Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009g.htm |
| EX-23 - EXHIBIT 23 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009d.htm |
| EX-31.1 - EXHIBIT 31.1 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009f.htm |
| EX-32.1 - EXHIBIT 32.1 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009h.htm |
| EX-4.G - EXHIBIT 4G FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009b.htm |
| EX-21 - EXHIBIT 21 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009c.htm |
| EX-32.2 - EXHIBIT 32.2 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009i.htm |
| EX-24 - EXHIBIT 24 FILED FEBRUARY 19, 2010 - BLACK & DECKER CORP | form10k12312009e.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
FOR
THE FISCAL YEAR ENDED
|
COMMISSION
FILE NUMBER
|
|
December
31, 2009
|
1-01553
|
THE
BLACK & DECKER CORPORATION
(Exact
name of registrant as specified in its charter)
|
Maryland
|
52-0248090
|
||
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification Number)
|
||
|
Towson,
Maryland
|
21286
|
||
|
(Address
of principal executive offices)
|
(Zip
Code)
|
||
|
(410)
716-3900
|
|||
|
(Registrant’s
telephone number, including area code)
|
|||
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, par value $.50 per share
|
New
York Stock Exchange
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
None
|
Indicate
by check mark whether if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES x NO
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definition of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (check one):
|
Large
accelerated filer x
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o NO
x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 26, 2009, was $1.62 billion.
The
number of shares of Common Stock outstanding as of January 22, 2010, was
61,654,405.
The
exhibit index as required by Item 601(a) of Regulation S-K is included in Item
15 of Part IV of this report.
Documents
Incorporated by Reference: Portions of the registrant’s definitive proxy
statement for the 2010 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report or will be contained in an amendment to
this Form 10-K.
PART
I
ITEM
1. BUSINESS
(a)
General Development of Business
The Black
& Decker Corporation (collectively with its subsidiaries, the Corporation),
incorporated in Maryland in 1910, is a leading global manufacturer and marketer
of power tools and accessories, hardware and home improvement products, and
technology-based fastening systems. With products and services marketed in over
100 countries, the Corporation enjoys worldwide recognition of its strong brand
names and a superior reputation for quality, design, innovation, and value.
The
Corporation is one of the world’s leading producers of power tools, power tool
accessories, and residential security hardware, and the Corporation’s product
lines hold leading market share positions in these industries. The Corporation
is also a major global supplier of engineered fastening and assembly systems.
The Corporation is one of the leading producers of faucets in North America.
These assertions are based on total volume of sales of products compared to the
total market for those products and are supported by market research studies
sponsored by the Corporation as well as independent industry statistics
available through various trade organizations and periodicals, internally
generated market data, and other sources.
On
November 2, 2009, the Corporation announced that it had entered into a
definitive merger agreement to create Stanley Black & Decker,
Inc. in an all-stock transaction. Under the terms of the transaction, which
has been approved by the Boards of Directors of both the Corporation and The
Stanley Works, the Corporation’s shareholders will receive a fixed ratio of
1.275 shares of The Stanley Works common stock for each share of the
Corporation’s common stock that they own. Consummation of the transaction, which
is subject to customary closing conditions, including obtaining certain
regulatory approvals outside of the United States, as well as shareholder
approval from the shareholders of both the Corporation and The Stanley Works, is
expected to occur on March 12, 2010.
(b)
Financial Information about Business Segments
The
Corporation operates in three reportable business segments: Power Tools and
Accessories, including consumer and industrial power tools and accessories, lawn
and garden products, electric cleaning, automotive, lighting, and household
products, and product service; Hardware and Home Improvement, including security
hardware and plumbing products; and Fastening and Assembly Systems. For
additional information about these segments, see Note 17 of Notes to
Consolidated Financial Statements included in Item 8 of Part II, and
Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 of Part II of this report.
(c)
Narrative Description of the Business
The
following is a brief description of each of the Corporation’s reportable
business segments.
POWER
TOOLS AND ACCESSORIES
The Power
Tools and Accessories segment has worldwide responsibility for the manufacture
and sale of consumer (home use) and industrial corded and cordless electric
power tools and equipment, lawn and garden products, consumer portable power
products, home products, accessories and attachments for power tools, and
product service. In addition, the Power Tools and Accessories segment has
responsibility for the sale of security hardware to customers in Mexico, Central
America, the Caribbean, and South America; for the sale of plumbing products to
customers outside of the United States and Canada; and for sales of household
products, principally in Europe and Brazil.
Power
tools and equipment include drills, screwdrivers, impact wrenches and drivers,
hammers, wet/dry vacuums, lights, radio/chargers, saws, grinders, band saws,
polishers, plate joiners, jointers, lathes, dust management systems, routers,
planers, tile saws, sanders, benchtop and stationary machinery, air tools,
building instruments, air compressors, generators, laser products, and
WORKMATE®
project centers and related products. Lawn and garden products include hedge
trimmers, string trimmers, lawn mowers, edgers, pruners, shears, shrubbers,
blower/vacuums, power sprayers, chain saws, pressure washers, and related
accessories. Consumer portable power products include inverters, jump-starters,
vehicle battery chargers, rechargeable spotlights, and other related products.
Home products include stick, canister and hand-held vacuums; flexible
flashlights; and wet scrubbers. Power tool accessories include drill bits,
hammer bits, router bits, hacksaws and blades, circular saw blades, jig and
reciprocating saw blades, diamond blades, screwdriver bits and quick-change
systems, bonded and other abrasives, and worksite tool belts and bags. Product
service provides replacement parts and repair and maintenance of power tools,
equipment, and lawn and garden products.
Power
tools, lawn and garden products, portable power products, home products, and
accessories are marketed around the world under the BLACK & DECKER name as
well as other trademarks, and trade names, including, without limitation, ORANGE
AND BLACK COLOR SCHEME; POWERFUL SOLUTIONS; FIRESTORM; GELMAX COMFORT GRIP;
MOUSE; BULLSEYE; PIVOT DRIVER; STORMSTATION; WORKMATE; BLACK & DECKER XT;
1
SMART
SELECT; AUTO SELECT; LITHIUM BATTERY-TECH; SMARTDRIVER; READY-WRENCH; CYCLONE;
NAVIGATOR; DRAGSTER;
SANDSTORM; PROJECTMATE; PIVOTPLUS; QUICK CLAMP; SIGHT LINE; ACCU-MARK;
ACCU-BEVEL; CROSSFIRE; CROSSHAIR; 360°; QUATTRO;
DECORMATE; LASERCROSS; AUTO-WRENCH; AUTO-TAPE; AIRSTATION; SHOPMASTER BY DELTA;
DEWALT; YELLOW AND BLACK COLOR SCHEME; GUARANTEED TOUGH; XRP; XLR; XPS; NANO;
EHP; PORTER-CABLE; TRADESMAN; GRAY AND BLACK COLOR SCHEME; IMPACT READY;
PORTA-BAND; POWERBACK; MOLLY; JOB BOSS; DELTA; THE DELTA TRIANGLE LOGO; UNISAW;
OMNIJIG; TIGER SAW; TIGER CLAW; CONTRACTOR’S SAW; UNIFENCE; T-SQUARE;MAG SAW;
ENDURATECH; BIESEMEYER; BLACK AND WHITE COLOR SCHEME; DAPC; EMGLO; AFS AUTOMATIC
FEED SPOOL; GROOM ‘N’ EDGE; HEDGE HOG; GRASS HOG; EDGE HOG; LEAF HOG; LAWN HOG;
STRIMMER; REFLEX; VAC ‘N’ MULCH; ALLIGATOR; TRIM ‘N’ EDGE; HDL; TOUGH TRUCK;
FLEX TUBE; VECTOR; ELECTROMATE; SIMPLE START; DUSTBUSTER; DUSTBUSTER FLEXI;
SNAKELIGHT; SCUMBUSTER; STEAMBUSTER; CYCLOPRO; SWEEP & COLLECT; PIVOT VAC;
CLICK & GO; B&D; BULLET; QUANTUM PRO; PIRANHA; SCORPION; QUICK CONNECT;
PILOT POINT; RAPID LOAD; ROCK CARBIDE; TOUGH CASE; MAX LIFE; RAZOR; OLDHAM;
DEWALT SERVICENET; DROP BOX EXPRESS; and GUARANTEED REPAIR COST
(GRC).
The
composition of the Corporation’s sales by product groups for 2009, 2008, and
2007 is included in Note 17 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report. Within each product group shown,
there existed no individual product that accounted for greater than 10% of the
Corporation’s consolidated sales for 2009, 2008, or 2007.
The
Corporation’s product offerings in the Power Tools and Accessories segment are
sold primarily to retailers, wholesalers, distributors, and jobbers, although
some discontinued or reconditioned power tools, lawn and garden products,
consumer portable power products, and electric cleaning and lighting products
are sold through company-operated service centers and factory outlets directly
to end users. Sales to two of the segment’s customers, The Home Depot and Lowe’s
Companies, Inc., accounted for greater than 10% of the Corporation’s
consolidated sales for 2009, 2008, and 2007. For additional information
regarding sales to The Home Depot and Lowe’s Companies, Inc., see Note 17 of
Notes to Consolidated Financial Statements included in Item 8 of Part II of this
report.
The
Corporation’s product service program supports its power tools and lawn and
garden products. Replacement parts and product repair services are available
through a network of company-operated service centers, which are identified and
listed in product information material generally included in product packaging.
At December 31, 2009, there were approximately 120 such service centers, of
which roughly three-quarters were located in the United States. The remainder
was located around the world, primarily in Canada and Asia. These
company-operated service centers are supplemented by several hundred authorized
service centers operated by independent local owners. The Corporation also
operates reconditioning centers in which power tools, lawn and garden products,
and electric cleaning and lighting products are reconditioned and then re-sold
through numerous company-operated factory outlets and service centers and
various independent distributors.
Most of
the Corporation’s consumer power tools, lawn and garden products, and electric
cleaning, automotive, lighting, and household products sold in the United States
carry a two-year warranty, pursuant to which the consumer can return defective
products during the two years following the purchase in exchange for a
replacement product or repair at no cost to the consumer. Most of the
Corporation’s industrial power tools sold in the United States carry a one-year
service warranty and a three-year warranty for manufacturing defects. Products
sold outside of the United States generally have varying warranty arrangements,
depending upon local market conditions and laws and regulations.
The
principal materials used in the manufacturing of products in the Power Tools and
Accessories segment are batteries, copper, aluminum, steel, certain electronic
components, motors, and plastics. These materials are used in various forms. For
example, aluminum or steel may be used in the form of wire, sheet, bar, and
strip stock.
The
materials used in the various manufacturing processes are purchased on the open
market, and the majority are available through multiple sources and are in
adequate supply. The Corporation has experienced no significant work stoppages
to date as a result of shortages of materials.
The
Corporation has certain long-term commitments for the purchase of various
finished goods, component parts, and raw materials. Since the onset of the
global economic crisis in 2008, certain of the Corporation’s suppliers have
experienced financial difficulties and the Corporation believes it is possible
that a limited number of suppliers may either cease operations or require
additional financial assistance from the Corporation in order to fulfill their
obligations. However, alternate sources of supply at competitive prices are
available for most items for which long-term commitments exist. Because the
Corporation is a leading producer of power tools and accessories, in a limited
number of instances, the magnitude of the Corporation’s purchases of certain
items is of such significance that a change in the Corporation’s established
supply relationship may cause disruption in the marketplace and/or a temporary
price imbalance. While the Corporation believes that the termination of any of
these commitments would not have a material adverse effect on the operating
results of the Power Tools and Accessories segment over the long term, the
termination of
2
a limited
number of these commitments would have an adverse effect over the short term. In
this regard, the Corporation defines long term as a period of time in excess of
12 months and short term as a period of time under 12 months.
Principal
manufacturing and assembly facilities of the power tools, lawn and garden
products, electric cleaning and lighting products, and accessories businesses in
the United States are located in Jackson, Tennessee; Shelbyville, Kentucky; and
Tampa, Florida. The principal distribution facilities in the United States,
other than those located at the manufacturing and assembly facilities listed
above, are located in Fort Mill, South Carolina, and Rialto, California.
Principal
manufacturing and assembly facilities of the power tools, lawn and garden
products, electric cleaning, lighting, and household products, and accessories
businesses outside of the United States are located in Suzhou, China; Usti nad
Labem, Czech Republic; Buchlberg, Germany; Perugia, Italy; Reynosa, Mexico; and
Uberaba, Brazil. In addition to the principal facilities described above, the
manufacture and assembly of products for the Power Tools and Accessories segment
also occurs at the facility of its 50%-owned joint venture located in Shen Zhen,
China. The principal distribution facilities outside of the United States, other
than those located at the manufacturing facilities listed above, consist of a
central-European distribution center in Tongeren, Belgium, and facilities in
Aarschot, Belgium; Brockville, Canada; Northampton, England; Gliwice, Poland;
and Dubai, United Arab Emirates.
For
additional information with respect to these and other properties owned or
leased by the Corporation, see Item 2, “Properties.”
The
Corporation holds various patents and licenses on many of its products and
processes in the Power Tools and Accessories segment. Although these patents and
licenses are important, the Corporation is not materially dependent on such
patents or licenses with respect to its operations.
The
Corporation holds various trademarks that are employed in its businesses and
operates under various trade names, some of which are stated previously. The
Corporation believes that these trademarks and trade names are important to the
marketing and distribution of its products.
A
significant portion of the Corporation’s sales in the Power Tools and
Accessories segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature. However, sales of certain
consumer and industrial power tools tend to be higher during the period
immediately preceding the Christmas gift-giving season, while the sales of most
lawn and garden products are at their peak during the late winter and early
spring period. Most of the Corporation’s other product lines within this segment
generally are not seasonal in nature, but are influenced by other general
economic trends.
The
Corporation is one of the world’s leaders in the manufacturing and marketing of
portable power tools, electric lawn and garden products, and accessories.
Worldwide, the markets in which the Corporation sells these products are highly
competitive on the basis of price, quality, and after-sale service. A number of
competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies
manufacture products that are competitive with a number of the Corporation’s
product lines. Other competitors restrict their operations to fewer categories,
and some offer only a narrow range of competitive products. Competition from
certain of these manufacturers has been intense in recent years and is expected
to continue.
HARDWARE
AND HOME IMPROVEMENT
The
Hardware and Home Improvement segment has worldwide responsibility for the
manufacture and sale of security hardware products (except for the sale of
security hardware in Mexico, Central America, the Caribbean, and South America).
It also has responsibility for the manufacture of plumbing products and for the
sale of plumbing products to customers in the United States and Canada. Security
hardware products consist of residential and light commercial door locksets,
electronic keyless entry systems, exit devices, keying systems, tubular and
mortise door locksets, general hardware, decorative hardware, and lamps. General
hardware includes door hinges, cabinet hinges, door stops, kick plates, and
house numbers. Decorative hardware includes cabinet hardware, switchplates, door
pulls, and push plates. Plumbing products consist of a variety of conventional
and decorative lavatory, kitchen, and tub and shower faucets, bath and kitchen
accessories, and replacement parts.
Security
hardware products are marketed under a variety of trademarks and trade names,
including, without limitation, KWIKSET; KWIKSET SIGNATURE SERIES; BLACK &
DECKER; TYLO; POLO; AVALON; ASHFIELD; ARLINGTON; SMARTSCAN; SMARTKEY; SMARTCODE;
POWERBOLT; ABBEY; AMHERST; KWIK INSTALL; GEO; SAFELOCK BY BLACK & DECKER;
LIDO; PEMBROKE; TUSTIN; VALIANT; BALBOA; KEY CONTROL; BALDWIN; THE ESTATE
COLLECTION; THE IMAGES COLLECTION; ARCHETYPES; BEDFORD; BEL AIR; BROOKLANE;
COMMONWEALTH; SONOMA; WELLINGTON; CHELSEA; SHERIDAN; DELTA; CIRCA; LAUREL;
HANCOCK; HAWTHORNE; GIBSON; FARMINGTON; CAMERON; LIFETIME FINISH; ROMAN; REGAL;
COPA; CORTEZ; DAKOTA; DORIAN; SHELBURNE; LOGAN; SPRINGFIELD; HAMILTON; BLAKELY;
MANCHESTER; CANTERBURY; MADISON; STONEGATE; EDINBURGH; KENSINGTON; BRISTOL;
TREMONT; PEYTON; PASADENA; RICHLAND; WEISER; WEISER LOCK; COLLECTIONS; WELCOME
HOME; ELEMENTS; BASICS BY WEISER LOCK; BRILLIANCE LIFETIME ANTI-TARNISH FINISH;
POWERBOLT;
3
POWERBOLT
KEYLESS ACCESS SYSTEM; WEISERBOLT; ENTRYSETS; BEVERLY; FAIRFAX; CORSAIR; DANE;
GALIANO; KIM COLUMBIA; FASHION; HERITAGE; COVE; and HOME CONNECT TECHNOLOGY.
Plumbing products are marketed under a variety of trademarks and trade names,
including, without limitation, PRICE PFISTER; PFIRST SERIES BY PRICE PFISTER;
PRICE PFISTER PROFESSIONAL SERIES; AMHERST; AVALON; ASHFIELD; BEDFORD; BIXBY;
BRISTOL; BROOKWOOD; CARMEL; CATALINA; CLAIRMONT; CONTEMPRA; FALSETTO; GENESIS;
GEORGETOWN; HANOVER; HARBOR; KENZO; LANGSTON; MARIELLE; PASADENA; PARISA;
PICARDY; PORTLAND; PORTOLA; REMBRANDT; SANTIAGO; SAVANNAH; SAXTON; SEDONA;
SHELDON; SKYE; TREVISO; UNISON; VEGA; and VIRTUE.
The
composition of the Corporation’s sales by product groups for 2009, 2008, and
2007 is included in Note 17 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report. Within each product group shown,
there existed no individual product that accounted for greater than 10% of the
Corporation’s consolidated sales for 2009, 2008, or 2007.
The
Corporation’s product offerings in the Hardware and Home Improvement segment are
sold primarily to retailers, wholesalers, distributors, and jobbers. Certain
security hardware products are sold to commercial, institutional, and industrial
customers. Sales to two of the segment’s customers, The Home Depot and Lowe’s
Companies, Inc., accounted for greater than 10% of the Corporation’s
consolidated sales for 2009, 2008, and 2007. For additional information
regarding sales to The Home Depot and Lowe’s Companies, Inc., see Note 17 of
Notes to Consolidated Financial Statements included in Item 8 of Part II of this
report.
Most of
the Corporation’s security hardware products sold in the United States carry a
warranty, pursuant to which the consumer can return defective product during the
warranty term in exchange for a replacement product at no cost to the consumer.
Warranty terms vary by product and carry a lifetime warranty with respect to
mechanical operations and range from a 5-year to a lifetime warranty with
respect to finish. Products sold outside of the United States for residential
use generally have similar warranty arrangements. Such arrangements vary,
however, depending upon local market conditions and laws and regulations. Most
of the Corporation’s plumbing products sold in the United States carry a
lifetime warranty with respect to function and finish, pursuant to which the
consumer can return defective product in exchange for a replacement product or
repair at no cost to the consumer.
The
principal materials used in the manufacturing of products in the Hardware and
Home Improvement segment are zamak, brass, zinc, steel, and copper. The
materials used in the various manufacturing processes are purchased on the open
market, and the majority are available through multiple sources and are in
adequate supply. The Corporation has experienced no significant work stoppages
to date as a result of shortages of materials.
The
Corporation has certain long-term commitments for the purchase of various
finished goods, component parts, and raw materials. Since the onset of the
global economic crisis in 2008, certain of the Corporation’s suppliers have
experienced financial difficulties and the Corporation believes it is possible
that a limited number of suppliers may either cease operations or require
additional financial assistance from the Corporation in order to fulfill their
obligations. However, alternate sources of supply at competitive prices are
available for most items for which long-term commitments exist. Because the
Corporation is a leading producer of residential security hardware and faucets,
in a limited number of instances, the magnitude of the Corporation’s purchases
of certain items is of such significance that a change in the Corporation’s
established supply relationship may cause disruption in the marketplace and/or a
temporary price imbalance. While the Corporation believes that the termination
of any of these commitments would not have a material adverse effect on the
operating results of the Hardware and Home Improvement segment over the long
term, the termination of a limited number of these commitments would have an
adverse effect over the short term. In this regard, the Corporation defines long
term as a period of time in excess of 12 months and short term as a period of
time under 12 months.
From time
to time, the Corporation enters into commodity hedges on certain raw materials
used in the manufacturing process to reduce the risk of market price
fluctuations. Additional information with respect to the Corporation’s commodity
hedge program, utilizing derivative financial instruments, is included in Notes
1 and 10 of Notes to Consolidated Financial Statements included in Item 8 of
Part II of this report.
Principal
manufacturing and assembly facilities of the Hardware and Home Improvement
segment in the United States are located in Denison, Texas; and Reading,
Pennsylvania. The principal distribution facilities in the United States, other
than those located at the manufacturing and assembly facilities listed above,
are located in Mira Loma, California; and Charlotte, North
Carolina.
Principal
manufacturing and assembly facilities of the Hardware and Home Improvement
segment outside of the United States are located in Mexicali and Nogales,
Mexico; and Xiamen, China.
For
additional information with respect to these and other properties owned or
leased by the Corporation, see Item 2, “Properties.”
The
Corporation holds various patents and licenses on many of its products and
processes in the Hardware and Home Improvement segment. Although these patents
and licenses are important, the Corporation is not materially dependent on such
patents or licenses with respect to its operations.
4
The
Corporation holds various trademarks that are employed in its businesses and
operates under various trade names, some of which are stated above. The
Corporation believes that these trademarks and trade names are important to the
marketing and distribution of its products.
A
significant portion of the Corporation’s sales in the Hardware and Home
Improvement segment is derived from the do-it-yourself and home modernization
markets, which generally are not seasonal in nature, but are influenced by
trends in the residential and commercial construction markets and other general
economic trends.
The
Corporation is one of the world’s leading producers of residential security
hardware and is one of the leading producers of faucets in North America.
Worldwide, the markets in which the Corporation sells these products are highly
competitive on the basis of price, quality, and after-sale service. A number of
competing domestic and foreign companies are strong, well-established
manufacturers that compete on a global basis. Some of these companies
manufacture products that are competitive with a number of the Corporation’s
product lines. Other competitors restrict their operations to fewer categories,
and some offer only a narrow range of competitive products. Competition from
certain of these manufacturers has been intense in recent years and is expected
to continue.
FASTENING
AND ASSEMBLY SYSTEMS
The
Corporation’s Fastening and Assembly Systems segment has worldwide
responsibility for the development, manufacture and sale of an extensive line of
metal and plastic fasteners and engineered fastening systems for commercial
applications, including blind riveting, stud welding, specialty screws,
prevailing torque nuts and assemblies, insert systems, metal and plastic
fasteners, and self-piercing riveting systems. The Fastening and Assembly
Systems segment focuses on engineering solutions for end users’ fastening
requirements. The fastening and assembly systems products are marketed under a
variety of trademarks and trade names, including, without limitation, EMHART
TEKNOLOGIES; EMHART FASTENING TEK-NOLOGIES; EMHART; AUTOSET; DODGE; DRIL-KWICK;
F-SERIES; GRIPCO; GRIPCO ASSEMBLIES; HELI-COIL; JACK NUT; KALEI; MASTERFIX; NPR;
NUT-FAST; PARKER-KALON; PLASTIFAST; PLASTIKWICK; POINT & SET; PRIMER FREE;
POP; POP-LOK; POPMATIC; POPNUT; POPSET; POP-SERT; POWERLINK; PROSET; SMARTSET;
SPIRALOCK; SWS; TUCKER; ULTRA-GRIP; ULTRASERT; WARREN; WELDFAST; and WELL-NUT.
The
composition of the Corporation’s sales by product groups for 2009, 2008, and
2007 is included in Note 17 of Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report. Within each product group shown,
there existed no individual product that accounted for greater than 10% of the
Corporation’s consolidated sales for 2009, 2008, or 2007.
The
principal markets for these products include the automotive, transportation,
electronics, aerospace, machine tool, and appliance industries. Substantial
sales are made to automotive manufacturers worldwide.
Products
are marketed directly to customers and also through distributors and
representatives. These products face competition from many manufacturers in
several countries. Product quality, performance, reliability, price, delivery,
and technical and application engineering services are the primary competitive
factors. There is little seasonal variation in sales.
The raw
materials used in the fastening and assembly systems business consist primarily
of ferrous and nonferrous metals (in the form of wire, bar stock, and strip and
sheet metals) and plastics. These materials are readily available from a number
of suppliers.
Principal
manufacturing facilities of the Fastening and Assembly Systems segment in the
United States are located in Danbury, Connecticut; Montpelier, Indiana;
Campbellsville and Hopkinsville, Kentucky; and Chesterfield, Michigan. Principal
manufacturing and assembly facilities outside of the United States are located
in Birmingham, England; Giessen, Germany; and Toyohashi, Japan. For additional
information with respect to these and other properties owned or leased by the
Corporation, see Item 2, “Properties.”
The
Corporation owns a number of United States and foreign patents, trademarks, and
license rights relating to the fastening and assembly systems business. While
the Corporation considers those patents, trademarks, and license rights to be
valuable, it is not materially dependent upon such patents or license rights
with respect to its operations.
OTHER
INFORMATION
The
Corporation’s product development program for the Power Tools and Accessories
segment is coordinated from the Corporation’s headquarters in Towson, Maryland.
Additionally, product development activities are performed at facilities within
the United States in Hampstead, Maryland, and Jackson, Tennessee; and at
facilities in Spennymoor, England; Brockville, Canada; Perugia, Italy; Suzhou,
China; Buchlberg and Idstein, Germany; Mooroolbark, Australia; Uberaba, Brazil;
and Reynosa, Mexico.
Product
development activities for the Hardware and Home Improvement segment are
performed at facilities within the United States in Lake Forest, California, and
Reading, Pennsylvania; and at a facility in Xiamen, China.
Product
development activities for the Fastening and Assembly Systems segment are
performed at
facilities within the United States in Danbury and Shelton, Connecticut;
Montpelier, Indiana; Campbellsville, Kentucky; Chesterfield and Madison
5
Heights,
Michigan; and at facilities in Birmingham, England; Maastricht, Netherlands;
Giessen, Germany; and Toyohashi, Japan.
Costs
associated with development of new products and changes to existing products are
charged to operations as incurred. See Note 1 of Notes to Consolidated Financial
Statements included in Item 8 of Part II of this report for amounts of
expenditures for product development activities.
As of
December 31, 2009, the Corporation employed approximately 19,900 persons in its
operations worldwide. Approximately 260 employees in the United States are
covered by collective bargaining agreements. During 2009, two collective
bargaining agreements in the United States were negotiated without material
disruption to operations. One agreement is scheduled for negotiation during
2010. Also, the Corporation has government-mandated collective bargaining
arrangements or union contracts with employees in other countries. The
Corporation’s operations have not been affected significantly by work stoppages
and, in the opinion of management, employee relations are good. As more fully
described under the caption “Restructuring
Actions” in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, the Corporation is committed to continuous productivity improvement
and continues to evaluate opportunities to reduce fixed costs, simplify or
improve processes, and eliminate excess capacity. As a consequence, the
Corporation may, from time to time, transfer production from one manufacturing
facility to another, outsource certain production, close certain manufacturing
facilities, or eliminate selling and administrative positions. Such production
transfers, outsourcing, facility closures, and/or eliminations of positions may
result in a deterioration of employee relations at the impacted locations or
elsewhere in the Corporation. As more fully described under Item 1A, “Risk Factors”, consummation of
the proposed merger with The Stanley Works is subject to customary closing
conditions, including obtaining certain regulatory approvals as well as
shareholder approval from both the Corporation’s shareholders and those of The
Stanley Works. Expected synergies associated with the merger will require the
assimilation of certain of the Corporation’s operations into those of The
Stanley Works, resulting in the likely termination of a number of the
Corporation’s employees and restructuring of certain of the Corporation’s
operations. The pending nature of the proposed merger could have an adverse
effect on the Corporation’s relationship with its employees.
The
Corporation’s operations are subject to foreign, federal, state, and local
environmental laws and regulations. Many foreign, federal, state, and local
governments also have enacted laws and regulations that govern the labeling and
packaging of products and limit the sale of products containing certain
materials deemed to be environmentally sensitive. These laws and regulations not
only limit the acceptable methods for the discharge of pollutants and the
disposal of products and components that contain certain substances, but also
require that products be designed in a manner to permit easy recycling or proper
disposal of environmentally sensitive components such as nickel cadmium
batteries. The Corporation seeks to comply fully with these laws and
regulations. Although compliance involves continuing costs, the ongoing costs of
compliance with existing environmental laws and regulations have not had, nor
are they expected to have, a material adverse effect upon the Corporation’s
capital expenditures or financial position.
Pursuant
to authority granted under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA), the United States Environmental
Protection Agency (EPA) has issued a National Priority List (NPL) of sites at
which action is to be taken to mitigate the risk of release of hazardous
substances into the environment. The Corporation is engaged in continuing
activities with regard to various sites on the NPL and other sites covered under
analogous state environmental laws. As of December 31, 2009, the Corporation had
been identified as a potentially responsible party (PRP) in connection with
approximately 23 sites being investigated by federal or state agencies under
CERCLA or analogous state environmental laws. The Corporation also is engaged in
site investigations and remedial activities to address environmental
contamination from past operations at current and former manufacturing
facilities in the United States and abroad.
To
minimize the Corporation’s potential liability with respect to these sites,
management has undertaken, when appropriate, active participation in steering
committees established at the sites and has agreed to remediation through
consent orders with the appropriate government agencies. Due to uncertainty as
to the Corporation’s involvement in some of the sites, uncertainty over the
remedial measures to be adopted, and the fact that imposition of joint and
several liability with the right of contribution is possible under CERCLA and
other laws and regulations, the liability of the Corporation with respect to any
site at which remedial measures have not been completed cannot be established
with certainty. On the basis of periodic reviews conducted with respect to these
sites, however, the Corporation has established appropriate liability accruals.
The Corporation’s estimate of the costs associated with environmental exposures
is accrued if, in management’s judgment, the likelihood of a loss is probable
and the amount of the loss can be reasonably estimated. As of December 31, 2009,
the Corporation’s aggregate probable exposure with respect to environmental
liabilities, for which accruals have been established in the consolidated
financial statements, was $102.1 million. In the opinion of management, the
amount accrued for probable exposure for aggregate environmental liabilities is
adequate and, accordingly, the ultimate resolution of these matters
6
is not
expected to have a material adverse effect on the Corporation’s consolidated
financial statements. As of December 31, 2009, the Corporation had no known
probable but inestimable exposures relating to environmental matters that are
expected to have a material adverse effect on the Corporation. There can be no
assurance, however, that unanticipated events will not require the Corporation
to increase the amount it has accrued for any environmental matter or accrue for
an environmental matter that has not been previously accrued because it was not
considered probable. While it is possible that the increase or establishment of
an accrual could have a material adverse effect on the financial results for any
particular fiscal quarter or year, in the opinion of management there exists no
known potential exposures that would have a material adverse effect on the
financial condition or on the financial results of the Corporation beyond any
such fiscal quarter or year.
(d)
Financial Information about Geographic Areas
Reference
is made to Note 17 of Notes to Consolidated Financial Statements, entitled “Business Segments
and Geographic Information”, included in Item
8 of Part II of this report.
(e)
Available Information
The
Corporation files annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The public may read and copy
any materials that the Corporation files with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the Corporation, that file electronically with the SEC. The
public can obtain any documents that the Corporation files with the SEC at
http://www.sec.gov.
The
Corporation also makes available free of charge on or through its Internet
website (http://www.bdk.com) the Corporation’s Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Exchange Act as soon as reasonably practicable after the Corporation
electronically files such material with, or furnishes it to, the
SEC.
Black
& Decker’s Corporate Governance Policies and Procedures Statement is
available free of charge on or through its Internet website (http://www.bdk.com)
or in print by calling (800) 992-3042 or (410) 716-2914. The Statement contains
charters of the standing committees of the Board of Directors, the Code of
Ethics and Standards of Conduct, and the Code of Ethics for Senior Financial
Officers.
In May
2009, the Corporation submitted to the New York Stock Exchange the CEO
certification required by Section 303A.12(a) of the New York Stock Exchange
Listed Company Manual. The Corporation has also filed, as exhibits to this
report, the CEO and CFO certifications required by Sections 302 and 906 of the
Sarbanes-Oxley Act.
(f)
Executive Officers and Other Senior Officers of the
Corporation
The
current Executive Officers and Other Senior Officers of the Corporation, their
ages, current offices or positions, and their business experience during the
past five years are set forth below.
|
•
|
NOLAN
D. ARCHIBALD – 66
|
|
|
Chairman,
President, and Chief Executive Officer,
|
|
|
January
1990 – present.
|
|
•
|
BRUCE
W. BROOKS – 45
|
|
|
Group
Vice President of the Corporation
and
|
|
|
President
– Consumer Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
January
2009 – present;
|
|
|
Group
Vice President of the Corporation
and
|
|
|
President
– Consumer Products Group
|
|
|
for
North America,
|
|
|
Power
Tools and Accessories,
|
|
|
September
2008 – January 2009;
|
|
|
Group
Vice President of the Corporation
and
|
|
|
President
– Consumer Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
March
2007 – September 2008;
|
|
|
Vice
President of the Corporation and President –
Construction
Tools, Industrial Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
May
2005 – March 2007;
|
|
|
Vice
President and General Manager –
|
|
|
Construction
Tools, Industrial Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
October
2004 – May 2005.
|
|
•
|
JAMES
T. CAUDILL – 42
|
|
|
Group
Vice President of the Corporation
and
|
|
|
President
– Hardware and Home Improvement,
|
|
|
July
2006 – present;
|
|
|
Vice
President of the Corporation and President –
Hardware
and Home Improvement,
|
|
|
May
2005 – July 2006;
|
|
|
Vice
President and General Manager –
|
|
|
Accessories,
Industrial Products Group,
|
|
|
Power
Tools and Accessories Group,
|
|
|
October
2004 – May 2005.
|
7
|
•
|
CHARLES
E. FENTON – 61
|
|
|
Senior
Vice President and General Counsel,
|
|
|
December
1996 – present.
|
|
•
|
LES
H. IRELAND – 45
|
|
|
Vice
President of the Corporation and
|
|
|
President
– North America,
|
|
|
Power
Tools and Accessories,
|
|
|
January
2009 – present;
|
|
|
Vice
President of the Corporation and
|
|
|
President
– Commercial Operations –
|
|
|
Industrial
Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
April
2008 – January 2009;
|
|
|
Vice
President of the Corporation and
|
|
|
President
– Europe, Middle East, Africa,
|
|
|
Power
Tools and Accessories,
|
|
|
January
2005 – April 2008;
|
|
|
Vice
President of the Corporation and
|
|
|
Managing
Director – Commercial Operations,
|
|
|
Europe,
Black & Decker Consumer Group,
|
|
|
Power
Tools and Accessories Group,
|
|
|
November
2001 – January 2005.
|
|
•
|
MICHAEL
D. MANGAN – 53
|
|
|
Senior
Vice President of the Corporation and
|
|
|
President
– Worldwide Power Tools and
Accessories,
|
|
|
September
2008 – present;
|
|
|
Senior
Vice President and Chief Financial Officer,
January
2000 – September 2008.
|
|
•
|
PAUL
F. McBRIDE
– 54
|
|
|
Senior
Vice President – Human Resources
|
|
|
and
Corporate Initiatives,
|
|
|
March
2004 – present.
|
|
•
|
CHRISTINA
M. McMULLEN
– 54
|
|
|
Vice
President and Controller,
|
|
|
April
2000 – present.
|
|
•
|
ANTHONY
V. MILANDO – 47
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President Global Operations,
|
|
|
Power
Tools and Accessories,
|
|
|
January
2009 – present;
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President – Industrial Products Group
|
|
|
Global
Operations,
|
|
|
Power
Tools and Accessories,
|
|
|
July
2008 – January 2009;
|
|
|
Vice
President – Industrial Products
Group
|
|
|
Global
Operations,
|
|
|
Power
Tools and Accessories,
|
|
|
November
2005 – July 2008;
|
|
|
Vice
President – Global Sourcing,
|
|
|
Power
Tools and Accessories,
|
|
|
March
2001 – November 2005.
|
|
•
|
AMY
K. O’KEEFE – 39
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President – Worldwide Power Tools
|
|
|
and
Accessories Finance,
|
|
|
September
2008 – present;
|
|
|
Vice
President of Finance,
|
|
|
Hardware
and Home Improvement Group,
|
|
|
August
2004 – September 2008.
|
|
•
|
JAIME
A. RAMIREZ – 42
|
|
|
Vice
President of the Corporation and President –
Latin
America, Power Tools and
Accessories,
|
|
|
September
2008 – present;
|
|
|
Vice
President and General Manager –
|
|
|
Latin
America, Power Tools and
Accessories,
|
|
|
May
2007 – September 2008;
|
|
|
Vice
President and General Manager –
|
|
|
Andean
Region, Power Tools and
Accessories,
|
|
|
July
2000 – May 2007.
|
|
•
|
JAMES
R. RASKIN – 49
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President – Business Development,
|
|
|
July
2006 – present;
|
|
|
Vice
President – Business Development,
|
|
|
May
2002 – July 2006.
|
|
•
|
STEPHEN
F. REEVES – 50
|
|
|
Senior
Vice President and Chief Financial
Officer,
|
|
|
September
2008 – present;
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President – Global Finance,
|
|
|
Power
Tools and Accessories,
|
|
|
March
2004 – September 2008.
|
|
•
|
MARK
M. ROTHLEITNER – 51
|
|
|
Vice
President – Investor Relations and
Treasurer,
|
|
|
January
2000 – present.
|
|
•
|
JOHN
W. SCHIECH – 51
|
|
|
Group
Vice President of the Corporation
and
|
|
|
President
– Industrial Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
January
2009 – present;
|
|
|
Group
Vice President of the Corporation
|
|
|
and
President – Industrial Products Group
|
|
|
for
North America, Power Tools and
Accessories,
|
|
|
September
2008 – January 2009;
|
|
|
Group
Vice President of the Corporation
|
|
|
and
President – Industrial Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
March
2004 – September 2008.
|
|
•
|
NATALIE
A. SHIELDS – 53
|
|
|
Vice
President and Corporate Secretary,
|
|
|
April
2006 – present;
|
|
|
International
Tax and Trade Counsel,
|
|
|
June
1993 – April 2006.
|
8
|
•
|
BEN
S. SIHOTA – 51
|
|
|
Vice
President of the Corporation and President –
|
|
|
Asia
Pacific, Power Tools and
Accessories,
|
|
|
February
2006 – present;
|
|
|
President
– Asia, Power Tools and
Accessories,
|
|
|
September
2000 – February 2006.
|
|
•
|
WILLIAM
S. TAYLOR – 54
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President – Global Product Development
|
|
|
Industrial
Products Group,
|
|
|
Power
Tools and Accessories,
|
|
|
January
2009 – present;
|
|
|
Vice
President of the Corporation and
|
|
|
Vice
President – Industrial Products
|
|
|
Group
Product Development,
|
|
|
Power
Tools and Accessories,
|
|
|
July
2008 – January 2009;
|
|
|
Vice
President – Industrial Products
Group
|
|
|
Product
Development,
|
|
|
Power
Tools and Accessories,
|
|
|
April
2008 – July 2008;
|
|
|
Vice
President/General Manager –
|
|
|
Industrial
Accessories Business,
|
|
|
Power
Tools and Accessories,
|
|
|
June
2005 – April 2008;
|
|
|
Vice
President and General Manager –
|
|
|
Woodworking
Tools, Power Tools and Accessories,
|
|
|
October
2004 – June 2005.
|
|
•
|
MICHAEL
A. TYLL – 53
|
|
|
Group
Vice President of the Corporation
and
|
|
|
President
– Fastening and Assembly Systems,
|
|
|
April
2006 – present;
|
|
|
President
– Automotive Division,
|
|
|
Fastening
and Assembly Systems,
|
|
|
January
2001 – April 2006.
|
|
•
|
JOHN
H. A. WYATT – 51
|
|
|
Vice
President of the Corporation and
|
|
|
President
– Europe, Middle East, and Africa,
|
|
|
Power
Tools and Accessories,
|
|
|
September
2008 – present;
|
|
|
Vice
President – Consumer Products –
|
|
|
Europe,
Middle East, and Africa,
|
|
|
Power
Tools and Accessories,
|
|
|
October
2006 – September 2008.
|
(g)
Forward-Looking Statements
The
Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a
safe harbor for forward-looking statements made by or on behalf of the
Corporation. The Corporation and its representatives may, from time to time,
make written or verbal forward-looking statements, including statements
contained in the Corporation’s filings with the Securities and Exchange
Commission and in its reports to stockholders. Generally, the inclusion of the
words “believe,” “expect,”
“intend,” “estimate,” “anticipate,” “will,” and similar expressions identify
statements that constitute “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and that are intended to come within the safe harbor
protection provided by those sections. All statements addressing operating
performance, events, or developments that the Corporation expects or anticipates
will occur in the future, including statements relating to sales growth,
earnings or earnings per share growth, and market share, as well as statements
expressing optimism or pessimism about future operating results, are
forward-looking statements within the meaning of the Reform Act. The
forward-looking statements are and will be based upon management’s then-current
views and assumptions regarding future events and operating performance, and are
applicable only as of the dates of such statements. The Corporation undertakes
no obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
By their
nature, all forward-looking statements involve risks and uncertainties,
including without limitations the risks described under the caption “Risk Factors” that could
materially harm the Corporation’s business, financial condition, and results of
operations. You are cautioned not to place undue reliance on the Corporation’s
forward-looking statements.
ITEM
1A. RISK FACTORS
Many of
the factors that affect our business and operations involve risk and
uncertainty. The factors described below are some of the risks that could
materially harm our business, financial condition, and results of
operations.
•Our
announcement that we had entered into a definitive merger agreement with The
Stanley Works to create Stanley Black & Decker in an all-stock transaction
could adversely affect our business. On November 2, 2009, we announced
that we had entered into a definitive merger agreement to create Stanley Black
& Decker in an all stock transaction. As a result of the merger, each of our
shareholders will receive a fixed ratio of 1.275 shares of The Stanley Works
common stock for each share of our common stock that they own. Consummation of
the transaction, which is subject to customary closing conditions, including
obtaining certain regulatory approvals outside of the United States as well as
shareholder approval from both our shareholders and the shareholders of The
Stanley Works, is expected to occur on March 12, 2010. Expected
synergies associated with the transaction will require the merger of certain of
our operations into those of The Stanley Works, resulting in the likely
termination of a number of our employees and restructuring of certain of our
operations. The announcement and pending nature of the transaction could cause
disruptions in our business and have an adverse effect on our relationship with
our customers, vendors, and employees, which
9
could, in
turn, have an adverse effect on our business, financial results, and
operations.
•The
consummation of the transaction to create Stanley Black & Decker is not
certain, and its delay or failure could adversely affect our business.
There is no assurance that the transaction will occur. If the transaction is
consummated, it is currently anticipated to be completed on March
12, 2010. However, we cannot predict the exact timing of the consummation
of the transaction. Consummation of the transaction is subject to the
satisfaction of various conditions, including obtaining certain regulatory
approvals outside of the United States and the approval of both our shareholders
and the shareholders of The Stanley Works. A number of the conditions are not
within our control. We cannot assure you that all closing conditions will be
satisfied, that we will receive the required governmental approvals outside of
the United States, or that the transaction will be successfully consummated. If
the transaction is not completed, the share price of our common stock may change
to the extent that the current market price of our common stock reflects the
assumption that the transaction will be completed. In addition, a failed
transaction may result in negative publicity and a negative impression of us in
the investment community. Under certain circumstances, upon termination of the
merger agreement, we could be required to pay a termination fee of $125 million
to The Stanley Works.
•Our
business depends on the strength of the economies in various parts of the world,
particularly in the United States and Europe. We conduct business in
various parts of the world, primarily in the United States and Europe and, to a
lesser extent, in Mexico, Central America, the Caribbean, South America, Canada,
Asia and Australia. As a result of this worldwide exposure, our net revenue and
profitability could be harmed as a result of economic conditions in our major
markets, including, but not limited to, recession, inflation and deflation,
general weakness in retail, automotive and construction markets, and changes in
consumer purchasing power.
•Changes
in customer preferences, the inability to maintain mutually beneficial
relationships with large customers, and the inability to penetrate new channels
of distribution could adversely affect our business. We have a number of
major customers, including two large customers that, in the aggregate,
constituted approximately 32% of our consolidated sales in 2009. The loss of
either of these large customers, a material negative change in our relationship
with these large customers or other major customers, or changes in consumer
preferences or loyalties could have an adverse effect on our business. Our major
customers are volume purchasers, a few of which are much larger than us and have
strong bargaining power with suppliers. This limits our ability to recover cost
increases through higher selling prices. Changes in purchasing patterns by major
customers could negatively impact manufacturing volumes and inventory levels.
Further, our inability to continue to penetrate new channels of distribution may
have a negative impact on our future results.
•The
inability to obtain raw materials, component parts, and/or finished goods in a
timely and cost-effective manner from suppliers would adversely affect our
ability to manufacture and market our products. We purchase raw materials
and component parts from suppliers to be used in the manufacturing of our
products. In addition, we purchase certain finished goods from suppliers. Since
the onset of the global economic crisis in 2008, certain of our suppliers have
experienced financial difficulties and we believe it is possible that a limited
number of suppliers may either cease operations or require additional financial
assistance from us in order to fulfill their obligations. In a limited number of
circumstances, the magnitude of our purchases of certain items is of such
significance that a change in our established supply relationships may cause
disruption in the marketplace, a temporary price imbalance, or both. Changes in
our relationships with suppliers or increases in the costs of purchased raw
materials, component parts or finished goods could result in manufacturing
interruptions, delays, inefficiencies or our inability to market products. An
increase in value-added taxes by various foreign jurisdictions, or a reduction
in value-added tax rebates currently available to us or to our suppliers, could
also increase the costs of our manufactured products as well as purchased
products and components and could adversely affect our results of operations. In
addition, our profit margins would decrease if prices of purchased raw
materials, component parts, or finished goods increase and we are unable to pass
on those increases to our customers.
•We face
significant global competition. The markets in which we sell products are
highly competitive on the basis of price, quality, and after-sale service. A
number of competing domestic and foreign companies are strong, well-established
manufacturers that compete globally with us. Some of our major customers sell
their own “private label” brands that
compete directly with our products. Price reductions taken by us in response to
customer and competitive pressures, as well as price reductions and promotional
actions taken to drive demand that may not result in anticipated sales levels,
could also negatively impact our business. Competition has been intense in
recent years and is expected to continue. If we are unable to maintain a
competitive advantage, loss of market share, revenue, or profitability may
result.
•Low
demand for new products and the inability to develop and introduce new products
at favorable margins could adversely impact our performance and prospects for
future growth. Our competitive advantage is due in part to our ability to
develop and introduce new products in a timely manner at favorable
10
margins.
The uncertainties associated with developing and introducing new products, such
as market demand and costs of development and production, may impede the
successful development and introduction of new products on a consistent basis.
Introduction of new technology may result in higher costs to us than that of the
technology replaced. That increase in costs, which may continue indefinitely or
until and if increased demand and greater availability in the sources of the new
technology drive down its cost, could adversely affect our results of
operations. Market acceptance of the new products introduced in recent years and
scheduled for introduction in 2010 may not meet sales expectations due to
various factors, such as our failure to accurately predict market demand,
end-user preferences, and evolving industry standards, to resolve technical and
technological challenges in a timely and cost-effective manner, and to achieve
manufacturing efficiencies. Our investments in productive capacity and
commitments to fund advertising and product promotions in connection with these
new products could be excessive if those expectations are not met.
•Price
increases could impact the demand for our products from customers and
end-users. We may periodically increase the prices of our products. An
adverse reaction by our customers or end-users to price increases could
negatively impact our anticipated sales, profitability, manufacturing volumes,
and/or inventory levels.
•The
inability to generate sufficient cash flows to support operations and other
activities could prevent future growth and success. Our inability to
generate sufficient cash flows to support capital expansion, business
acquisition plans, share repurchases and general operating activities could
negatively affect our operations and prevent our expansion into existing and new
markets. Our ability to generate cash flows is dependent in part upon obtaining
necessary financing at favorable interest rates. Interest rate fluctuations and
other capital market conditions may prevent us from doing so.
•The
global credit crisis may impact the availability and cost of credit. The
turmoil in the credit markets has resulted in higher borrowing costs and, for
some companies, has limited access to credit, particularly through the
commercial paper markets. Our ability to maintain our commercial paper program
is principally a function of our short-term debt credit rating. During the first
quarter of 2009, Fitch Ratings affirmed our short-term debt rating of F2,
Moody’s Investors Service downgraded our short-term debt rating from P2 to P3,
and Standard & Poor’s downgraded our short-term debt rating from A2 to A3.
As a result of the reduction in our short-term credit ratings that occurred
during the first quarter of 2009, our ability to access commercial paper
borrowings was substantially reduced during portions of 2009. As a result, we
utilized our $1.0 billion unsecured credit facility during 2009. Although we
believe that the lenders participating in our revolving credit facility will be
able to provide financing in accordance with their contractual obligations, the
current economic environment may adversely impact our ability to borrow
additional funds on comparable terms in a timely manner. Continued disruption in
the credit markets also may negatively affect the ability of our customers and
suppliers to conduct business on a normal basis. The deterioration of our future
business performance, beyond our current expectations, could result in our
non-compliance with debt covenants.
•Our
success depends on our ability to improve productivity and streamline operations
to control or reduce costs. We are committed to continuous productivity
improvement and continue to evaluate opportunities to reduce fixed costs,
simplify or improve processes, and eliminate excess capacity. We have also
undertaken restructuring actions as described in Note 19 of Notes to
Consolidated Financial Statements and in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”. The ultimate
savings realized from restructuring actions may be mitigated by many factors,
including economic weakness, competitive pressures, and decisions to increase
costs in areas such as promotion or research and development above levels that
were otherwise assumed. Our failure to achieve projected levels of efficiencies
and cost reduction measures and to avoid delays in or unanticipated
inefficiencies resulting from manufacturing and administrative reorganization
actions in progress or contemplated would adversely affect our results of
operations.
•The
inability to realize new acquisition opportunities or to successfully integrate
the operations of acquired businesses could negatively impact our prospect for
future growth and profitability. We expend significant resources on
identifying opportunities to acquire new lines of business and companies that
could contribute to our success and expansion into existing and new markets. Our
inability to successfully identify or realize acquisition opportunities,
integrate the operations of acquired businesses, or realize the anticipated cost
savings, synergies and other benefits related to the acquisition of those
businesses could have a material adverse effect on our business, financial
condition and future growth. Acquisitions may also have a material adverse
effect on our operating results due to large write-offs, contingent liabilities,
substantial depreciation, or other adverse tax or audit
consequences.
•Failures of our infrastructure could have a material
adverse effect on our business. We are heavily dependent on our
infrastructure. Significant problems with our infrastructure, such as
manufacturing failures, telephone or information technology (IT) system failure,
computer viruses or other third-party tampering with IT systems, could halt or
delay manufacturing and hinder our ability to ship in a timely manner or
otherwise routinely conduct business. Any of these events could result in the
loss of customers, a decrease in revenue, or the incurrence of significant costs
to eliminate the problem or failure.
11
•Our
products could be subject to product liability claims and litigation. We
manufacture products that create exposure to product liability claims and
litigation. If our products are not properly manufactured or designed, personal
injuries or property damage could result, which could subject us to claims for
damages. The costs associated with defending product liability claims and
payment of damages could be substantial. Our reputation could also be adversely
affected by such claims, whether or not successful.
•Our
products could be recalled. The Consumer Product Safety Commission or
other applicable regulatory bodies may require the recall, repair or replacement
of our products if those products are found not to be in compliance with
applicable standards or regulations. A recall could increase costs and adversely
impact our reputation.
•We may
have additional tax liabilities. We are subject to income taxes in the
United States and numerous foreign jurisdictions. Significant judgment is
required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and calculations
where the ultimate tax determination is uncertain. We are regularly under audit
by tax authorities. Although we believe our tax estimates are reasonable, the
final outcome of tax audits and any related litigation could be materially
different than that which is reflected in historical income tax provisions and
accruals. Based on the status of a given tax audit or related litigation, a
material effect on our income tax provision or net income may result in the
period or periods from initial recognition in our reported financial results to
the final closure of that tax audit or settlement of related litigation when the
ultimate tax and related cash flow is known with certainty.
•We are
subject to current environmental and other laws and regulations. We are
subject to environmental laws in each jurisdiction in which we conduct business.
Some of our products incorporate substances that are regulated in some
jurisdictions in which we conduct manufacturing operations. We could be subject
to liability if we do not comply with these regulations. In addition, we are
currently and may, in the future, be held responsible for remedial
investigations and clean-up costs resulting from the discharge of hazardous
substances into the environment, including sites that have never been owned or
operated by us but at which we have been identified as a potentially responsible
party under federal and state environmental laws and regulations. Changes in
environmental and other laws and regulations in both domestic and foreign
jurisdictions could adversely affect our operations due to increased costs of
compliance and potential liability for non-compliance.
•If our
goodwill or indefinite-lived intangible assets become impaired, we may be
required to record a significant charge to earnings. Under United States
generally accepted accounting principles, goodwill and indefinite-lived
intangible assets are not amortized but are reviewed for impairment on an annual
basis or more frequently whenever events or changes in circumstances indicate
that their carrying value may not be recoverable. A deterioration in the future
performance of certain of our businesses, beyond our current expectations, may
result in the impairment of certain amounts of our goodwill and indefinite-lived
intangible assets. We may be required to record a significant charge to earnings
in our financial statements during the period in which any impairment of our
goodwill or indefinite-lived intangible assets is determined, resulting in an
impact on our results of operations.
•Changes
in accounting may affect our reported earnings. For many aspects of our
business, United States generally accepted accounting principles, including
pronouncements, implementation guidelines, and interpretations, are highly
complex and require subjective judgments. Changes in these accounting
principles, including their interpretation and application, could significantly
change our reported earnings, adding significant volatility to our reported
results without a comparable underlying change in our cash flows. If the U.S.
Securities and Exchange Commission were to mandate the adoption of International
Financial Reporting Standards, significant changes to our reported earnings and
balance sheet could result without a comparable underlying change in our cash
flows.
•We are
exposed to adverse changes in currency exchange rates, raw material commodity
prices or interest rates, both in absolute terms and relative to competitors’
risk profiles. We have a number of manufacturing sites throughout the
world and sell our products in more than 100 countries. As a result, we are
exposed to movements in the exchange rates of various currencies against the
United States dollar and against the currencies of countries in which we have
manufacturing facilities. We believe our most significant foreign currency
exposures are the euro, pound sterling, and Chinese renminbi. A decrease in the
value of the euro and pound sterling relative to the U.S. dollar could adversely
affect our results of operations. An increase in the value of the Chinese
renminbi relative to the U.S. dollar could adversely affect our results of
operations. We utilize materials in the manufacturing of our products that
include certain components and raw materials that are subject to commodity price
volatility. We believe our most significant commodity-related exposures are to
nickel, steel, resins, copper, aluminum, and zinc. An increase in the market
prices of these items could adversely affect our results of operations. We have
outstanding variable-rate and fixed-rate borrowings. To meet our cash
requirements, we may incur additional borrowings in the future under our
existing or future borrowing facilities. An increase in interest rates could
adversely affect our results of operations.
12
•We are
exposed to counterparty risk in our hedging arrangements. From time to
time we enter into arrangements with financial institutions to hedge our
exposure to fluctuations in currency and interest rates, including forward
contracts and swap agreements. Recently, a number of financial institutions
similar to those that serve as counterparties to our hedging arrangements have
been adversely affected by the global credit crisis. The failure of one or more
counterparties to our hedging arrangements to fulfill their obligations to us
could adversely affect our results of operations.
•We
operate a global business that exposes us to additional risks. Our sales
outside of the United States accounted for approximately 43% of our consolidated
sales in 2009. We continue to expand into foreign markets. The future growth and
profitability of our foreign operations are subject to a variety of risks and
uncertainties, such as tariffs, nationalization, exchange controls, interest
rate fluctuations, civil unrest, governmental changes, limitations on foreign
investment in local business and other political, economic and regulatory risks
inherent in conducting business internationally. Over the past several years,
such factors have become increasingly important as a result of our higher
percentage of manufacturing in China, Mexico, and the Czech Republic and
purchases of products and components from foreign countries.
•We have
pension plans that are exposed to adverse changes in the market values of equity
securities, fixed income securities, and other investments. Our funded
pension plans cover substantially all of our employees in the United States and
Canada (if hired before 2007) and the United Kingdom (if hired before 2005). Our
funding of pension obligations and our pension benefit costs are dependent on
the assumptions used in calculating such amounts, as compared to the actual
experience of the plans. A decrease in the market value of equity securities,
fixed income securities, and other investments could result in an increase to
those obligations and costs and could adversely affect our results of operations
and our cash flow.
•Catastrophic events may disrupt our business.
Unforeseen events, including war, terrorism and other international conflicts,
public health issues, and natural disasters such as earthquakes, hurricanes or
other adverse weather and climate conditions, whether occurring in the United
States or abroad, could disrupt our operations, disrupt the operations of our
suppliers or customers, or result in political or economic instability. These
events could reduce demand for our products and make it difficult or impossible
for us to manufacture our products, deliver products to customers, or to receive
products from suppliers.
The
foregoing list is not exhaustive. There can be no assurance that we have
correctly identified and appropriately assessed all factors affecting our
business or that the publicly available and other information with respect to
these matters is complete and correct. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial also may
adversely impact our business. Should any risks or uncertainties develop into
actual events, these developments could have material adverse effects on our
business, financial condition, and results of operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
The
Corporation operates 39 manufacturing facilities around the world, including 25
located outside of the United States in 11 foreign countries. The major
properties associated with each business segment are listed in “Narrative
Description of the Business” in Item 1(c) of
Part I of this report.
The
following are the Corporation’s major leased facilities:
In the
United States: Lake Forest, Mira Loma, and Rialto, California; Charlotte, North
Carolina; Tampa, Florida; Chesterfield, Michigan; and Towson,
Maryland.
Outside
of the United States: Tongeren and Aarschot, Belgium; Reynosa and Mexicali,
Mexico; Brockville, Canada; Usti nad Labem, Czech Republic; Gliwice, Poland; and
Xiamen and Suzhou, China.
Additional
property both owned and leased by the Corporation in Towson, Maryland, is used
for administrative offices. Subsidiaries of the Corporation lease certain
locations primarily for smaller manufacturing and/or assembly operations,
service operations, sales and administrative offices, and for warehousing and
distribution centers. The Corporation also owns a manufacturing plant located on
leased land in Suzhou, China.
As more
fully described in Item 7 of Part II of this report under the caption “Restructuring
Actions”, the
Corporation is committed to continuous productivity improvement and continues to
evaluate opportunities to reduce fixed costs, simplify or improve processes, and
eliminate excess capacity. The Corporation will continue to evaluate its
worldwide manufacturing cost structure to identify opportunities to improve
capacity utilization and lower product costs and will take appropriate action as
deemed necessary.
Management
believes that its owned and leased facilities are suitable and adequate to meet
the Corporation’s anticipated needs.
ITEM
3. LEGAL PROCEEDINGS
The
Corporation is involved in various lawsuits in the ordinary course of business.
These lawsuits primarily involve claims for damages arising out of the use of
13
the
Corporation’s products and allegations of patent and trademark infringement. The
Corporation also is involved in litigation and administrative proceedings
involving employment matters, commercial disputes, and income tax matters. Some
of these lawsuits include claims for punitive as well as compensatory damages.
The
Corporation, using current product sales data and historical trends, actuarially
calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability as described above up to the
limits of the deductibles. All other claims and lawsuits are handled on a
case-by-case basis. The Corporation’s estimate of costs associated with product
liability claims, environmental matters, and other legal proceedings is accrued
if, in management’s judgment, the likelihood of a loss is probable and the
amount of the loss can be reasonably estimated. These accrued liabilities are
not discounted.
As
previously noted under Item 1(c) of Part I of this report, the Corporation also
is party to litigation and administrative proceedings with respect to claims
involving the discharge of hazardous substances into the environment. Some of
these assert claims for damages and liability for remedial investigations and
clean-up costs with respect to sites that have never been owned or operated by
the Corporation but at which the Corporation has been identified as a PRP.
Others involve current and former manufacturing facilities.
The EPA
and the Santa Ana Regional Water Quality Control Board have each initiated
administrative proceedings against the Corporation and certain of the
Corporation’s current or former affiliates alleging that the Corporation and
numerous other defendants are responsible to investigate and remediate alleged
groundwater contamination in and adjacent to a 160-acre property located in
Rialto, California. The United States of America, the cities of Colton and
Rialto, and certain other PRPs have also initiated lawsuits (and/or asserted
cross and counter-claims against the Corporation and certain of the
Corporation’s former or current affiliates) that are currently pending in the
United States District Court for the Central District of California
(collectively, the “Litigation”). In the Litigation, the various parties allege
that the Corporation is liable under CERCLA, the Resource Conservation and
Recovery Act, and various state laws for the discharge or release of hazardous
substances into the environment and the contamination caused by those alleged
releases. The Corporation, in turn, through certain of the aforementioned
affiliates, has also initiated a lawsuit in the United States District Court for
the Central District of California alleging that various other PRPs are liable
for the alleged contamination at issue. The City of Colton also has a companion
case in California State court, which is currently stayed for all purposes.
Certain defendants in that case have cross-claims against other defendants and
have asserted claims against the State of California. The administrative
proceedings and the lawsuits generally allege that West Coast Loading
Corporation (WCLC), a defunct company that operated in Rialto between 1952 and
1957, and an as yet undefined number of other defendants are responsible for the
release of perchlorate and solvents into the groundwater basin, and that the
Corporation and certain of the Corporation’s current or former affiliates are
liable as a “successor” of WCLC. The Corporation believes that neither the facts
nor the law support an allegation that the Corporation is responsible for the
contamination and is vigorously contesting these claims.
The EPA
has provided an affiliate of the Corporation a “Notice of
Potential Liability” related to
environmental contamination found at the Centredale Manor Restoration Project
Superfund site, located in North Providence, Rhode Island. The EPA has
discovered dioxin, polychlorinated biphenyls, and pesticide contamination at
this site. The EPA alleged that an affiliate of the Corporation is liable for
site cleanup costs under CERCLA as a successor to the liability of
Metro-Atlantic, Inc., a former operator at the site, and demanded reimbursement
of the EPA’s costs related to this site. The EPA, which considers the
Corporation to be the primary potentially responsible party (PRP) at the site,
is expected to release a draft Feasibility Study Report, which will identify and
evaluate remedial alternatives for the site, in 2011. At December 31, 2009, the
estimated remediation costs related to this site (including the EPA’s past costs
as well as costs of additional investigation, remediation, and related costs,
less escrowed funds contributed by PRPs who have reached settlement agreements
with the EPA), which the Corporation considers to be probable and can be
reasonably estimable, range from approximately $50.5 million to approximately
$100 million, with no amount within that range representing a more likely
outcome. At December 31, 2009, the Corporation maintains a reserve for this
environmental remediation matter of $50.5 million, reflecting the probability
that the Corporation will be identified as the principal financially viable PRP
upon issuance of the EPA draft Feasibility Study Report in 2010. The Corporation
has not yet determined the extent to which it will contest the EPA’s claims with
respect to this site. Further, to the extent that the Corporation agrees to
perform or finance remedial activities at this site, it
will seek participation or contribution from additional potentially responsible
parties and insurance carriers. As the specific nature of the environmental
remediation activities that may be mandated by the EPA at this site have not yet
been determined, the ultimate remedial costs associated with the site may vary
from the amount accrued by the Corporation at December 31, 2009.
14
Total
future costs for environmental remediation activities will depend upon, among
other things, the identification of any additional sites, the determination of
the extent of contamination at each site, the timing and nature of required
remedial actions, the technology available, the nature and terms of cost sharing
arrangements with other PRPs, the existing legal requirements and nature and
extent of future environmental laws, and the determination of the Corporation’s
liability at each site. The recognition of additional losses, if and when they
may occur, cannot be reasonably predicted.
In the
opinion of management, amounts accrued for exposures relating to product
liability claims, environmental matters, and other legal proceedings are
adequate and, accordingly, the ultimate resolution of these matters is not
expected to have a material adverse effect on the Corporation’s consolidated
financial statements. As of December 31, 2009, the Corporation had no known
probable but inestimable exposures relating to product liability claims,
environmental matters, or other legal proceedings that are expected to have a
material adverse effect on the Corporation. There can be no assurance, however,
that unanticipated events will not require the Corporation to increase the
amount it has accrued for any matter or accrue for a matter that has not been
previously accrued because it was not considered probable. While it is possible
that the increase or establishment of an accrual could have a material adverse
effect on the financial results for any particular fiscal quarter or year, in
the opinion of management there exists no known potential exposures that would
have a material adverse effect on the financial condition or on the financial
results of the Corporation beyond any such fiscal quarter or year.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
15
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(a)
Market
Information
The
Corporation’s Common Stock is listed on the New York Stock
Exchange.
The
following table sets forth, for the periods indicated, the high and low sale
prices of the Common Stock as reported in the consolidated reporting system for
the New York Stock Exchange Composite Transactions:
|
QUARTER
|
2009 |
2008
|
||||||||||||||||
|
January
to March
|
$ | 46.66 |
to
|
$ | 20.10 | $ | 74.24 |
to
|
$ | 61.71 | ||||||||
|
April
to June
|
$ | 41.28 |
to
|
$ | 27.10 | $ | 71.23 |
to
|
$ | 57.50 | ||||||||
|
July
to September
|
$ | 51.12 |
to
|
$ | 26.44 | $ | 69.50 |
to
|
$ | 51.56 | ||||||||
|
October
to December
|
$ | 67.13 |
to
|
$ | 42.51 | $ | 62.09 |
to
|
$ | 32.31 | ||||||||
(b) Holders of the Corporation’s Capital Stock
As of
January 22, 2010, there were 10,257 holders of record of the Corporation’s
Common Stock.
Common
Stock:
150,000,000
shares authorized, $.50 par value, 61,645,196 and 60,092,726 outstanding as of
December 31, 2009 and 2008, respectively.
Preferred
Stock:
5,000,000
shares authorized, without par value, no shares outstanding as of December 31,
2009 and 2008.
(c) Dividends
The
Corporation has paid consecutive quarterly dividends on its Common Stock since
1937. Future dividends will depend upon the Corporation’s earnings, financial
condition, and other factors. The Credit Facility, as more fully described in
Note 8 of Notes to Consolidated Financial Statements included in Item 8 of Part
II of this report, does not restrict the Corporation’s ability to pay regular
dividends in the ordinary course of business on the Common Stock. Under the
terms of the definitive merger agreement to create
Stanley Black & Decker, absent the consent of The Stanley Works, the
Corporation has agreed to limit its
regular quarterly cash dividend to $.12 per share.
Quarterly
dividends per common share for the most recent two years are as
follows:
|
QUARTER
|
2009 | 2008 | ||||||
|
January
to March
|
$ | .42 | $ | .42 | ||||
|
April
to June
|
.12 | .42 | ||||||
|
July
to September
|
.12 | .42 | ||||||
|
October
to December
|
.12 | .42 | ||||||
| $ | .78 | $ | 1.68 | |||||
16
(d)
Performance Graph
COMPARISON OF
FIVE-YEAR CUMULATIVE TOTAL RETURN
|
(1)
|
Assumes
$100 invested at the close of business on December 31, 2004 in Black &
Decker common stock, Standard & Poor’s (S&P) 500 Index, and the
Peer Group.
|
|
(2)
|
The
cumulative total return assumes reinvestment of
dividends.
|
|
(3)
|
The
Peer Group consists of the companies in the following indices within the
Standard & Poor’s Super Composite 1,500: Household Appliances,
Housewares & Specialties, Industrial Machinery, and Building Products.
A list of the companies in the Peer Group will be furnished upon request
addressed to the Corporate Secretary at 701 East Joppa Road, Towson,
Maryland 21286.
|
|
(4)
|
Total
return is weighted according to market capitalization of each company at
the beginning of each year.
|
(e)
Issuer Purchases of Equity Securities
|
PERIOD
(a)
|
TOTAL
NUMBER
OF
SHARES
PURCHASED
|
(b) |
AVERAGE
PRICE
PAID
PER
SHARE
|
TOTAL
NUMBER
OF
SHARES
PURCHASED
AS
PART
OF PUBLICLY
ANNOUNCED
PLANS
|
MAXIMUM
NUMBER
OF
SHARES
THAT
MAY YET
BE
PURCHASED
UNDER
THE PLANS
|
(c) | ||
|
September
28, 2009 through
October
25, 2009
|
2,816 | $ | 45.64 | — | 3,777,145 | |||
|
October
26, 2009 through
November
29, 2009
|
186,326 | 59.76 | — | 3,777,145 | ||||
|
November
30, 2009 through
December
31, 2009
|
— | — | — | 3,777,145 | ||||
|
Total
|
189,142 | $ | 59.55 | — | 3,777,145 | |||
|
(a)
|
The
periods represent the Corporation’s monthly fiscal
calendar.
|
|
(b)
|
Shares
acquired from associates to satisfy withholding tax requirements upon the
vesting of restricted stock.
|
|
(c)
|
The
maximum number of shares that may yet be purchased under the plans
represent the remaining shares that are available pursuant to the
Corporation’s publicly announced repurchase plans. The maximum number of
shares that may yet be purchased under the plans noted above included
4,000,000 shares authorized by the Board of Directors on October 17, 2007,
and 2,000,000 shares authorized by the Board of Directors on February 14,
2008. Under the terms of the definitive merger agreement to create Stanley
Black & Decker, absent the consent of The Stanley Works, the
Corporation has agreed not to repurchase shares of its common stock
pending consummation of the merger.
|
17
ITEM
6. SELECTED FINANCIAL DATA
FIVE-YEAR
SUMMARY (a)(b)
|
(DOLLARS
IN MILLIONS EXCEPT PER SHARE DATA)
|
2009 |
(c)
|
2008 |
(d)
|
2007 | (e) | 2006 |
|
2005 | (f) | ||||||||||
|
Sales
|
$ | 4,775.1 | $ | 6,086.1 | $ | 6,563.2 | $ | 6,447.3 | $ | 6,523.7 | ||||||||||
|
Net
earnings from continuing operations
|
132.5 | 293.6 | 518.1 | 486.1 | 532.2 | |||||||||||||||
|
Loss
from discontinued operations (g)
|
— | — | — | — | (.1 | ) | ||||||||||||||
|
Net
earnings
|
132.5 | 293.6 | 518.1 | 486.1 | 532.1 | |||||||||||||||
|
Net
earnings per common share – basic
|
2.18 | 4.83 | 7.96 | 6.67 | 6.68 | |||||||||||||||
|
Net
earnings per common share – assuming dilution
|
2.17 | 4.77 | 7.78 | 6.51 | 6.51 | |||||||||||||||
|
Total
assets
|
5,495.2 | 5,183.3 | 5,410.9 | 5,247.7 | 5,842.4 | |||||||||||||||
|
Long-term
debt
|
1,715.0 | 1,444.7 | 1,179.1 | 1,170.3 | 1,030.3 | |||||||||||||||
|
Cash
dividends per common share
|
.78 | 1.68 | 1.68 | 1.52 | 1.12 | |||||||||||||||
|
(a)
|
The
Corporation adopted a new accounting standard effective January 1, 2009,
that clarifies whether instruments granted in share-based payment
transactions should be included in the computation of earnings per share
using the two-class method prior to vesting, and, as required,
retrospectively adjusted basic and diluted earnings per share for all
prior periods to reflect the adoption of that
standard.
|
|
(b)
|
The
Corporation adopted a new accounting standard effective January 1, 2006,
for the recognition of stock-based compensation expense using the modified
retrospective method of adoption whereby the Corporation restated all
prior periods presented based on amounts previously recognized for
purposes of pro forma disclosures. Amounts in this five-year summary for
2005 reflect such restated amounts.
|
|
(c)
|
Earnings
from continuing operations for 2009 includes a restructuring charge of
$11.9 million before taxes ($8.4 million after taxes). In addition,
earnings from continuing operations for 2009 includes merger-related
expenses of $58.8 million ($42.6 million after taxes) relating to the
Corporation’s proposed merger with The Stanley
Works.
|
|
(d)
|
Earnings
from continuing operations for 2008 includes a restructuring charge of
$54.7 million before taxes ($39.6 million after taxes).
|
|
(e)
|
Earnings
from continuing operations for 2007 includes a favorable $153.4 million
settlement of tax litigation. In addition, earnings from continuing
operations for 2007 includes a charge for an environmental remediation
matter of $31.7 million before taxes ($20.6 million after taxes) and a
restructuring charge of $19.0 million before taxes ($12.8 million after
taxes).
|
|
(f)
|
Earnings
from continuing operations for 2005 includes a favorable $55.0 million
before taxes ($35.8 million after taxes) settlement of environmental and
product liability coverage litigation with an insurer. In addition,
earnings from continuing operations for 2005 includes $51.2 million of
incremental tax expense resulting from the repatriation of $888.3 million
of foreign earnings under the American Jobs Creation Act of
2004.
|
|
(g)
|
Loss
from discontinued operations represents the loss, net of applicable income
taxes, of the Corporation’s discontinued European security hardware
business.
|
18
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The
Corporation is a global manufacturer and marketer of power tools and
accessories, hardware and home improvement products, and technology-based
fastening systems. As more fully described in Note 17 of Notes to Consolidated
Financial Statements, the Corporation operates in three reportable business
segments – Power Tools and Accessories, Hardware and Home Improvement, and
Fastening and Assembly Systems – with these business segments comprising
approximately 73%, 16%, and 11%, respectively, of the Corporation’s sales in
2009.
The
Corporation markets its products and services in over 100 countries. During
2009, approximately 57%, 23%, and 20% of its sales were made to customers in the
United States, in Europe (including the United Kingdom and Middle East), and in
other geographic regions, respectively. The Power Tools and Accessories and
Hardware and Home Improvement segments are subject to general economic
conditions in the countries in which they operate as well as the strength of the
retail economies. The Fastening and Assembly Systems segment is also subject to
general economic conditions in the countries in which it operates as well as to
automotive and industrial demand.
As more
fully described in Note 2 of Notes to Consolidated Financial Statements, on
November 2, 2009, the Corporation announced that it had entered into a
definitive merger agreement to create Stanley Black & Decker, Inc. in
an all-stock transaction. Under the terms of the transaction, which has been
approved by the Boards of Directors of both the Corporation and The Stanley
Works, the Corporation’s shareholders will receive a fixed ratio of 1.275 shares
of The Stanley Works common stock for each share of the Corporation’s common
stock that they own. Consummation of the transaction is subject to customary
closing conditions, including obtaining certain regulatory approvals outside of
the United States as well as shareholder approval from the shareholders of both
the Corporation and The Stanley Works. The Corporation and The Stanley Works
will each hold special shareholder meetings on March 12, 2010, to vote on the
proposed transaction and expect that closing of the transaction will occur on
that date. Unless expressly noted to the contrary, all forward-looking
statements in the discussion and analysis of financial condition and results of
operations that follows relate to the Corporation on a stand-alone basis and are
not reflective of the impact of the proposed merger with The Stanley
Works.
An
overview of certain aspects of the Corporation’s performance during the year
ended December 31, 2009, follows:
•The Corporation continued to face a
difficult demand environment during 2009 due to the impact of the global
recession. Sales for 2009 were $4,775.1 million, which represented a 22%
decrease from 2008 sales of $6,086.1 million. This reduction was the result of a
20% decline in unit volume and a 3% unfavorable impact from foreign currency
translation attributable to the effects of a stronger U.S. dollar, partially
offset by 1% of favorable price. That unit volume decline was experienced across
all business segments and throughout all geographic regions. Entering 2010, the
Corporation believes most of its key markets have stabilized – albeit at low
levels – and anticipates a modest improvement in a number of those markets. For
2010, the Corporation is projecting a low-single-digit rate of sales growth over
the 2009 levels as global consumer spending improves very gradually but
commercial construction continues to weaken. On a stand-alone basis in 2010, the
Corporation expects that its operating income as a percentage of sales will
increase by 100 to 150 basis points over the 2009 level, excluding any expenses
associated with the proposed merger with The Stanley Works and excluding the
effect of $11.9 million of pre-tax restructuring and exit costs recognized in
2009.
•Operating income as a percentage of
sales for 2009 decreased by approximately 170 basis points from the 2008 level
to 5.2%. Of that decline, an increase in selling, general, and administrative
expenses contributed approximately 150 basis points and expenses of $58.8
million related to the proposed merger with The Stanley Works contributed
approximately 120 basis points. Those declines were partially offset by a
decrease of $42.8 million in restructuring and exit costs that contributed a
favorable 60 basis points to operating income as a percentage of sales as well
as an increase in gross margin of approximately 40 basis points. Gross margin as
a percentage of sales increased in 2009 over the 2008 level as a result of the
favorable effects of pricing, restructuring and cost reduction initiatives,
productivity gains and commodity deflation, which were partially offset by the
unfavorable effects of lower volumes, including the de-leveraging of fixed
costs. Despite a $255.2 million reduction in selling, general, and
administrative expenses in 2009, selling, general, and administrative expenses
as a percentage of sales increased 150 basis points over the 2008 level due to
the de-leveraging of expenses over a lower sales base.
•Interest expense (net of interest
income) increased by $21.4 million in 2009 over the 2008 level, primarily as a
result of the April 2009 issuance of $350.0 million of 8.95% senior notes due
2014 and of the effects of lower interest rate spreads earned on the
Corporation’s foreign currency hedging activities, partially offset by the
effects of lower short-term borrowing levels and interest rates during
2009.
•Net earnings were $132.5 million, or
$2.17 per diluted share, for the year ended December 31, 2009, as compared to
$293.6 million, or $4.77 per diluted share, for 2008. Net earnings for the year
ended December 31, 2009, included the effect of after-tax merger-related
19
expenses
of $42.6 million ($58.8 million before taxes), or $.70 per diluted share, and an
after-tax restructuring charge of $8.4 million ($11.9 million before taxes), or
$.14 per diluted share. Net earnings for the year ended December 31, 2008,
included the effects of an after-tax restructuring charge of $39.6 million
($54.7 million before taxes), or $.64 per diluted share. Excluding the
aforementioned effects of merger-related expenses in 2009 and restructuring and
exit costs in 2009 and 2008, earnings per share on a diluted basis were $3.01
for the year ended December 31, 2009, as compared to $5.41 for the year ended
December 31, 2008.
•Cash flow from operating activities
increased by $60.2 million over the 2008 level to $485.6 million for the year
ended December 31, 2009. The increase in cash provided by operating activities
in 2009 was primarily due to significant reductions in inventory levels, which
more than offset a decrease in net earnings from the 2008 level. Net cash
generation, defined by the Corporation as cash flow from operating activities
less capital expenditures, plus proceeds from the sale of assets and cash flow
from net investment hedging activities, increased to $583.5 million in 2009 from
$389.7 million in 2008 as higher cash provided from operating activities was
augmented by an increase of $115.1 million in net cash inflow from net
investment hedging activities.
The
preceding information is an overview of certain aspects of the Corporation’s
performance during 2009 and should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations in its
entirety.
In the
discussion and analysis of financial condition and results of operations that
follows, the Corporation generally attempts to list contributing factors in
order of significance to the point being addressed.
Results
of Operations
SALES
The
following chart provides an analysis of the consolidated changes in sales for
the years ended December 31, 2009, 2008, and 2007.
|
(DOLLARS
IN MILLIONS)
|
2009 | 2008 | 2007 | |||||||||
|
Total
sales
|
$ | 4,775.1 | $ | 6,086.1 | $ | 6,563.2 | ||||||
|
Unit
volume
|
(20 | ) % | (9 | ) % | (1 | ) % | ||||||
|
Price
|
1 | % | — | % | — | % | ||||||
|
Currency
|
(3 | ) % | 2 | % | 3 | % | ||||||
|
Change
in total sales
|
(22 | ) % | (7 | ) % | 2 | % | ||||||
The
global economic recession, which began in late 2008, continued to adversely
impact the Corporation’s sales during 2009. Total consolidated sales for the
year ended December 31, 2009, were $4,775.1 million, which represented a
decrease of 22% from 2008 sales of $6,086.1 million. As compared to the 2008
level, unit volume decreased 20% in 2009. The unit volume decline was
experienced across all business segments and throughout all geographic regions.
Pricing actions had a 1% favorable impact on sales. The effects of a stronger
U.S. dollar, as compared to most other currencies, particularly the euro,
British pound, Canadian dollar, Brazilian real, and Mexican peso, caused the
Corporation’s consolidated sales for 2009 to decrease by 3% from the 2008
level.
Total
consolidated sales for the year ended December 31, 2008, were $6,086.1 million,
which represented a decrease of 7% from 2007 sales of $6,563.2 million. As
compared to the 2007 level, unit volume decreased 9% in 2008. That unit volume
decline was primarily driven by lower sales in the United States, due to general
economic conditions in the U.S., including lower housing starts, and in Western
Europe due to weakening economic conditions. The effects of pricing actions did
not have a material effect on sales in 2008. The effects of a weaker U.S.
dollar, as compared to most other currencies, particularly the euro, Japanese
yen, Brazilian real, and Canadian dollar, caused the Corporation’s consolidated
sales for 2008 to increase by 2% over the 2007 level.
EARNINGS
A summary
of the Corporation’s consolidated gross margin, selling, general, and
administrative expenses, merger-related expenses, restructuring and exit costs,
and operating income – all expressed as a percentage of sales –
follows:
|
YEAR
ENDED DECEMBER 31,
|
||||||||||||
|
(PERCENTAGE
OF SALES)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
margin
|
33.2 | % | 32.8 | % | 33.9 | % | ||||||
|
Selling,
general, and administrative expenses
|
26.5 | % | 25.0 | % | 24.7 | % | ||||||
| Merger-related expenses | 1.2 | % | — | % | — | % | ||||||
|
Restructuring
and exit costs
|
.3 | % | .9 | % | .3 | % | ||||||
|
Operating
income
|
5.2 | % | 6.9 | % | 8.9 | % | ||||||
The
Corporation reported consolidated operating income of $249.4 million on sales of
$4,775.1 million in 2009, as compared to operating income of $422.1 million on
sales of $6,086.1 million in 2008 and to operating income of $582.2 million on
sales of $6,563.2 million in 2007.
Consolidated
gross margin as a percentage of sales increased by approximately 40 basis points
over the 2008 level to 33.2% in 2009. That increase in gross margin was driven
by the favorable effects of pricing actions, commodity deflation, and
restructuring and cost reduction initiatives, which were partially offset by the
unfavorable effects of lower volumes, including the de-leveraging of fixed
costs.
Consolidated
gross margin as a percentage of sales declined by approximately 110 basis points
from the 2007 level to 32.8% in 2008. That decrease in gross margin was driven
by the negative effects of commodity inflation – together with the change in
China’s value added tax and appreciation of the Chinese renminbi – which, in the
aggregate, increased cost of goods sold over the 2007 level by approximately
$160 million in 2008. In addition, the comparison of gross margin as
a
20
percentage
of sales for the year ended December 31, 2008, to the 2007 level was negatively
impacted by the effects of unfavorable product mix as well as the de-leveraging
of fixed costs over a lower sales base. Those negative factors were partially
offset by the favorable effects of productivity and restructuring initiatives,
foreign currency transaction gains, and lower customer consideration and cost of
sales promotions.
Consolidated
selling, general, and administrative expenses as a percentage of sales were
approximately 26.5% in 2009 and 25.0% in 2008. Consolidated selling, general,
and administrative expenses in 2009 decreased by $255.2 million from the 2008
level. That decline was due to several factors, including: (i) cost reduction
initiatives and restructuring savings; (ii) decreases in variable selling
expenses (such as transportation and distribution) due to lower sales volumes;
and (iii) the favorable effects of foreign currency translation.
Consolidated
selling, general, and administrative expenses as a percentage of sales were
approximately 25.0% in 2008 and 24.7% in 2007. Consolidated selling, general,
and administrative expenses in 2008 decreased by $104.2 million from the 2007
level. The favorable effects of cost control and restructuring initiatives,
coupled with the effect of lower sales on certain volume-sensitive expenses
(such as transportation and distribution), and lower environmental expense
offset the unfavorable effects of foreign currency
translation and additional selling, general, and administrative expenses to
support increased sales in certain markets outside of the United States and
Europe.
In 2009,
the Corporation recognized $58.8 million of pre-tax merger-related expenses
related to its proposed merger with The Stanley Works. As more fully described
in Note 2 of Notes to Consolidated Financial Statements, those $58.8 million of
merger-related expenses included employment-related change-in-control costs
triggered by the signing of the merger agreement in 2009 together with legal and
advisory fees associated with the transaction. In addition during 2009, the
Corporation recognized $11.9 million of pre-tax restructuring and exit costs
related to actions in its Power Tools and Accessories, Hardware and Home
Improvement, and Fastening and Assembly Systems segments. As more fully
described in Note 19 of Notes to Consolidated Financial Statements, these
restructuring charges primarily reflected actions to reduce the Corporation’s
selling, general, and administrative expenses and to improve its manufacturing
cost base.
In 2008,
the Corporation recognized $54.7 million of pre-tax restructuring and exit costs
related to actions in each of its business segments as well as its corporate
office. The 2008 restructuring charge reflected actions to reduce the
Corporation’s manufacturing cost base as well as selling, general, and
administrative expenses.
In 2007,
the Corporation recognized $19.0 million of pre-tax restructuring and exit costs
related to actions in its Power Tools and Accessories and Hardware and Home
Improvement segments. The 2007 restructuring charge reflected actions to reduce
the Corporation’s manufacturing cost base as well as selling, general, and
administrative expenses in those segments.
Consolidated
net interest expense (interest expense less interest income) was $83.8 million
in 2009, as compared to $62.4 million in 2008 and $82.3 million in 2007. The
increase in net interest expense in 2009, as compared to 2008, was primarily the
result of the April 2009 issuance of $350.0 million of 8.95% senior notes due
2014 and of the effects of lower interest rate spreads earned on the
Corporation’s foreign currency hedging activities, partially offset by the
effects of lower short-term borrowing levels and interest rates during 2009. The
decrease in net interest expense in 2008, as compared to 2007, was primarily the
result of lower interest rates, including the impact on the Corporation’s
foreign currency hedging activities.
Other
(income) expense was $(4.8) million in 2009, as compared to $(5.0) million in
2008 and $2.3 million in 2007. Other (income) expense for the year ended
December 31, 2009, benefited from a $6.0 million insurance settlement related to
an environmental matter. Other (income) expense for the year ended December 31,
2008, benefited from a gain on the sale of a non-operating asset.
Consolidated
income tax expense (benefit) of $37.9 million, $71.1 million, and $(20.5)
million was recognized on the Corporation’s earnings before income taxes of
$170.4 million, $364.7 million, and $497.6 million, for 2009, 2008, and 2007,
respectively. The effective tax rate of 22.3% recognized for the year ended
December 31, 2009, benefited from favorable adjustments associated with new
facts regarding certain income tax matters and the favorable resolution of
certain tax audits. The Corporation’s 2009 effective tax rate of 22.3% was
higher than its 2008 effective tax rate of 19.5% primarily as a result of
discrete items in 2008 discussed below and the de-leveraging effect of the
interest component on reserves for uncertain tax positions, included as an
element of tax expense, on lower earnings before income taxes in 2009. Income
tax expense (benefit) in 2008 reflects: (i) the favorable resolution of certain
tax audits in 2008; (ii) a $15.1 million tax benefit associated with a $54.7
million pre-tax restructuring charge; and (iii) favorability associated with the
finalization of closing agreements of the settlement of income tax litigation
between the Corporation and the U.S. government agreed to in late 2007. Income
tax expense (benefit) in 2007 reflects: (i) the effect of a $153.4 million tax
benefit associated with a settlement reached on an income tax litigation matter;
(ii) an $11.1 million tax benefit associated with a $31.7 million pre-tax charge
for an environmental remediation matter; and (iii) a $6.2 million tax benefit
associated with a $19.0 million pre-tax restructuring charge. The previously
described items had a significant impact on the Corporation’s effective income
tax rates. A further analysis of taxes on earnings is included in Note 12 of
Notes to Consolidated Financial Statements.
21
The
Corporation reported net earnings of $132.5 million, $293.6 million, and $518.1
million, or $2.17, $4.77 and $7.78 per share on a diluted basis, for the years
ended December 31, 2009, 2008, and 2007, respectively. Net earnings for the year
ended December 31, 2009, included the effect of after-tax merger-related
expenses of $42.6 million ($58.8 million before taxes), or $.70 per share on a
diluted basis, and an after-tax restructuring charge of $8.4 million ($11.9
million before taxes) or $.14 per share on a diluted basis. Net earnings for the
year ended December 31, 2008, included the effect of an after-tax restructuring
charge of $39.6 million ($54.7 million before taxes), or $.64 per share on a
diluted basis. Excluding the aforementioned effects of merger-related expenses
in 2009 and restructuring and exit costs in 2009 and 2008, earnings per share on
a diluted basis were $3.01 for the year ended December 31, 2009, as compared to
$5.41 for the year ended December 31, 2008.
Business
Segments
As more
fully described in Note 17 of Notes to Consolidated Financial Statements, the
Corporation operates in three reportable business segments: Power Tools and
Accessories, Hardware and Home Improvement, and Fastening and Assembly
Systems.
POWER
TOOLS AND ACCESSORIES
Segment
sales and profit for the Power Tools and Accessories segment, determined on the
basis described in Note 17 of Notes to Consolidated Financial Statements, were
as follows (in millions of dollars):
|
YEAR
ENDED DECEMBER 31,
|
2009 | 2008 | 2007 | |||||||||
|
Sales
to unaffiliated customers
|
$ | 3,471.5 | $ | 4,286.6 | $ | 4,754.8 | ||||||
|
Segment
profit
|
257.3 | 317.4 | 482.2 | |||||||||
Sales to
unaffiliated customers in the Power Tools and Accessories segment during 2009
decreased 19% from the 2008 level. That decline primarily resulted in the North
American and European businesses as those businesses were adversely affected by
the impact of the global recession, including lower residential and commercial
construction activity, reduced consumer discretionary spending, and inventory
de-stocking by
retailers.
Sales in
North America decreased 21% during 2009, as compared to the 2008 level,
primarily due to continued weak demand in the United States in light of
depressed housing activity and decelerating commercial construction. Sales
declines were experienced across all channels and product lines. Sales of
industrial power tools and accessories in the United States decreased 26%, with
lower sales in the independent channel and at retail. Sales of consumer power
tools and accessories in the United States decreased at a mid-single-digit rate
from the 2008 level. In Canada, sales decreased 25%, with a 26% decline in sales
of industrial power tools and accessories and a double-digit rate of decline in
sales of consumer power tools and accessories.
Sales in
Europe during 2009 decreased 23% from the level experienced in 2008 due to the
impact of the global recession. Sales declined across all markets and in all key
product lines. The sales decline was particularly severe in Eastern Europe,
Scandinavia, and the United Kingdom. During 2009, European sales of industrial
power tools and accessories declined by 26% and sales of consumer power tools
and accessories declined by a double-digit rate from the 2008
levels.
Sales in
other geographic areas decreased at a mid-single-digit rate during 2009 from the
2008 level. This decrease primarily resulted from a mid-single-digit rate of
decline in Latin America, with double-digit rates of declines experienced in the
Caribbean, Central America, and Mexico – areas more closely tied to the U.S.
economy than others in the region. Sales in Asia/Pacific decreased at a
mid-single-digit rate.
Segment
profit as a percentage of sales for the Power Tools and Accessories segment was
7.4% for 2009 and 2008. As percentages of sales, a 110-basis-point improvement
in gross margin during 2009 was offset by a 110-basis-point increase in selling,
general, and administrative expenses. The increase in gross margin as a
percentage of sales was principally due to favorable price, a positive
comparison to inventory write-downs in 2008, and the benefit of restructuring
and cost reduction initiatives. The increase in selling, general, and
administrative expenses as a percentage of sales resulted from the de-leveraging
of expenses over lower sales, which more than offset the favorable effects of
restructuring and cost reduction initiatives and a reduction in variable selling
expenses.
Sales to
unaffiliated customers in the Power Tools and Accessories segment during 2008
decreased 10% from the 2007 level. That decline primarily resulted from the
North American business, which faced weak housing and discretionary spending all
year, and a slowdown in Europe which accelerated during the second half of the
year.
Sales in
North America decreased at a double-digit rate during 2008, as compared to the
2007 level, primarily as a result of weak demand in the United States as a
result of depressed housing and decelerating commercial construction. Sales of
the Corporation’s industrial power tools and accessories business in the United
States decreased at a low-double-digit rate with declines in all major product
categories and in most channels due primarily to broad market weakness. Sales of
the consumer power tools and accessories business in the United States decreased
by more than 20% primarily due to lost listings in the pressure washer category,
weak demand, and the effects of a transition from the Firestorm® to the
Porter-Cable®
brand of power tools and accessories at a large customer. Most other product
categories also declined in comparison to 2007, but those declines were
partially offset by increased sales in outdoor products. In Canada, sales
increased at a mid-single-digit rate over the 2007 level, primarily due to a
double-digit rate of increase
22
of sales
of industrial power tools and accessories that partially offset a double-digit
rate of decline of sales of consumer power tools and accessories.
Sales of
the European power tools and accessories business during 2008 decreased at a
low-double-digit rate from the level experienced in 2007 as a result of
deteriorating economic conditions in Western Europe, which were partially offset
by growth in the Eastern Europe and Middle East/Africa regions due to growth in
the first nine months of 2008 which offset declines in the fourth quarter. The
decline in sales of the European
power tools and accessories business reflected a rapid deterioration in the
second half of 2008, following a mid-single-digit rate of decline in the first
half of the year. Sales of both the Corporation’s industrial and consumer power
tools and accessories businesses in Europe decreased at a double-digit rate
during 2008 from the 2007 level.
Sales in
other geographic areas increased at a double-digit rate in 2008 over the 2007
level. That growth primarily resulted from a double-digit rate of increase in
Latin America and a low-single-digit rate of increase in the Asia/Pacific
region, where sales growth in Asia offset declines in Australia and New
Zealand.
Segment
profit as a percentage of sales for the Power Tools and Accessories segment was
7.4% for 2008, as compared to 10.1% for 2007. Gross margin as a percentage of
sales for 2008 declined in comparison to 2007 primarily as a result of commodity
inflation (together with the change in China’s value added tax and appreciation
of the Chinese renminbi), unfavorable product mix, and the de-leveraging of
fixed costs, partially offset by the favorable effects of productivity and
restructuring initiatives and the absence of a significant product recall that
occurred in 2007. Selling, general, and administrative expenses as a percentage
of sales for 2008 increased over the 2007 level due primarily to the
de-leveraging of expenses over lower sales volumes.
HARDWARE
AND HOME IMPROVEMENT
Segment
sales and profit for the Hardware and Home Improvement segment, determined on
the basis described in Note 17 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
|
YEAR
ENDED DECEMBER 31,
|
2009 | 2008 | 2007 | |||||||||
|
Sales
to unaffiliated customers
|
$ | 755.4 | $ | 891.6 | $ | 1,001.7 | ||||||
|
Segment
profit
|
76.9 | 75.8 | 113.6 | |||||||||
Sales to
unaffiliated customers in the Hardware and Home Improvement segment during 2009
decreased 15% from the 2008 level. Sales of security hardware in the United
States declined at a double-digit rate due to continued weakness in residential
construction, which was partially offset by the continued success of the
SmartKey product line. Sales of plumbing products in the United States declined
21% in 2009 across all channels. Sales of the Hardware and Home Improvement
segment outside of the United States declined at a double-digit rate in 2009
from the 2008 level, principally due to weakness in Canada.
Segment
profit as a percentage of sales in the Hardware and Home Improvement segment
increased from 8.5% in 2008 to 10.2% in 2009. Gross margin as a percentage of
sales increased in 2009, as compared to 2008, due to product cost deflation as
well as to the favorable effect of restructuring and productivity initiatives.
Despite cost reduction initiatives implemented throughout 2009, selling,
general, and administrative expenses as a percentage of sales increased in 2009,
as compared to 2008, as a result of de-leveraging of fixed and semi-fixed costs
over a lower sales base.
Sales to
unaffiliated customers in the Hardware and Home Improvement segment during 2008
decreased 11% from the 2007 level. Sales of security hardware in the United
States declined at a double-digit rate due, in part, to the negative effects of
the U.S. housing slowdown. Sales of plumbing products in the United States
declined at a high-single-digit rate in 2008, driven by the U.S. housing
slowdown. Sales of the Hardware and Home Improvement segment outside of the
United States declined at a low-single-digit rate in 2008 from the 2007 level,
principally due to weakness in Canada.
Segment
profit as a percentage of sales in the Hardware and Home Improvement segment
decreased from 11.3% in 2007 to 8.5% in 2008. Gross margin as a percentage of
sales declined slightly in 2008, as compared to 2007, as the negative effects of
commodity inflation and lower volumes were only partially offset by productivity
and restructuring initiatives. Selling, general, and administrative expenses as
a percentage of sales increased in 2008, as compared to 2007, as a result of
de-leveraging of fixed and semi-fixed costs over a lower sales
base.
FASTENING
AND ASSEMBLY SYSTEMS
Segment
sales and profit for the Fastening and Assembly Systems segment, determined on
the basis described in Note 17 of Notes to Consolidated Financial Statements,
were as follows (in millions of dollars):
|
YEAR
ENDED DECEMBER 31,
|
2009 | 2008 | 2007 | |||||||||
|
Sales
to unaffiliated customers
|
$ | 536.6 | $ | 703.2 | $ | 720.7 | ||||||
|
Segment
profit
|
39.5 | 106.0 | 113.9 | |||||||||
Sales to
unaffiliated customers in the Fastening and Assembly Systems segment decreased
24% in 2009 from the 2008 level. Incremental sales of the Spiralock business,
acquired in September 2008, contributed 1.6% to the segment’s sales during 2009.
Sales of the North American and European automotive businesses declined 35% and
20%, respectively, due to the collapse of the automotive industry in the first
half of 2009. Sales in the North American and European industrial businesses
declined 30% and 24%, respectively, due to reductions in industrial production
levels as a result of the global recession. In Asia, sales declined by
24% from the 2008 level.
23
Segment
profit as a percentage of sales for the Fastening and Assembly Systems segment
decreased from 15.1% in 2008 to 7.4% in 2009. Despite significant restructuring
and cost reduction initiatives undertaken by the segment in 2009, the decrease
in segment profit as a percentage of sales was primarily due to de-leveraging of
costs over lower volumes.
Sales to
unaffiliated customers in the Fastening and Assembly Systems segment decreased
2% in 2008 from the 2007 level. The September acquisition of Spiralock resulted
in a 1% increase in the segment’s sales during 2008. Sales of the North American
businesses declined at a double-digit rate, reflecting weakness in the
automotive businesses due to a drop in automotive production. Sales in the
European industrial business fell at a low-single-digit rate while sales in the
European automotive business rose at a low-single-digit rate. In Asia, sales
grew at a high-single-digit rate, reflecting sales growth across all
markets.
Segment
profit as a percentage of sales for the Fastening and Assembly Systems segment
decreased from 15.8% in 2007 to 15.1% in 2008. The decrease in segment profit as
a percentage of sales was principally attributable to commodity inflation as
well as de-leveraging of fixed costs over a lower sales base.
OTHER
SEGMENT-RELATED MATTERS
As
indicated in the first table of Note 17 of Notes to Consolidated Financial
Statements, segment profit (loss), associated with Corporate, Adjustments, and
Eliminations (Corporate) was $(67.1) million, $(51.8) million, and $(106.2)
million for the years ended December 31, 2009, 2008, and 2007, respectively.
Corporate expenses for 2009 increased over the 2008 level primarily due to
higher expenses associated with benefits and risk management, as well as higher
pension expense.
Corporate
expenses for 2008 decreased from the 2007 level primarily due to the effects of
lower pension, legal, and environmental expenses, lower expenses associated with
intercompany eliminations (due, in part, to foreign currency effects), and a
foreign currency loss by a Corporate subsidiary in 2007 that did not recur in
2008, which were partially offset by expense directly related to reportable
business segments booked in consolidation in 2008 (as compared to income in 2007
as described below).
Expense
recognized by the Corporation in 2009, on a consolidated basis, relating to its
pension and other postretirement benefits plans increased by approximately $4
million over the 2008 level. Expense recognized by the Corporation in 2008, on a
consolidated basis, relating to its pension and other postretirement benefits
plans decreased by approximately $24 million from the 2007 level. The Corporate
adjustment to businesses’ postretirement benefit expense booked in
consolidation, as identified in the second table included in Note 17 of Notes to
Consolidated Financial Statements, was expense in 2009, 2008, and 2007 of $12.0
million, $3.6 million, and $19.9 million, respectively. The $8.4 million
increase in that Corporate adjustment in 2009, as compared to 2008, resulted
from the higher level of pension and other postretirement benefit expenses
(excluding service costs allocated to the reportable business segments). The
$16.3 million decrease in that Corporate adjustment in 2008, as compared to
2007, resulted from the lower level of pension and other postretirement benefit
expenses (excluding service costs allocated to the reportable business
segments). As more fully described in Note 17 of Notes to Consolidated Financial
Statements, the only element of pension and other postretirement benefits
expense included in the determination of segment profit of the Corporation’s
reportable business segments is service costs.
Income
(expenses) directly related to reportable business segments booked in
consolidation, and, thus, excluded from segment profit for the reportable
business segments, were $(.3) million, $(4.9) million, and $8.3 million for the
years ended December 31, 2009, 2008, and 2007, respectively. The $(.3) million
of segment-related expenses excluded from segment profit in 2009 principally
related to the Power Tools and Accessories and Hardware and Home Improvement
segments. The $4.9 million of segment-related expenses excluded from segment
profit in 2008 principally related to the Power Tools and Accessories segment,
partially offset by the reversal of certain performance-based incentive expenses
included in the allocation of Corporate expenses to each of the reportable
business segments. The $8.3 million of segment-related income excluded from
segment profit in 2007 principally related to the Power Tools and Accessories
segment as well as to the reversal of certain performance-based incentive
expenses included in the allocation of Corporate expenses to each of the
reportable business segments.
As
indicated in Note 17 of Notes to Consolidated Financial Statements, the
determination of segment profit excludes restructuring and exit costs and, in
2009, pre-tax merger-related expenses of $58.8 million. Of the $11.9 million
pre-tax restructuring charge recognized in 2009, $7.1 million, $1.7 million, and
$3.1 million related to the Power Tools and Accessories, Hardware and Home
Improvement and Fastening and Assembly Systems segments, respectively. Of the
$54.7 million pre-tax restructuring charge recognized in 2008, $42.1 million,
$6.1 million, and $6.0 million related to the Power Tools and Accessories,
Hardware and Home Improvement and Fastening and Assembly Systems segments,
respectively, and $.5 million related to corporate functions. Of the $19.0
million pre-tax restructuring charge recognized in 2007, $9.0 million and $10.0
million related to the Power Tools and Accessories and Hardware and Home
Improvement segments, respectively.
Restructuring
Actions
The
Corporation is committed to continuous productivity improvement and continues to
evaluate opportunities to reduce fixed costs, simplify or improve processes,
24
and
eliminate excess capacity. A tabular summary of restructuring activity during
the three years ended December 31, 2009, is included in Note 19 of Notes to
Consolidated Financial Statements.
In 2009,
the Corporation recognized $14.2 million of pre-tax restructuring and exit costs
related to actions taken in its Power Tools and Accessories, Hardware and Home
Improvement, and Fastening and Assembly segments. The $14.2 million charge
recognized in 2009 was offset, however, by the reversal of $1.8 million and $.5
million of severance and other accruals, respectively, established as part of
previously provided restructuring reserves that were no longer required. The
2009 restructuring charge related to the elimination of direct and indirect
manufacturing positions as well as selling, general, and administrative
positions. A severance benefits accrual of $12.6 million was included in the
restructuring charge, of which $8.9 million related to the Power Tools and
Accessories segment, $2.3 million related to the Fastening and Assembly Systems
segment, and $1.4 million related to the Hardware and Home Improvement segment.
The severance benefits accrual included the elimination of approximately 1,500
positions, including approximately 1,200 manufacturing related positions. The
restructuring charge also included a $.4 million write-down to fair value of
certain long-lived assets for the Hardware and Home Improvement segment. In
addition, the restructuring charge included charges of $.3 million and $.9
million related to the early termination of lease agreements by the Power Tools
and Accessories segment and Fastening and Assembly Systems segment,
respectively, necessitated by the restructuring actions.
In 2008,
the Corporation recognized $54.7 million of pre-tax restructuring and exit costs
related to actions taken in its Power Tools and Accessories, Hardware and Home
Improvement, and Fastening and Assembly segments as well as in its corporate
offices. The 2008 restructuring charge reflected actions to reduce the
Corporation’s manufacturing cost base as well as selling, general, and
administrative expenses. The principal component of the 2008 restructuring
charge related to the elimination of manufacturing and selling, general, and
administrative positions. A severance benefits accrual of $48.3 million was
recognized associated with the elimination of approximately 2,300 positions. The
Corporation estimates that, as a result of increases in manufacturing employee
headcount in other facilities, approximately 200 replacement positions will be
filled, yielding a net total of approximately 2,100 positions eliminated as a
result of the 2008 restructuring actions. The restructuring charge also included
a $3.7 million write-down to fair value of certain long-lived assets for the
Power Tools and Accessories segment ($3.0 million) and Hardware and Home
Improvement segment ($.7 million), which were either held for sale or idled in
preparation for disposal. As part of these restructuring actions, the Power
Tools and Accessories segment closed its manufacturing facility in Decatur,
Arkansas, and transferred production to another facility. The restructuring
charge also reflected $1.8 million related to the early termination of a lease
agreement by the Power Tools and Accessories segment necessitated by
restructuring actions. The restructuring charge also included a $.9 million
non-cash pension curtailment charge associated with positions eliminated as part
of the restructuring actions.
In 2007,
the Corporation recognized $19.0 million of pre-tax restructuring and exit costs
related to actions taken in its Power Tools and Accessories and Hardware and
Home Improvement segments. The 2007 restructuring charge reflected actions to
reduce the Corporation’s manufacturing cost base as well as selling, general,
and administrative expenses. The restructuring actions to reduce the
Corporation’s manufacturing cost base in the Power Tools and Accessories segment
included the closure of a manufacturing facility, with production from that
facility either transferred to other facilities or outsourced from third-party
suppliers. Actions to reduce the Corporation’s manufacturing cost base in the
Hardware and Home Improvement segment primarily related to optimization of its
North American finishing operations, including the transfer of most finishing
operations to a single facility. The principal component of the 2007
restructuring charge related to the elimination of manufacturing and selling,
general, and administrative positions. A severance benefits accrual of $14.8
million was recognized associated with the elimination of approximately 650
positions. The Corporation estimates that, as a result of increases in
manufacturing employee headcount in other facilities, approximately 100
replacement positions were filled, yielding a net total of approximately 550
positions eliminated as a result of the 2007 restructuring actions. The
restructuring and exit costs also include a $7.4 million write-down to fair
value of certain long-lived assets of the Hardware and Home Improvement segment
that had been idled and either sold or scrapped. The $19.0 million restructuring
charge taken in 2007 was net of a $3.4 million gain, representing the excess of
proceeds received on the sale of the manufacturing facility to be closed under
the restructuring plan over its carrying value.
In
addition to the recognition of restructuring and exit costs, the Corporation
also recognized related expenses, incremental to the cost of the underlying
restructuring actions, that do not qualify as restructuring or exit costs under
accounting principles generally accepted in the United States
(restructuring-related expenses). Those restructuring-related expenses included
items – directly related to the underlying restructuring actions – that
benefited on-going operations, such as costs associated with the transfer of
equipment. Operating results included restructuring-related expenses of
approximately $4 million for the years ended December 31, 2009 and December 31,
2008, respectively, and $5 million for the year ended December 31, 2007.
25
The
Corporation realized benefits of approximately $76 million, $23 million, and $—
million in 2009, 2008, and 2007, respectively, net of restructuring-related
expenses. Those benefits resulted in a reduction in cost of goods sold of
approximately $25 million and $5 million in 2009 and 2008, respectively, and a
reduction in selling, general, and administrative expenses of approximately $51
million and $18 million in 2009 and 2008, respectively. The Corporation expects
that pre-tax savings associated with the 2009, 2008, and 2007 restructuring
actions will benefit 2010 results by approximately $37 million, net of
restructuring-related expenses.
Ultimate
savings realized from restructuring actions may be mitigated by such factors as
economic weakness and competitive pressures, as well as decisions to increase
costs in areas such as promotion or research and development above levels that
were otherwise assumed.
Hedging
Activities
The
Corporation has a number of manufacturing sites throughout the world and sells
its products in more than 100 countries. As a result, it is exposed to movements
in the exchange rates of various currencies against the United States dollar and
against the currencies of countries in which it manufactures. The major foreign
currencies in which foreign currency risks exist are the euro, pound sterling,
Canadian dollar, Japanese yen, Chinese renminbi, Australian dollar, Mexican
peso, Czech koruna, and Brazilian real. Through its foreign currency activities,
the Corporation seeks to reduce the risk that cash flows resulting from the
sales of products manufactured in a currency different from that of the selling
subsidiary will be affected by changes in exchange rates.
From time
to time, currencies may strengthen or weaken in countries in which the
Corporation sells or manufactures its product. While the Corporation will take
actions to mitigate the impact of any future currency movements, there is no
assurance that such movements will not adversely affect the
Corporation.
Assets
and liabilities of subsidiaries located outside of the United States are
translated at rates of exchange at the balance sheet date as more fully
explained in Note 1 of Notes to Consolidated Financial Statements. The resulting
translation adjustments are included in the accumulated other comprehensive
income (loss) component of stockholders’ equity. During 2009 and 2008,
translation adjustments, recorded in the accumulated other comprehensive income
(loss) component of stockholders’ equity, increased (decreased) stockholders’
equity by $88.4 million and $(172.1) million, respectively.
The
materials used in the manufacturing of the Corporation’s products, which include
certain components and raw materials, are subject to price volatility. These
component parts and raw materials are principally subject to market risk
associated with changes in the price of nickel, steel, resins, copper, aluminum,
and zinc. The materials used in the various manufacturing processes are
purchased on the open market, and the majority is available through multiple
sources. While future movements in prices of raw materials and component parts
are uncertain, the Corporation uses a variety of methods, including established
supply arrangements, purchase of component parts and raw materials for future
delivery, and supplier price commitments, to address this risk. In addition, the
Corporation utilizes derivatives to manage its risk to changes in the prices of
certain commodities. As of December 31, 2009, the amount outstanding under
commodity hedges was not material.
As more
fully described in Note 1 of Notes to Consolidated Financial Statements, the
Corporation seeks to issue debt opportunistically, whether at fixed or variable
rates, at the lowest possible costs. Based upon its assessment of the future
interest rate environment and its desired variable-rate-debt to total-debt
ratio, the Corporation may elect to manage its interest rate risk associated
with changes in the fair value of its indebtedness, or the cash flows of its
indebtedness, through the use of interest rate swap agreements.
In order
to meet its goal of fixing or limiting interest costs, the Corporation maintains
a portfolio of interest rate hedge instruments. The variable-rate-debt to
total-debt ratio, after taking interest rate hedges into account, was 30% at
December 31, 2009, as compared to 44% at December 31, 2008 and 2007. The
reduction in the variable rate percentage in 2009 resulted from the
Corporation’s issuance of $350.0 million of fixed rate debt in April 2009. At
December 31, 2009, average debt maturity was 5.2 years, as compared to 6.0 years
at December 31, 2008, and 6.2 years at December 31, 2007. At December 31, 2009
the average long-term debt maturity was 5.2 years, as compared to 6.3 years at
December 31, 2008, and 8.0 years at December 31, 2007.
INTEREST
RATE SENSITIVITY
The
following table provides information as of December 31, 2009, about the
Corporation’s derivative financial instruments and other financial instruments
that are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. For debt obligations, the table presents principal cash
flows and related average interest rates by contractual maturity dates. For
interest rate swaps, the table presents notional principal amounts and
weighted-average interest rates by contractual maturity dates. Notional amounts
are used to calculate the contractual payments to be exchanged under the
interest rate swaps. Weighted-average variable rates are generally based on the
London Interbank Offered Rate (LIBOR) as of the reset dates. The cash flows of
these instruments are denominated in a variety of currencies. Unless otherwise
indicated, the information is presented in U.S. dollar equivalents, which is the
Corporation’s reporting currency, as of December 31, 2009.
26
Principal Payments and Interest Rate Detail by
Contractual Maturity Dates
|
(U.S.
DOLLARS IN MILLIONS)
|
2010
|
2011 | 2012 | 2013 | 2014 | THEREAFTER | TOTAL |
FAIR
VALUE
(ASSETS)/
LIABILITIES
|
||||||||||||||||||||||||
|
LIABILITIES
|
||||||||||||||||||||||||||||||||
|
Short-term
borrowings
|
||||||||||||||||||||||||||||||||
|
Variable
rate (U.S. dollars and
other
currencies)
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Average
interest rate
|
||||||||||||||||||||||||||||||||
|
Long-term
debt
|
||||||||||||||||||||||||||||||||
|
Variable
rate (U.S. dollars)
|
$ | — | $ | 75.0 | $ | 100.0 | $ | — | $ | — | $ | — | $ | 175.0 | $ | 175.0 | ||||||||||||||||
|
Average
interest rate
|
1.37 | % | 1.44 | % | 1.41 | % | ||||||||||||||||||||||||||
|
Fixed
rate (U.S. dollars)
|
$ | — | $ | 400.0 | $ | — | $ | — | $ | 650.0 | $ | 450.0 | $ | 1,500.0 | $ | 1,611.7 | ||||||||||||||||
|
Average
interest rate
|
7.13 | % | 7.01 | % | 6.18 | % | 6.79 | % | ||||||||||||||||||||||||
|
INTEREST
RATE DERIVATIVES
|
||||||||||||||||||||||||||||||||
|
Fixed
to Variable Rate Interest
|
||||||||||||||||||||||||||||||||
|
Rate
Swaps (U.S. dollars)
|
$ | — | $ | 100.0 | $ | — | $ | — | $ | 200.0 | $ | 25.0 | $ | 325.0 | $ | (26.6 | ) | |||||||||||||||
|
Average
pay rate (a)
|
||||||||||||||||||||||||||||||||
|
Average
receive rate
|
4.87 | % | 4.64 | % | 5.97 | % | 4.81 | % | ||||||||||||||||||||||||
|
(a)
|
The
average pay rate for swaps in the notional principal amount of $125.0
million is based upon 3-month forward LIBOR (with swaps in the notional
principal amounts of $100.0 million maturing in 2011 and $25.0 million
maturing thereafter). The average pay rate for the remaining swap is based
upon 6-month forward LIBOR.
|
FOREIGN
CURRENCY EXCHANGE RATE SENSITIVITY
As
discussed previously, the Corporation is exposed to market risks arising from
changes in foreign exchange rates. As of December 31, 2009, the Corporation has
hedged a portion of its 2010 estimated foreign currency transactions using
forward exchange contracts. The Corporation estimated the effect on 2010 gross
profits, based upon a recent estimate of foreign exchange exposures, of a
uniform 15% strengthening in the value of the United States dollar. The
Corporation estimated that this would have the effects of reducing gross profits
for 2010 by approximately $42 million. The Corporation also estimated the
effects on 2010 gross profits, based upon a recent estimate of foreign exchange
exposures, of a uniform 15% weakening in the value of the United States dollar.
A uniform 15% weakening in the value of the United States dollar would have the
effect of increasing gross profits.
In
addition to their direct effects, changes in exchange rates also affect sales
volumes and foreign currency sales prices as competitors’ products become more
or less attractive. The sensitivity analysis of the effects of changes in
foreign currency exchange rates previously described does not reflect a
potential change in sales levels or local currency prices nor does it reflect
higher exchange rates, as compared to those experienced during 2009, inherent in
the foreign exchange hedging portfolio at December 31, 2009.
Critical
Accounting Policies
The
Corporation’s accounting policies are more fully described in Note 1 of Notes to
Consolidated Financial Statements. As disclosed in Note 1 of Notes to
Consolidated Financial Statements, the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions about future events that
affect the amounts reported in the financial statements and accompanying notes.
Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
The
Corporation believes that, of its significant accounting policies, the following
may involve a higher degree of judgment, estimation, or complexity than other
accounting policies. The discussions of the Corporation’s critical accounting
policies that follow relate to the Corporation on a stand-alone basis and are
not reflective of the impact of the proposed merger with The Stanley
Works.
As more
fully described in Note 1 of Notes to Consolidated Financial Statements, the
Corporation performs goodwill impairment tests on at least an annual basis and
more frequently in certain circumstances. The Corporation cannot predict the
occurrence of certain events that might adversely affect the reported value of
goodwill that totaled $1,230.0 million at December 31, 2009. Such events may
include, but are not limited to, strategic decisions made in response to
economic and competitive conditions, the impact of the economic environment on
the Corporation’s customer base, or a material negative change in its
relationships with significant customers.
The
Corporation assesses the fair value of its reporting units for its goodwill
impairment tests based upon a discounted cash flow methodology. The
identification of reporting units begins at the operating segment level – in the
Corporation’s case, the Power Tools and Accessories segment, the Hardware and
Home Improvement segment, and the Fastening and Assembly Systems segment – and
considers whether operating
27
components
one level below the segment level should be identified as reporting units for
purposes of goodwill impairment tests if certain conditions exists. These
conditions include, among other factors, (i) the extent to which an operating
component represents a business (that is, the operating component contains all
of the inputs and processes necessary for it to continue to conduct normal
operations if transferred from the segment) and (ii) the disaggregation of
economically dissimilar operating components within a segment. The Corporation
has determined that its reporting units, for purposes of its goodwill impairment
tests, represent its operating segments, except with respect to its Hardware and
Home Improvement segment for which its reporting units are the plumbing products
and security hardware businesses. Goodwill is allocated to each reporting unit
at the time of a business acquisition and is adjusted upon finalization of the
purchase price of an acquisition. The Corporation did not make any material
change in the accounting methodology used to evaluate goodwill impairment during
2009.
The
discounted cash flow methodology utilized by the Corporation in estimating the
fair value of its reporting units for purposes of its goodwill impairment
testing requires various judgmental assumptions about sales, operating margins,
growth rates, discount rates, and working capital requirements. In determining
those judgmental assumptions, the Corporation considers a variety of data,
including – for each reporting unit – its annual budget for the upcoming year
(which forms the basis of certain annual incentive targets for reporting unit
management), its longer-term business plan, economic projections, anticipated
future cash flows, and market data. Assumptions are also made for varying
perpetual growth rates for periods beyond the longer-term business plan period.
When estimating the fair value of its reporting units in the fourth quarter of
2009, the Corporation assumed operating margins in years 2010 and beyond in
excess of the margins realized in 2009 based upon its belief that recovery from
the global economic crisis will permit a return to more normalized sales levels
and operating margins for its reporting units. The key assumptions used to
estimate the fair value of the Corporation’s reporting units at the time of its
fourth quarter 2009 goodwill impairment test included: (i) an average sales
growth assumption of approximately 3% per annum; (ii) annual operating margins
ranging from approximately 8% to 15%; and (iii) a discount rate of 9.7%, which
was determined based upon a market-based weighted average cost of
capital.
The
Corporation’s goodwill impairment analysis is subject to uncertainties due to
uncontrollable events, including the strategic decisions made in response to
economic or competitive conditions, the general economic environment, or
material changes in its relationships with significant customers that could
positively or negatively impact anticipated future operating conditions and cash
flows. In addition, the Corporation’s goodwill impairment analysis is subject to
uncertainties due to the current global economic crisis, including the severity
of that crisis and the time period before which the global economy
recovers.
If the
carrying amounts of the Corporation’s reporting units (including recorded
goodwill) exceed their respective fair values, determined through the discounted
cash flow methodology described above, goodwill impairment may be present. In
such an instance, the Corporation would measure the goodwill impairment loss, if
any, based upon the fair value of the underlying assets and liabilities of the
impacted reporting unit, including any unrecognized intangible assets, and
estimate the implied fair value of goodwill. An impairment loss would be
recognized to the extent that a reporting unit’s recorded goodwill exceeded the
implied fair value of goodwill.
The
Corporation could be required to evaluate the recoverability of goodwill prior
to the next annual assessment if it experiences unexpected significant declines
in operating results (including those associated with a more severe or prolonged
global economic crisis or other business disruptions than currently assumed), a
material negative change in its relationships with significant customers, or
divestitures of significant components of the Corporation’s businesses. However,
based upon the Corporation’s goodwill impairment analysis conducted in the
fourth quarter of 2009, a hypothetical reduction in the fair value of its
reporting units by a specified percentage, ranging from approximately 12% for
one reporting unit to between approximately 30% to 70% for the Corporation’s
other reporting units, would not have resulted in a situation in which the
carrying value of the respective reporting unit exceeded that reduced fair
value.
Pension
and other postretirement benefits costs and obligations are dependent on
assumptions used in calculating such amounts. These assumptions include discount
rates, expected return on plan assets, rates of salary increase, health care
cost trend rates, mortality rates, and other factors. These assumptions are
updated on an annual basis prior to the beginning of each year. The Corporation
considers current market conditions, including interest rates, in making these
assumptions. The Corporation develops the discount rates by considering the
yields available on high-quality fixed income investments with maturities
corresponding to the related benefit obligation. The Corporation’s discount rate
for United States defined benefit pension plans was 5.75% and 6.75% at December
31, 2009 and 2008, respectively. As discussed further in Note 13 of Notes to
Consolidated Financial Statements, the Corporation develops the expected return
on plan assets by considering various factors, which include its targeted asset
allocation percentages, historic returns, and expected future returns. The
Corporation’s expected long-term rate of return assumption for United States
defined benefit plans for 2009 and 2010 was 8.25%.
28
The
Corporation believes that the assumptions used are appropriate; however,
differences in actual experience or changes in the assumptions may materially
affect the Corporation’s financial position or results of operations. In
accordance with accounting principles generally accepted in the United States,
actual results that differ from the actuarial assumptions are accumulated and,
if in excess of a specified corridor, amortized over future periods and,
therefore, generally affect recognized expense and the recorded obligation in
future periods. The expected return on plan assets is determined using the
expected rate of return and a calculated value of assets referred to as the
market-related value of assets. The Corporation’s aggregate market-related value
of assets exceeded the fair value of plan assets by approximately $210 million
as of December 31, 2009. Differences between assumed and actual returns are
amortized to the market-related value on a straight-line basis over a five-year
period. Also, gains and losses resulting from changes in assumptions and from
differences between assumptions and actual experience (except those differences
being amortized to the market-related value of assets) are amortized over the
expected remaining service period of active plan participants or, for retired
participants, the average remaining life expectancy, to the extent that such
amounts exceed ten percent of the greater of the market-related value of plan
assets or the projected benefit obligation at the beginning of the year. The
Corporation expects that its pension and other postretirement benefit costs in
2010 will increase over the 2009 level by approximately $20 million.
As more
fully described in Item 3 of this report, the Corporation is subject to various
legal proceedings and claims, including those with respect to environmental
matters, the outcomes of which are subject to significant uncertainty. The
Corporation evaluates, among other factors, the degree of probability of an
unfavorable outcome, the ability to make a reasonable estimate of the amount of
loss, and in certain instances, the ability of other parties to share costs.
Also, in accordance with accounting principles generally accepted in the United
States, when a range of probable loss exists, the Corporation accrues at the low
end of the range when no other more likely amount exists. Unanticipated events
or changes in these factors may require the Corporation to increase the amount
it has accrued for any matter or accrue for a matter that has not been
previously accrued because it was not probable.
Further,
as indicated in Note 21 of Notes to Consolidated Financial Statements, insurance
recoveries for environmental and certain general liability claims have not been
recognized until realized. Any insurance recoveries, if realized in future
periods, could have a favorable impact on the Corporation’s financial condition
or results of operations in the periods realized.
Note 21
of Notes to Consolidation Financial Statements further discusses significant
environmental matters which may affect the Corporation.
As more
fully disclosed in Notes 1 and 12 of Notes to Consolidated Financial Statements,
on January 1, 2007, the Corporation adopted a new accounting standard for
uncertainty in income taxes. The Corporation considers many factors when
evaluating and estimating income tax uncertainties. These factors include an
evaluation of the technical merits of the tax position as well as the amounts
and probabilities of the outcomes that could be realized upon ultimate
settlement. The actual resolution of those uncertainties will inevitably differ
from those estimates, and such differences may be material to the financial
statements.
Impact
of New Accounting Standards
As more fully disclosed in Notes 1 and 11 of Notes to Consolidated Financial Statements, effective January 1, 2008, the Corporation adopted a new accounting standard for measuring the fair value of financial assets and financial liabilities. The Corporation adopted the fair value measurement and disclosure requirements for non-financial assets and liabilities as of January 1, 2009. That adoption did not have a material impact on the Corporation’s financial position or results of operations.
Effective
January 1, 2009, the Corporation adopted a new accounting standard that requires
enhanced disclosures about an entity’s derivative and hedging activities,
without a change to existing standards relative to measurement and recognition.
That adoption did not have any effect on the Corporation’s financial position or
results of operations. The Corporation’s disclosure about its derivative and
hedging activities are included in Note 1 and 10 of Notes to Consolidated
Financial Statements.
Effective
January 1, 2009, the Corporation adopted a new accounting standard that
clarifies whether instruments granted in share-based payment transactions should
be included in the computation of earnings per share using the two-class method
prior to vesting. See Note 15 of Notes to Consolidated Financial Statements for
application of the two-class method to the Corporation’s stock-based plans. The
new accounting standard required that all prior-period earnings per share
presented be adjusted retrospectively. Accordingly, basic earnings per share for
the year ended December 31, 2008 and 2007, have been adjusted to $4.83 and
$7.96, respectively, from $4.91 and $8.06, respectively. Diluted earnings per
share for the year ended December 31, 2008 and 2007, have been adjusted to $4.77
and $7.78, respectively, from $4.82 and $7.85, respectively.
Effective
December 31, 2009, the Corporation adopted a new accounting standard that
provides enhanced disclosures about plan assets of a defined benefit pension and
other postretirement plan including (i) investment policies and strategies, (ii)
major categories of plan assets, (iii) the valuation techniques used to measure
the fair value of plan assets, including the effect of significant unobservable
inputs on changes in
29
plan
assets, and (iv) significant concentrations within plan assets. The
Corporation’s disclosure about postretirement benefits is included in Note 13 of
Notes to Consolidated Financial Statements.
Financial
Condition
Introduction: The following summarizes the Corporation’s cash flows for each of the three years ended December 31, 2009 (in millions of dollars).
| 2009 | 2008 | 2007 | ||||||||||
|
Cash
flow from operating activities
|
$ | 485.6 | $ | 425.4 | $ | 725.9 | ||||||
|
Cash
flow from investing activities
|
96.5 | (61.4 | ) | (149.8 | ) | |||||||
|
Cash
flow from financing activities
|
210.6 | (317.0 | ) | (568.2 | ) | |||||||
|
Effect
of exchange rate changes on cash
|
12.7 | (23.9 | ) | 13.5 | ||||||||
|
Increase
in cash and cash equivalents
|
$ | 805.4 | $ | 23.1 | $ | 21.4 | ||||||
|
Cash
and cash equivalents at end of year
|
$ | 1,083.2 | $ | 277.8 | $ | 254.7 | ||||||
The
Corporation’s operating cash flows provide the primary source of funds to
finance operating needs and capital expenditures. Operating cash flow is first
used to fund capital expenditures and dividends to the Corporation’s
stockholders. Other significant uses of operating cash flow may include share
repurchases, acquisitions of businesses, and debt reduction. As necessary, the
Corporation supplements its operating cash flow with debt. The Corporation’s
operating cash flow is significantly impacted by its net earnings and working
capital management.
The
Corporation will continue to have cash requirements to support seasonal working
capital needs, capital expenditures, and dividends to stockholders, to pay
interest, and to service debt. At December 31, 2009, the Corporation had
$1,083.2 million of cash and cash equivalents. Most of the Corporation’s cash is
held by its subsidiaries. The Corporation’s overall cash position reflects its
business results and a global cash management strategy that takes into account
liquidity management, economic factors, the statutes, regulations and practices
in jurisdictions where the Corporation has operations, and tax considerations.
At December 31, 2009, the Corporation had approximately $1.0 billion of
borrowings available under its $1.0 billion unsecured revolving credit facility
that expires in December 2012. If necessary, that facility serves as a backstop
to the Corporation’s uncommitted commercial paper borrowings. In order to meet
its cash requirements, the Corporation intends to use its existing cash, cash
equivalents, and internally generated funds, and to borrow under its commercial
paper program, existing unsecured revolving credit facility or under short-term
borrowing facilities. The Corporation believes that – absent events or payments
which would only be triggered upon consummation of the proposed merger with The
Stanley Works – cash provided from these sources will be adequate to meet its
cash requirements over the next 12 months.
Cash
inflows and outflows related to the Corporation’s currency hedging activities
are classified in the cash flow statement under operating activities or
investing activities based upon the nature of the hedge. Cash flows related to
hedges of the Corporation’s foreign currency denominated assets, liabilities,
and forecasted transactions are classified as operating activities, and cash
flows related to hedges of the Corporation’s net investment in foreign
subsidiaries are classified as investing activities. Due to the rapid
strengthening of the U.S. dollar in late 2008, the Corporation experienced much
larger gains and losses on these hedges in 2009 than in 2008 or 2007. The cash
outflows associated with currency hedges whose cash flows are classified within
operating activities reduced cash flows from operating activities by
approximately $30 million over the 2008 level to approximately $95 million for
the year ended December 31, 2009. However, that $30 million reduction was more
than offset by an increase of approximately $115 million over the 2008 level in
net cash inflows associated with hedges of the Corporation’s net investment in
foreign subsidiaries, which are classified within cash flows from investing
activities, to $157.8 million for the year ended December 31, 2009.
Net cash
generation, defined by the Corporation as cash flow from operating activities
less capital expenditures, plus proceeds from the sale of assets and cash flow
from net investment hedging activities, increased to $583.5 million in 2009 from
$389.7 million in 2008 as higher cash provided from operating activities was
augmented by an increase of $115.1 million in net cash inflow from net
investment hedging activities. The computation of net cash generation for the
years ended December 31, 2009 and 2008, follows (in millions of
dollars):
|
2009
|
2008
|
|||||||
|
Cash
flow from operating activities
|
$ | 485.6 | $ | 425.4 | ||||
|
Capital
expenditures
|
(63.1 | ) | (98.8 | ) | ||||
|
Proceeds
from disposals of assets
|
3.2 | 20.4 | ||||||
|
Free
cash flow
|
425.7 | 347.0 | ||||||
|
Cash
inflow from net investment hedging activities
|
196.0 | 72.4 | ||||||
|
Cash
outflow from net investment hedging activities
|
(38.2 | ) | (29.7 | ) | ||||
|
Net
cash generation
|
$ | 583.5 | $ | 389.7 | ||||
Cash
Flow from Operating Activities: Operating activities provided cash of
$485.6 million for the year ended December 31, 2009, as compared to $425.4
million for the year ended December 31, 2008. The increase in cash provided by
operating activities in 2009 was primarily due to higher cash provided by
working capital partially offset by lower net earnings as well as an increase in
cash outflows associated with foreign currency hedges. The higher level of cash
generated from working capital in 2009, as compared to 2008, was primarily due
to lower inventory levels.
As part
of its capital management, the Corporation reviews certain working capital
metrics. For example, the Corporation evaluates its trade receivables and
30
inventory
levels through the computation of days sales outstanding and inventory turnover
ratio, respectively. The number of days sales outstanding as of December 31,
2009, decreased from the level as of December 31, 2008. Average inventory
turns as of December 31, 2009, improved slightly, as compared to the inventory
turns as of December 31, 2008.
The
Corporation sponsors pension and postretirement benefit plans. The Corporation’s
cash funding of these plans was approximately $31 million, $36 million, and $34
million for the years ended December 31, 2009, 2008, and 2007, respectively.
Cash contribution requirements for these plans are either based upon the
applicable regulation for each country (principally the U.S. and United Kingdom)
or are funded on a pay-as-you-go basis. The Corporation expects that its cash
funding of its pension and postretirement benefit plans will approximate $75
million to $80 million in 2010. The increase in cash funding is principally
attributable to the Corporation’s qualified pension plans in the U.S. Cash
contributions for the Corporation’s qualified pension plans in the U.S. are
governed by the Pension Protection Act of 2006 (PPA). Contribution requirements
under the PPA are generally based upon the funded status of the plan (determined
by comparing plan assets to the actuarially determined plan obligations). These
contribution requirements could also continue or increase in years subsequent to
2010 unless there is an improvement in the funded status of the Corporation’s
qualified pension plans.
Cash Flow from Investing Activities:
Investing activities provided cash of $96.5 million for the year ended
December 31, 2009, as compared to a use a of cash of $61.4 million for the year
ended December 31, 2008. Hedging activities – associated with the Corporation’s
net investment hedging activities – resulted in a net cash inflow of $157.8
million in 2009, as compared to a net cash inflow of $42.7 million in 2008, due
to the effects of the strengthening U.S. dollar during 2009 and 2008. Capital
expenditures decreased by $35.7 million from the 2008 level to $63.1 million in
2009. The Corporation anticipates that its capital spending in 2010 will
approximate $90 million. Cash used by investing activities in 2008 included the
purchase of Spiralock for $24.1 million, net of cash acquired. The ongoing costs
of compliance with existing environmental laws and regulations have not had, and
are not expected to have, a material adverse effect on the Corporation’s capital
expenditures or financial position.
Cash Flow from Financing Activities:
Financing activities provided cash of $210.6 million for the year ended
December 31, 2009, as compared to a use of cash of $317.0 million for the year
ended December 31, 2008. In April 2009, the Corporation issued $350.0 million of
8.95% senior notes due 2014. The Corporation utilized the proceeds of $343.1
million (net of issuance costs of $2.7 million and debt discount) from the
issuance of those senior notes to repay short-term borrowings that were
outstanding at the time. Sources of cash from financing activities in 2009 also
included $62.6 million of proceeds received upon the issuance of common stock,
including certain related income tax benefits, under stock-based compensation
plans. Cash used for financing activities in 2009 included a net decrease in
short-term borrowings of $84.3 million, payments on long-term debt of $50.1
million, and dividend payments of $47.3 million. Cash used to pay dividends was
$47.3 million for 2009, as compared to $101.8 million in 2008, a decrease of
$54.5 million. Dividend payments, on a per share basis, for the year ended
December 31, 2009 were $.78, as compared to $1.68 in 2008. In April 2009, the
Corporation announced that its Board of Directors declared a quarterly cash
dividend of $.12 per share on the Corporation’s outstanding stock payable during
the second quarter of 2009, a 71% decrease from the $.42 quarterly dividend paid
by the Corporation since the first quarter of 2007. Future dividends will depend
on the Corporation’s earnings, financial condition, and other factors. Under the
terms of the definitive merger agreement to create Stanley Black & Decker,
absent the consent of The Stanley Works, the Corporation has agreed to limit its
regular quarterly cash dividend to $.12 per share. During the year ended
December 31, 2009, the Corporation purchased 247,198 shares of its common stock
from employees to satisfy withholding tax requirements upon the vesting of
restricted stock at an aggregate cost of $13.4 million.
Sources
of cash from financing activities for 2008, primarily included proceeds from
long-term debt of $224.7 million (net of issuance costs of $.3 million). Cash
used for financing activities for 2008, included a net decrease in short-term
borrowings of $246.0 million and dividend payments of $101.8 million. During the
year ended December 31, 2008, the Corporation purchased 3,136,644 shares of its
common stock at an aggregate cost of $202.3 million.
At
December 31, 2009, the Corporation has remaining authorization from its Board of
Directors to repurchase an additional 3,777,145 shares of its common stock.
Under the terms of the definitive merger agreement to create Stanley Black &
Decker, absent the consent of The Stanley Works, the Corporation has agreed not
to repurchase any shares of its common stock pending consummation of the
merger.
Credit Rating: The Corporation’s credit
ratings are reviewed periodically by major debt rating agencies including
Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. The
Corporation’s credit ratings and outlook from each of the credit rating agencies
as of December 31, 2009, follow:
|
LONG-TERM
DEBT
|
SHORT-TERM
DEBT
|
OUTLOOK
|
|
|
Moody’s
Investors Service
|
Baa3
|
P3
|
Upgrade
|
|
Standard
& Poor’s
|
BBB
|
A3
|
Upgrade
|
|
Fitch
Ratings
|
BBB
|
F2
|
Upgrade
|
31
The
credit rating agencies consider many factors when assigning their ratings, such
as the global economic environment and their possible impact on the
Corporation’s financial performance, including certain financial metrics
utilized by the credit rating agencies in determining the Corporation’s credit
rating. Accordingly, it is possible that the credit rating agencies could reduce
the Corporation’s credit ratings from their current level. This could
significantly influence the interest rate of any of the Corporation’s future
financing.
The
Corporation’s ability to maintain its commercial paper program is principally a
function of its short-term debt credit rating. As a result of the reduction in
the Corporation’s short-term credit ratings that occurred during the first
quarter of 2009, the Corporation’s ability to access commercial paper borrowings
has been substantially reduced. As a result, the Corporation has utilized its
$1.0 billion unsecured credit facility during 2009. No amounts were outstanding
under this credit facility as of December 31, 2009. Borrowings under this credit
facility are at interest rates that may vary based upon the rating of its
long-term debt. The Corporation’s current borrowing rates under its credit
facility may be set at either Citibank’s prime rate or at LIBOR plus .30%. The
spread above LIBOR could increase by a maximum amount of .30% based upon
reductions in the Corporation’s credit rating. The Corporation expects to
utilize borrowings under its commercial paper program and $1.0 billion unsecured
credit facility to fund its short-term borrowing requirements.
Contractual Obligations: The following
table provides a summary of the Corporation’s contractual obligations by due
date (in millions of dollars). The Corporation’s short-term borrowings,
long-term debt, and lease commitments are more fully described in Notes 8, 9,
and 18 of Notes to Consolidated Financial
Statements.
|
PAYMENTS
DUE BY PERIOD
|
|||||||||||||||
|
LESS
THAN
1
YEAR
|
1 TO
3
YEARS
|
3 TO
5
YEARS
|
AFTER
5
YEARS
|
TOTAL | |||||||||||
|
Short-term
borrowings (a) (b) (c)
|
$ | — | $ | — | $ | — | $ | — | $ | — | |||||
|
Long-term
debt (c)
|
104.4 | 736.8 | 772.2 | 625.1 | 2,238.5 | ||||||||||
|
Operating
leases
|
65.6 | 83.6 | 34.6 | 12.1 | 195.9 | ||||||||||
|
Purchase
obligations (d)
|
319.1 | 3.5 | .5 | .2 | 323.3 | ||||||||||
|
Total
contractual cash obligations (e) (f)
|
$ | 489.1 | $ | 823.9 | $ | 807.3 | $ | 637.4 | $ | 2,757.7 | |||||
|
(a)
|
As
more fully described in Note 8 of Notes to Consolidated Financial
Statements, the Corporation has a $1.0 billion commercial paper program as
well as a supporting $1.0 billion credit facility that matures in December
2012. At December 31, 2009, there were no amounts outstanding under the
commercial paper program or other short-term borrowing arrangements. The
Corporation’s average borrowing outstanding under these facilities during
2009 was $167.0 million.
|
|
(b)
|
As
described in Note 8 of Notes to Consolidated Financial Statements, the
Corporation has uncommitted lines of credit of approximately $250 million
at December 31, 2009. These uncommitted lines of credit do not have
termination dates and are reviewed
periodically.
|
|
(c)
|
Payments
due by period include contractually required interest payments.
Contractually required interest payments on variable rate long-term debt
presented is based upon variable borrowing rates at December 31,
2009.
|
|
(d)
|
The
Corporation enters into contractual arrangements that result in its
obligation to make future payments, including purchase obligations. The
Corporation enters into these arrangements in the ordinary course of
business in order to ensure adequate levels of inventories, machinery and
equipment, or services. Purchase obligations primarily consist of
inventory purchase commitments, including raw materials, components, and
sourced products, and arrangements for other
services.
|
|
(e)
|
The
Corporation anticipates that funding of its pension and postretirement
benefit plans in 2010 will approximate $75 million to $80 million. That
amount principally represents contributions either required by regulations
or laws or, with respect to unfunded plans, necessary to fund current
benefits. The Corporation has not presented estimated pension and
postretirement funding in the table above as the funding can vary from
year to year based upon changes in the fair value of the plan assets and
actuarial assumptions.
|
|
(f)
|
As
more fully disclosed in Note 12 of Notes to the Consolidated Financial
Statements, at December 31, 2009, the Corporation has recognized $291.8
million of liabilities for unrecognized tax benefits of which $31.5
million related to interest. The final outcome of these tax uncertainties
is dependent upon various matters including tax examinations, legal
proceedings, competent authority proceedings, changes in regulatory tax
laws, or interpretation of those tax laws, or expiration of statutes of
limitation. However, based on the number of jurisdictions, the
uncertainties associated with litigation, and the status of examinations,
including the protocols of finalizing audits by the relevant tax
authorities, which could include formal legal proceedings, there is a high
degree of uncertainty regarding the future cash outflows associated with
these tax uncertainties. As of December 31, 2009, the Corporation
classified $48.0 million of its liabilities for unrecognized tax benefits
as a current liability. While the Corporation cannot reasonably predict
the timing of the cash flows, if any, associated with its liabilities for
unrecognized tax benefits, it believes that such cash flows would
principally occur within the next five
years.
|
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information
required under this Item is contained in Item 7 of this report under the caption
“Hedging
Activities”
and in Item 8 of this report in Notes 1 and 10 of Notes to Consolidated
Financial Statements, and is incorporated herein by reference.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
following consolidated financial statements of the Corporation and its
subsidiaries are included herein as indicated below:
Consolidated
Financial Statements
Consolidated
Statement of Earnings
– years
ended December 31, 2009, 2008,
and
2007.
Consolidated
Balance Sheet
–
December 31, 2009 and 2008.
Consolidated
Statement of Stockholders’ Equity
– years
ended December 31, 2009, 2008,
and
2007.
Consolidated
Statement of Cash Flows
– years
ended December 31, 2009, 2008,
and
2007.
Notes to
Consolidated Financial Statements.
Report of
Independent Registered Public
Accounting
Firm on Consolidated
Financial
Statements.
33
CONSOLIDATED
STATEMENT OF EARNINGS
THE
BLACK & DECKER CORPORATION AND SUBSIDIARIES
(DOLLARS
IN MILLIONS EXCEPT PER SHARE DATA)
|
YEAR
ENDED DECEMBER 31,
|
2009 | 2008 | 2007 | |||||||||
|
SALES
|
$ | 4,775.1 | $ | 6,086.1 | $ | 6,563.2 | ||||||
|
Cost
of goods sold
|
3,188.6 | 4,087.7 | 4,336.2 | |||||||||
|
Selling,
general, and administrative expenses
|
1,266.4 | 1,521.6 | 1,625.8 | |||||||||
| Merger-related expenses | 58.8 | — | — | |||||||||
|
Restructuring
and exit costs
|
11.9 | 54.7 | 19.0 | |||||||||
|
OPERATING
INCOME
|
249.4 | 422.1 | 582.2 | |||||||||
|
Interest
expense (net of interest income of
$7.9
for 2009, $38.4 for 2008, and $19.8 for 2007)
|
83.8 | 62.4 | 82.3 | |||||||||
|
Other
(income) expense
|
(4.8 | ) | (5.0 | ) | 2.3 | |||||||
|
EARNINGS
BEFORE INCOME TAXES
|
170.4 | 364.7 | 497.6 | |||||||||
|
Income
taxes (benefit)
|
37.9 | 71.1 | (20.5 | ) | ||||||||
|
NET
EARNINGS
|
$ | 132.5 | $ | 293.6 | $ | 518.1 | ||||||
|
NET
EARNINGS PER COMMON SHARE – BASIC
|
$ | 2.18 | $ | 4.83 | $ | 7.96 | ||||||
|
NET
EARNINGS PER COMMON SHARE – ASSUMING DILUTION
|
$ | 2.17 | $ | 4.77 | $ | 7.78 | ||||||
See
Notes to Consolidated Financial Statements.
34
CONSOLIDATED
BALANCE SHEET
THE
BLACK & DECKER CORPORATION AND SUBSIDIARIES
(MILLIONS
OF DOLLARS)
|
DECEMBER
31,
|
2009 | 2008 | ||||||
|
ASSETS
|
||||||||
|
Cash
and cash equivalents
|
$ | 1,083.2 | $ | 277.8 | ||||
|
Trade
receivables, less allowances of $45.8 for 2009 and $39.1 for
2008
|
832.8 | 924.6 | ||||||
|
Inventories
|
777.1 | 1,024.2 | ||||||
|
Other
current assets
|
308.8 | 377.0 | ||||||
|
TOTAL
CURRENT ASSETS
|
3,001.9 | 2,603.6 | ||||||
|
PROPERTY,
PLANT, AND EQUIPMENT
|
473.4 | 527.9 | ||||||
|
GOODWILL
|
1,230.0 | 1,223.2 | ||||||
|
OTHER
ASSETS
|
789.9 | 828.6 | ||||||
| $ | 5,495.2 | $ | 5,183.3 | |||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Short-term
borrowings
|
$ | — | $ | 83.3 | ||||
|
Current
maturities of long-term debt
|
— | .1 | ||||||
|
Trade
accounts payable
|
403.2 | 453.1 | ||||||
|
Other
current liabilities
|
792.7 | 947.4 | ||||||
|
TOTAL
CURRENT LIABILITIES
|
1,195.9 | 1,483.9 | ||||||
|
LONG-TERM
DEBT
|
1,715.0 | 1,444.7 | ||||||
|
POSTRESTIREMENT
BENEFITS
|
760.4 | 669.4 | ||||||
|
OTHER
LONG-TERM LIABILITIES
|
524.8 | 460.5 | ||||||
|
STOCKHOLDERS’
EQUITY
|
||||||||
|
Common
stock (outstanding: December 31, 2009 – 61,645,196 shares;
December
31, 2008 – 60,092,726 shares)
|
30.8 | 30.0 | ||||||
|
Capital
in excess of par value
|
119.1 | 14.3 | ||||||
|
Retained
earnings
|
1,622.0 | 1,536.8 | ||||||
|
Accumulated
other comprehensive income (loss)
|
(472.8 | ) | (456.3 | ) | ||||
|
TOTAL
STOCKHOLDERS’ EQUITY
|
1,299.1 | 1,124.8 | ||||||
| $ | 5,495.2 | $ | 5,183.3 | |||||
See
Notes to Consolidated Financial Statements.
35
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
THE
BLACK & DECKER CORPORATION AND SUBSIDIARIES
(DOLLARS
IN MILLIONS EXCEPT PER SHARE DATA)
|
OUTSTANDING
COMMON
SHARES
|
PAR
VALUE
|
CAPITAL
IN
EXCESS
OF
PAR
VALUE
|
RETAINED
EARNINGS
|
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS)
|
TOTAL
STOCKHOLDERS’
EQUITY
|
||||||||||||||||||
|
BALANCE
AT DECEMBER 31, 2006
|
66,734,843 | $ | 33.4 | $ | — | $ | 1,473.0 | $ | (342.8 | ) | $ | 1,163.6 | |||||||||||
|
Comprehensive
income (loss):
|
|||||||||||||||||||||||
|
Net
earnings
|
— | — | — | 518.1 | — | 518.1 | |||||||||||||||||
|
Net
loss on derivative instruments (net of tax)
|
— | — | — | — | (25.4 | ) | (25.4 | ) | |||||||||||||||
|
Minimum
pension liability adjustment (net of tax)
|
— | — | — | — | 161.0 | 161.0 | |||||||||||||||||
|
Foreign
currency translation adjustments, less effect of hedging activities
(net
of tax)
|
— | — | — | — | 83.2 | 83.2 | |||||||||||||||||
|
Amortization
of actuarial losses and
prior
service cost (net of tax)
|
— | — | — | — | 25.7 | 25.7 | |||||||||||||||||
|
Comprehensive
income
|
— | — | — | 518.1 | 244.5 | 762.6 | |||||||||||||||||
|
Cumulative
effect of adopting the new accounting standard relating to uncertain tax
positions
|
— | — | — | (7.3) | — | (7.3 | ) | ||||||||||||||||
|
Cash
dividends on common stock ($1.68 per share)
|
— | — | — | (108.6 | ) | — | (108.6 | ) | |||||||||||||||
|
Common
stock issued under stock-based plans (net of forfeitures)
|
1,666,123 | .8 | 109.0 | — | — | 109.8 | |||||||||||||||||
|
Purchase
and retirement of common stock
|
(5,477,243 | ) | (2.7 | ) | (82.0 | ) | (376.7 | ) | — | (461.4 | ) | ||||||||||||
|
BALANCE
AT DECEMBER 31, 2007
|
62,923,723 | 31.5 | 27.0 | 1,498.5 | (98.3 | ) | 1,458.7 | ||||||||||||||||
|
Comprehensive
income (loss):
|
|||||||||||||||||||||||
|
Net
earnings
|
— | — | — | 293.6 | — | 293.6 | |||||||||||||||||
|
Net gain
on derivative instruments (net of tax)
|
— | — | — | — | 83.5 | 83.5 | |||||||||||||||||
|
Minimum
pension liability adjustment (net of tax)
|
— | — | — | — | (284.2 | ) | (284.2 | ) | |||||||||||||||
|
Foreign
currency translation adjustments, less effect of hedging activities
(net
of tax)
|
— | — | — | — | (172.1 | ) | (172.1 | ) | |||||||||||||||
|
Amortization
of actuarial losses and
prior
service cost (net of tax)
|
— | — | — | — | 14.8 | 14.8 | |||||||||||||||||
|
Comprehensive
income (loss)
|
— | — | — | 293.6 | (358.0 | ) | (64.4 | ) | |||||||||||||||
|
Adoption
of new accounting standard requiring a year-end measurement date for
defined benefit pension and other postretirement benefit plans (net of
tax)
|
— | — | — | (5.1 | ) | — | (5.1 | ) | |||||||||||||||
|
Cash
dividends on common stock ($1.68 per share)
|
— | — | — | (101.8 | ) | — | (101.8 | ) | |||||||||||||||
|
Common
stock issued under stock-based plans (net of forfeitures)
|
305,647 | .1 | 39.6 | — | — | 39.7 | |||||||||||||||||
|
Purchase
and retirement of common stock
|
(3,136,644 | ) | (1.6 | ) | (52.3 | ) | (148.4 | ) | — | (202.3 | ) | ||||||||||||
|
BALANCE
AT DECEMBER 31, 2008
|
60,092,726 | 30.0 | 14.3 | 1,536.8 | (456.3 | ) | 1,124.8 | ||||||||||||||||
|
Comprehensive
income (loss):
|
|||||||||||||||||||||||
|
Net
earnings
|
— | — | — | 132.5 | — | 132.5 | |||||||||||||||||
|
Net loss
on derivative instruments (net of tax)
|
— | — | — | — | (53.4 | ) | (53.4 | ) | |||||||||||||||
|
Minimum
pension liability adjustment (net of tax)
|
— | — | — | — | (66.8 | ) | (66.8 | ) | |||||||||||||||
|
Foreign
currency translation adjustments, less effect of hedging activities
(net
of tax)
|
— | — | — | — | 88.4 | 88.4 | |||||||||||||||||
|
Amortization
of actuarial losses and
prior
service cost (net of tax)
|
— | — | — | — | 15.3 | 15.3 | |||||||||||||||||
|
Comprehensive
income (loss)
|
— | — | — | 132.5 | (16.5 | ) | 116.0 | ||||||||||||||||
|
Cash
dividends on common stock ($.78 per share)
|
— | — | — | (47.3 | ) | — | (47.3 | ) | |||||||||||||||
|
Common
stock issued under stock-based plans (net of forfeitures)
|
1,799,668 | .9 | 118.1 | — | — | 119.0 | |||||||||||||||||
|
Purchase
and retirement of common stock
|
(247,198 | ) | (.1 | ) | (13.3 | ) | — | — | (13.4 | ) | |||||||||||||
|
BALANCE
AT DECEMBER 31, 2009
|
61,645,196 | $ | 30.8 | $ | 119.1 | $ | 1,622.0 | $ | (472.8 | ) | $ | 1,299.1 | |||||||||||
See
Notes to Consolidated Financial Statements.
36 &
37
CONSOLIDATED
STATEMENT OF CASH FLOWS
THE
BLACK & DECKER CORPORATION AND SUBSIDIARIES
(MILLIONS
OF DOLLARS)
|
YEAR
ENDED DECEMBER 31,
|
2009 | 2008 | 2007 | |||||||||
|
OPERATING
ACTIVITIES
|
||||||||||||
|
Net
earnings
|
$ | 132.5 | $ | 293.6 | $ | 518.1 | ||||||
|
Adjustments
to reconcile net earnings to cash flow
from
operating activities:
|
||||||||||||
|
Non-cash
charges and credits:
|
||||||||||||
|
Depreciation
and amortization
|
128.0 | 136.6 | 143.4 | |||||||||
|
Stock-based
compensation
|
69.8 | 29.1 | 25.9 | |||||||||
|
Amortization
of actuarial losses and prior service costs
|
15.3 | 14.8 | 25.7 | |||||||||
|
Settlement
of income tax litigation
|
— | — | (153.4 | ) | ||||||||
|
Restructuring
and exit costs
|
11.9 | 54.7 | 19.0 | |||||||||
|
Other
|
(7.5 | ) | .3 | .5 | ||||||||
|
Changes
in selected working capital items
(net
of effects of businesses acquired):
|
||||||||||||
|
Trade
receivables
|
127.2 | 132.5 | 99.4 | |||||||||
|
Inventories
|
273.3 | 67.9 | (32.0 | ) | ||||||||
|
Trade
accounts payable
|
(53.1 | ) | (47.9 | ) | 32.6 | |||||||
|
Other
current liabilities
|
(102.2 | ) | (141.8 | ) | 33.3 | |||||||
|
Restructuring
spending
|
(39.8 | ) | (25.3 | ) | (1.0 | ) | ||||||
|
Other
assets and liabilities
|
(69.8 | ) | (89.1 | ) | 14.4 | |||||||
|
CASH
FLOW FROM OPERATING ACTIVITIES
|
485.6 | 425.4 | 725.9 | |||||||||
|
INVESTING
ACTIVITIES
|
||||||||||||
|
Capital
expenditures
|
(63.1 | ) | (98.8 | ) | (116.4 | ) | ||||||
|
Proceeds
from disposal of assets
|
3.2 | 20.4 | 13.0 | |||||||||
|
Purchase
of businesses, net of cash acquired
|
— | (25.7 | ) | — | ||||||||
| Cash outflow associated with purchase of previously acquired business | (1.4 | ) | — | — | ||||||||
|
Cash
inflow from hedging activities
|
196.0 | 72.4 | 2.0 | |||||||||
|
Cash
outflow from hedging activities
|
(38.2 | ) | (29.7 | ) | (47.4 | ) | ||||||
|
Other
investing activities, net
|
— | — | (1.0 | ) | ||||||||
|
CASH
FLOW FROM INVESTING ACTIVITIES
|
96.5 | (61.4 | ) | (149.8 | ) | |||||||
|
FINANCING
ACTIVITIES
|
||||||||||||
|
Net
(decrease) increase in short-term borrowings
|
(84.3 | ) | (246.0 | ) | 68.8 | |||||||
|
Proceeds
from issuance of long-term debt
(net
of debt issue costs of $2.7 for 2009 and $.3 for 2008)
|
343.1 | 224.7 | — | |||||||||
|
Payments
on long-term debt
|
(50.1 | ) | (.2 | ) | (150.3 | ) | ||||||
|
Purchase
of common stock
|
(13.4 | ) | (202.3 | ) | (461.4 | ) | ||||||
|
Issuance
of common stock
|
62.6 | 8.6 | 83.3 | |||||||||
|
Cash
dividends
|
(47.3 | ) | (101.8 | ) | (108.6 | ) | ||||||
|
CASH
FLOW FROM FINANCING ACTIVITIES
|
210.6 | (317.0 | ) | (568.2 | ) | |||||||
|
Effect
of exchange rate changes on cash
|
12.7 | (23.9 | ) | 13.5 | ||||||||
|
INCREASE IN
CASH AND CASH EQUIVALENTS
|
805.4 | 23.1 | 21.4 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
277.8 | 254.7 | 233.3 | |||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 1,083.2 | $ | 277.8 | $ | 254.7 | ||||||
See
Notes to Consolidated Financial Statements.
38
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
THE BLACK
& DECKER CORPORATION AND SUBSIDIARIES
NOTE
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The
Consolidated Financial Statements include the accounts of the Corporation and
its subsidiaries. Intercompany transactions have been eliminated.
Reclassifications:
Certain prior years’ amounts in the Consolidated Financial Statements have been
reclassified to conform to the presentation used in 2009.
Use of Estimates: The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
Revenue Recognition: Revenue from sales
of products is recognized when title passes, which occurs either upon shipment
or upon delivery based upon contractual terms. The Corporation recognizes
customer program costs, including customer incentives such as volume or trade
discounts, cooperative advertising and other sales related discounts, as a
reduction to sales.
Foreign Currency Translation: The
financial statements of subsidiaries located outside of the United States,
except those subsidiaries operating in highly inflationary economies, generally
are measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange at the
balance sheet date. The resultant translation adjustments are included in
accumulated other comprehensive income (loss), a separate component of
stockholders’ equity. Income and expense items are translated at average monthly
rates of exchange. Gains and losses from foreign currency transactions of these
subsidiaries are included in net earnings. For subsidiaries operating in highly
inflationary economies, gains and losses from balance sheet translation
adjustments are included in net earnings.
Cash and Cash Equivalents: Cash and cash
equivalents include cash on hand, demand deposits, and short-term investments
with maturities of three months or less from the date of acquisition.
Concentration of Credit: The Corporation
sells products to customers in diversified industries and geographic regions
and, therefore, has no significant concentrations of credit risk other than with
two major customers. As of December 31, 2009, approximately 27% of the
Corporation’s trade receivables were due from two large home improvement
retailers.
The
Corporation continuously evaluates the credit-worthiness of its customers and
generally does not require collateral.
Inventories:
Inventories are stated at the lower of cost or market. The cost of United States
inventories is based primarily on the last-in, first-out (LIFO) method; all
other inventories are based on the first-in, first-out (FIFO)
method.
Property and Depreciation: Property,
plant, and equipment is stated at cost. Depreciation is computed generally on
the straight-line method. Estimated useful lives range from 10 years to 50 years
for buildings and 3 years to 15 years for machinery and equipment. The
Corporation capitalizes improvements that extend the useful life of an asset.
Repair and maintenance costs are expensed as incurred.
Goodwill and Other Intangible Assets:
Goodwill represents the excess of the cost of an acquired entity over the
net of the amounts assigned to assets acquired and liabilities assumed. Goodwill
and intangible assets deemed to have indefinite lives are not amortized, but are
subject to an impairment test on an annual basis, or whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. Other
intangible assets are amortized over their estimated useful lives.
The
Corporation assesses the fair value of its reporting units for its goodwill
impairment tests based upon a discounted cash flow methodology. The
identification of reporting units begins at the operating segment level – in the
Corporation’s case, the Power Tools and Accessories segment, the Hardware and
Home Improvement segment, and the Fastening and Assembly Systems segment – and
considers whether operating components one level below the segment level should
be identified as reporting units for purposes of goodwill impairment tests if
certain conditions exists. The conditions include, among other factors, (i) the
extent to which an operating component represents a business (that is, the
operating component contains all of the inputs and processes necessary for it to
continue to conduct normal operations if transferred from the segment) and (ii)
the disaggregation of economically dissimilar operating components within a
segment. The Corporation has determined that its reporting units, for purposes
of its goodwill impairment tests, represent its operating segments, except with
respect to its Hardware and Home Improvement segment for which its reporting
units are the plumbing products and security hardware businesses. Goodwill is
allocated to each reporting unit at the time of a business acquisition and is
adjusted upon finalization of the purchase price of an acquisition.
The
discounted cash flow methodology utilized by the Corporation to assess the fair
value of its reporting units for its goodwill impairment tests is based upon
estimated future cash flows – which are based upon historical results and
current projections – and are
39
discounted
at a rate corresponding to a market rate. If the carrying amount of the
reporting unit exceeds the estimated fair value determined through that
discounted cash flow methodology, goodwill impairment may be present. The
Corporation would measure the goodwill impairment loss based upon the fair value
of the reporting unit, including any unrecognized intangible assets, and
estimate the implied fair value of goodwill. An impairment loss would be
recognized to the extent that a reporting unit’s recorded goodwill exceeded the
implied fair value of goodwill.
The
Corporation performed its annual impairment test in the fourth quarters of 2009,
2008, and 2007. No impairment was present upon performing these impairment
tests. The Corporation cannot predict the occurrence of certain events that
might adversely affect the reported value of goodwill. Such events may include,
but are not limited to, strategic decisions made in response to economic and
competitive conditions, the impact of the economic environment on the
Corporation’s customer base, or a material negative change in its relationships
with significant customers.
Product
Development Costs: Costs associated with the development of new products
and changes to existing products are charged to operations as incurred. Product
development costs were $127.8 million in 2009, $146.0 million in 2008, and
$150.9 million in 2007.
Shipping and Handling Costs: Shipping
and handling costs represent costs associated with shipping products to
customers and handling finished goods. Included in selling, general, and
administrative expenses are shipping and handling costs of $240.0 million in
2009, $315.1 million in 2008, and $340.6 million in 2007. Freight charged to
customers is recorded as revenue.
Advertising and Promotion: Advertising
and promotion expense, which is expensed as incurred, was $114.9 million in
2009, $162.6 million in 2008, and $199.2 million in 2007.
Product Warranties: Most of the
Corporation’s products in the Power Tools and Accessories segment and Hardware
and Home Improvement segment carry a product warranty. That product warranty, in
the United States, generally provides that customers can return a defective
product during the specified warranty period following purchase in exchange for
a replacement product or repair at no cost to the consumer. Product warranty
arrangements outside the United States vary depending upon local market
conditions and laws and regulations. The Corporation accrues an estimate of its
exposure to warranty claims based upon both current and historical product sales
data and warranty costs incurred.
Stock-Based Compensation: The
Corporation recognizes stock-based compensation expense – the cost of employee
services in exchange for awards of equity instruments – based on the grant-date
fair value of those awards. Stock-based compensation expense is recognized on a
straight-line basis over the requisite service period of the award, which is
generally the vesting period. Stock-based compensation expense is reflected in
the Consolidated Statement of Earnings in selling, general, and administrative
expenses. The fair value of stock options is determined using the Black-Scholes
option valuation model, which incorporates assumptions surrounding expected
volatility, dividend yield, the risk-free interest rate, expected option life,
and the exercise price compared to the stock price on the grant date. The
volatility assumptions utilized in determining the fair value of stock options
granted after 2005, are based upon the average of historical and implied
volatility. The volatility assumptions utilized in determining the fair value of
stock options granted before 2005, are based upon historical volatility. The
Corporation determined the estimated expected life of options based on a
weighted average of the average period of time from grant date to exercise date,
the average period of time from grant date to cancellation date after vesting,
and the mid-point of time to expiration for outstanding vested options. The
Corporation determines the fair value of the Corporation’s restricted stock and
restricted stock units based on the fair value of its common stock at the date
of grant.
Cash
flows resulting from the tax benefits of tax deductions in excess of the
compensation cost recognized for share-based arrangements are classified as
financing cash flows.
Postretirement
Benefits: Pension plans, which cover substantially all of the
Corporation’s employees in North America (if hired before 2007), the United
Kingdom (if hired before 2005), and Europe consist primarily of non-contributory
defined benefit plans. The defined benefit plans are funded in conformity with
the funding requirements of applicable government regulations. Generally,
benefits are based on age, years of service, and the level of compensation
during the final years of employment. Prior service costs for defined benefit
plans generally are amortized over the estimated remaining service periods of
employees.
Certain
employees are covered by defined contribution plans. The Corporation’s
contributions to these plans are generally based on a percentage of employee
compensation or employee contributions. These plans are funded on a current
basis.
In
addition to pension benefits, certain postretirement medical, dental, and life
insurance benefits are provided to most United States retirees who retired
before 1994. Most current United States employees (if hired before 2005) are
eligible for postretirement medical and dental benefits from their date of
retirement to age 65. The postretirement medical benefits are contributory and
include certain cost-sharing features, such as deductibles and co-payments.
Retirees in other countries generally are covered by government-sponsored
programs.
40
The
Corporation recognizes the overfunded or underfunded status of its defined
benefit postretirement plans as an asset or a liability in the balance sheet,
with changes in the funded status recorded through comprehensive income in the
year in which those changes occur.
Effective
December 31, 2008, the Corporation adopted a new accounting standard that
requires the funded status be measured as of an entity’s year-end balance sheet
date rather than as of an earlier date as previously permitted. Prior to
December 31, 2008, the Corporation used a measurement date of September 30 for
the majority of its defined benefit pension and postretirement plans. Effective
December 31, 2008, the Corporation uses a measurement date of December 31 for
its defined benefit pension and postretirement plans. The adoption of the
year-end measurement date requirement of as of December 31, 2008, resulted in a
charge to retained earnings of $5.1 million, an increase in deferred tax assets
of $.7 million, an increase in pension assets of $.6 million, an increase in
pension liabilities of $3.2 million, and an increase in accumulated other
comprehensive income of $3.2 million.
The
expected return on plan assets is determined using the expected rate of return
and a calculated value of plan assets referred to as the market-related value of
plan assets. Differences between assumed and actual returns are amortized to the
market-related value of assets on a straight-line basis over five
years.
The
Corporation uses the corridor approach in the valuation of defined benefit plans
and other postretirement benefits. The corridor approach defers all actuarial
gains and losses resulting from variances between actual results and economic
estimates or actuarial assumptions. For defined benefit pension plans, these
unrecognized gains and losses are amortized when the net gains and losses exceed
10% of the greater of the market-related value of plan assets or the projected
benefit obligation at the beginning of the year. For other postretirement
benefits, amortization occurs when the net gains and losses exceed 10% of the
accumulated postretirement benefit obligation at the beginning of the year. The
amount in excess of the corridor is amortized over the average remaining service
period to retirement date of active plan participants or, for retired
participants, the average remaining life expectancy.
Environmental Liabilities: The
Corporation accrues for its environmental remediation costs, including costs of
required investigation, remedial activities, and post-remediation operating and
maintenance, when it is probable that a liability has been incurred and the
amount can be reasonably estimated. For matters associated with properties
currently operated by the Corporation, the Corporation makes an assessment as to
whether an investigation and remediation would be required under applicable
federal and state laws. For matters associated with properties previously sold
or operated by the Corporation, the Corporation considers any applicable terms
of sale and applicable federal and state laws to determine if it has any
remaining liability. For environmental remediation matters, the most likely cost
to be incurred is accrued based on an evaluation of currently available facts
with respect to each individual site, including current laws and regulations,
remedial activities under consideration, and prior remediation experience. Where
no amount within a range of estimates is considered by the Corporation as more
likely to occur than another, the minimum amount is accrued. In establishing an
accrual for environmental remediation costs at sites with multiple potentially
responsible parties, the Corporation considers its likely proportionate share of
the anticipated remediation costs and the ability of other parties to fulfill
their obligations. Environmental liabilities are not discounted. When future
liabilities are determined to be reimbursable by insurance coverage, a
receivable is recorded related to the insurance reimbursement when reimbursement
is virtually certain. As more fully disclosed in Note 21, the uncertain nature
inherent in estimating the costs of such environmental remediation and the
possibility that current estimates may not reflect the final outcome could
result in the recognition of additional expenses in future periods.
Derivative Financial Instruments: The
Corporation is exposed to certain market risks arising from its business
operations. With products and services marketed in over 100 countries and with
manufacturing sites in 12 countries, the Corporation is exposed to risks arising
from changes in foreign currency rates. Also, the materials used in the
manufacturing of the Corporation’s products, which include certain components
and raw materials, are subject to price volatility. These component parts and
raw materials are principally subject to market risk associated with changes in
the price of nickel, steel, resins, copper, aluminum, and zinc. The Corporation
is also exposed to market risks associated with changes in interest rates. The
primary risks managed by derivative instruments are foreign currency exchange
risk, commodity price risk, and interest rate risk. The Corporation also manages
each of these risks using methods other than derivative instruments. The
Corporation does not utilize derivatives that contain leverage features.
Derivative
instruments are recognized as either assets or liabilities in the Consolidated
Balance Sheet at fair value. On the date on which the Corporation enters into a
derivative, the derivative is generally designated as a hedge of the identified
exposure. The Corporation formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Corporation specifically identifies the asset, liability, firm commitment,
forecasted transaction, or net investment that has been designated as the hedged
item and states how the hedging instrument is expected to reduce the risks
related to the hedged item. The Corporation measures effectiveness
41
of its
hedging relationships both at hedge inception and on an ongoing basis. The
Corporation enters into certain derivatives that are not designated as a hedge
of the identified exposures; however, these derivatives are believed to be
hedges of the underlying economic exposure.
Cash Flow Hedging Strategy. For each
derivative instrument that is designated and qualifies as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of accumulated other comprehensive income (loss) and reclassified
into earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future cash flows of the
hedged item, if any, is recognized in current earnings during the period of
change. For hedged forecasted transactions, hedge accounting is discontinued if
the forecasted transaction is no longer probable of occurring, in which case
previously deferred hedging gains or losses would be recorded to earnings
immediately.
The fair
value of foreign currency-related derivatives are generally included in the
Consolidated Balance Sheet in other current assets, other assets, other current
liabilities, and other long-term liabilities. The earnings impact of cash flow
hedges relating to forecasted purchases of inventory is reported in cost of
goods sold to match the underlying transaction being hedged.
The
earnings impact of cash flow hedges relating to the variability in cash flows
associated with foreign currency-denominated assets and liabilities is reported
in cost of goods sold, selling, general, and administrative expenses, or other
expense (income), depending on the nature of the assets or liabilities being
hedged. The amounts deferred in accumulated other comprehensive income (loss)
associated with these instruments generally relate to foreign currency spot-rate
to forward-rate differentials and are recognized in earnings over the term of
the hedge. The discount or premium relating to cash flow hedges associated with
foreign currency-denominated assets and liabilities is recognized in net
interest expense over the life of the hedge.
Forward
contracts on various foreign currencies are entered into to manage the foreign
currency exchange risk associated with forecasted sale or purchase of product
manufactured in a currency different than that of the selling subsidiary. The
objective of the hedges is to reduce the variability of cash flows associated
with the receipt or payment of those foreign currency risks. When the functional
currency of the selling subsidiary weakens against the exposed currency, the
increase in the present value of the future foreign currency cash flow
associated with the purchase of product is offset by gains in the fair value of
the forward contract designated as hedged. Conversely, when the functional
currency of the selling subsidiary strengthens against the exposed currency, the
decrease in the present value of the future foreign currency cash flow
associated with the purchase of product is offset by losses in the fair value of
the forward contract designated as hedged. The Corporation may also manage this
foreign currency exchange risk through the use of options. No options to buy or
sell currencies were outstanding at December 31, 2009.
|
AS
OF DECEMBER 31, 2009
|
BUY | SELL | ||||||
|
United
States dollar
|
$ | 243.9 | $ | (6.9 | ) | |||
|
Pound
sterling
|
— | (35.1 | ) | |||||
|
Euro
|
60.6 | (163.5 | ) | |||||
|
Canadian
dollar
|
— | (77.3 | ) | |||||
|
Australian
dollar
|
— | (13.3 | ) | |||||
|
Czech
koruna
|
14.9 | — | ||||||
|
Swedish
krona
|
— | (13.2 | ) | |||||
|
Norwegian
krone
|
— | (8.1 | ) | |||||
|
Other
|
7.4 | (12.7 | ) | |||||
|
Total
|
$ | 326.8 | $ | (330.1 | ) | |||
|
AS
OF DECEMBER 31, 2008
|
||||||||
|
Total
|
$ | 583.2 | $ | (518.3 | ) | |||
Forward
contracts on various foreign currencies are also entered into to manage the
foreign currency exchange risk associated with foreign currency denominated
assets, liabilities, and firm commitments. The objective of the hedges is to
reduce the variability of cash flows associated with the receipt or payment of
those foreign currency risks. When the functional currency of the selling
subsidiary weakens against the exposed currency, the increase in the present
value of the future foreign currency cash flow associated with the future
receipt or payment of the foreign currency denominated asset or liability is
offset by gains in the fair value of the forward contract designated as hedged.
Conversely, when the functional currency of the selling subsidiary strengthens
against the exposed currency, the decrease in the future receipt or payment of
the foreign currency denominated asset or liability is offset by losses in the
fair value of the forward contract designated as hedged.
The
following table summarizes the contractual amounts of forward exchange contracts
as of December 31, 2009 and 2008, in millions of dollars, which were entered
into to hedge foreign currency denominated assets, liabilities, and firm
commitments, including details by major currency as of December 31, 2009.
Foreign currency amounts were translated at current rates as of the reporting
date. The “Buy” amounts represent the United States dollar equivalent of
42
commitments
to purchase currencies, and the “Sell” amounts represent
the United States dollar equivalent of commitments to sell
currencies.
|
AS
OF DECEMBER 31, 2009
|
BUY | SELL | ||||||
|
United
States dollar
|
$ | 1,425.1 | $ | (2,863.8 | ) | |||
|
Pound
sterling
|
1,838.4 | (537.7 | ) | |||||
|
Euro
|
1,009.9 | (750.2 | ) | |||||
|
Canadian
dollar
|
22.9 | (64.5 | ) | |||||
| Czech koruna | — | (5.1 | ) | |||||
|
Japanese
yen
|
— | (31.4 | ) | |||||
|
Swedish
krona
|
95.0 | (73.7 | ) | |||||
| New Zealand dollar | 22.5 | (11.2 | ) | |||||
|
Swiss
franc
|
1.2 | (16.9 | ) | |||||
|
Norwegian
krone
|
— | (4.4 | ) | |||||
|
Danish
krone
|
.8 | (34.3 | ) | |||||
|
Other
|
5.6 | (25.1 | ) | |||||
|
Total
|
$ | 4,421.4 | $ | (4,418.3 | ) | |||
|
AS
OF DECEMBER 31, 2008
|
||||||||
|
Total
|
$ | 2,261.4 | $ | (2,434.2 | ) | |||
The
Corporation’s foreign currency derivatives are designated to, and generally are
denominated in the currencies of, the underlying exposures. Some of the forward
exchange contracts involve the exchange of two foreign currencies according to
the local needs of the subsidiaries. Some natural hedges also are used to
mitigate risks associated with transaction and forecasted exposures. The
Corporation also responds to foreign exchange movements through various means,
such as pricing actions, changes in cost structure, and changes in hedging
strategies.
The
Corporation has entered into forward contracts on certain commodities –
principally zinc and copper – to manage the price risk associated with the
forecasted purchases of materials used in the manufacturing of the Corporation’s
products. The objective of the hedge is to reduce the variability of cash flows
associated with the forecasted purchase of those commodities. The Corporation
had the following notional amounts of commodity contracts outstanding (in
millions of pounds).
|
AS
OF DECEMBER 31,
|
2009
|
2008
|
||||||
|
Zinc
|
7.3 | 13.7 | ||||||
|
Copper
|
1.6 | 3.3 | ||||||
Fair
Value Hedging Strategy. For each derivative instrument that is designated and
qualifies as a fair value hedge, the gain or loss on the derivative instrument
as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk are recognized in the same line item associated with the hedged item
in current earnings during the period of the change in fair values. The
Corporation manages its interest rate risk, primarily through the use of
interest rate swap agreements, in order to achieve a cost-effective mix of fixed
and variable rate indebtedness. It seeks to issue debt opportunistically,
whether at fixed or variable rates, at the lowest possible costs. The
Corporation may, based upon its assessment of the future interest rate
environment, elect to manage its interest rate risk associated with changes in
the fair value of its indebtedness through the use of interest rate swaps. The
interest rate swap agreements utilized by the Corporation effectively modify the
Corporation’s exposure to interest rates by converting the Corporation’s
fixed-rate debt, to the extent it has been swapped, to a floating rate. The
Corporation has designated each of its outstanding interest rate swap agreements
as fair value hedges of the underlying fixed rate obligation. The fair value of
the interest rate swap agreements is recorded in other current assets, other
assets, other current liabilities, or other long-term liabilities with a
corresponding increase or decrease in the fixed rate obligation. The changes in
the fair value of the interest rate swap agreements and the underlying fixed
rate obligations are recorded as equal and offsetting unrealized gains and
losses in interest expense in the Consolidated Statement of Earnings. Gains or
losses resulting from the early termination of interest rate swaps are deferred
as an increase or decrease to the carrying value of the related debt and
amortized as an adjustment to the yield of the related debt instrument over the
remaining period originally covered by the swap.
As of
December 31, 2009 and 2008, the total notional amount of the Corporation’s
portfolio of fixed-to-variable interest rate swap instruments was $325.0
million, respectively.
Net
Investment Hedging Strategy. For derivatives that are designated and
qualify as hedges of net investments in subsidiaries located outside the United
States, the gain or loss (net of tax) is reported in accumulated other
comprehensive income (loss) as part of the cumulative translation adjustment to
the extent the derivative is effective. Any ineffective portion of net
investment hedges are recognized in current earnings. Amounts due from or to
counterparties are included in other current assets or other current
liabilities. The objective of the hedge is to protect the value of the
Corporation’s investment in its foreign subsidiaries.
As of
December 31, 2009 and 2008, the total notional amount of the Corporation’s net
investment hedges consisted of contracts to sell the British Pound Sterling in
the amount of £753.2 million and £383.8 million, respectively.
Other
Hedging Strategy. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in current earnings during the
period of change. The notional amounts of derivative instruments not designated
as hedging instruments at December 31, 2009 and 2008, were not
material.
Credit
Exposure. The
Corporation is exposed to credit-related losses in the event of nonperformance
by counterparties to certain derivative financial instruments. The Corporation
monitors the creditworthiness of the counterparties and presently does not
expect default by any of the counterparties. The Corporation does not obtain
collateral in connection with its derivative financial instruments.
43
The
credit exposure that results from interest rate and foreign exchange contracts
is the fair value of contracts with a positive fair value as of the reporting
date. Some derivatives are not subject to credit exposures. The fair value of
all financial instruments is summarized in Note 11.
Fair
Value Measurements: Effective January 1, 2008, the Corporation adopted a
new accounting standard that defined fair value, established a framework for
measuring fair value, and expanded disclosures about fair value measurements.
This standard clarified how to measure fair value as permitted under other
accounting pronouncements but did not require any new fair value measurements.
In February 2008, the FASB adopted a one-year deferral of the fair value
measurement and disclosure requirements for non-financial assets and
liabilities, except for those that are recognized and disclosed at fair value in
the financial statements on at least an annual basis.
The
Corporation adopted the fair value measurement and disclosure requirements for
measuring financial assets and liabilities and non-financial assets and
liabilities that are recognized at fair value in the financial statements on at
least an annual basis as of January 1, 2008. The Corporation adopted the fair
value measurement and disclosure requirements for non-financial assets and
liabilities as of January 1, 2009.
The fair
value accounting standard defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants at the measurement date. That fair value
accounting standard also establishes a three-level fair value hierarchy that
prioritizes the inputs used to measure fair value. This hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
•Level 1 – Quoted prices in active
markets for identical assets or liabilities.
•Level 2 – Observable inputs other than
quoted market prices included in Level 1, such as quoted prices for similar
assets and liabilities in active markets; quoted prices for identical or similar
assets and liabilities in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data.
•Level 3 – Unobservable inputs that are
supported by little or no market activity and that are significant to the fair
value of the assets or liabilities. This includes certain pricing models,
discounted cash flow methodologies and similar techniques that use significant
unobservable inputs.
Income Taxes: The provision for income
taxes is determined using the asset and liability approach. Under this approach,
deferred income taxes represent the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of assets and
liabilities. Valuation allowances are recorded to reduce the deferred tax assets
to an amount that will more likely than not be realized. No provision is made
for the U.S. income taxes on the undistributed earnings of wholly-owned foreign
subsidiaries as substantially all such earnings are permanently reinvested, or
will only be repatriated when possible to do so at minimal additional tax
cost.
Effective
January 1, 2007, the Corporation adopted a new accounting standard that provided
guidance for the recognition, derecognition and measurement in financial
statements of tax positions taken in previously filed tax returns or tax
positions expected to be taken in tax returns. The Corporation recognizes the
financial statement impact of a tax position when it is more likely than not
that the position will be sustained upon examination. If the tax position meets
the more-likely-than-not recognition threshold, the tax effect is recognized at
the largest amount of the benefit that is greater than fifty percent likely of
being realized upon ultimate settlement. The Corporation recognizes a liability
created for unrecognized tax benefits as a separate liability that is not
combined with deferred tax liabilities or assets. The Corporation recognizes
interest and penalties related to tax uncertainties as income tax expense. The
impact of the adoption of that new accounting standard for tax positions is more
fully disclosed in Note 12.
Earnings
per Share: The
Corporation calculates basic net earnings per share using the weighted-average
number of common shares outstanding during the period. Diluted net earnings per
share is computed using the weighted-average number of common shares and
dilutive potential commons shares outstanding during the period. Dilutive
potenital common shares, which primarily consist of stock options, restricted
stock and restricted stock units, are determined under the treasury stock
method.
Effective
January 1, 2009, the Corporation adopted a new accounting standard that
clarifies whether instruments grated in share-based payment transactions should
be included in the computation of earnings per share using the two-class method
prior to vesting. See Note 15 for application of the two-class method to the
Corporation’s share-based plans. The new accounting standard requires that all
prior-period earnings per share presented be adjusted retrospectively.
Accordingly, basic and diluted earnings per share for the year ended December
31, 2008, have been adjusted to $4.83 and $4.77, respectively, from $4.91 and
$4.82, respectively. Basic and diluted earnings per share for the year ended
December 31, 2007, have been adjusted to $7.96 and $7.78, respectively, from
$8.06 and $7.85, respectively.
Subsequent Events: The Corporation has
evaluated subsequent events through February 19, 2010, the date of issuance of
these financial statements, and determined that: (i) no subsequent events have
occurred
44
that
would require recognition in its consolidated financial statements for the year
ended December 31, 2009; and (ii) no other subsequent events have occurred that
would require disclosure in the notes thereto.
NOTE
2: DEFINITIVE MERGER AGREEMENT
On
November 2, 2009, the Corporation announced that it had entered into a
definitive merger agreement to create Stanley Black & Decker, Inc. in
an all-stock transaction. Under the terms of the transaction, which has been
approved by the Boards of Directors of both the Corporation and The Stanley
Works, the Corporation’s shareholders will receive a fixed ratio of 1.275 shares
of The Stanley Works common stock for each share of the Corporation’s common
stock that they own. Consummation of the transaction is subject to customary
closing conditions, including obtaining certain regulatory approvals as well as
shareholder approval from the shareholders of both the Corporation and The
Stanley Works.
On
December 29, 2009, the Corporation announced that the Hart-Scott-Rodino
antitrust review period had expired. The expiration of the Hart-Scott-Rodino
antitrust review period satisfies one of the conditions to the closing of the
transaction. On
February 2, 2010, the Corporation and The Stanley Works announced that both
companies will hold special shareholder meetings on March 12, 2010, to vote on
the combination of their businesses. In connection with the proposed
transaction, The Stanley Works has filed with the Securities and Exchange
Commission (SEC) a Registration Statement on Form S-4 (File No. 333-163509) that
includes a joint proxy statement of Stanley and the Corporation that also
constitutes a prospectus of Stanley. The joint proxy statement of both the
Corporation and The Stanley Works was mailed to shareholders commencing on
or about Febuary 4, 2010. Investors and security holders are urged to read the
joint proxy statement/prospectus and any other relevant documents filed with the
SEC because they contain important information. The Corporation and The Stanley
Works expect that closing of the proposed transaction will occur on March 12,
2010.
The
provisions of the definitive merger agreement provide for a termination fee, in
the amount of $125 million, to be paid by either the Corporation or by The
Stanley Works under certain circumstances, including circumstances in which the
Board of Directors of The Stanley Works or the Corporation withdraw or modify
adversely their recommendation of the proposed transaction.
The
Corporation recognized merger-related expenses of $58.8 million for the year
ended December 31, 2009, for the matters described in the following
paragraphs.
Approval
of the definitive merger agreement by the Corporation’s Board of Directors
constituted a “change in
control” as
defined in certain agreements with employees. That “change in
control”
resulted in the following events, all of which were recognized in the
Corporation’s financial statements for the year ended December 31,
2009:
|
i.
|
Under
the terms of two restricted stock plans, all restrictions lapsed on
outstanding, but non-vested, restricted stock and restricted stock units,
except for those held by the Corporation’s Chairman, President, and Chief
Executive Officer. As a result of that lapse, the Corporation recognized
previously unrecognized compensation expense in the amount of
approximately $33.0 million, restrictions lapsed on 479,034 restricted
shares, and the Corporation issued 311,963 shares in satisfaction of the
restricted units (those 311,963 shares were net of 166,037 shares withheld
to satisfy employee tax withholding requirements). In addition, the
Corporation repurchased 186,326 shares, representing shares with a
fair value equal to amounts necessary to satisfy employee tax withholding
requirements on the 479,034 restricted shares on which restrictions
lapsed.
|
|
ii.
|
Under
the terms of severance agreements with 19 of its key employees, all
unvested stock options held by those individuals, aggregating
approximately 1.1 million options, immediately vested. As a result, the
Corporation recognized previously unrecognized compensation expense
associated with those options in the amount of approximately $9.3
million.
|
|
iii.
|
Under
the terms of The Black & Decker Supplemental Executive Retirement
Plan, which covers six key employees, the participants became fully
vested. As a result, the Corporation recognized additional pension expense
of approximately $5.3 million.
|
The
events described in paragraphs i. through iii. above were recognized in the
Corporation’s financial statements for the year ended December 31, 2009, as the
approval of the definitive merger agreement by the Corporation’s Board of
Directors on November 2, 2009, constituted a “change in
control”
under certain agreements with employees and resulted in the
occurrence—irrespective of whether or not the proposed merger is ultimately
consummated—of those events. Additional payments upon a change in control—that
are solely payable upon consummation of the proposed merger or termination of
certain employees—will not be recognized in the Corporation’s financial
statements until: (1) consummation of the proposed merger, which is subject to
customary closing conditions, including obtaining certain regulatory approvals,
as well as shareholder approval from the shareholders of both the Corporation
and The Stanley Works, and therefore cannot be considered probable until such
approvals are obtained; or (2) if prior to consummation of the proposed merger,
the Corporation reaches a determination to terminate an affected employee,
irrespective of whether the proposed merger is consummated.
45
On
November 2, 2009, the Corporation’s Board of Directors amended the terms of The
Black & Decker 2008 Executive Long-Term Incentive/Retention Plan to remove
the provision whereby cash payouts under the plan are adjusted upward or
downward proportionately to the extent that the Corporation’s common stock
exceeds or is less than $67.78. As a result of this modification, the
Corporation recognized additional compensation expense of $2.8 million in its
financial statements for the year ended December 31, 2009.
The
Corporation also expects that it will incur fees for various advisory, legal,
and accounting services, as well as other expenses, associated with the proposed
merger. The Corporation estimates that these outside service fees and other
expenses, which will be expensed as incurred, will approximate $25 million, of
which approximately $8.4 million of expenses were recognized in the year ended
December 31, 2009. The anticipated $25 million of outside service fees includes
approximately $10.5 million of fees that are only payable upon consummation of
the proposed merger. The Corporation’s estimate of outside service fees is based
upon current forecasts of expected service activity. There is no assurance that
the amount of these fees could not increase significantly in the future if
circumstances change.
NOTE
3: ACQUISITIONS
Effective
September 9, 2008, the Corporation acquired Spiralock Corporation (Spiralock)
for a cash purchase price of $24.1 million. During 2009, the Corporation
received a $.2 million reduction to that purchase price based upon changes in
the net assets of Spiralock as of the closing date. The addition of Spiralock to
the Corporation’s Fastening and Assembly Systems segment allows the Corporation
to offer customers a broader range of products.
The
allocation of the purchase price resulted in the recognition of $13.6 million of
goodwill primarily related to the anticipated future earnings and cash flows of
Spiralock. The transaction also generated $10.2 million of finite-lived
intangible assets that will be amortized over 15 years. These intangible assets
are reflected in other assets in the Consolidated Balance Sheet. The Corporation
does not believe that the goodwill and intangible assets recognized will be
deductible for income tax purposes.
The
Corporation also acquired another business during 2008, included in the
Corporation’s Power Tools and Accessories segment, for a purchase price of $3.8
million. Of that purchase price, $1.6 million was paid in 2008, $1.6 million was
paid in 2009 and the remainder will be paid in 2010.
The
financial position and results of operations associated with these acquisitions
have been included in the Corporation’s Consolidated Balance Sheet and Statement
of Earnings since the date of acquisition.
NOTE
4: INVENTORIES
The
classification of inventories at the end of each year, in millions of dollars,
was as follows:
| 2009 | 2008 | |||||||
|
FIFO
cost
|
||||||||
|
Raw
materials and work-in-process
|
$ | 195.7 | $ | 263.9 | ||||
|
Finished
products
|
593.3 | 783.8 | ||||||
| 789.0 | 1,047.7 | |||||||
|
Adjustment
to arrive at LIFO
inventory value
|
(11.9 | ) | (23.5 | ) | ||||
| $ | 777.1 | $ | 1,024.2 | |||||
The cost
of United States inventories stated under the LIFO method was approximately 44%
of the value of total inventories at December 31, 2009 and 2008.
NOTE
5: PROPERTY, PLANT, AND EQUIPMENT
Property,
plant, and equipment at the end of each year, in millions of dollars, consisted
of the following:
| 2009 | 2008 | |||||||
|
Property,
plant, and equipment at cost:
|
||||||||
|
Land
and improvements
|
$ | 40.9 | $ | 41.3 | ||||
|
Buildings
|
299.6 | 299.7 | ||||||
|
Machinery
and equipment
|
1,252.2 | 1,288.9 | ||||||
| 1,592.7 | 1,629.9 | |||||||
|
Less
accumulated depreciation
|
1,119.3 | 1,102.0 | ||||||
| $ | 473.4 | $ | 527.9 | |||||
Depreciation
expense was $116.3 million, $125.2 million, and $132.6 million for the years
ended December 31, 2009, 2008, and 2007, respectively.
NOTE
6: GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS
The
changes in the carrying amount of goodwill by reportable business segment, in
millions of dollars, were as follows:
|
POWER
TOOLS
&
ACCESSORIES
|
HARDWARE
&
HOME
IMPROVEMENT
|
FASTENING
&
ASSEMBLY
SYSTEMS
|
TOTAL | |||||||||||||
|
Balance
at January 1, 2008
|
$ | 436.4 | $ | 464.4 | $ | 312.1 | $ | 1,212.9 | ||||||||
|
Acquisition
|
— | — | 13.9 | 13.9 | ||||||||||||
|
Currency
translation adjustment
|
(3.5 | ) | (1.0 | ) | .9 | (3.6 | ) | |||||||||
|
Balance
at December 31, 2008
|
432.9 | 463.4 | 326.9 | 1,223.2 | ||||||||||||
|
Activity
associated with prior year acquisition
|
— | — | (.3 | ) | (.3 | ) | ||||||||||
|
Currency
translation adjustment
|
3.2 | .7 | 3.2 | 7.1 | ||||||||||||
|
Balance
at December 31, 2009
|
$ | 436.1 | $ | 464.1 | $ | 329.8 | $ | 1,230.0 | ||||||||
46
The
carrying amount of acquired intangible assets included in other assets at the
end of each year, in millions of dollars, was as follows:
| 2009 | 2008 | |||||||
|
Customer
relationships
(net
of accumulated amortization
of
$21.4 in 2009 and $15.7 in 2008)
|
$ | 51.2 | $ | 56.9 | ||||
|
Technology
and patents
(net
of accumulated amortization
of
$11.8 in 2009 and $9.5 in 2008)
|
11.9 | 14.2 | ||||||
|
Trademarks
and trade names
(net
of accumulated amortization
of
$2.2 in 2009 and $5.6 in 2008)
|
197.9 | 206.5 | ||||||
|
Total
intangibles, net
|
$ | 261.0 | $ | 277.6 | ||||
Trademarks and trade names include indefinite-lived assets of $193.9 million at December 31, 2009 and 2008, respectively.
Expense
associated with the amortization of finite- lived intangible assets in 2009,
2008, and 2007 was $10.4 million, $9.8 million, and $9.1 million, respectively.
At December 31, 2009, the weighted-average amortization periods were 13 years
for customer relationships, 11 years for technology and patents, and 10 years
for trademarks and trade names. The estimated future amortization expense for
identifiable intangible assets during each of the next four years is
approximately $9.0 million. For the year ended December 31, 2014, this expense
is expected to be approximately $8.0 million.
NOTE
7: OTHER CURRENT LIABILITIES
Other
current liabilities at the end of each year, in millions of dollars, included
the following:
| 2009 | 2008 | |||||||
|
Trade
discounts and allowances
|
$ | 153.9 | $ | 202.8 | ||||
|
Employee
benefits
|
117.5 | 128.8 | ||||||
|
Salaries
and wages
|
93.9 | 81.1 | ||||||
|
Advertising
and promotion
|
38.8 | 37.8 | ||||||
|
Warranty
|
50.7 | 55.2 | ||||||
|
Income
taxes, including deferred taxes
|
64.0 | 102.0 | ||||||
|
All
other
|
273.9 | 339.7 | ||||||
| $ | 792.7 | $ | 947.4 | |||||
All other
at December 31, 2009 and 2008, consisted primarily of accruals for foreign
currency derivatives, environmental exposures, interest, insurance,
restructuring, and taxes other than income taxes.
The
following provides information with respect to the Corporation’s warranty
accrual, in millions of dollars:
| 2009 | 2008 | |||||||
|
Warranty
reserve at January 1
|
$ | 55.2 | $ | 60.5 | ||||
|
Accruals
for warranties issued during
the
period and changes in estimates
related
to pre-existing warranties
|
92.1 | 123.0 | ||||||
|
Settlements
made
|
(98.1 | ) | (125.1 | ) | ||||
|
Currency
translation adjustments
|
1.5 | (3.2 | ) | |||||
|
Warranty
reserve at December 31
|
$ | 50.7 | $ | 55.2 | ||||
NOTE
8: SHORT-TERM BORROWINGS
Short-term
borrowings in the amounts of $83.3 million at December 31, 2008, consisted
primarily of borrowings under the terms of the Corporation’s commercial paper
program, uncommitted lines of credit, and other short-term borrowing
arrangements. The weighted-average interest rate on short-term borrowings
outstanding was 2.20% at December 31, 2008.
The
Corporation maintains an agreement under which it may issue commercial paper at
market rates with maturities of up to 365 days from the date of issue. The
maximum amount authorized for issuance under its commercial paper program is
$1.0 billion. The Corporation’s ability to borrow under this commercial paper
agreement is generally dependent upon the Corporation maintaining a minimum
short-term debt credit rating of A2 / P2. There was $65.0 million outstanding
under this agreement at December 31, 2008.
In
December 2007, the Corporation replaced a $1.0 billion unsecured revolving
credit facility (the Former Credit Facility) with a $1.0 billion senior
unsecured revolving credit agreement (the Credit Facility) that expires December
2012. The amount available for borrowings under the Credit Facility was
approximately $1.0 billion and $935.0 million at December 31, 2009 and 2008,
respectively.
Under the
Credit Facility, the Corporation has the option of borrowings at London
Interbank Offered Rate (LIBOR) plus an applicable margin or at other variable
rates set forth therein. The Credit Facility provides that the interest rate
margin over LIBOR, initially set at .30%, will increase (by a maximum amount of
.30%) or decrease (by a maximum amount of .12%) based on changes in the ratings
of the Corporation’s long-term senior unsecured debt.
In
addition to interest payable on the principal amount of indebtedness outstanding
from time to time under the Credit Facility, the Corporation is required to pay
an annual facility fee, initially equal to .10% of the amount of the aggregate
commitments under the Credit Facility, whether used or unused. The Corporation
is also required to pay a utilization fee, initially equal to .05% per annum,
applied to the outstanding balance when borrowings under the Credit Facility
exceed 50% of the aggregate commitments. The Credit Facility provides that both
the facility fee and the utilization fee will increase or decrease based on
changes in the ratings of the Corporation’s long-term senior unsecured
debt.
The
Credit Facility includes usual and customary covenants for transactions of this
type, including covenants limiting liens on assets of the Corporation,
sale-leaseback transactions and certain asset sales, mergers or changes to the
businesses engaged in by the Corporation. The Credit Facility requires that the
Corporation maintain specific leverage and interest
47
coverage
ratios. As of December 31, 2009, the Corporation was in compliance with all
terms and conditions of the Credit Facility.
Under the
terms of uncommitted lines of credit at December 31, 2009, the Corporation may
borrow up to approximately $250 million on such terms as may be mutually agreed.
These arrangements do not have termination dates and are reviewed periodically.
No material compensating balances are required or maintained.
The
average borrowings outstanding under the Corporation’s commercial paper program,
uncommitted lines of credit, and other short-term borrowing arrangements during
2009 and 2008 were $167.0 million and $651.7 million, respectively.
NOTE
9: LONG-TERM DEBT
The
composition of long-term debt at the end of each year, in millions of dollars,
was as follows:
| 2009 | 2008 | |||||||
|
7.125%
notes due 2011 (including
discount
of
$.4
in 2009 and $.7 in 2008)
|
$ | 399.6 | $ | 399.3 | ||||
|
4.75%
notes due 2014 (including
discount
of
$1.1
in 2009 and $1.3 in 2008)
|
298.9 | 298.7 | ||||||
|
8.95%
notes due in 2014 (including discount
of
$3.6 in 2009)
|
346.4 | — | ||||||
|
5.75%
notes due 2016 (including
discount
of
$.8
in 2009 and $1.0 in 2008)
|
299.2 | 299.0 | ||||||
|
7.05%
notes due 2028
|
150.0 | 150.0 | ||||||
|
Other
loans due through 2012
|
175.0 | 225.0 | ||||||
|
Fair
value hedging adjustment
|
45.9 | 72.8 | ||||||
|
Less
current maturities of
long-term debt
|
— | (.1 | ) | |||||
| $ | 1,715.0 | $ | 1,444.7 | |||||
During
2008, the Corporation entered into loan agreements in the aggregate amount of
$225.0 million, with $125.0 million and $100.0 million maturing in April 2011
and December 2012, respectively. The terms of the loan agreements permit
repayment prior to maturity. Borrowings under the loan agreements are at
variable rates. The average borrowing rate under the loan agreements is LIBOR
plus 1.14%. At December 31, 2009 and 2008, the weighted-average interest rate on
these loans was 1.41% and 3.76%, respectively.
In June
2009, the Corporation amended the terms of a $50.0 million term loan agreement
to provide for periodic repayments and borrowings up to the original loan amount
through the maturity date of April 2011. The Corporation is required to pay a
commitment fee on the unutilized portion of the facility. At December 31, 2009,
no borrowings were outstanding under this agreement. In February 2010, the
Corporation terminated this agreement.
As more
fully described in Note 1, at December 31, 2009 and 2008, the carrying amount of
long-term debt and current maturities thereof includes $45.9 million and $72.8
million, respectively, relating to outstanding or terminated fixed-to-variable
rate interest rate swap agreements. Deferred gains on the early termination of
interest rate swaps were $21.8 million and $29.0 million at December 31, 2009
and 2008, respectively.
Indebtedness
of subsidiaries in the aggregate principal amounts of $150.0 million and $152.8
million were included in the Consolidated Balance Sheet at December 31, 2009 and
2008, respectively, in short-term borrowings, current maturities of long-term
debt, and long-term debt.
Principal
payments on long-term debt obligations due over the next five years are as
follows: $— million in 2010, $475.0 million in 2011, $100.0 million in 2012, $—
million in 2013, and $650.0 million in 2014. Interest payments on all
indebtedness were $97.9 million in 2009, $101.1 million in 2008, and $104.3
million in 2007.
NOTE
10: DERIVATIVE FINANCIAL INSTRUMENTS
As more
fully described in Note 1, the Corporation is exposed to market risks arising
from changes in foreign currency exchange rates, commodity prices, and interest
rates. The Corporation manages these risks by entering into derivative financial
instruments. The Corporation also manages these risks using methods other than
derivative financial instruments. The fair value of all financial instruments is
summarized in Note 11.
Foreign Currency Derivatives: As more
fully described in Note 1, the Corporation enters into various foreign currency
contracts in managing its foreign currency exchange risk. Generally, the foreign
currency contracts have maturity dates of less than twenty-four months. The
contractual amounts of foreign currency derivatives, principally forward
exchange contracts, generally are exchanged by the counterparties.
Hedge
ineffectiveness and the portion of derivative gains and losses excluded from the
assessment of hedge effectiveness related to the Corporation’s cash flow hedges
that were recorded to earnings during 2009, 2008, and 2007 were not significant.
Amounts
deferred in accumulated other comprehensive income (loss) at December 31, 2009,
that are expected to be reclassified into earnings during 2010 represent an
after-tax loss of $1.0 million. The amounts expected to be reclassified into
earnings during 2010 include unrealized gains and losses related to open foreign
currency contracts. Accordingly, the amounts that are ultimately reclassified
into earnings may differ materially.
Interest
Rate Derivatives: The Corporation’s portfolio of interest rate swap
instruments at December 31, 2009 and 2008, consisted of $325.0 million notional
amounts of fixed-to-variable rate swaps with a weighted-average fixed rate
receipt of 4.81%, respectively. The basis of the variable rate paid is
LIBOR.
The
amounts exchanged by the counterparties to interest rate swap agreements
normally are based upon the notional amounts and other terms, generally related
to interest rates, of the derivatives. While notional amounts of interest rate
swaps form part of the basis
48
for the
amounts exchanged by the counterparties, the notional amounts are not themselves
exchanged and, therefore, do not represent a measure of the Corporation’s
exposure as an end user of derivative financial instruments.
Commodity Derivatives: As more fully
described in Note 1, the Corporation enters into various commodity contracts in
managing price risk related to metal purchases used in the manufacturing
process. Generally, the commodity contracts have maturity dates of less than
twenty-four months. The amounts exchanged by the counterparties to the commodity
contracts normally are based upon the notional amounts and other terms,
generally related to commodity prices. While the notional amounts of the
commodity contracts form part of the basis for the amounts exchanged by the
counterparties, the notional amounts are not themselves exchanged, and,
therefore, do not represent a measure of the Corporation’s exposure as an end
user of derivative financial instruments.
Hedge
ineffectiveness and the portion of derivative gains and losses excluded from the
assessment of hedge effectiveness related to the Corporation’s cash flow hedges
for commodity trades recorded to earnings during 2009, 2008, and 2007 were not
significant.
Amounts
deferred in accumulated other comprehensive income (loss) at December 31, 2009,
that are expected to be reclassified into earnings during 2010 represent an
after-tax gain of $3.0 million. The amount expected to be reclassified into
earnings during 2010 includes unrealized gains and losses related to open
commodity contracts. Accordingly, the amounts that are ultimately reclassified
into earnings may differ materially.
Credit Exposure: The Corporation’s
credit exposure on foreign currency, interest rate, and commodity derivatives as
of December 31, 2009 and 2008 were $27.9 million and $183.4 million,
respectively. That credit exposure reflects the effects of legally enforceable
master netting arrangements.
Fair Value of Derivative Financial Instruments:
The following table details the fair value of derivative financial
instruments included in the Consolidated Balance Sheet as of December 31, 2009
(in millions of dollars):
|
ASSET
DERIVATIVES
|
LIABILITY
DERIVATIVES
|
|||||||||
|
BALANCE
SHEET LOCATION
|
FAIR
VALUE
|
BALANCE
SHEET LOCATION
|
FAIR
VALUE
|
|||||||
|
Derivatives
Designated as Hedging Instruments
|
||||||||||
|
Interest
rate contracts
|
Other
current assets
|
$ | 2.4 |
Other
current liabilities
|
$ | — | ||||
|
Other
assets
|
24.2 |
Other
long-term liabilities
|
— | |||||||
|
Foreign
exchange contracts
|
Other
current assets
|
48.5 |
Other
current liabilities
|
50.1 | ||||||
|
Other
assets
|
.9 |
Other
long-term liabilities
|
.3 | |||||||
|
Net
investment contracts
|
Other
current assets
|
2.9 |
Other
current liabilities
|
15.2 | ||||||
|
Commodity
contracts
|
Other
current assets
|
6.0 |
Other
current liabilities
|
— | ||||||
|
Total
Derivatives Designated as Hedging Instruments
|
$ | 84.9 | $ | 65.6 | ||||||
|
Derivatives
Not Designated as Hedging Instruments
|
||||||||||
|
Foreign
exchange contracts
|
Other
current assets
|
$ | 17.9 |
Other
current liabilities
|
$ | 17.0 | ||||
|
Total
Derivatives
|
$ | 102.8 | $ | 82.6 | ||||||
The fair
value of derivative financial instruments in the preceding table is presented
prior to the netting of derivative receivables and derivative payables as
disclosed previously.
The
following table details the impact of derivative financial instruments in the
Consolidated Statement of Earnings for the year ended December 31, 2009 (in
millions of dollars):
|
Derivatives
in Cash Flow
Hedging
Relationships
|
AMOUNT OF
GAIN (LOSS)
RECOGNIZED
IN
OCI (a)
[EFFECTIVE
PORTION]
|
LOCATION
OF
GAIN
(LOSS)
RECLASSIFIED
FROM
OCI
INTO INCOME
[EFFECTIVE
PORTION]
|
AMOUNT
OF
GAIN
(LOSS)
RECLASSIFIED
FROM
OCI
INTO INCOME
[INEFFECTIVE PORTION]
|
LOCATION OF
GAIN
(LOSS)
RECOGNIZED
IN
INCOME
[INEFFECTIVE
PORTION]
|
AMOUNT
OF
GAIN
(LOSS)
RECOGNIZED
IN
INCOME
[INEFFECTIVE PORTION]
|
|||||||||
|
Foreign
exchange contracts
|
$ | 46.9 |
Cost
of goods sold
|
$ | 42.4 |
Cost
of goods sold
|
$ | — | ||||||
|
Interest
expense, net
|
2.3 |
Interest
expense, net
|
— | |||||||||||
|
Other
expense
(income)
|
78.8 |
Other
expense
(income)
|
.1 | |||||||||||
|
Commodity
contracts
|
9.6 |
Cost
of goods sold
|
(6.5 | ) |
Cost
of goods sold
|
— | ||||||||
|
Total
|
$ | 56.5 | $ | 117.0 | $ | .1 | ||||||||
49
|
Derivatives
in Fair Value Hedging Relationships
|
LOCATION
OF GAIN (LOSS)
RECOGNIZED
IN INCOME
|
AMOUNT
OF GAIN (LOSS)
RECOGNIZED
IN INCOME
|
|||
|
Interest
rate contracts
|
Interest
expense, net
|
$ | (8.6 | ) | |
|
Derivatives
in Net Investment Hedging Relationships
|
AMOUNT
OF GAIN (LOSS)
RECOGNIZED
IN OCI
[EFFECTIVE
PORTION]
|
LOCATION
OF GAIN (LOSS)
RECOGNIZED
IN INCOME
[INEFFECTIVE
PORTION]
|
AMOUNT
OF GAIN (LOSS)
RECOGNIZED
IN INCOME
[INEFFECTIVE
PORTION]
|
||||||
|
Foreign
exchange contracts
|
$ | (66.1 | ) |
Other
expense
(income)
|
$ | — | |||
|
Derivatives
Not Designated as Hedging Instruments
|
LOCATION
OF GAIN (LOSS)
RECOGNIZED
IN INCOME
|
AMOUNT
OF GAIN (LOSS)
RECOGNIZED
IN INCOME
|
|||
|
Foreign
exchange contracts
|
Cost
of goods sold
|
$ | (.1 | ) | |
|
Other
expense (income)
|
1.6 | ||||
|
Total
|
$ | 1.5 | |||
|
(a)
|
OCI
is defined as Accumulated Other Comprehensive income (loss), a component
of stockholders’ equity.
|
NOTE
11: FAIR VALUE OF FINANCIAL INSTRUMENTS
The
following table presents the fair value of the Corporation’s financial
instruments as of December 31, 2009 and 2008, in millions of dollars.
Significant differences can arise between the fair value and carrying amount of
financial instruments that are recognized at historical cost
amounts.
|
QUOTED
PRICES
IN
ACTIVE
MARKETS
FOR
IDENTICAL
ASSETS
(LEVEL
1)
|
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL
2)
|
NETTING
|
(a) |
DECEMBER 31,
2009
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Investments
|
$ | 34.3 | $ | 25.2 | $ | — | $ | 59.5 | ||||||||
|
Derivatives
|
6.0 | 96.8 | (65.7 | ) | 37.1 | |||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
|
— | (82.6 | ) | 65.7 | (16.9 | ) | ||||||||||
|
Debt
|
— | (1,786.7 | ) | — | (1,786.7 | ) | ||||||||||
|
QUOTED
PRICES
IN
ACTIVE
MARKETS
FOR
IDENTICAL
ASSETS
(LEVEL
1)
|
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL
2)
|
NETTING
|
(a) |
DECEMBER 31,
2008
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Investments
|
$ | 45.8 | $ | 21.7 | $ | — | $ | 67.5 | ||||||||
|
Derivatives
|
— | 402.7 | (219.3 | ) | 183.4 | |||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives
|
(7.7 | ) | (261.6 | ) | 219.3 | (50.0 | ) | |||||||||
|
Debt
|
— | (1,370.8 | ) | — | (1,370.8 | ) | ||||||||||
|
(a)
|
Accounting
principles generally accepted in the Unites States permit the netting of
derivative receivables and derivative payables when a legally enforceable
master netting arrangement exists.
|
The
carrying amounts of investments and derivatives are equal to their fair value.
The carrying amount of debt at December 31, 2009 and 2008, is $1,715.0 million
and $1,528.1 million, respectively.
Investments,
derivative contracts and debt are valued at December 31, 2009 and 2008, using
quoted market prices for identical or similar assets and liabilities.
Investments classified as Level 1 include those whose fair value is based on
identical assets in an active market. Investments classified as Level 2 include
those whose fair value is based upon identical assets in markets that are less
active. The fair value for derivative contracts are based upon current quoted
market prices and are classified as Level 1 or Level 2 based on the nature of
the underlying markets in which these derivatives are traded. The fair value of
debt is based upon current quoted market prices in markets that are less
active.
NOTE
12: INCOME TAXES
Earnings
(loss) before income taxes for each year, in millions of dollars, were as
follows:
| 2009 | 2008 | 2007 | ||||||||||
|
United
States
|
$ | (121.2 | ) | $ | .4 | $ | 97.2 | |||||
|
Other
countries
|
291.6 | 364.3 | 400.4 | |||||||||
| $ | 170.4 | $ | 364.7 | $ | 497.6 | |||||||
Significant
components of income taxes (benefit) for each year, in millions of dollars, were
as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Current:
|
||||||||||||
|
United
States
|
$ | (28.7 | ) | $ | (6.1 | ) | $ | (65.5 | ) | |||
|
Other
countries
|
50.5 | 69.8 | 68.6 | |||||||||
| 21.8 | 63.7 | 3.1 | ||||||||||
|
Deferred:
|
||||||||||||
|
United
States
|
15.5 | 3.2 | (16.3 | ) | ||||||||
|
Other
countries
|
.6 | 4.2 | (7.3 | ) | ||||||||
| 16.1 | 7.4 | (23.6 | ) | |||||||||
| $ | 37.9 | $ | 71.1 | $ | (20.5 | ) | ||||||
Income
tax expense (benefits) recorded directly as an adjustment to equity as a result
of the exercise of employee stock options and the vesting of other stock-based
compensation arrangements were $.9 million, $(.1) million, and $(13.3) million
in 2009, 2008, and 2007, respectively. Income tax expense (benefits) recorded
directly as an adjustment to equity as a result of hedging activities were
$(23.1) million, $89.4 million, and $(13.8) million in 2009, 2008, and 2007,
respectively.
50
Income
tax payments were $85.9 million in 2009, $168.1 million in 2008, and $139.5
million in 2007.
Deferred
tax (liabilities) assets at the end of each year, in millions of dollars, were
composed of the following:
| 2009 | 2008 | |||||||
|
Deferred
tax liabilities:
|
||||||||
|
Other
|
$ | (84.1 | ) | $ | (80.4 | ) | ||
|
Gross
deferred tax liabilities
|
(84.1 | ) | (80.4 | ) | ||||
|
Deferred
tax assets:
|
||||||||
|
Tax
loss carryforwards
|
49.9 | 36.2 | ||||||
|
Postretirement
benefits
|
244.0 | 209.1 | ||||||
|
Environmental
remediation matters
|
34.3 | 34.7 | ||||||
|
Stock-based
compensation
|
29.8 | 40.7 | ||||||
|
Other
|
161.6 | 163.9 | ||||||
|
Gross
deferred tax assets
|
519.6 | 484.6 | ||||||
|
Deferred
tax asset valuation allowance
|
(37.8 | ) | (27.6 | ) | ||||
|
Net
deferred tax assets
|
$ | 397.7 | $ | 376.6 | ||||
Deferred
income taxes are included in the Consolidated Balance Sheet in other current
assets, other assets, other current liabilities, and other long-term
liabilities. Other deferred tax assets principally relate to accrued liabilities
that are not currently deductible and items relating to uncertain tax benefits
which would not affect the annual effective tax rate.
Tax loss
carryforwards at December 31, 2009, consisted of net operating losses expiring
from 2010 to 2026.
A
reconciliation of income taxes (benefit) at the federal statutory rate to the
Corporation’s income taxes for each year, in millions of dollars, is as
follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Income
taxes at federal
statutory
rate
|
$ | 59.7 | $ | 127.6 | $ | 174.2 | ||||||
|
Settlement
of tax litigation
|
— | — | (153.4 | ) | ||||||||
|
Lower
effective taxes on
earnings
in other countries
|
(37.9 | ) | (59.5 | ) | (53.6 | ) | ||||||
|
Other –
net
|
16.1 | 3.0 | 12.3 | |||||||||
|
Income
taxes (benefit)
|
$ | 37.9 | $ | 71.1 | $ | (20.5 | ) | |||||
At
December 31, 2009, unremitted earnings of subsidiaries outside of the United
States were approximately $2.1 billion, on which no United States taxes had been
provided. The Corporation’s intention is to reinvest these earnings permanently
or to repatriate the earnings only when possible to do so at minimal additional
tax cost. It is not practicable to estimate the amount of additional taxes that
might be payable upon repatriation of foreign earnings.
Uncertain
Tax Positions: As disclosed in Note 1 of Notes to Consolidated Financial
Statements the Corporation adopted a new accounting standard for uncertain tax
positions effective January 1, 2007. Upon adoption, the Corporation recorded the
cumulative effect of the change in accounting principle of $7.3 million as a
reduction to retained earnings.
As of
December 31, 2009 and 2008, the Corporation has recognized $291.8 million and
$255.8 million, respectively, of liabilities for unrecognized tax benefits of
which $31.5 million and $24.3 million, respectively, related to interest. As of
December 31, 2009 and 2008, the Corporation classified $48.0 million and $47.5
million, respectively, of its liabilities for unrecognized tax benefits within
other current liabilities. Non-current tax reserves are recorded in other
long-term liabilities in the Consolidated Balance Sheet.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits,
excluding interest, for each year, in million of dollars, is set forth
below:
| 2009 | 2008 | 2007 | ||||||||||
|
Balance
at January 1
|
$ | 231.5 | $ | 317.4 | $ | 359.5 | ||||||
|
Additions
based on tax positions
related
to current year
|
23.9 | 33.9 | 35.2 | |||||||||
|
Additions
for tax positions
related
to prior years
|
18.9 | 65.5 | 63.0 | |||||||||
|
Reductions
for tax positions
related
to prior years
|
(9.2 | ) | (40.3 | ) | (115.0 | ) | ||||||
|
Settlements
(payments)
|
(4.8 | ) | (57.0 | ) | (26.2 | ) | ||||||
|
Expiration
of the statute of limitations
|
(3.4 | ) | (75.1 | ) | (13.5 | ) | ||||||
|
Foreign
currency translation adjustment
|
3.4 | (12.9 | ) | 14.4 | ||||||||
|
Balance
at December 31
|
$ | 260.3 | $ | 231.5 | $ | 317.4 | ||||||
The
liabilities for unrecognized tax benefits at December 31, 2009 and 2008, include
$39.1 million and $38.0 million, respectively, for which the disallowance of
such items would not affect the annual effective tax rate. However, the timing
of the realization of the tax benefits is uncertain. Such uncertainty would not
impact tax expense but could affect the timing of tax payments to taxing
authorities.
The
Corporation conducts business globally and, as a result, the Corporation and/or
one or more of its subsidiaries file income tax returns in the federal and
various state jurisdictions in the U.S. as well as in various jurisdictions
outside of the U.S. In certain jurisdictions, the Corporation is either
currently in the process of a tax examination or the statute of limitations has
not yet expired. The Corporation generally remains subject to examination of its
U.S. federal income tax returns for 2006 and later years, except as disclosed
below. In the U.S., the Corporation generally remains subject to examination of
its various state income tax returns for a period of four to five years from the
date the return was filed. The state impact of any federal changes remains
subject to examination by various states for a period up to
51
one year
after formal notification of the states. The Corporation generally remains
subject to examination of its various income tax returns in its significant
jurisdictions outside the U.S. for periods ranging from three to five years
after the date the return was filed. However, in Canada and Germany, the
Corporation remains subject to examination of its tax returns for 2001 and later
years, and 1999 and later years, respectively.
During
2003, the Corporation received notices of proposed adjustments from the U.S.
Internal Revenue Service (IRS) in connection with audits of the tax years 1998
through 2000. The principal adjustment proposed by the IRS, and disputed by the
Corporation, consisted of the disallowance of a capital loss deduction taken in
the Corporation’s tax returns and interest on the deficiency. This matter was
the subject of litigation between the Corporation and the U.S. government. If
the U.S. government were to have prevailed in its disallowance of the capital
loss deduction and imposition of related interest, it would have resulted in a
cash outflow by the Corporation of approximately $180 million. If the
Corporation were to have prevailed, it would have resulted in the Corporation
receiving a refund of taxes previously paid of approximately $50 million, plus
interest. In December 2007, the Corporation and the U.S. government reached a
settlement agreement with respect to the previously described litigation. That
settlement agreement resolved the litigation relating to the audits of the tax
years 1998 through 2000 and also resolved the treatment of this tax position in
subsequent years. As a result of the settlement agreement, the Corporation
recognized a $153.4 million reduction to tax expense in 2007, representing a
reduction of the previously unrecognized tax benefit associated with the IRS’s
disallowance of the capital loss, the imposition of related interest, and the
effects of certain related tax positions taken in subsequent years. The effect
of tax positions taken in subsequent years included the recognition of $31.4
million of previously unrecognized net operating loss carryforwards of a
subsidiary. The IRS closing agreements were finalized in 2008. The Corporation
made cash payments of approximately $50 million during 2008 relating to this
settlement.
Judgment
is required in assessing the future tax consequences of events that have been
recognized in the Corporation’s financial statements or income tax returns.
Additionally, the Corporation is subject to periodic examinations by taxing
authorities in many countries. The Corporation is currently undergoing periodic
examinations of its tax returns in the United States (both federal and state),
Canada, Germany, and the United Kingdom. The IRS completed its examination of
the Corporation’s U.S. federal income tax returns for 2004 and 2005 in 2008. At
that time, the Corporation received notices of proposed adjustments from the IRS
in conjunction with those audits. The Corporation vigorously disputed the
position taken by the IRS on these matters and initiated an appeals process with
the IRS. During 2009, the Corporation reached a tentative settlement agreement
with IRS appeals for those years. If that settlement – currently pending
approval by the Joint Committee on Taxation of the U.S. Congress – is finalized,
the Corporation will release tax reserves. The IRS is currently examining the
Corporation’s U.S. federal income tax returns for 2006 and 2007. To date, no
proposed adjustments have been issued; however, the Corporation expects that the
IRS will complete that examination in 2010. The Corporation is also subject to
legal proceedings regarding certain of its tax positions in a number of
countries, including Italy. The final outcome of the future tax consequences of
these examinations and legal proceedings as well as the outcome of competent
authority proceedings, changes in regulatory tax laws, or interpretation of
those tax laws, changes in income tax rates, or expiration of statutes of
limitation could impact the Corporation’s financial statements. The Corporation
is subject to the effects of these matters occurring in various jurisdictions.
Accordingly, the Corporation has tax reserves recorded for which it is
reasonably possible that the amount of the unrecognized tax benefit will
increase or decrease within the next twelve months. Any such increase or
decrease could have a material affect on the financial results for any
particular fiscal quarter or year. However, based on the uncertainties
associated with litigation and the status of examinations, including the
protocols of finalizing audits by the relevant tax authorities, which could
include formal legal proceedings, it is not possible to estimate the impact of
any such change.
52
NOTE
13: POSTRETIREMENT BENEFITS
The
following tables set forth the funded status of the defined benefit pension and
postretirement plans, and amounts recognized in the Consolidated Balance Sheet
at the end of each year, in millions of dollars.
|
2009
|
2008
|
|||||||||||||||||||||||
|
PENSION
BENEFITS
PLANS
IN
THE
UNITED STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE
OF
THE
UNITED STATES
|
OTHER
POST-
RETIREMENT
BENEFITS
ALL
PLANS
|
PENSION
BENEFITS
PLANS
IN
THE
UNITED STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE
OF
THE
UNITED STATES
|
OTHER
POST-
RETIREMENT
BENEFITS
ALL
PLANS
|
|||||||||||||||||||
|
CHANGE
IN BENEFIT OBLIGATION
|
||||||||||||||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 1,012.3 | $ | 531.4 | $ | 81.4 | $ | 1,013.2 | $ | 793.1 | $ | 86.9 | ||||||||||||
|
Service
cost
|
18.2 | 7.7 | .7 | 26.1 | 14.7 | .8 | ||||||||||||||||||
|
Interest
cost
|
65.9 | 33.5 | 4.8 | 78.1 | 49.1 | 4.9 | ||||||||||||||||||
|
Curtailment
gain
|
— | — | — | (1.1 | ) | (1.5 | ) | — | ||||||||||||||||
|
Plan
participants’ contributions
|
— | 1.1 | 1.4 | — | 1.6 | 3.3 | ||||||||||||||||||
|
Actuarial
(gains) losses
|
107.3 | 72.5 | 9.6 | (21.9 | ) | (96.7 | ) | 3.4 | ||||||||||||||||
|
Foreign
currency exchange rate changes
|
— | 50.3 | 1.5 | — | (182.3 | ) | (1.9 | ) | ||||||||||||||||
|
Benefits
paid
|
(67.8 | ) | (36.9 | ) | (12.9 | ) | (82.1 | ) | (46.6 | ) | (15.6 | ) | ||||||||||||
|
Plan
amendments
|
2.5 | — | — | — | — | (.4 | ) | |||||||||||||||||
|
Benefit
obligation at end of year
|
1,138.4 | 659.6 | 86.5 | 1,012.3 | 531.4 | 81.4 | ||||||||||||||||||
|
CHANGE
IN PLAN ASSETS
|
||||||||||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
606.4 | 343.6 | — | 987.8 | 643.6 | — | ||||||||||||||||||
|
Actual
return/(loss) on plan assets
|
140.4 | 62.6 | — | (297.1 | ) | (119.6 | ) | — | ||||||||||||||||
|
Expenses
|
(6.6 | ) | (1.4 | ) | — | (9.2 | ) | (2.1 | ) | — | ||||||||||||||
|
Benefits
paid
|
(67.8 | ) | (35.5 | ) | (12.9 | ) | (82.1 | ) | (44.5 | ) | (15.6 | ) | ||||||||||||
|
Employer
contributions
|
6.8 | 13.1 | 11.5 | 7.0 | 21.4 | 12.3 | ||||||||||||||||||
|
Contributions
by plan participants
|
— | 1.1 | 1.4 | — | 1.6 | 3.3 | ||||||||||||||||||
|
Foreign
currency exchange rate changes
|
— | 39.2 | — | — | (156.8 | ) | — | |||||||||||||||||
|
Fair
value of plan assets at end of year
|
679.2 | 422.7 | — | 606.4 | 343.6 | — | ||||||||||||||||||
|
Funded
status
|
(459.2 | ) | (236.9 | ) | (86.5 | ) | (405.9 | ) | (187.8 | ) | (81.4 | ) | ||||||||||||
|
Contributions
subsequent to measurement date
|
— | — | — | — | — | — | ||||||||||||||||||
|
Accrued
benefit cost at December 31
|
$ | (459.2 | ) | $ | (236.9 | ) | $ | (86.5 | ) | $ | (405.9 | ) | $ | (187.8 | ) | $ | (81.4 | ) | ||||||
|
AMOUNTS
RECOGNIZED IN THE
CONSOLIDATED
BALANCE
SHEET
|
||||||||||||||||||||||||
|
Noncurrent
assets
|
$ | — | $ | — | $ | — | $ | 17.5 | $ | — | $ | — | ||||||||||||
|
Current
liabilities
|
(7.0 | ) | (5.9 | ) | (9.3 | ) | (8.6 | ) | (5.3 | ) | (9.3 | ) | ||||||||||||
|
Postretirement
benefits
|
(452.2 | ) | (231.0 | ) | (77.2 | ) | (414.8 | ) | (182.5 | ) | (72.1 | ) | ||||||||||||
|
Net
amount recognized at December 31
|
$ | (459.2 | ) | $ | (236.9 | ) | $ | (86.5 | ) | $ | (405.9 | ) | $ | (187.8 | ) | $ | (81.4 | ) | ||||||
|
WEIGHTED-AVERAGE
ASSUMPTIONS
USED
TO DETERMINE BENEFIT
OBLIGATIONS
AS OF MEASUREMENT
DATE
|
||||||||||||||||||||||||
|
Discount
rate
|
5.75 | % | 5.56 | % | 5.25 | % | 6.75 | % | 6.16 | % | 6.25 | % | ||||||||||||
|
Rate
of compensation increase
|
3.95 | % | 3.61 | % | — | 3.95 | % | 3.60 | % | — | ||||||||||||||
The
amounts recognized in accumulated other comprehensive income (loss) as of
December 31, 2009 and 2008, are as follows, in millions of
dollars:
|
DECEMBER
31, 2009
|
PENSION
BENEFITS
PLANS
IN
THE
UNITED
STATES
|
PENSION
BENEFITS
PLANS OUTSIDE
OF
THE UNITED
STATES
|
OTHER
POSTRETIREMENT
BENEFITS
ALL
PLANS
|
TOTAL | ||||||||||||
|
Prior
service (cost) credit
|
$ | (5.7 | ) | $ | (5.0 | ) | $ | 19.7 | $ | 9.0 | ||||||
|
Net
loss
|
(579.9 | ) | (174.0 | ) | (23.9 | ) | (777.8 | ) | ||||||||
|
Total
|
$ | (585.6 | ) | $ | (179.0 | ) | $ | (4.2 | ) | $ | (768.8 | ) | ||||
|
DECEMBER
31, 2008
|
||||||||||||||||
|
Prior
service (cost) credit
|
$ | (9.9 | ) | $ | (5.4 | ) | $ | 23.1 | $ | 7.8 | ||||||
|
Net
loss
|
(556.3 | ) | (117.8 | ) | (15.1 | ) | (689.2 | ) | ||||||||
|
Total
|
$ | (566.2 | ) | $ | (123.2 | ) | $ | 8.0 | $ | (681.4 | ) | |||||
53
The
amounts in accumulated other comprehensive income (loss) as of December 31,
2009, that are expected to be recognized as components of net periodic benefit
cost (credit) during 2010 are as follows, in millions of dollars:
|
PENSION
BENEFITS
PLANS
IN
THE
UNITED
STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE
OF
THE
UNITED STATES
|
OTHER
POSTRETIREMENT
BENEFITS
ALL
PLANS
|
TOTAL | |||||||||||||
|
Prior
service cost (credit)
|
$ | .8 | $ | 1.0 | $ | (3.4 | ) | $ | (1.6 | ) | ||||||
|
Net
loss
|
38.6 | 5.9 | 1.5 | 46.0 | ||||||||||||
|
Total
|
$ | 39.4 | $ | 6.9 | $ | (1.9 | ) | $ | 44.4 | |||||||
The
Corporation’s overall investment strategy is to achieve an asset allocation of
approximately 65% equity securities, 30% fixed income securities, and 5%
alternative investments. The Corporation’s overall investment strategy provides
that, to the extent the actual allocation of plan assets differs from the
targeted asset allocation by more than 5% for any category, plan assets are
rebalanced. The Corporation further allocates assets within the
equity securities and fixed income securities between investments that attempt
to approximate the return achieved by broadly established investment indexes as
well as investments that are actively managed and attempt to exceed the returns
achieved by these broadly established investment indexes. Equity securities
include investments in individual stocks and collective investment funds
(referred to as mutual funds), including an allocation of those investments to
U.S. equity securities, including large-cap, mid-cap and small-cap companies,
and non-U.S. equity securities. Fixed income securities include U.S. Treasury
securities, corporate bonds of companies from diversified industries,
mortgaged-backed securities, and mutual funds. The Corporation does not believe
there is a significant concentration risk within the plan assets given the
diversification of asset types, fund strategies, and fund managers.
| ASSET CATEGORY |
QUOTED
PRICES
IN
ACTIVE
MARKETS
FOR
IDENTICAL
ASSETS
(LEVEL
1)
|
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL
2)
|
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL
3)
|
DECEMBER
31, 2009
TOTAL
|
||||||||||||
|
Cash
and cash equivalents
|
$ | .3 | $ | 4.9 | $ | — | $ | 5.2 | ||||||||
|
Equity
securities:
|
||||||||||||||||
|
U.S.
companies
|
107.0 | — | — | 107.0 | ||||||||||||
|
Mutual
funds
|
163.1 | 193.6 | — | 356.7 | ||||||||||||
|
Fixed
income:
|
||||||||||||||||
|
U.S.
treasury securities
|
— | 43.4 | — | 43.4 | ||||||||||||
|
Corporate
bonds
|
— | 43.2 | — | 43.2 | ||||||||||||
|
Mortgage-backed
securities
|
— | 8.1 | — | 8.1 | ||||||||||||
|
Mutual
funds
|
— | 93.8 | 8.0 | 101.8 | ||||||||||||
|
Other
fixed income
|
— | 1.5 | — | 1.5 | ||||||||||||
|
Alternative
investments
|
— | — | 23.1 | 23.1 | ||||||||||||
|
Other
|
(10.8 | ) | — | — | (10.8 | ) | ||||||||||
|
Total
|
$ | 259.6 | $ | 388.5 | $ | 31.1 | $ | 679.2 | ||||||||
54
The fair
values, by asset category, of assets of defined benefit pension plans outside of
the United States at December 31, 2009, were as follows, in millions of
dollars:
| ASSET CATEGORY |
QUOTED
PRICES
IN
ACTIVE
MARKETS
FOR
IDENTICAL
ASSETS
(LEVEL
1)
|
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL
2)
|
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL
3)
|
DECEMBER
31, 2009
TOTAL
|
||||||||||||
|
Cash
and cash equivalents
|
$ | 4.6 | $ | — | $ | — | $ | 4.6 | ||||||||
|
Equity
securities:
|
||||||||||||||||
|
International companies
|
61.0 | 6.9 | — | 67.9 | ||||||||||||
|
Mutual
funds
|
218.3 | — | — | 218.3 | ||||||||||||
|
Fixed
income:
|
||||||||||||||||
|
Corporate
bonds
|
— | 69.7 | — | 69.7 | ||||||||||||
|
Government
issues
|
— | 50.3 | — | 50.3 | ||||||||||||
|
Other
fixed income
|
— | 4.7 | — | 4.7 | ||||||||||||
|
Alternative
investments
|
.3 | — | 6.7 | 7.0 | ||||||||||||
|
Other
|
.2 | — | — | .2 | ||||||||||||
|
Total
|
$ | 284.4 | $ | 131.6 | $ | 6.7 | $ | 422.7 | ||||||||
The
equity securities – mutual funds held by the pension plans in the United States
include approximately 70% that invest in large-cap and small-cap U.S. companies,
and 30% that invest in international equity securities. The equity
securities – mutual funds held by the pension plans outside of the United States
include approximately 50% that invest in U.K. equity securities and 50% that
invest in other international equity securities.
The
following table sets forth a summary of changes in the fair value of assets of
the Corporation’s defined benefit pension plans, determined based upon
significant unobservable inputs (Level 3), for the year ended December 31, 2009,
in millions of dollars:
|
PENSION
BENEFITS
PLANS
IN THE
UNITED
STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE OF THE
UNITED
STATES
|
TOTAL | ||||||||||
|
Balance,
beginning of year
|
$ | 37.4 | $ | 20.7 | $ | 58.1 | ||||||
|
Sales
(net of purchases)
|
(4.7 | ) | (11.5 | ) | (16.2 | ) | ||||||
|
Transfers
in (out)
|
— | (.2 | ) | (.2 | ) | |||||||
|
Net
realized and unrealized gain (loss)
|
(1.6 | ) | (3.9 | ) | (5.5 | ) | ||||||
|
Foreign
exchange
|
— | 1.6 | 1.6 | |||||||||
|
Balance,
end of year
|
$ | 31.1 | $ | 6.7 | $ | 37.8 | ||||||
The
Corporation establishes its estimated long-term return on plan assets
considering various factors, which include the targeted asset allocation
percentages, historical returns, and expected future returns. Specifically, the
factors are considered in the fourth quarter of the year preceding the year for
which those assumptions are applied. The Corporation’s weighted-average expected
long-term return on plan assets assumption for defined benefit pension plans in
the United States and outside of the United States will be 8.25% and 7.23%,
respectively, in 2010.
The
accumulated benefit obligation related to all defined benefit pension plans and
information related to unfunded and underfunded defined benefit pension plans at
the end of each year, in millions of dollars, follows:
|
PENSION
BENEFITS
PLANS
IN
THE
UNITED
STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE
OF THE
UNITED
STATES
|
|||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
All
defined benefit plans:
|
||||||||||||||||
|
Accumulated
benefit obligation
|
$ | 1,079.3 | $ | 958.4 | $ | 632.9 | $ | 504.4 | ||||||||
|
Unfunded
defined benefit plans:
|
||||||||||||||||
|
Projected
benefit obligation
|
108.8 | 95.3 | 125.5 | 119.4 | ||||||||||||
|
Accumulated
benefit obligation
|
97.3 | 84.5 | 116.3 | 110.5 | ||||||||||||
|
Defined
benefit plans with an accumulated benefit
obligation
in
excess of the fair value of plan assets:
|
||||||||||||||||
|
Projected
benefit obligation
|
1,138.4 | 1,006.1 | 659.6 | 522.3 | ||||||||||||
|
Accumulated
benefit obligation
|
1,079.3 | 952.2 | 632.9 | 496.1 | ||||||||||||
|
Fair
value of plan assets
|
679.2 | 582.7 | 422.7 | 334.6 | ||||||||||||
55
The
following table sets forth, in millions of dollars, benefit payments, which
reflect expected future service, as appropriate, expected to be paid in the
periods indicated:
|
PENSION
BENEFITS
PLANS IN
THE
UNITED
STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE
OF
THE
UNITED
STATES
|
OTHER
POST-
RETIREMENT
BENEFITS
ALL
PLANS
|
||||||||||
|
2010
|
$ | 72.9 | $ | 30.9 | $ | 9.6 | ||||||
|
2011
|
72.9 | 32.0 | 9.2 | |||||||||
|
2012
|
72.5 | 33.0 | 8.7 | |||||||||
|
2013
|
94.7 | 34.3 | 8.3 | |||||||||
|
2014
|
74.2 | 35.3 | 8.1 | |||||||||
|
2015-2019
|
388.0 | 195.1 | 35.9 | |||||||||
The net
periodic cost (benefit) related to the defined benefit pension plans included
the following components, in millions of dollars:
|
PENSION
BENEFITS
PLANS
IN THE UNITED
STATES
|
PENSION
BENEFITS
PLANS
OUTSIDE OF THE UNITED
STATES
|
|||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Service
cost
|
$ | 19.3 | $ | 22.6 | $ | 26.0 | $ | 7.7 | $ | 12.3 | $ | 14.7 | ||||||||||||
|
Interest
cost
|
65.9 | 63.7 | 62.5 | 33.5 | 40.9 | 39.6 | ||||||||||||||||||
|
Expected
return on plan assets
|
(69.5 | ) | (77.9 | ) | (75.6 | ) | (32.4 | ) | (40.1 | ) | (39.3 | ) | ||||||||||||
|
Amortization
of prior service cost
|
1.4 | 2.1 | 2.1 | 1.0 | 1.4 | 1.7 | ||||||||||||||||||
|
Amortization
of net actuarial loss
|
18.4 | 15.9 | 26.3 | — | 4.7 | 12.9 | ||||||||||||||||||
|
Curtailment
loss
|
5.3 | — | — | — | 1.1 | — | ||||||||||||||||||
|
Net
periodic cost
|
$ | 40.8 | $ | 26.4 | $ | 41.3 | $ | 9.8 | $ | 20.3 | $ | 29.6 | ||||||||||||
|
WEIGHTED-AVERAGE
ASSUMPTIONS
USED
IN DETERMINING NET
PERIODIC
COST FOR YEAR:
|
||||||||||||||||||||||||
|
Discount
rate
|
6.75 | % | 6.50 | % | 6.00 | % | 6.16 | % | 5.67 | % | 4.93 | % | ||||||||||||
|
Expected
return on plan assets
|
8.25 | % | 8.75 | % | 8.75 | % | 7.24 | % | 7.49 | % | 7.49 | % | ||||||||||||
|
Rate
of compensation increase
|
4.00 | % | 4.00 | % | 3.95 | % | 3.60 | % | 3.65 | % | 3.65 | % | ||||||||||||
The net
periodic cost related to the defined benefit postretirement plans included the
following components, in millions of dollars:
|
2009
|
2008
|
2007
|
||||||||||
|
Service
cost
|
$ | .7 | $ | .8 | $ | .8 | ||||||
|
Interest
cost
|
4.8 | 4.9 | 5.3 | |||||||||
|
Amortization
of prior service cost
|
(3.4 | ) | (3.6 | ) | (4.5 | ) | ||||||
|
Amortization
of net actuarial loss
|
.8 | .4 | .2 | |||||||||
|
Net
periodic cost
|
$ | 2.9 | $ | 2.5 | $ | 1.8 | ||||||
|
Weighted-average
discount rate
used
in determining net
periodic
cost for year
|
6.25 | % | 6.00 | % | 6.25 | % | ||||||
The
health care cost trend rate used to determine the postretirement benefit
obligation was 7.70% for participants under 65 and 7.00% for participants 65 and
older in 2009. This rate decreases gradually to an ultimate rate of 4.50% in
2028, and remains at that level thereafter. The trend rate is a significant
factor in determining the amounts reported. A one-percentage-point change in
these assumed health care cost trend rates would have the following effects, in
millions of dollars:
|
ONE-PERCENTAGE-POINT
|
INCREASE | (DECREASE) | ||||||
|
Effect
on total of service and
interest
cost components
|
$ | .2 | $ | (.2 | ) | |||
|
Effect
on postretirement benefit
obligation
|
3.9 | (3.6 | ) | |||||
In 2010,
the Corporation expects to make cash contributions of approximately $67.0
million to its defined benefit pension plans. The amounts principally represent
contributions required by funding regulations or laws or those related to
unfunded plans necessary to fund current benefits. In addition, the Corporation
expects to continue to make contributions in 2010 sufficient to fund benefits
paid under its other postretirement benefit plans during that year, net of
contributions by plan participants. The Corporation expects that such
contributions will be approximately $9.6 million in 2010.
Expense
for defined contribution plans amounted to $6.2 million, $13.0 million, and
$12.4 million in 2009, 2008, and 2007, respectively.
NOTE 14: STOCKHOLDERS’ EQUITY
The
Corporation repurchased 247,198, 3,136,644 and 5,477,243 shares of its common
stock during 2009, 2008 and 2007 at an aggregate cost of $13.4 million, $202.3
million and $461.4 million, respectively.
To
reflect the repurchases in its Consolidated Balance Sheet, the Corporation: (i)
first, reduced its common stock by $.1 million in 2009, $1.6 million in 2008,
and $2.7 million in 2007, representing the aggregate par value of the shares
repurchased; (ii) next, reduced capital in excess of par value by $13.3 million
in 2009, $52.3 million in 2008, and $82.0 million in 2007 – amounts which
brought capital in excess of par value to zero during the quarters in 2008 and
2007 in which the repurchases occurred; and (iii) last, charged the residual of
$— million in 2009, $148.4 million in 2008, and $376.7 million in 2007, to
retained earnings.
56
Accumulated
other comprehensive income (loss) at the end of each year, in millions of
dollars, included the following components:
| 2009 | 2008 | |||||||
|
Foreign
currency translation adjustment
|
$ | 32.1 | $ | (65.4 | ) | |||
|
Net
gain (loss) on derivative instruments,
net
of tax
|
2.6 | 55.9 | ||||||
|
Minimum
pension liability adjustment,
net
of tax
|
(507.5 | ) | (446.8 | ) | ||||
| $ | (472.8 | ) | $ | (456.3 | ) | |||
Foreign
currency translation adjustments are not generally adjusted for income taxes as
they relate to indefinite investments in foreign subsidiaries. The Corporation
has designated certain intercompany loans and foreign currency derivative
contracts as long-term investments in certain foreign subsidiaries. Net
translation gains (losses) associated with these designated intercompany loans
and foreign currency derivative contracts in the amounts of $32.6 million and
$(151.6) million were recorded in the foreign currency translation adjustment in
2009 and 2008, respectively.
The
minimum pension liability adjustments as of December 31, 2009 and 2008, are net
of taxes of $261.3 million and $234.6 million,
respectively.
NOTE
15: EARNINGS PER SHARE
The
computations of basic and diluted earnings per share for each year were as
follows:
|
(AMOUNTS
IN MILLIONS
EXCEPT
PER SHARE DATA)
|
2009 | 2008 | 2007 | |||||||||
|
Numerator:
|
||||||||||||
|
Net
earnings
|
$ | 132.5 | $ | 293.6 | $ | 518.1 | ||||||
| Dividends on stock-based plans | (.8 | ) | (1.5 | ) | (1.3 | ) | ||||||
|
Undistributed
earnings allocable
to
stock-based plans
|
(1.5 | ) | (3.0 | ) | (5.1 | ) | ||||||
|
Numerator
for basic and
diluted
earnings per share –
net
earnings available to
common
shareholders
|
$ | 130.2 | $ | 289.1 | $ | 511.7 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic
earnings
per share –
weighted-average
shares
|
59.6 | 59.8 | 64.3 | |||||||||
|
Employee
stock options
|
.3 | .8 | 1.4 | |||||||||
|
Denominator
for diluted
earnings
per share –
adjusted
weighted-average
shares
and assumed
conversions
|
59.9 | 60.6 | 65.7 | |||||||||
|
Basic
earnings per share
|
$ | 2.18 | $ | 4.83 | $ | 7.96 | ||||||
|
Diluted
earnings per share
|
$ | 2.17 | $ | 4.77 | $ | 7.78 | ||||||
The
following options to purchase shares of common stock were outstanding during
each year, but were not included in the computation of diluted earnings per
share because the effect would be anti-dilutive. The options indicated in the
following table were anti-dilutive because the related exercise price was
greater than the average market price of the common shares for the year.
| 2009 | 2008 | 2007 | ||||||||||
|
Number
of options (in
millions)
|
4.8 | 2.6 | 1.6 | |||||||||
|
Weighted-average
exercise
price
|
$ | 63.71 | $ | 81.39 | $ | 88.76 | ||||||
NOTE
16: STOCK-BASED COMPENSATION
The
Corporation recognized total stock-based compensation costs of $69.8 million,
$32.7 million, and $25.9
million in 2009, 2008, and 2007, respectively. These amounts are reflected in
the Consolidated Statement of Earnings in selling, general, and administrative
expenses, and in 2009, merger-related expenses. As more fully described in Note
2, stock-based compensation expense in 2009 includes approximately $42.3 million
associated with the lapsing of the restriction on outstanding, but non-vested
restricted stock and restricted stock units and the immediate vesting of certain
stock options. The total income tax benefit for stock-based compensation
arrangements was $18.4 million, $9.1 million, and $7.9
million in 2009, 2008, and 2007, respectively.
At
December 31, 2009, unrecognized stock-based compensation expense totaled $20.1
million. The cost of these non-vested awards is expected to be recognized over a
weighted-average period of 2.4 years. The Corporation’s stock-based employee
compensation plans are described below.
Stock Option Plans: Under various stock
option plans, options to purchase common stock may be granted until 2013.
Options are granted at fair market value at the date of grant, generally become
exercisable in four equal installments beginning one year from the date of
grant, and expire 10 years after the date of grant. The plans permit the
issuance of either incentive stock options or non-qualified stock
options.
Under all
stock option plans, there were 597,964 shares of common stock reserved for
future grants as of December 31, 2009. Transactions are summarized as
follows:
|
STOCK
OPTIONS
|
WEIGHTED-
AVERAGE
EXERCISE
PRICE
|
|||||||
|
Outstanding
at December 31, 2006
|
6,036,012 | $ | 55.68 | |||||
|
Granted
|
790,470 | 88.38 | ||||||
|
Exercised
|
(1,406,664 | ) | 49.75 | |||||
|
Forfeited
|
(154,788 | ) | 80.80 | |||||
|
Outstanding
at December 31, 2007
|
5,265,030 | 61.43 | ||||||
|
Granted
|
548,020 | 67.11 | ||||||
|
Exercised
|
(163,728 | ) | 51.74 | |||||
|
Forfeited
|
(149,128 | ) | 83.80 | |||||
|
Outstanding
at December 31, 2008
|
5,500,194 | 61.68 | ||||||
|
Granted
|
795,940 | 38.28 | ||||||
|
Exercised
|
(1,342,211 | ) | 42.04 | |||||
|
Forfeited
|
(255,799 | ) | 68.13 | |||||
|
Outstanding
at December 31, 2009
|
4,698,124 | $ | 62.97 | |||||
|
Options
expected to vest at
December
31, 2009
|
4,623,002 | $ | 62.94 | |||||
|
Options
exercisable at
December
31, 2009
|
3,800,872 | $ | 63.08 | |||||
57
As of
December 31, 2009, the weighted average remaining contractual term was 5.9
years, 5.8 years, and 5.3 years for options outstanding, options expected to
vest, and options exercisable, respectively. As of December 31, 2009, the
aggregate intrinsic value was $51.7 million, $51.0 million, and $41.6 million
for options outstanding, options expected to vest, and options exercisable.
These preceding aggregate intrinsic values represent the total pretax intrinsic
value (the difference between the Corporation’s closing stock price on the last
trading day of 2009 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option holders had
all option holders exercised their options on December 31, 2009. These amounts
will change based on the fair market value of the Corporation’s
stock.
Cash
received from option exercises in 2009, 2008, and 2007, was $57.4 million, $8.5
million, and $70.0 million, respectively. The Corporation has recognized $5.2
million, $.1 million, and $13.3 million, as a financing cash flow, within the
caption “Issuance of common
stock”, for
the years ended December 31, 2009, 2008, and 2007, respectively, associated with
the cash flows resulting from the tax benefits of tax deductions in excess of
the compensation cost recognized for share-based arrangements.
The total
intrinsic value of options exercised in 2009, 2008, and 2007, was $28.9 million,
$2.5 million, and $59.0 million, respectively. The actual tax benefit realized
for the tax deduction from option exercises totaled $9.8 million, $.9 million,
and $20.4 million in 2009, 2008, and 2007, respectively.
The
weighted-average grant-date fair values of options granted during 2009, 2008,
and 2007, were $11.55 per share, $17.85 per share, and $22.98 per share,
respectively. The fair value of options granted during 2009, 2008, and 2007 were
determined using the Black-Scholes option valuation model with the following
weighted-average assumptions:
| 2009 | 2008 | 2007 | ||||||||||
|
Expected
life in years
|
6.0 | 6.0 | 5.5 | |||||||||
|
Interest
rate
|
2.23 | % | 3.30 | % | 4.56 | % | ||||||
|
Volatility
|
35.4 | % | 30.7 | % | 25.3 | % | ||||||
|
Dividend
yield
|
2.00 | % | 2.50 | % | 1.90 | % | ||||||
The Corporation has a share repurchase program that was
implemented based on the belief that its shares were undervalued and to manage
share growth resulting from option exercises. At December 31, 2009, the
Corporation has remaining authorization from its Board of Directors to
repurchase an additional 3,777,145 shares of its common stock. Under the terms
of the definitive merger agreement to create Stanley Black & Decker, absent
the consent of The Stanley Works, the Corporation has agreed not to repurchase
shares of its common stock pending consummation of the merger.
|
NUMBER
OF
SHARES
|
WEIGHTED-
AVERAGE
FAIR
VALUE AT
GRANT
DATE
|
|||||||
|
Non-vested
at December 31, 2006
|
618,038 | $ | 76.32 | |||||
|
Granted
|
266,537 | 88.53 | ||||||
|
Forfeited
|
(46,425 | ) | 81.04 | |||||
|
Vested
|
(157,056 | ) | 56.10 | |||||
|
Non-vested
at December 31, 2007
|
681,094 | 85.43 | ||||||
|
Granted
|
347,175 | 66.62 | ||||||
|
Forfeited
|
(53,592 | ) | 82.20 | |||||
|
Vested
|
(50,263 | ) | 56.16 | |||||
|
Non-vested
at December 31, 2008
|
924,414 | 80.15 | ||||||
|
Granted
|
584,560 | 38.29 | ||||||
|
Forfeited
|
(54,005 | ) | 74.16 | |||||
|
Vested
|
(1,115,269 | ) | 63.85 | |||||
|
Non-vested
at December 31, 2009
|
339,700 | $ | 62.57 | |||||
The fair
value of the shares vested during 2009, 2008, and 2007 were $63.1 million, $3.3
million, and $14.5
million, respectively.
Under all
restricted stock plans, 647,891 shares of common stock were reserved for future
grants at December 31, 2009.
Other
Stock-based Compensation Plans: The Corporation has an Executive
Long-Term Incentive/Retention Plan. As more fully described in Note 2, the terms
of the Executive Long-Term Incentive/Retention Plan were amended during 2009
whereby the previous adjustment to cash payouts under the plan, based upon
upward or downward movements in the Corporation’s average common stock price as
compared to $67.78, was removed. Prior to this amendment the awards were payable
in cash but indexed to the fair market value of the Corporation’s common stock.
Vesting of the awards generally occurs three years after the awards are made.
Awards under this plan would vest upon consummation of the proposed
merger.
The
Corporation also has a Performance Equity Plan (PEP) under which awards payable
in the Corporation’s common stock are made. Vesting of the awards, which can
range from 0% to 150% of the initial award, is based on pre-established
financial performance measures during a two-year performance period. The fair
value of the shares that vested during 2009, 2008, and 2007 was $— million, $.1
million, and $4.4 million, respectively. During 2007, the Corporation granted
41,880 performance shares under the PEP. During 2009 and 2008, there were no
performance shares granted by the Corporation under the PEP. At December 31,
2009 and 2008, there were no performance shares outstanding under the PEP.
58
NOTE 17: BUSINESS SEGMENTS AND
GEOGRAPHIC INFORMATION
The
Corporation has elected to organize its businesses based principally upon
products and services. In certain instances where a business does not have a
local presence in a particular country or geographic region, however, the
Corporation has assigned responsibility for sales of that business’s products to
one of its other businesses with a presence in that country or region.
The
Corporation operates in three reportable business segments: Power Tools and
Accessories, Hardware and Home Improvement, and Fastening and Assembly Systems.
The Power Tools and Accessories segment has worldwide responsibility for the
manufacture and sale of consumer and industrial power tools and accessories,
lawn and garden products, and electric cleaning, automotive, lighting, and
household products, as well as for product service. In addition, the Power Tools
and Accessories segment has responsibility for the sale of security hardware to
customers in Mexico, Central America, the Caribbean, and South America; for the
sale of plumbing products to customers outside the United States and Canada; and
for sales of household products. The Hardware and Home Improvement segment has
worldwide responsibility for the manufacture and sale of security hardware
(except for the sale of security hardware in Mexico, Central America, the
Caribbean, and South America). The Hardware and Home Improvement segment also
has responsibility for the manufacture of plumbing products and for the sale of
plumbing products to customers in the United States and Canada. The Fastening
and Assembly Systems segment has worldwide responsibility for the manufacture
and sale of fastening and assembly systems. On September 9, 2008, the
Corporation acquired Spiralock Corporation (Spiralock), a component of the
Fastening and Assembly Systems segment.
Business
Segments
(Millions
of Dollars)
|
Reportable
Business Segments
|
||||||||||||||||||||
|
Year
Ended December 31, 2009
|
Power
Tools
& Accessories
|
Hardware
&
Home Improvement
|
Fastening
&
Assembly Systems
|
Total
|
Currency
Translation Adjustments
|
Corporate,
Adjustment,
&
Eliminations
|
Consolidated
|
|||||||||||||
|
Sales to unaffiliated
customers
|
$ | 3,471.5 | $ | 755.4 | $ | 536.6 | $ | 4,763.5 | $ | 11.6 | $ | — | $ | 4,775.1 | ||||||
|
Segment profit (loss)
(for Consolidated,
operating
income
before merger-related
expenses
and restructuring
and
exit
costs)
|
257.3 | 76.9 | 39.5 | 373.7 | 13.5 | (67.1 | ) | 320.1 | ||||||||||||
|
Depreciation
and amortization
|
85.1 | 18.8 | 22.0 | 125.9 | .6 | 1.5 | 128.0 | |||||||||||||
|
Income
from equity method investees
|
21.3 | — | — | 21.3 | — | (1.9 | ) | 19.4 | ||||||||||||
|
Capital
expenditures
|
41.3 | 13.2 | 7.4 | 61.9 | .3 | .9 | 63.1 | |||||||||||||
|
Segment
assets
(for
Consolidated,
total
assets)
|
2,108.2 | 503.9 | 388.8 | 3,000.9 | 85.9 | 2,408.4 | 5,495.2 | |||||||||||||
|
Investment
in equity method investees
|
28.1 | — | .6 | 28.7 | — | (1.7 | ) | 27.0 | ||||||||||||
|
Year
Ended December 31, 2008
|
||||||||||||||||||||
|
Sales
to unaffiliated customers
|
$ | 4,286.6 | $ | 891.6 | $ | 703.2 | $ | 5,881.4 | $ | 204.7 | $ | — | $ | 6,086.1 | ||||||
|
Segment
profit (loss)
(for
Consolidated, operating
income
before
restructuring
and
exit
costs)
|
317.4 | 75.8 | 106.0 | 499.2 | 29.4 | (51.8 | ) | 476.8 | ||||||||||||
|
Depreciation
and amortization
|
89.9 | 20.6 | 21.6 | 132.1 | 3.4 | 1.1 | 136.6 | |||||||||||||
|
Income
from equity method investees
|
12.0 | — | — | 12.0 | — | (.9 | ) | 11.1 | ||||||||||||
|
Capital
expenditures
|
56.6 | 16.5 | 18.6 | 91.7 | 2.3 | 4.8 | 98.8 | |||||||||||||
|
Segment
assets
(for
Consolidated,
total
assets)
|
2,492.6 | 571.7 | 433.1 | 3,497.4 | (11.8 | ) | 1,697.7 | 5,183.3 | ||||||||||||
|
Investment
in equity method investees
|
26.8 | — | .5 | 27.3 | — | (1.7 | ) | 25.6 | ||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
|
Sales
to unaffiliated customers
|
$ | 4,754.8 | $ | 1,001.7 | $ | 720.7 | $ | 6,477.2 | $ | 86.0 | $ | — | $ | 6,563.2 | ||||||
|
Segment
profit (loss)
(for
Consolidated, operating
income
before restructuring
and
exit costs)
|
482.2 | 113.6 | 113.9 | 709.7 | (2.3 | ) | (106.2 | ) | 601.2 | |||||||||||
|
Depreciation
and amortization
|
96.7 | 22.8 | 20.5 | 140.0 | .5 | 2.9 | 143.4 | |||||||||||||
|
Income
from equity method investees
|
12.7 | — | — | 12.7 | — | (1.0 | ) | 11.7 | ||||||||||||
|
Capital
expenditures
|
65.0 | 20.8 | 22.2 | 108.0 | .5 | 7.9 | 116.4 | |||||||||||||
|
Segment
assets
(for
Consolidated,
total
assets)
|
2,654.2 | 653.7 | 406.6 | 3,714.5 | 135.5 | 1,560.9 | 5,410.9 | |||||||||||||
|
Investment
in equity method investees
|
15.6 | — | .5 | 16.1 | — | (1.7 | ) | 14.4 | ||||||||||||
59
The
profitability measure employed by the Corporation and its chief operating
decision maker for making decisions about allocating resources to segments and
assessing segment performance is segment profit (for the Corporation on a
consolidated basis, operating income before restructuring and exit costs). In
general, segments follow the same accounting policies as those described in Note
1, except with respect to foreign currency translation and except as further
indicated below. The financial statements of a segment’s operating units located
outside of the United States, except those units operating in highly
inflationary economies, are generally measured using the local currency as the
functional currency. For these units located outside of the United States,
segment assets and elements of segment profit are translated using budgeted
rates of exchange. Budgeted rates of exchange are established annually and, once
established, all prior period segment data is restated to reflect the current
year’s budgeted rates of exchange. The amounts included in the preceding table
under the captions “Reportable
Business Segments” and “Corporate,
Adjustments, & Eliminations” are reflected at
the Corporation’s budgeted rates of exchange for 2008. The amounts included in
the preceding table under the caption “Currency
Translation Adjustments” represent the
difference between consolidated amounts determined using those budgeted rates of
exchange and those determined based upon the rates of exchange applicable under
accounting principles generally accepted in the United States.
Segment
profit excludes interest income and expense, non-operating income and expense,
adjustments to eliminate intercompany profit in inventory, and income tax
expense. In addition, segment profit excludes merger-related expenses and
restructuring and exit costs. In determining segment profit, expenses relating
to pension and other postretirement benefits are based solely upon estimated
service costs. Corporate expenses, as well as certain centrally managed
expenses, including expenses related to share-based compensation, are allocated
to each reportable segment based upon budgeted amounts. While sales and
transfers between segments are accounted for at cost plus a reasonable profit,
the effects of intersegment sales are excluded from the computation of segment
profit. Intercompany profit in inventory is excluded from segment assets and is
recognized as a reduction of cost of goods sold by the selling segment when the
related inventory is sold to an unaffiliated customer. Because the Corporation
compensates the management of its various businesses on, among other factors,
segment profit, the Corporation may elect to record certain segment-related
expense items of an unusual non-recurring nature in consolidation rather than
reflect such items in segment profit. In addition, certain segment-related items
of income or expense may be recorded in consolidation in one period and
transferred to the various segments in a later period.
Segment
assets exclude pension and tax assets, intercompany profit in inventory,
intercompany receivables, and goodwill associated with the Corporation’s
acquisition of Emhart Corporation in 1989.
The
reconciliation of segment profit to consolidated earnings before income taxes
for each year, in millions of dollars, is as follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Segment
profit for total
reportable
business segments
|
$ | 373.7 | $ | 499.2 | $ | 709.7 | ||||||
|
Items
excluded from segment profit:
|
||||||||||||
|
Adjustment
of budgeted foreign
exchange
rates to actual rates
|
13.5 | 29.4 | (2.3 | ) | ||||||||
|
Depreciation
of Corporate property
|
(1.5 | ) | (1.1 | ) | (1.4 | ) | ||||||
|
Adjustment
to businesses’ postretirement
benefit
expenses booked in consolidation
|
(12.0 | ) | (3.6 | ) | (19.9 | ) | ||||||
|
Other
adjustments booked in consolidation
directly
related to reportable business segments
|
(.3 | ) | (4.9 | ) | 8.3 | |||||||
|
Amounts
allocated to businesses in arriving at
segment
profit in excess of (less than) Corporate
center
operating expenses, eliminations, and other
amounts
identified above
|
(53.3 | ) | (42.2 | ) | (93.2 | ) | ||||||
|
Operating
income before merger-related expenses
and restructuring
and exit costs
|
320.1 | 476.8 | 601.2 | |||||||||
| Merger-related expenses | 58.8 | — | — | |||||||||
|
Restructuring
and exit costs
|
11.9 | 54.7 | 19.0 | |||||||||
|
Operating
income
|
249.4 | 422.1 | 582.2 | |||||||||
|
Interest
expense, net of interest income
|
83.8 | 62.4 | 82.3 | |||||||||
|
Other
(income) expense
|
(4.8 | ) | (5.0 | ) | 2.3 | |||||||
|
Earnings
before income taxes
|
$ | 170.4 | $ | 364.7 | $ | 497.6 | ||||||
The
reconciliation of segment assets to consolidated total assets at the end of each
year, in millions of dollars, is as
follows:
| 2009 | 2008 | 2007 | ||||||||||
|
Segment
assets for total
reportable
business
segments
|
$ | 3,000.9 | $ | 3,497.4 | $ | 3,714.5 | ||||||
|
Items
excluded from segment assets:
|
||||||||||||
|
Adjustment
of budgeted foreign
exchange
rates to actual rates
|
85.9 | (11.8 | ) | 135.5 | ||||||||
|
Goodwill
|
636.6 | 633.8 | 640.5 | |||||||||
|
Pension
assets
|
— | 17.5 | 76.6 | |||||||||
|
Other
Corporate assets
|
1,771.8 | 1,046.4 | 843.8 | |||||||||
| $ | 5,495.2 | $ | 5,183.3 | $ | 5,410.9 | |||||||
Other
Corporate assets principally consist of cash and cash equivalents, tax assets,
property, and other assets.
60
Sales to
The Home Depot, a customer of the Power Tools and Accessories and Hardware and
Home Improvement segments, accounted for approximately $.8 billion, $1.0
billion, and $1.3 billion of the Corporation’s consolidated sales for the years
ended December 31, 2009, 2008, and 2007, respectively. Sales to Lowe’s
Companies, Inc., a customer of the Power Tools and Accessories and Hardware and
Home Improvement segments, accounted for approximately $.7 billion, $.8 billion,
and $.9 billion of the Corporation’s consolidated sales for the years ended
December 31, 2009, 2008, and 2007, respectively.
The
composition of the Corporation’s sales by product group for each year, in
millions of dollars, is set forth below:
| 2009 | 2008 | 2007 | ||||||||||
|
Consumer
and industrial power
tools
and product service
|
$ | 2,449.2 | $ | 3,236.1 | $ | 3,537.3 | ||||||
|
Lawn
and garden products
|
312.1 | 377.9 | 430.6 | |||||||||
|
Consumer
and industrial accessories
|
392.6 | 452.0 | 479.2 | |||||||||
|
Cleaning,
automotive, lighting, and
household
products
|
266.7 | 321.0 | 345.3 | |||||||||
|
Security
hardware
|
552.5 | 649.9 | 730.9 | |||||||||
|
Plumbing
products
|
248.0 | 309.2 | 323.3 | |||||||||
|
Fastening
and assembly systems
|
554.0 | 740.0 | 716.6 | |||||||||
| $ | 4,775.1 | $ | 6,086.1 | $ | 6,563.2 | |||||||
The
Corporation markets its products and services in over 100 countries and has
manufacturing sites in 12 countries. Other than in the United States, the
Corporation does not conduct business in any country in which its sales in that
country exceed 10% of consolidated sales. Sales are attributed to countries
based on the location of customers. The composition of the Corporation’s sales
to unaffiliated customers between those in the United States and those in other
locations for each year, in millions of dollars, is set forth below:
| 2009 | 2008 | 2007 | ||||||||||
|
United
States
|
$ | 2,705.5 | $ | 3,358.6 | $ | 3,930.2 | ||||||
|
Canada
|
275.7 | 382.3 | 361.8 | |||||||||
|
North
America
|
2,981.2 | 3,740.9 | 4,292.0 | |||||||||
|
Europe
|
1,076.7 | 1,516.0 | 1,568.0 | |||||||||
|
Other
|
717.2 | 829.2 | 703.2 | |||||||||
| $ | 4,775.1 | $ | 6,086.1 | $ | 6,563.2 | |||||||
The
composition of the Corporation’s property, plant, and equipment between those in
the United States and those in other countries as of the end of each year, in
millions of dollars, is set forth below:
| 2009 | 2008 | 2007 | ||||||||||
|
United
States
|
$ | 195.4 | $ | 217.7 | $ | 259.6 | ||||||
|
Mexico
|
71.5 | 98.3 | 106.8 | |||||||||
|
Other
countries
|
206.5 | 211.9 | 229.8 | |||||||||
| $ | 473.4 | $ | 527.9 | $ | 596.2 | |||||||
NOTE
18: LEASES
The
Corporation leases certain service centers, offices, warehouses, manufacturing
facilities, and equipment. Generally, the leases carry renewal provisions and
require the Corporation to pay maintenance costs. Rental payments may be
adjusted for increases in taxes and insurance above specified amounts. Rental
expense for 2009, 2008, and 2007 amounted to $96.7 million, $104.6 million, and
$103.6 million, respectively. Capital leases were immaterial in amount. Future
minimum payments under non-cancelable operating leases with initial or remaining
terms of more than one year as of December 31, 2009, in millions of dollars,
were as follows:
|
2010
|
$ | 65.6 | ||
|
2011
|
47.6 | |||
|
2012
|
36.0 | |||
|
2013
|
20.4 | |||
|
2014
|
14.2 | |||
|
Thereafter
|
12.1 | |||
| $ | 195.9 | |||
NOTE
19: RESTRUCTURING ACTIONS
A summary
of restructuring activity during the three years ended December 31, 2009, in
millions of dollars, is set forth below:
|
SEVERANCE
BENEFITS
|
WRITE-DOWN
TO
FAIR VALUE
LESS
COSTS
TO
SELL
OF
CERTAIN
LONG-LIVED
ASSETS
|
OTHER
CHARGES
|
TOTAL | |||||||||||||
|
Restructuring
reserve at December 31, 2006
|
$ | 2.8 | $ | — | $ | .4 | $ | 3.2 | ||||||||
|
Reserves
established in 2007
|
14.8 | 4.0 | .2 | 19.0 | ||||||||||||
|
Utilization
of reserves:
|
||||||||||||||||
|
Cash
|
(1.0 | ) | — | — | (1.0 | ) | ||||||||||
|
Non-cash
|
— | (4.0 | ) | — | (4.0 | ) | ||||||||||
|
Foreign
currency translation
|
.1 | — | — | .1 | ||||||||||||
|
Restructuring
reserve at December 31, 2007
|
16.7 | — | .6 | 17.3 | ||||||||||||
|
Reserves
established in 2008
|
48.3 | 3.7 | 2.7 | 54.7 | ||||||||||||
|
Utilization
of reserves:
|
||||||||||||||||
|
Cash
|
(24.9 | ) | — | (.4 | ) | (25.3 | ) | |||||||||
|
Non-cash
|
— | (3.7 | ) | (.9 | ) | (4.6 | ) | |||||||||
|
Foreign
currency translation
|
(4.5 | ) | — | — | (4.5 | ) | ||||||||||
|
Restructuring
reserve at December 31, 2008
|
35.6 | — | 2.0 | 37.6 | ||||||||||||
|
Reserves
established in 2009
|
12.6 | .4 | 1.2 | 14.2 | ||||||||||||
| Reversal of reserves | (1.8 | ) | — | (.5 | ) | (2.3 | ) | |||||||||
|
Utilization
of reserves:
|
||||||||||||||||
|
Cash
|
(37.9 | ) | — | (1.9 | ) | (39.8 | ) | |||||||||
|
Non-cash
|
— | (.4 | ) | — | (.4 | ) | ||||||||||
|
Foreign
currency translation
|
1.2 | — | — | 1.2 | ||||||||||||
|
Restructuring
reserve at December 31, 2009
|
$ | 9.7 | $ | — | $ | .8 | $ | 10.5 | ||||||||
61
During
2009, the Corporation recognized $14.2 million of pre-tax restructuring and exit
costs related to actions taken in its Power Tools and Accessories, Hardware and
Home Improvement, and Fastening and Assembly segments. The $14.2 million charge
recognized during 2009 was offset; however, by the reversal of $1.8 million of
severance and $.5 million of other accruals established as part of previously
provided restructuring reserves that were no longer required. The 2009
restructuring charge related to the elimination of direct and indirect
manufacturing positions as well as selling, general, and administrative
positions. A severance benefits accrual of $12.6 million was included in the
restructuring charge, of which $8.9 million related to the Power Tools and
Accessories segment, $2.3 million related to the Fastening and Assembly Systems
segment and $1.4 million related to the Hardware and Home Improvement segment.
The severance benefits accrual included the elimination of approximately 1,500
positions including approximately 1,200 manufacturing related positions. The
restructuring charge also included a $.4 million write-down to fair value of
certain long-lived assets for the Hardware and Home Improvement segment. In
addition, the restructuring charge reflected $.3 million and $.9 million related
to the early termination of lease agreements by the Power Tools and Accessories
segment and Fastening and Assembly Systems segment, respectively, necessitated
by the restructuring actions.
During
2008, the Corporation recorded a restructuring charge of $54.7 million,
reflecting actions to reduce its manufacturing cost base and selling, general,
and administrative expenses. The principal components of this restructuring
charge related to the elimination of direct and indirect manufacturing positions
as well as selling, general, and administrative positions. As a result, a
severance benefits accrual of $48.3 million was included in the restructuring
charge, of which $36.4 million related to the Power Tools and Accessories
segment, $5.4 million related to the Hardware and Home Improvement segment, and
$6.0 million related to the Fastening and Assembly Systems segment, as well as
$.5 million related to certain Corporate functions. The severance benefits
accrual included the elimination of approximately 2,300 positions including
approximately 1,400 manufacturing-related positions. The Corporation estimates
that, as a result of increases in manufacturing employee headcount in other
facilities, approximately 200 replacement positions will be filled, yielding a
net total of approximately 2,100 positions eliminated as a result of the 2008
restructuring actions. The restructuring charge also included a $3.7 million
write-down to fair value of certain long-lived assets for the Power Tools and
Accessories segment ($3.0 million) and Hardware and Home Improvement segment
($.7 million), which were either held for sale or idled in preparation for
disposal. As part of these restructuring actions, the Power Tools and
Accessories segment closed its manufacturing facility in Decatur, Arkansas, and
transferred production to another facility. The actions to reduce the
Corporation’s manufacturing cost base in its Hardware and Home Improvement
segment included the transfer of production from a facility in Mexico to a
facility in China. The restructuring charge also reflected $1.8 million related
to the early termination of a lease agreement by the Power Tools and Accessories
segment necessitated by restructuring actions. The restructuring charge also
included a $.9 million non-cash curtailment charge associated with the
restructuring actions.
During
2007, the Corporation recorded a restructuring charge of $19.0 million. The
$19.0 million was net of $3.4 million representing the excess of proceeds
received on the sale of a manufacturing facility which will be closed as part of
the restructuring actions, over its carrying value. The 2007 restructuring
charge reflected actions to reduce the Corporation’s manufacturing cost base and
selling, general and administrative expenses in its Power Tools and Accessories
and Hardware and Home Improvement segments. The restructuring actions to reduce
the Corporation’s manufacturing cost base in the Power Tools and Accessories
segment included the closure of one facility, transferring production to other
facilities, and outsourcing certain manufactured items. Actions to reduce the
Corporation’s manufacturing cost base in the Hardware and Home Improvement
segment primarily related to optimization of its North American finishing
operations.
The
principal component of the 2007 restructuring charge related to the elimination
of manufacturing and selling, general and administrative positions. As a result,
a severance benefit accrual of $14.8 million, related to the Power Tools and
Accessories segment ($12.4 million) and the Hardware and Home Improvement
segment ($2.4 million), was included in the restructuring charge. The severance
benefits accrual included the elimination of approximately 650 positions. The
Corporation estimated that, as a result of increases in manufacturing employee
headcount in other facilities, approximately 100 replacement positions were
filled, yielding a net total of approximately 550 positions eliminated as a
result of the 2007 restructuring actions. The restructuring reserve also
included a $7.4 million write-down to fair value of certain long-lived assets of
the Hardware and Home Improvement segment, which were either held for sale or
have been idled in preparation for disposal as of December 31,
2007.
During
2009, 2008, and 2007 the Corporation paid severance and other exit costs related
to restructuring charges taken of $39.8 million, $25.3 million and $1.0 million,
respectively.
Of the
remaining $10.5 million restructuring accrual at December 31, 2009, $7.0 million
relates to the Power Tools and Accessories segment, $2.4 million relates to the
Fastening and Assembly Systems segment and $1.1 million relates to the Hardware
and Home Improvement segment. The Corporation anticipates that the remaining
actions contemplated under that $10.5 million accrual will be completed during
62
2010. As
of December 31, 2009, the carrying value of long-lived assets held for sale was
not significant.
NOTE
20: OTHER (INCOME) EXPENSE
Other
(income) expense was $(4.8) million in 2009, $(5.0) million in 2008, and $2.3
million in 2007.
Other
(income) expense for the year ended December 31, 2009, includes a $6.0 million
settlement on an insurance settlement related to an environmental matter. Other
(income) expense for the year ended December 31, 2008, benefited from a gain on
the sale of a non-operating asset.
NOTE
21: LITIGATION AND CONTINGENT LIABILITIES
The
Corporation is involved in various lawsuits in the ordinary course of business.
These lawsuits primarily involve claims for damages arising out of the use of
the Corporation’s products and allegations of patent and trademark infringement.
The Corporation also is involved in litigation and administrative proceedings
involving employment matters and commercial disputes. Some of these lawsuits
include claims for punitive as well as compensatory damages.
The
Corporation, using current product sales data and historical trends, actuarially
calculates the estimate of its exposure for product liability. The Corporation
is insured for product liability claims for amounts in excess of established
deductibles and accrues for the estimated liability up to the limits of the
deductibles. All other claims and lawsuits are handled on a case-by-case basis.
The Corporation’s estimate of the costs associated with product liability
claims, environmental exposures, and other legal proceedings is accrued if, in
management’s judgment, the likelihood of a loss is probable and the amount of
the loss can be reasonably estimated.
The
Corporation also is party to litigation and administrative proceedings with
respect to claims involving the discharge of hazardous substances into the
environment. Some of these assert claims for damages and liability for remedial
investigations and clean-up costs with respect to sites that have never been
owned or operated by the Corporation but at which the Corporation has been
identified as a potentially responsible party. Other matters involve current and
former manufacturing facilities.
The EPA
and the Santa Ana Regional Water Quality Control Board have each initiated
administrative proceedings against the Corporation and certain of the
Corporation’s current or former affiliates alleging that the Corporation and
numerous other defendants are responsible to investigate and remediate alleged
groundwater contamination in and adjacent to a 160-acre property located in
Rialto, California. The United States of America, the cities of Colton and
Rialto, and certain other PRPs have also initiated lawsuits (and/or asserted
cross and counter-claims against the Corporation and certain of the
Corporation’s former or current affiliates) that are currently pending in the
United States District Court for the Central District of California
(collectively, the “Litigation”). In the Litigation, the various parties allege
that the Corporation is liable under CERCLA, the Resource Conservation and
Recovery Act, and various state laws for the discharge or release of hazardous
substances into the environment and the contamination caused by those alleged
releases. The Corporation, in turn, through certain of the aforementioned
affiliates, has also initiated a lawsuit in the United States District Court for
the Central District of California alleging that various other PRPs are liable
for the alleged contamination at issue. The City of Colton also has a companion
case in California State court, which is currently stayed for all purposes.
Certain defendants in that case have cross-claims against other defendants and
have asserted claims against the State of California. The administrative
proceedings and the lawsuits generally allege that West Coast Loading
Corporation (WCLC), a defunct company that operated in Rialto between 1952 and
1957, and an as yet undefined number of other defendants are responsible for the
release of perchlorate and solvents into the groundwater basin, and that the
Corporation and certain of the Corporation’s current or former affiliates are
liable as a “successor” of WCLC. The Corporation believes that neither the facts
nor the law support an allegation that the Corporation is responsible for the
contamination and is vigorously contesting these claims.
The EPA
has provided an affiliate of the Corporation a “Notice of
Potential Liability” related to
environmental contamination found at the Centredale Manor Restoration Project
Superfund site, located in North Providence, Rhode Island. The EPA has
discovered dioxin, polychlorinated biphenyls, and pesticide contamination at
this site. The EPA alleged that an affiliate of the Corporation is liable for
site cleanup costs under CERCLA as a successor to the liability of
Metro-Atlantic, Inc., a former operator at the site, and demanded reimbursement
of the EPA’s costs related to this site. The EPA, which considers the
Corporation to be the primary potentially responsible party (PRP) at the site,
is expected to release a draft Feasibility Study Report, which will identify and
evaluate remedial alternatives for the site, in 2010. At December 31, 2009, the
estimated remediation costs related to this site (including the EPA’s past costs
as well as costs of additional investigation, remediation, and related costs,
less escrowed funds contributed by PRPs who have reached settlement agreements
with the EPA), which the Corporation considers to be probable and can be
reasonably estimable, range from approximately $50.5 million to approximately
$100 million, with no amount within that range representing a more likely
outcome. The Corporation’s reserve for this matter at December 31, 2009 is $50.5
million. During 2007, the Corporation increased its reserve for this
environmental remediation matter by $31.7 million to $48.7 million, reflecting
the probability that the Corporation will be identified as the principal
financially viable PRP upon issuance of the EPA draft Feasibility Study Report.
The Corpo-
63
ration
has not yet determined the extent to which it will contest the EPA’s claims with
respect to this site. Further, to the extent that the Corporation agrees to
perform or finance remedial activities at this site, it will seek participation
or contribution from additional PRPs and insurance carriers. As the specific
nature of the environmental remediation activities that may be mandated by the
EPA at this site have not yet been determined, the ultimate remedial costs
associated with the site may vary from the amount accrued by the Corporation at
December 31, 2009.
As of
December 31, 2009, the Corporation’s aggregate probable exposure with respect to
environmental liabilities, for which accruals have been established in the
consolidated financial statements, was $102.1
million. These accruals are reflected in other current liabilities and other
long-term liabilities in the Consolidated Balance Sheet.
Total
future costs for environmental remediation activities will depend upon, among
other things, the identification of any additional sites, the determination of
the extent of contamination at each site, the timing and nature of required
remedial actions, the technologies available, the nature and terms of cost
sharing arrangements with other PRPs, the existing legal requirements and nature
and extent of future environmental laws, and the determination of the
Corporation’s liability at each site. The recognition of additional losses, if
and when they may occur, cannot be reasonably predicted.
In the
opinion of management, amounts accrued for exposures relating to product
liability claims, environmental matters, income tax matters, and other legal
proceedings are adequate and, accordingly, the ultimate resolution of these
matters is not expected to have a material adverse effect on the Corporation’s
consolidated financial statements. As of December 31, 2009, the Corporation had
no known probable but inestimable exposures relating to product liability
claims, environmental matters, income tax matters, or other legal proceedings
that are expected to have a material adverse effect on the Corporation. There
can be no assurance, however, that unanticipated events will not require the
Corporation to increase the amount it has accrued for any matter or accrue for a
matter that has not been previously accrued because it was not considered
probable. While it is possible that the increase or establishment of an accrual
could have a material adverse effect on the financial results for any particular
fiscal quarter or year, in the opinion of management there exists no known
potential exposure that would have a material adverse effect on the financial
condition or on the financial results of the Corporation beyond any such fiscal
quarter or year.
NOTE
22: QUARTERLY RESULTS (UNAUDITED)
|
(DOLLARS
IN MILLIONS EXCEPT PER SHARE DATA)
YEAR
ENDED DECEMBER 31, 2009
|
FIRST
QUARTER
|
SECOND
QUARTER
|
THIRD
QUARTER
|
FOURTH
QUARTER
|
||||||||||||
|
Sales
|
$ | 1,073.7 | $ | 1,191.4 | $ | 1,208.7 | $ | 1,301.3 | ||||||||
|
Gross
margin
|
340.8 | 372.2 | 400.3 | 473.2 | ||||||||||||
|
Net
earnings
|
4.9 | 38.3 | 55.4 | 33.9 | ||||||||||||
|
Net
earnings per common share–basic
|
$ | .08 | $ | .63 | $ | .91 | $ | .56 | ||||||||
|
Net
earnings per common share–diluted
|
$ | .08 | $ | .63 | $ | .91 | $ | .55 | ||||||||
|
YEAR
ENDED DECEMBER 31, 2008
|
FIRST
QUARTER
|
SECOND
QUARTER
|
THIRD
QUARTER
|
FOURTH
QUARTER
|
||||||||||||
|
Sales
|
$ | 1,495.8 | $ | 1,641.7 | $ | 1,570.8 | $ | 1,377.8 | ||||||||
|
Gross
margin
|
517.5 | 537.2 | 508.9 | 434.8 | ||||||||||||
|
Net
earnings
|
67.4 | 96.7 | 85.8 | 43.7 | ||||||||||||
|
Net
earnings per common share–basic
|
$ | 1.10 | $ | 1.58 | $ | 1.43 | $ | .72 | ||||||||
|
Net
earnings per common share–diluted
|
$ | 1.08 | $ | 1.56 | $ | 1.41 | $ | .72 | ||||||||
As more
fully described in Note 2, net earnings for the fourth quarter of 2009, included
a pre-tax charge of $58.8 million ($42.6 million after taxes) associated with
the Corporation’s proposed merger with The Stanley Works. As more fully
described in Note 19, net earnings for the first quarter of 2009 included a
pre-tax restructuring charge of $11.9 million ($8.4 million after
taxes).
Earnings
per common share are computed independently for each of the quarters presented.
Therefore, the sum of the quarters may not be equal to the full year earnings
per share.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
ON
CONSOLIDATED FINANCIAL STATEMENTS
To the
Stockholders and Board of Directors
of The
Black & Decker Corporation and Subsidiaries:
We have
audited the accompanying consolidated balance sheet of The Black & Decker
Corporation and Subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of earnings, stockholders’ equity, and cash flows for
each of the three years in the period ended December 31, 2009. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Black &
Decker Corporation and Subsidiaries at December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, the Corporation,
effective December 31, 2008, adopted a new accounting standard that required the
Corporation to change the measurement date for defined benefit pension and
postretirement plan assets and liabilities to coincide with its
year-end.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), The Black & Decker Corporation and
Subsidiaries’ internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 19, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG,
LLP
Baltimore,
Maryland
February
19, 2010
65
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not
applicable.
ITEM
9A. CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Under the
supervision and with the participation of the Corporation’s management,
including the Chief Executive Officer and Chief Financial Officer, the
Corporation evaluated the effectiveness of the design and operation of the
Corporation’s disclosure controls and procedures as of December 31, 2009. Based
upon that evaluation, the Corporation’s Chief Executive Officer and Chief
Financial Officer concluded that the Corporation’s disclosure controls and
procedures are effective.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Corporation’s management is responsible for establishing and maintaining
adequate internal control over financial reporting. Under the supervision and
with the participation of the Corporation’s management, including the Chief
Executive Officer and Chief Financial Officer, the Corporation evaluated the
effectiveness of the design and operation of its internal control over financial
reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, the Corporation’s Chief Executive
Officer and Chief Financial Officer concluded that the Corporation’s internal
control over financial reporting was effective as of December 31,
2009.
Ernst
& Young LLP, the Corporation’s independent registered public accounting
firm, audited the effectiveness of internal control over financial reporting
and, based on that audit, issued the report set forth on the following
page.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in the Corporation’s internal controls over financial reporting
during the quarterly period ended December 31, 2009, that have materially
affected, or are reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
66
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the
Stockholders and Board of Directors
of The
Black & Decker Corporation and Subsidiaries:
We have
audited The Black & Decker Corporation and Subsidiaries’ internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Black &
Decker Corporation’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, The Black & Decker Corporation and Subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2009, based on the COSO criteria.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of The Black
& Decker Corporation and Subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of earnings, stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2009, and our
report dated February 19, 2010 expressed an unqualified opinion
thereon.
/s/ ERNST & YOUNG,
LLP
Baltimore,
Maryland
February
19, 2010
67
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information
required under this Item is hereby incorporated by reference from the
Corporation’s definitive proxy statement or will be contained in an amendment to
this Form 10-K.
Information
required under this Item with respect to Executive Officers of the Corporation
is included in Item 1 of Part I of this report.
ITEM
11. EXECUTIVE COMPENSATION
Information
required under this Item is hereby incorporated by reference from the
Corporation’s definitive proxy statement or will be contained in an amendment to
this Form 10-K.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information
required under this Item is hereby incorporated by reference from the
Corporation’s definitive proxy statement or will be contained in an amendment to
this Form 10-K.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information
required under this Item is hereby incorporated by reference from the
Corporation’s definitive proxy statement or will be contained in an amendment to
this Form 10-K.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information
required under this Item is hereby incorporated by reference from the
Corporation’s definitive proxy statement or will be contained in an amendment to
this Form 10-K.
68
PART
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
(a)
|
List
of Financial Statements, Financial Statement Schedules, and
Exhibits
|
(1)LIST OF FINANCIAL
STATEMENTS
The
following consolidated financial statements of the Corporation and its
subsidiaries are included in Item 8 of Part II of this report:
Consolidated
Statement of Earnings – years ended December 31, 2009, 2008, and
2007.
Consolidated
Balance Sheet – December 31, 2009 and 2008.
Consolidated
Statement of Stockholders’ Equity – years ended December 31, 2009, 2008, and
2007.
Consolidated
Statement of Cash Flows – years ended December 31, 2009, 2008, and
2007.
Notes to
Consolidated Financial Statements.
Report of
Independent Registered Public Accounting Firm on Consolidated Financial
Statements.
(2)LIST OF FINANCIAL
STATEMENT SCHEDULES
The
following financial statement schedules of the Corporation and its subsidiaries
are included herein:
Schedule
II – Valuation and Qualifying Accounts and Reserves.
All other
schedules for which provision is made in the applicable accounting regulations
of the Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3)LIST OF
EXHIBITS
The
following exhibits are either included in this report or incorporated herein by
reference as indicated below:
Exhibit
2
Agreement
and Plan of Merger, dated as of November 2, 2009, among the Corporation, The
Stanley Works, and Blue Jay Acquisition Corp., included in the Corporation’s
Current Report on Form 8-K filed with the Commission on November 3, 2009, is
incorporated herein by reference.
Exhibit
3(a)
Articles
of Restatement of the Charter of the Corporation, included in the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, are
incorporated herein by reference.
Exhibit
3(b)
Bylaws of
the Corporation, as amended, included in the Corporation’s Current Report on
Form 8-K filed with the Commission on November 3, 2009, are incorporated herein
by reference.
Exhibit
4(a)
Indenture,
dated as of June 26, 1998, by and among Black & Decker Holdings Inc., as
Issuer, the Corporation, as Guarantor, and The First National Bank of Chicago,
as Trustee, included in the Corporation’s Quarterly Report on Form 10-Q for the
quarter ended June 28, 1998, is incorporated herein by reference.
Exhibit
4(b)
Indenture,
dated as of June 5, 2001, between the Corporation and The Bank of New York, as
Trustee, included in the Corporation’s Registration Statement on Form S-4 (Reg.
No. 333-64790), is incorporated herein by reference.
Exhibit
4(c)
Indenture,
dated as of October 18, 2004, between the Corporation and The Bank of New York,
as Trustee, included in the Corporation’s Current Report on Form 8-K filed with
the Commission on October 20, 2004, is incorporated herein by
reference.
Exhibit
4(d)
Indenture,
dated as of November 16, 2006, between the Corporation and The Bank of New York,
as Trustee, included in the Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2006, is incorporated herein by reference.
Exhibit
4(e)
First
Supplemental Indenture, dated as of November 16, 2006, between the Corporation
and The Bank of New York, as Trustee, included in the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2006, is incorporated herein
by reference.
Exhibit
4(f)
Second
Supplemental Indenture, dated as of April 3, 2009, between the Corporation and
The Bank of New York Mellon (formerly known as The Bank of New York), as
Trustee, included in the Corporation’s Current Report on Form 8-K filed with the
Commission on April 3, 2009, is incorporated herein by reference.
The
Corporation agrees to furnish a copy of any other documents with respect to
long-term debt instruments of the Corporation and its subsidiaries upon
request.
Exhibit
4(g)
Credit
Agreement, dated as of December 7, 2007, among the Corporation, Black &
Decker Luxembourg Finance S.C.A., and Black & Decker Luxembourg S.A.R.L., as
Initial Borrowers, the initial lenders named therein, as Initial Lenders,
Citibank, N.A., as Administrative Agent, JPMorgan Chase Bank, as Syndication
Agent, and Bank of America, N.A., BNP Paribas and Commerzbank AG, as
Documentation Agents (including all exhibits and schedules).
69
Exhibit
10(a)
The Black
& Decker Corporation Deferred Compensation Plan for Non-Employee Directors,
as amended and restated, included in the Corporation’s Current Report on Form
8-K filed with the Commission on October 20, 2008, is incorporated herein by
reference.
Exhibit
10(b)
The Black
& Decker Non-Employee Directors Stock Plan, as amended and restated,
included as Exhibit B to the Proxy Statement, dated March 11, 2008, for the 2008
Annual Meeting of Stockholders of the Corporation, is incorporated herein by
reference.
Exhibit
10(c)
The Black
& Decker 1989 Stock Option Plan, as amended, included in the Corporation’s
Quarterly Report on Form 10-Q for the quarter ended March 30, 1997, is
incorporated herein by reference.
Exhibit
10(d)
The Black
& Decker 1992 Stock Option Plan, as amended, included in the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated
herein by reference.
Exhibit
10(e)
The Black
& Decker 1995 Stock Option Plan for Non-Employee Directors, as amended,
included in the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 1998, is incorporated herein by reference.
Exhibit
10(f)
The Black
& Decker 1996 Stock Option Plan, as amended, included in the Corporation’s
Annual Report on Form 10-K for the year ended December 31, 2005, is incorporated
herein by reference.
Exhibit
10(g)
The Black
& Decker 2003 Stock Option Plan, as amended and restated, included in the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 29,
2009, is incorporated herein by reference.
Exhibit
10(h)
The Black
& Decker Corporation 2004 Restricted Stock Plan, included as Exhibit B to
the Proxy Statement, dated March 16, 2004, for the 2004 Annual Meeting of
Stockholders of the Corporation, is incorporated herein by reference.
Exhibit
10(i)
The Black
& Decker 2008 Restricted Stock Plan, included as Exhibit A to the Proxy
Statement, dated March 11, 2008, for the 2008 Annual Meeting of Stockholders of
the Corporation, is incorporated herein by reference.
Exhibit
10(j)
The Black
& Decker Performance Equity Plan, as amended, included in the Corporation’s
Current Report on Form 8-K filed with the Commission on March 26, 2008, is
incorporated herein by reference.
Exhibit
10(k)
Form of
Restricted Share Agreement relating to The Black & Decker Corporation 2004
Restricted Stock Plan, included in the Corporation’s Current Report on Form 8-K
filed with the Commission on April 30, 2009, is incorporated herein by
reference.
Exhibit
10(l)
Form of
Restricted Stock Unit Award Agreement relating to The Black & Decker
Corporation 2008 Restricted Stock Plan, included in the Corporation’s Current
Report on Form 8-K filed with the Commission on April 30, 2009, is incorporated
herein by reference.
Exhibit
10(m)
Form of
Nonqualified Stock Option Agreement with executive officers relating to the
Corporation’s stock option plans, included in the Corporation’s Current Report
on Form 8-K filed with the Commission on April 28, 2005, is incorporated herein
by reference.
Exhibit
10(n)
The Black
& Decker Executive Annual Incentive Plan, as amended and restated, included
in the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 28, 2008, is incorporated herein by reference.
Exhibit
10(o)
The Black
& Decker Management Annual Incentive Plan, as amended and restated, included
in the Corporation’s Quarterly Report on Form 10-Q for the quarter ended
September 28, 2008, is incorporated herein by reference.
Exhibit
10(p)
The Black
& Decker Supplemental Pension Plan, as amended and restated, included in the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 28,
2008, is incorporated herein by reference.
Exhibit
10(q)
First
Amendment to The Black & Decker Supplemental Pension Plan, included in the
Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2009,
is incorporated herein by reference.
Exhibit
10(r)
The Black
& Decker Supplemental Retirement Savings Plan, as amended and restated,
included in the Corporation’s Current Report on Form 8-K filed with the
Commission on October 20, 2008, is incorporated herein by
reference.
70
Exhibit
10(s)
The Black
& Decker Supplemental Executive Retirement Plan, as amended and restated,
included in the Corporation’s Current Report on Form 8-K filed with the
Commission on July 20, 2009, is incorporated herein by reference.
Exhibit
10(t)
The Black
& Decker Executive Salary Continuance Plan, as amended and restated,
included in the Corporation’s Quarterly Report on Form 10-Q for the quarter
ended September 28, 2008, is incorporated herein by reference.
Exhibit
10(u)
Form of
Severance Benefits Agreement by and between the Corporation and approximately 19
of its key employees, included in the Corporation’s Current Report on Form 8-K
filed with the Commission on November 3, 2009, is incorporated herein by
reference.
Exhibit
10(v)
Amended
and Restated Employment Agreement, dated as of November 2, 2009, by and between
the Corporation and Nolan D. Archibald, included in the Corporation’s Current
Report on Form 8-K filed with the Commission on November 3, 2009, is
incorporated herein by reference.
Exhibit
10(w)
Severance
Benefits Agreement, dated as of November 2, 2009, by and between the Corporation
and John W. Schiech, included in the Corporation’s Current Report on Form 8-K
filed with the Commission on November 3, 2009, is incorporated herein by
reference.
Exhibit
10(x)
Severance
Benefits Agreement, dated as of November 2, 2009, by and between the Corporation
and Charles E. Fenton, included in the Corporation’s Current Report on Form 8-K
filed with the Commission on November 3, 2009, is incorporated herein by
reference.
Exhibit
10(y)
Severance
Benefits Agreement, dated as of November 2, 2009, by and between the Corporation
and Michael D. Mangan, included in the Corporation’s Current Report on Form 8-K
filed with the Commission on November 3, 2009, is incorporated herein by
reference.
Exhibit
10(z)
Severance
Benefits Agreement, dated as of November 2, 2009, by and between the Corporation
and Stephen F. Reeves, included in the Corporation’s Current Report on Form 8-K
filed with the Commission on November 3, 2009, is incorporated herein by
reference.
Exhibit
10(aa)
The Black
& Decker Corporation Corporate Governance Policies and Procedures Statement,
included in the Corporation’s Annual Report on Form 10-K for the year ended
December 31, 2008, is incorporated herein by reference.
Exhibit
10(ab)
The Black
& Decker 2008 Executive Long-Term Incentive/Retention Plan, as amended and
restated, included in the Corporation’s Current Report on Form 8-K filed with
the Commission on November 3, 2009, is incorporated herein by
reference.
Exhibit
10(ac)
Executive
Chairman Agreement, dated as of November 2, 2009, by and between The Stanley
Works and Nolan D. Archibald, included in the Corporation’s Current Report on
Form 8-K filed with the Commission on November 2, 2009, is incorporated herein
by reference.
Items
10(a) through 10(ac) constitute management contracts and compensatory plans and
arrangements required to be filed as exhibits under Item 14(c) of this
Report.
Exhibit
21
List of
Subsidiaries.
Exhibit
23
Consent
of Independent Registered Public Accounting Firm.
Exhibit
24
Powers of
Attorney.
Exhibit
31.1
Chief
Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
31.2
Chief
Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15-d-14(a) and
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit
32.1
Chief
Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit
32.2
Chief
Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
All other
items are “not
applicable”
or “none”.
|
(b)
|
Exhibits
|
The
exhibits required by Item 601 of Regulation S-K are filed herewith.
71
|
(c)
|
Financial
Statement Schedules and Other Financial
Statements
|
The
Financial Statement Schedule required by Regulation S-X is filed
herewith.
SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
The
Black & Decker Corporation and Subsidiaries
(MILLIONS
OF DOLLARS)
|
DESCRIPTION
|
BALANCE
AT
BEGINNING
OF
PERIOD
|
ADDITIONS
CHARGED
TO
COSTS
AND
EXPENSES
|
DEDUCTIONS |
OTHER
CHANGES
ADD
(DEDUCT)
|
BALANCE
AT
END
OF
PERIOD
|
|||||||||||||||
|
Year
Ended December 31, 2009
|
||||||||||||||||||||
|
Reserve
for doubtful accounts and cash discounts
|
$ | 39.1 | $ | 71.9 | $ | 67.3 | (a) | $ | 2.1 | (b) | $ | 45.8 | ||||||||
|
Year
Ended December 31, 2008
|
||||||||||||||||||||
|
Reserve
for doubtful accounts and cash discounts
|
$ | 44.2 | $ | 89.2 | $ | 91.8 | (a) | $ | (2.5 | )(b) | $ | 39.1 | ||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
|
Reserve
for doubtful accounts and cash discounts
|
$ | 44.5 | $ | 91.8 | $ | 94.5 | (a) | $ | 2.4 | (b) | $ | 44.2 | ||||||||
(a)
Accounts written off during the year and cash discounts taken by
customers.
(b)
Primarily includes currency translation adjustments and amounts associated with
acquired businesses.
72
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
THE
BLACK & DECKER CORPORATION
|
||||||
|
Date:
|
February 19, 2010
|
By
|
/s/ NOLAN D. ARCHIBALD
|
|||
|
Nolan
D. Archibald
|
||||||
|
Chairman,
President, and
Chief
Executive Officer
|
||||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on February 19, 2010, by the following persons on behalf of
the registrant and in the capacities indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
|
|
|
Principal
Executive Officer
|
||||
|
/s/
NOLAN D. ARCHIBALD
|
February
19, 2010
|
|
||
|
Nolan
D. Archibald
|
Chairman,
President, and Chief Executive Officer
|
|||
|
Principal
Financial Officer
|
||||
|
/s/
STEPHEN F. REEVES
|
February
19, 2010
|
|
||
|
Stephen
F. Reeves
|
Senior
Vice President and Chief Financial Officer
|
|||
|
Principal
Accounting Officer
|
||||
|
/s/
CHRISTINA M. MCMULLEN
|
February
19, 2010
|
|
||
|
Christina
M. McMullen
|
Vice
President and Controller
|
|||
This
report has been signed by the following directors, constituting a majority of
the Board of Directors, by Nolan D. Archibald,
Attorney-in-Fact.
|
Nolan
D. Archibald
|
Manual
A. Fernandez
|
|||
|
Norman
R. Augustine
|
Benjamin
H. Griswold, IV
|
|||
|
Barbara
L. Bowles
|
Anthony
Luiso
|
|||
|
George
W. Buckley
|
Robert
L. Ryan
|
|||
|
M.
Anthony Burns
|
Mark
H. Willes
|
|||
|
Kim
B. Clark
|
|
By
|
/s/
NOLAN D. ARCHIBALD
|
Date:
|
February
19, 2010
|
||
|
Nolan
D. Archibald
|
|||||
|
Attorney-in-Fact
|
73