UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): October 19, 2012
SPECTRUM BRANDS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation)
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001-13615
(Commission File No.)
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22-2423556
(IRS Employer
Identification No.)
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601 Rayovac Drive
Madison, Wisconsin 53711
(Address of principal executive offices)
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(608) 275-3340
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 7.01.
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Regulation FD Disclosure.
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As previously announced, on October 8, 2012, Spectrum Brands, Inc. (“Spectrum Brands”) entered into an Acquisition Agreement (the “Acquisition Agreement”), with Stanley Black & Decker, Inc. (“Seller”), to acquire the residential hardware and home improvement business (the “HHI Business”) of Seller (the “Acquisition”).
In connection with the financing of the Acquisition, Spectrum Brands is disclosing certain financial information relating to the HHI Business to potential financing sources. A copy of the financial information is attached hereto as Exhibits 99.1 and 99.2.
Spectrum Brands is furnishing the information in this Current Report on Form 8-K and Exhibits 99.1 and 99.2 attached hereto to comply with Regulation FD. Such information shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be deemed to be incorporated by reference into any of Spectrum Brands’ filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and regardless of any general incorporation language in such filings, except to the extent expressly set forth by specific reference in such a filing.
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Item 9.01
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Financial Statements and Exhibits.
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(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Exhibits.
The following exhibits are being filed with this Current Report on Form 8-K.
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Exhibit
No.
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Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 8-K to be signed on its behalf by the undersigned, thereunto duly authorized.
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SPECTRUM BRANDS, INC.
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By:
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/s/ Nathan E. Fagre | |
| Name: | Nathan E. Fagre | ||
| Title: | Secretary and General Counsel | ||
Dated: October 19, 2012
EXHIBIT 99.1
The HHI Group
Combined Financial Statements
Fiscal Years Ended December 31, 2011 and January 1, 2011
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1
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2
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3
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4
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5
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The HHI Group
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December 31,
2011
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January 1,
2011
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(In Millions)
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||||||||
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Assets
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Current assets:
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||||||||
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Cash and cash equivalents
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$ | 44.8 | $ | 47.7 | ||||
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Accounts receivable, net
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108.1 | 93.1 | ||||||
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Inventories, net
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171.2 | 158.1 | ||||||
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Prepaid expenses
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4.2 | 7.7 | ||||||
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Deferred taxes
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22.4 | 23.0 | ||||||
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Other current assets
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2.7 | 2.6 | ||||||
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Total current assets
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353.4 | 332.2 | ||||||
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Property, plant and equipment, net
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110.7 | 107.3 | ||||||
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Goodwill
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573.6 | 583.3 | ||||||
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Customer relationships, net
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39.9 | 45.2 | ||||||
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Trade names, net
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110.7 | 119.5 | ||||||
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Patents and technology, net
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20.5 | 23.4 | ||||||
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Affiliate notes receivable
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33.5 | 21.6 | ||||||
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Other assets
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5.0 | 7.2 | ||||||
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Total assets
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$ | 1,247.3 | $ | 1,239.7 | ||||
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Liabilities and business equity
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Current liabilities:
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Accounts payable
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$ | 115.7 | $ | 74.4 | ||||
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Current portion of affiliate debt
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138.0 | 132.3 | ||||||
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Accrued expenses
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64.5 | 45.3 | ||||||
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Total current liabilities
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318.2 | 252.0 | ||||||
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Long-term affiliate debt
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273.7 | 373.9 | ||||||
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Deferred taxes
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45.7 | 45.5 | ||||||
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Post-retirement benefits
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27.3 | 24.7 | ||||||
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Other liabilities
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41.3 | 34.7 | ||||||
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Commitments and contingencies (Notes Q and R)
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Business equity:
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Parent Company’s net investment and accumulated earnings
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514.5 | 466.6 | ||||||
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Accumulated other comprehensive income
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24.3 | 39.6 | ||||||
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Parent Company’s net investment and accumulated earnings and accumulated other comprehensive income
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538.8 | 506.2 | ||||||
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Non-controlling interest
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2.3 | 2.7 | ||||||
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Total business equity
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541.1 | 508.9 | ||||||
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Total liabilities and business equity
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$ | 1,247.3 | $ | 1,239.7 | ||||
See notes to combined financial statements.
1
The HHI Group
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Fiscal Years Ended
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December 31,
2011
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January 1,
2011
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(In Millions)
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Net sales:
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Trade
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$ | 942.9 | $ | 849.1 | ||||
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Affiliate
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32.1 | 15.1 | ||||||
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Total net sales
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975.0 | 864.2 | ||||||
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Costs and expenses:
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Cost of sales – trade
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639.6 | 604.0 | ||||||
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Cost of sales – affiliate
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30.1 | 13.8 | ||||||
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Selling, general and administrative
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189.8 | 178.8 | ||||||
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Provision for doubtful accounts
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0.8 | 0.1 | ||||||
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Other affiliate income
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(1.0 | ) | (1.0 | ) | ||||
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Other – net
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21.7 | 14.6 | ||||||
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Restructuring charges
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3.2 | 11.9 | ||||||
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Interest expense – affiliate, net
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42.7 | 41.9 | ||||||
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Interest (income) expense – trade, net
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(0.6 | ) | 3.9 | |||||
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Total costs and expenses
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926.3 | 868.0 | ||||||
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Earnings (loss) before income taxes
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48.7 | (3.8 | ) | |||||
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Income taxes (benefit)
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12.3 | (0.7 | ) | |||||
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Net earnings (loss)
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36.4 | (3.1 | ) | |||||
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Net income attributable to non-controlling interests
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(0.6 | ) | (0.4 | ) | ||||
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Net earnings (loss) attributable to Parent Company
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$ | 35.8 | $ | (3.5 | ) | |||
See notes to combined financial statements.
2
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Fiscal Years Ended
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December 31,
2011
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January 1,
2011
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(In Millions)
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Operating activities
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Net earnings (loss) attributable to Parent Company
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$ | 35.8 | $ | (3.5 | ) | |||
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Net income attributable to non-controlling interests
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(0.6 | ) | (0.4 | ) | ||||
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Net earnings (loss)
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36.4 | (3.1 | ) | |||||
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Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities:
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Depreciation and amortization of property, plant and equipment
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26.2 | 28.9 | ||||||
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Asset impairment
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– | 0.9 | ||||||
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Amortization of intangibles
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17.0 | 13.3 | ||||||
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Inventory step-up amortization
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– | 31.3 | ||||||
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Provision for doubtful accounts
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0.8 | 0.1 | ||||||
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Deferred taxes
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(6.2 | ) | (22.5 | ) | ||||
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Changes in operating assets and liabilities:
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Accounts receivable
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(16.7 | ) | 0.7 | |||||
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Inventories
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(13.9 | ) | (4.3 | ) | ||||
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Accounts payable
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41.3 | 12.6 | ||||||
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Prepaid expenses and other current assets
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3.9 | (14.6 | ) | |||||
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Other assets
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2.0 | 2.7 | ||||||
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Accrued expenses
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19.0 | (22.5 | ) | |||||
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Other liabilities
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15.3 | (27.4 | ) | |||||
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Net cash provided by (used in) operating activities
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125.1 | (3.9 | ) | |||||
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Investing activities
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Capital expenditures
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(22.6 | ) | (14.7 | ) | ||||
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Proceeds from sales of assets
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0.1 | 0.6 | ||||||
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Net cash used in investing activities
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(22.5 | ) | (14.1 | ) | ||||
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Financing activities
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Cash remitted to Parent
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(749.7 | ) | (651.5 | ) | ||||
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Cash received from Parent
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751.0 | 755.4 | ||||||
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Lending to affiliates through notes receivable
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(11.8 | ) | – | |||||
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Repayments on affiliate debt
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(94.7 | ) | (77.7 | ) | ||||
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Net cash (used in) provided by financing activities
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(105.2 | ) | 26.2 | |||||
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Effect of exchange rate changes on cash
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(0.3 | ) | 1.7 | |||||
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(Decrease) increase in cash and cash equivalents
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(2.9 | ) | 9.9 | |||||
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Cash and cash equivalents, beginning of year
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47.7 | 37.8 | ||||||
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Cash and cash equivalents, end of year
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$ | 44.8 | $ | 47.7 | ||||
See notes to combined financial statements.
3
The HHI Group
Fiscal Years Ended December 31, 2011 and January 1, 2011
(In Millions)
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Parent Company’s Net Investment and Accumulated Earnings
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Accumulated Other Comprehensive Income (Loss)
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Non-Controlling Interest
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Total
Business
Equity
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Balance at January 3, 2010
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$ | 486.3 | $ | 16.7 | $ | 2.3 | $ | 505.3 | ||||||||
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Comprehensive income:
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Net income (loss)
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(3.5 | ) | – | 0.4 | (3.1 | ) | ||||||||||
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Currency translation adjustment
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– | 24.7 | – | 24.7 | ||||||||||||
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Change in pension, net of tax
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– | (1.8 | ) | – | (1.8 | ) | ||||||||||
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Total comprehensive income
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(3.5 | ) | 22.9 | 0.4 | 19.8 | |||||||||||
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Net transfers to the Parent
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(16.2 | ) | – | – | (16.2 | ) | ||||||||||
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Balance at January 1, 2011
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466.6 | 39.6 | 2.7 | 508.9 | ||||||||||||
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Comprehensive income:
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Net income
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35.8 | – | 0.6 | 36.4 | ||||||||||||
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Currency translation adjustment
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– | (13.2 | ) | – | (13.2 | ) | ||||||||||
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Change in pension, net of tax
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– | (2.1 | ) | – | (2.1 | ) | ||||||||||
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Total comprehensive income
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35.8 | (15.3 | ) | 0.6 | 21.1 | |||||||||||
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Dividends declared
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(10.3 | ) | – | (1.0 | ) | (11.3 | ) | |||||||||
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Net transfers to the Parent
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22.4 | – | – | 22.4 | ||||||||||||
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Balance at December 31, 2011
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$ | 514.5 | $ | 24.3 | $ | 2.3 | $ | 541.1 | ||||||||
See Notes to combined financial statements.
4
A. Nature of Activities and Basis of Presentation
Description of Business
On March 12, 2010, a wholly owned subsidiary of The Stanley Works was merged with and into the Black & Decker Corporation (“Black & Decker”), with the result that Black & Decker became a wholly owned subsidiary of The Stanley Works (the “Merger”). The combined company was thereafter renamed Stanley Black & Decker, Inc. (the “Parent”).
These financial statements combine the legacy Stanley National Hardware (“SNH”) operations with the legacy Black and Decker Hardware and Home Improvement (“HHI”) operations. The combined company, the HHI Group (hereinafter referred to as “the Company”), offers a broad range of door security hardware as well as residential products, including locksets and interior and exterior hardware. The Company’s brand names include Baldwin, Weiser, Kwikset, Stanley National Hardware, Fanal, Geo and Pfister. The Company is operated by a single management team.
Approximately half of the Company’s sales are in the retail channel, including 24% to The Home Depot and 21% to Lowes in 2011, and 22% to The Home Depot and 24% to Lowes in 2010. The remaining sales of the Company are in the non-retail or new construction channels. Further, approximately 87% of the Company’s revenues for fiscal years 2011 and 2010 are generated from the U.S. and Canada, with the remainder spread across Latin America and Asia.
Basis of Presentation
The results of operations and cash flows of HHI have been included in the Company’s combined financial statements from the time of the Merger on March 12, 2010 (see Note F, Merger). The combined financial statements include the accounts of the Company and its majority-owned subsidiaries which require consolidation, after the elimination of intercompany accounts and transactions. The Company’s fiscal year ends on the Saturday nearest to December 31. There were 52 weeks in the fiscal years 2011 and 2010.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates.
5
The HHI Group
Notes to Combined Financial Statements (continued)
A. Nature of Activities and Basis of Presentation (continued)
Corporate Allocations
The Combined Balance Sheets include the assets and liabilities attributable to the Company’s operations. The Combined Statements of Operations includes certain allocated corporate expenses of the Parent attributable to the Company. These expenses include costs associated with legal, finance, treasury, accounting, human resources, employee benefits, insurance and stock-based compensation. Corporate costs are allocated on the basis of usage or another reasonable basis when usage is not identifiable. Management believes the assumptions and methodologies underlying the allocation of expenses are reasonable. Notwithstanding, the expenses allocated to the Company are not necessarily indicative of the actual level of expenses that would have been incurred if the Company had been an independent entity and had otherwise managed these functions. The following table summarizes the allocation of corporate expenses to specific captions within the Combined Statements of Operations.
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2011
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2010
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(In Millions)
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Cost of sales – trade
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$ | 5.0 | $ | 4.7 | ||||
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Selling, general and administrative
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24.4 | 21.8 | ||||||
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Total corporate allocations
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$ | 29.4 | $ | 26.5 | ||||
6
The HHI Group
Notes to Combined Financial Statements (continued)
A. Nature of Activities and Basis of Presentation (continued)
Related Party Transactions
Affiliate Sales and Expenses
Transactions the Company had with affiliated companies owned by the Parent have been included in the Combined Statements of Operations. These sales and related costs may not be indicative of sales pricing or volume in the event the Company is sold. The following table summarizes affiliate sales transactions:
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Description
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2011
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2010
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(In Millions)
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Affiliate sales
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$ | 32.1 | $ | 15.1 | ||||
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Affiliate cost of sales
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30.1 | 13.8 | ||||||
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Net gross margin on affiliate sales
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2.0 | 1.3 | ||||||
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Cost of sales – trade, mark-up on affiliate purchases
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10.9 | 9.7 | ||||||
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Net interest expense – affiliate
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42.7 | 41.9 | ||||||
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Other affiliate income
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(1.0 | ) | (1.0 | ) | ||||
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Net affiliate loss before provision for income taxes
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$ | (50.6 | ) | $ | (49.3 | ) | ||
The Company purchases certain products it sells from third party vendors through affiliate global purchasing agents of the Parent. The Combined Statements of Operations includes the affiliate mark-up arising from inventory purchase transactions between the Company and affiliates of the Parent. Mark-ups on affiliate purchases of $10.9 million and $9.7 million were included within cost of sales – trade in the Combined Statements of Operations for the fiscal years ended December 31, 2011 and January 1, 2011, respectively. The mark-up on affiliate purchase transactions is cash settled through the Parent’s centralized cash management program and reduces the net cash provided by operating activities in the Combined Statements of Cash Flows.
Other affiliate income represents royalty fees the Company charges to an affiliate of the Parent. The other affiliate income is assumed to be cash settled, as described below, and consequently reduces the net cash provided by operating activities in the Combined Statements of Cash Flows.
7
The HHI Group
A. Nature of Activities and Basis of Presentation (continued)
Cash Management and Business Equity
The Parent utilizes a centralized approach to cash management and financing of operations in the U.S. As a result of the Company’s participation in the Parent’s central cash management program, all the Company’s U.S. cash receipts are remitted to the Parent and all cash disbursements are funded by the Parent. Other transactions with the Parent and related affiliates include purchases and sales and miscellaneous other administrative expenses incurred by the Parent on behalf of the Company. The net amount of any receivable from or payable to the Parent and other affiliates, with the exception of affiliate debt and notes receivable, are reported as a component of business equity. There are no terms of settlement or interest charges associated with the intercompany account balances. All transactions with the Parent and other related affiliates outside of the Company are considered to be effectively settled for cash in the Combined Statements of Cash Flows at the time the transaction is recorded.
An analysis of the cash transactions solely with the Parent follows:
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2011
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2010
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(In Millions)
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Cash funding from Parent
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$ | 751.0 | $ | 755.4 | ||||
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Cash remitted to Parent
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(749.7 | ) | (651.5 | ) | ||||
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Taxes paid by Parent
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0.8 | 13.9 | ||||||
8
The HHI Group
Notes to Combined Financial Statements (continued)
A. Nature of Activities and Basis of Presentation (continued)
Affiliate Debt
A summary of the Company’s affiliate debt arrangements at December 31, 2011 and January 1, 2011 and related party interest expense are shown below:
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Interest Rate
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2011
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2010
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Affiliate notes payable due 2013
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0.0% – 7.2% | $ | 58.8 | $ | 77.8 | |||||||
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Affiliate notes payable due 2015
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10.8% | 319.9 | 395.4 | |||||||||
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Affiliate notes payable on demand
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2.0% | 33.0 | 33.0 | |||||||||
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Total affiliate debt, including current maturities
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411.7 | 506.2 | ||||||||||
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Less: affiliate notes payable on demand classified as current
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(33.0 | ) | (33.0 | ) | ||||||||
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Less: principle payments due within 1 year for other notes payable
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(105.0 | ) | (99.3 | ) | ||||||||
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Long-term related party debt
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$ | 273.7 | $ | 373.9 | ||||||||
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Interest expense – affiliate, net
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$ | 42.7 | $ | 41.9 | ||||||||
Affiliate Notes Receivable
The Company has a variety of notes receivable agreements with affiliates of the Parent. These loans bear interest at fixed rates ranging from 0.9% to 2.5% and have maturity dates ranging from 2013 through 2015. Affiliate notes receivable were $33.5 million and $21.6 million at December 31, 2011 and January 1, 2011, respectively.
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B. Significant Accounting Policies
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Foreign Currency
For foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates; income and expenses are translated using weighted-average exchange rates. Translation adjustments are reported in a separate component of business equity and exchange gains and losses on transactions are included in earnings.
9
The HHI Group
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B. Significant Accounting Policies (continued)
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Cash Equivalents
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Highly liquid investments with original maturities of three months or less are considered cash equivalents.
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Accounts Receivable
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Trade receivables are stated at gross invoice amount less discounts, other allowances and provision for uncollectible accounts.
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Allowance for Doubtful Accounts
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The Company estimates its allowance for doubtful accounts using two methods. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.
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Inventories
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Certain U.S. inventories are valued at the lower of Last-In First-Out (“LIFO”) cost or market because the Company believes it results in better matching of costs and revenues. Other inventories are valued at the lower of First-In, First-Out (“FIFO”) cost or market primarily because LIFO is not permitted for statutory reporting outside the U.S. See Note D, Inventories, for a quantification of the LIFO impact on inventory valuation.
10
The HHI Group
Notes to Combined Financial Statements (continued)
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B. Significant Accounting Policies (continued)
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Property, Plant and Equipment
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The Company generally values property, plant and equipment, including capitalized software, at historical cost less accumulated depreciation and amortization. Costs related to maintenance and repairs which do not prolong the assets useful life are expensed as incurred. Depreciation and amortization are provided using straight-line methods over the estimated useful lives of the assets as follows:
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Useful Life (Years)
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Land improvements
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10 – 20
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Buildings
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40
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Machinery and equipment
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3 – 15
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Computer software
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3 – 5
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Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of the lease.
The Company reports depreciation and amortization of property, plant and equipment in cost of sales and selling, general and administrative expenses (“SG&A”) based on the nature of the underlying assets. Depreciation and amortization related to the production of inventory and delivery of services are recorded in cost of sales. Depreciation and amortization related to distribution center activities, selling and support functions are reported in SG&A.
The Company assesses its long-lived assets for impairment when indicators that the carrying values may not be recoverable are present. In assessing long-lived assets for impairment, the Company groups its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are generated (“asset group”) and estimates the undiscounted future cash flows that are directly associated with and expected to be generated from the use of and eventual disposition of the asset group. If the carrying value is greater than the undiscounted cash flows, an impairment loss must be determined and the asset group is written down to fair value. The impairment loss is quantified by comparing the carrying amount of the asset group to the estimated fair value, which is determined using weighted-average discounted cash flows that consider various possible outcomes for the disposition of the asset group.
11
The HHI Group
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B. Significant Accounting Policies (continued)
|
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Goodwill and Intangible Assets
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Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are tested for impairment annually during the third quarter, and at any time when events suggest an impairment more likely than not has occurred. To assess goodwill for impairment, the Company determines the fair value of its reporting units, which are primarily determined using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including future growth rates, discount factors and tax rates. In the event the carrying value of a reporting unit exceeded its fair value, an impairment loss would be recognized to the extent the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of the goodwill.
Indefinite-lived intangible asset carrying amounts are tested for impairment by comparing to current fair market value, usually determined by the estimated cost to lease the asset from third parties. Intangible assets with definite lives are amortized over their estimated useful lives generally using an accelerated method. Under this accelerated method, intangible assets are amortized reflecting the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. If the carrying value exceeds the total undiscounted future cash flows, a discounted cash flow analysis is performed to determine the fair value of the asset. If the carrying value of the asset were to exceed the fair value, it would be written down to fair value. No goodwill or other intangible asset impairments were recorded during 2011 or 2010.
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Interest Expense
|
The Combined Statements of Operations included an allocation of $4.5 million of interest expense associated with the Parent Company’s junior subordinated debt issued by The Stanley Works on November 22, 2005. The outstanding junior subordinated debt was paid by the Parent in December 2010. The debt has not been reflected in the Combined Financial Statements as the Company did not assume the debt nor has the Company guaranteed or pledged its assets as collateral for the debt.
12
The HHI Group
Notes to Combined Financial Statements (continued)
|
B. Significant Accounting Policies (continued)
|
|
Financial Instruments
|
The Company participates in the Parent’s centralized hedging functions which are primarily designed to minimize exposure on foreign currency risk. These hedging instruments are recorded in the financial statements of the Parent and as such, the effects of such hedging instruments are not reflected in the Combined Statements of Operations or Combined Balance Sheets. In 2010, HHI employed derivative financial instruments to manage risks, specifically commodity prices, which were not used for trading or speculative purposes. The Company recognizes these derivative instruments in the Combined Balance Sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in business equity as a component of other comprehensive income, depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Changes in the fair value of derivatives accounted for as fair value hedges are recorded in earnings in the same caption as the changes in the fair value of the hedged items. Gains and losses on derivatives designated as cash flow hedges, to the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in other comprehensive income would generally be recognized in earnings.
|
Stock Based Compensation
|
Certain employees of the Company have historically participated in the stock-based compensation plans of the Parent. The plans provide for discretionary grants of stock options, restricted stock units, and other stock-based awards. All awards granted under the plan consist of the Parent’s common shares. As such, all related equity account balances remained at the Parent, with only the allocated expense for the awards provided to Company employees, as well as an allocation of expenses related to the Parent’s corporate employees who participate in the plan, being recorded in the Combined Financial Statements.
Stock options are granted at the fair market value of the Parent’s stock on the date of grant and have a 10-year term. Compensation cost relating to stock-based compensation grants is recognized on a straight-line basis over the vesting period, which is generally four years.
13
The HHI Group
|
B. Significant Accounting Policies (continued)
|
|
Revenue Recognition
|
The Company’s revenues result from the sale of tangible products, where revenue is recognized when the earnings process is complete, collectability is reasonably assured, and the risks and rewards of ownership have transferred to the customer, which generally occurs upon shipment of the finished product, but sometimes is upon delivery to customer facilities.
Provisions for customer volume rebates, product returns, discounts and allowances are recorded as a reduction of revenue in the same period the related sales are recorded. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is an identifiable benefit and evidence of the fair value of the advertising, in which case the expense is classified as SG&A.
|
Cost of Sales and Selling, General and Administrative
|
Cost of sales includes the cost of products and services provided reflecting costs of manufacturing and preparing the product for sale. These costs include expenses to acquire and manufacture products to the point that they are allocable to be sold to customers. Cost of sales is primarily comprised of inbound freight, direct materials, direct labor as well as overhead which includes indirect labor, facility and equipment costs. Cost of sales also includes quality control, procurement and material receiving costs as well as internal transfer costs. SG&A costs include the cost of selling products as well as administrative function costs. These expenses generally represent the cost of selling and distributing the products once they are available for sale and primarily include salaries and commissions of the Company’s sales force, distribution costs, notably salaries and facility costs, as well as administrative expenses for certain support functions and related overhead.
|
Advertising Costs
|
Television advertising is expensed the first time the advertisement airs, whereas other advertising is expensed as incurred. Advertising costs are classified in SG&A and amounted to $15.8 million in 2011 and $15.6 million in 2010. Expense pertaining to cooperative advertising with customers reported as a reduction of net sales was $52.0 million in 2011 and $60.0 million in 2010.
14
The HHI Group
|
B. Significant Accounting Policies (continued)
|
|
Sales Taxes
|
Sales and value added taxes collected from customers and remitted to governmental authorities are excluded from Net sales reported in the Combined Statements of Operations.
|
Shipping and Handling Costs
|
The Company generally does not bill customers for freight. Shipping and handling costs associated with inbound freight are reported in cost of sales. Shipping costs associated with outbound freight are reported as a reduction of net sales and amounted to $24.6 million and $23.5 million in 2011 and 2010, respectively. Distribution costs are classified as SG&A and amounted to $35.7 million and $32.4 million in 2011 and 2010.
|
Postretirement Defined Benefit Plan
|
For Company-sponsored plans, the Company uses the corridor approach to determine expense recognition for each defined benefit pension and other postretirement plan. The corridor approach defers actuarial gains and losses resulting from variances between actual and expected results (based on economic estimates or actuarial assumptions) and amortizes them over future periods. For 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. For ongoing, active plans, the amount in excess of the corridor is amortized on a straight-line basis over the average remaining service period for active plan participants. For plans with primarily inactive participants, the amount in excess of the corridor is amortized on a straight-line basis over the average remaining life expectancy of inactive plan participants.
Income Taxes
The Company’s operations are included in separate income tax returns filed with the appropriate taxing jurisdictions, except for U.S. federal and certain state and foreign jurisdictions in which the Company’s operations are included in the income tax returns of the Parent or an affiliate.
15
The HHI Group
Notes to Combined Financial Statements (continued)
|
B. Significant Accounting Policies (continued)
|
The provision for income taxes is computed as if the Company filed on a combined stand-alone or separate tax return basis, as applicable. The provision for income taxes does not reflect the Company’s inclusion in the tax returns of the Parent or an affiliate. It also does not reflect certain actual tax efficiencies realized by the Parent in its combined tax returns that include the Company, due to legal structures it employs outside the Company. Certain income taxes of the Company are paid by the Parent or an affiliate on behalf of the Company. The payment of income taxes by the Parent or affiliate on behalf of the Company is recorded within Parent Company’s net investment and accumulated earnings on the Combined Balance Sheets.
Deferred income taxes and related tax expense have been recorded by applying the asset and liability approach to the Company as if it was a separate taxpayer. Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the Combined Financial Statements. Deferred tax liabilities and assets are determined based on the differences between the book values and the tax bases of the particular assets and liabilities, using enacted tax rates and laws in effect for the years in which the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that a portion of the deferred tax asset balance will not be realized.
The Company records uncertain tax positions in accordance with ASC 740 which requires a two step process, first management determines whether it is more likely than not that a tax position will be sustained based on the technical merits of the position and second, for those tax positions that meet the more likely than not threshold, management recognizes the largest amount of the tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related taxing authority. The Company maintains an accounting policy of recording interest and penalties on uncertain tax positions as a component of the income tax expense in the Combined Statements of Operations.
|
Subsequent Events
|
The Company has evaluated all subsequent events through May 21, 2012, the date the financial statements were available to be issued.
16
The HHI Group
Notes to Combined Financial Statements (continued)
|
B. Significant Accounting Policies (continued)
|
|
New Accounting Standards
|
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220).” This ASU revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Effective January 1, 2012, the Company will adopt the requirements of this ASU.
In September 2011, the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment (revised standard).” The revised standard is intended to reduce the costs and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company will consider this new guidance as it conducts its annual goodwill impairment testing in 2012.
|
C. Accounts Receivable
|
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Gross accounts receivable
|
$ | 110.2 | $ | 94.6 | ||||
|
Allowance for doubtful accounts
|
(2.1 | ) | (1.5 | ) | ||||
|
Accounts receivable, net
|
$ | 108.1 | $ | 93.1 | ||||
Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses.
The Company was part of the Parent’s accounts receivable sale program in fiscal 2010 and 2011. According to the terms of that program, the Parent is required to sell certain of its trade accounts receivables at fair value to a wholly owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS”). The BRS, in turn, must sell such receivables to a third-party financial institution (“Purchaser”) for cash and a deferred purchase price receivable. The Purchaser’s
17
The HHI Group
Notes to Combined Financial Statements (continued)
|
C. Accounts Receivable (continued)
|
maximum cash investment in the receivables at any time is $100.0 million. The purpose of the program is to provide liquidity to the Parent. These transfers are accounted for as sales under ASC 860 “Transfers and Servicing”. Receivables are derecognized from the Combined Balance Sheets when the BRS sells those receivables to the Purchaser. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred purchase price receivable. At December 31, 2011 and January 1, 2011, the Parent, as well as the Company, did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.
At January 1, 2011, $2.6 million of net receivables were derecognized, with no amounts being derecognized at December 31, 2011, as the Company ended its participation in the program during the year. All cash flows under the program are reported as a component of changes in accounts receivable within operating activities in the Combined Statements of Cash Flows since all the cash from the Purchaser is either received upon the initial sale of the receivable; or from the ultimate collection of the underlying receivables and the underlying receivables are not subject to significant risks, other than credit risk, given their short-term nature.
|
D. Inventories
|
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Finished products
|
$ | 130.2 | $ | 115.0 | ||||
|
Work in process
|
13.5 | 10.6 | ||||||
|
Raw materials
|
27.5 | 32.5 | ||||||
|
Total
|
$ | 171.2 | $ | 158.1 | ||||
Net inventories in the amount of $78.0 million at December 31, 2011 and $74.8 million at January 1, 2011 were valued at the lower of LIFO cost or market. If the LIFO method had not been used, inventories would have been $14.6 million higher than reported at December 31, 2011 and $11.9 million higher than reported at January 1, 2011.
18
The HHI Group
Notes to Combined Financial Statements (continued)
|
E. Property, Plant and Equipment
|
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Land
|
$ | 6.7 | $ | 5.9 | ||||
|
Land improvements
|
6.2 | 6.0 | ||||||
|
Buildings
|
50.2 | 32.6 | ||||||
|
Leasehold improvements
|
11.3 | 11.6 | ||||||
|
Machinery and equipment
|
116.2 | 105.2 | ||||||
|
Computer software
|
14.4 | 12.1 | ||||||
|
Property, plant and equipment, gross
|
205.0 | 173.4 | ||||||
|
|
||||||||
|
Less: accumulated depreciation and amortization
|
(94.3 | ) | (66.1 | ) | ||||
|
Property, plant and equipment, net
|
$ | 110.7 | $ | 107.3 | ||||
Depreciation and amortization expense associated with property, plant and equipment was $26.2 million and $28.9 million for the year ended December 31, 2011 and January 1, 2011, respectively.
|
F. Merger
|
As more fully described in Note A Basis of Presentation, the Merger occurred on March 12, 2010. The fair value of consideration transferred by the Parent for HHI acquired from Black & Decker was $798.5 million, inclusive of Black & Decker shares outstanding and employee related equity awards. The consideration transferred was treated as a capital contribution to the Company in the Combined Financial Statements and included as part of the net transfers to the Parent in the Statement of Changes in Business Equity. The transaction was accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed be recognized at their fair values as of the date of acquisition. The purchase price allocation for the acquired businesses was completed in 2010.
19
The HHI Group
|
F. Merger (continued)
|
HHI sells residential and commercial hardware, including door knobs and handles, locksets and faucets. The Merger complemented the Company’s existing hardware product offerings and further diversified the Company’s product lines. The following table summarizes the fair values of major assets acquired and liabilities of HHI assumed as part of the Merger:
|
(In Millions)
|
||||
|
Cash and cash equivalents
|
$ | 9.2 | ||
|
Accounts receivable, net
|
73.4 | |||
|
Inventories, net
|
142.3 | |||
|
Prepaid expenses and other current assets
|
11.0 | |||
|
Property, plant and equipment
|
82.2 | |||
|
Trade names
|
108.0 | |||
|
Customer relationships
|
43.0 | |||
|
Patents and technology
|
25.0 | |||
|
Other assets
|
0.3 | |||
|
Accounts payable
|
(33.4 | ) | ||
|
Accrued liabilities
|
(38.6 | ) | ||
|
Deferred tax liabilities
|
(75.6 | ) | ||
|
Other long term liabilities
|
(52.7 | ) | ||
|
Total identifiable net assets
|
294.1 | |||
|
|
||||
|
Goodwill
|
504.4 | |||
|
Total consideration transferred by the Parent and contributed to the Company
|
$ | 798.5 | ||
As of the merger date, the expected fair value of accounts receivable approximated the historical cost. The gross contractual receivable was $76.3 million, of which $2.9 million was not expected to be collectible. Inventory includes a $31.3 million fair value adjustment, which was expensed through cost of sales during 2010 as the corresponding inventory was sold.
The weighted-average useful lives assigned to the finite-lived intangible assets are trade names – 15 years; customer relationships – 12 years; and patents and technology – 10 years. Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and
20
The HHI Group
|
F. Merger (continued)
|
represents the expected cost synergies of the combined business, assembled workforce, and the going concern nature of HHI. It is estimated that $19.9 million of goodwill, relating to HHI’s pre-merger historical tax basis, will be deductible for tax purposes.
|
Actual and Pro-Forma Impact of the Merger
|
The Company’s Combined Statements of Operations for the fiscal year ending January 1, 2011 includes $662.8 million in net sales and $10.4 million in net income relating to HHI.
The following table presents supplemental pro-forma information as if the Merger had occurred on January 3, 2010. This pro-forma information includes merger related charges for the period. The pro-forma results are not necessarily indicative of what the Company’s combined net earnings would have been had the Company completed the Merger on January 3, 2010. In addition, the pro-forma results do not reflect the expected realization of any cost savings associated with the Merger.
|
2010
|
||||
|
(In Millions)
|
||||
|
|
||||
|
Net sales
|
$ | 1,063.2 | ||
|
Net earnings
|
1.4 | |||
The 2010 pro-forma results were calculated by combining the results of the HHI Group with the HHI business’s stand-alone results from January 3, 2010 through March 12, 2010. The following adjustments were made to account for certain costs which would have been incurred during this pre-Merger period.
|
|
—
|
Elimination of the historical pre-Merger intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the Merger that would have been incurred from January 3, 2010 to March 12, 2010.
|
|
|
—
|
Additional depreciation related to property, plant and equipment fair value adjustments that would have been expensed from January 3, 2010 to March 12, 2010.
|
|
|
—
|
The modifications above were adjusted for the applicable tax impact.
|
21
The HHI Group
|
G. Goodwill and Intangible Assets
|
|
Goodwill
|
The changes in the carrying amount of goodwill are as follows:
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Beginning balance
|
$ | 583.3 | $ | 71.8 | ||||
|
Addition from the merger
|
– | 504.4 | ||||||
|
Foreign currency translation
|
(9.7 | ) | 7.1 | |||||
|
Ending balance
|
$ | 573.6 | $ | 583.3 | ||||
|
Intangible Assets
|
Intangible assets at December 31, 2011 and January 1, 2011 were as follows:
|
2011
|
2010
|
|||||||||||||||
|
Gross Carrying Amount
|
Accumulated Amortization
|
Gross Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
|
(In Millions)
|
||||||||||||||||
|
Amortized intangible assets – definite lives:
|
||||||||||||||||
|
Patents and technology
|
$ | 25.0 | $ | (4.5 | ) | $ | 25.0 | $ | (1.6 | ) | ||||||
|
Trade names
|
108.0 | (15.4 | ) | 108.0 | (6.7 | ) | ||||||||||
|
Customer relationships
|
65.1 | (25.2 | ) | 65.6 | (20.4 | ) | ||||||||||
|
Total
|
$ | 198.1 | $ | (45.1 | ) | $ | 198.6 | $ | (28.7 | ) | ||||||
Total indefinite-lived trade names are $18.1 million at December 31, 2011 and $18.2 million at January 1, 2011, relating to the National Hardware tradename, with the change in value due to fluctuations in currency rates. Future amortization expense in each of the next five years amounts to $17.7 million for 2012, $17.8 million for 2013, $17.2 million for 2014, $15.9 million for 2015, $14.5 million for 2016 and $69.9 million thereafter.
22
The HHI Group
|
H. Accrued Expenses
|
Accrued expenses at December 31, 2011 and January 1, 2011 were as follows:
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Payroll and related taxes
|
$ | 10.6 | $ | 11.4 | ||||
|
Customer rebates and sales returns
|
11.7 | 7.3 | ||||||
|
Accrued restructuring costs
|
7.8 | 8.9 | ||||||
|
Accrued freight
|
4.1 | 3.7 | ||||||
|
Insurance and benefits
|
5.9 | 5.1 | ||||||
|
Accrued litigation
|
5.0 | 2.5 | ||||||
|
ESOP
|
4.5 | 0.8 | ||||||
|
Warranty costs
|
4.4 | 4.3 | ||||||
|
Other
|
10.5 | 1.3 | ||||||
|
Total
|
$ | 64.5 | $ | 45.3 | ||||
I. Fair Value Measurements and Commodity Contracts
Fair Value Measurements
ASC 820 defines, establishes a consistent framework for measuring, and expands disclosure requirements about fair value. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs and significant value drivers are observable.
Level 3 – Instruments that are valued using unobservable inputs.
23
The HHI Group
Notes to Combined Financial Statements (continued)
|
I. Fair Value Measurements and Commodity Contracts (continued)
|
|
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
|
The assets and liabilities that are recorded at fair value on a recurring basis are derivative financial instruments, which are all considered Level 2 in the fair value hierarchy. The fair values of debt instruments are estimated using a discounted cash flow analysis using the Company’s marginal borrowing rates. The fair value of affiliate debt was $445.5 million and $559.1 million at December 31, 2011 and January 1, 2011, respectively.
|
Assets Recorded at Fair Value on a Nonrecurring Basis
|
The following table presents the fair value and hierarchy level used in determining the fair value of this asset group (in millions):
|
|
Carrying Value January 1,
2011
|
Level 1
|
Level 2
|
Level 3
|
Impairment
|
|||||||||||||||
|
|
||||||||||||||||||||
|
Long-lived assets held and used
|
$ | 20.8 | $ | – | $ | – | $ | 20.8 | $ | (0.9 | ) | |||||||||
As described in Note N, Restructuring and Asset Impairments, during 2010 the Company recorded a $0.9 million asset impairment relating to certain U.S. manufacturing operations with a net book value of $21.7 million. These fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method, which are classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows within these analyses was based on our most recent operational budgets, long-range strategic plans and other estimates.
|
Commodity Contracts
|
In conjunction with the Merger, commodity contracts to purchase 7.4 million pounds of zinc and copper were assumed. These contracts were used to manage price risks related to material purchases used in the manufacturing process. The objective of the contracts was to reduce the variability of cash flows associated with the forecasted purchase of these commodities. During 2010 all assumed commodity contracts either matured or were terminated. No notional amounts
24
The HHI Group
|
I. Fair Value Measurements and Commodity Contracts (continued)
|
were outstanding as of December 31, 2011 or January 1, 2011. The income statement impacts related to commodity contracts not designated as hedging instruments were as follows (in millions):
|
Income Statement
Classification
|
2010 Loss
Recorded in Income on
Derivative
|
||||
|
|
|||||
|
Commodity Contracts
|
Other, net
|
$ | 1.3 | ||
|
J. Stock Based Compensation
|
Stock Options: For the year ended December 31, 2011, there were 28,000 options in the common stock of the Parent granted to employees of the Company with 204,074 options outstanding at year end. Stock option expense recognized for the year ended December 31, 2011 was $0.3 million. Expense was recognized based on the fair value of the option awards granted to participating employees of the Company. For the year ended January 1, 2011, there were 35,250 options granted to employees of the Company, 209,466 options outstanding at year end and stock option expense recognized of $0.2 million. As of December 31, 2011, unrecognized compensation expense amounted to $1.0 million.
Employee Stock Purchase Plan: The Employee Stock Purchase Plan (“ESPP”) of the Parent enables eligible employees in the United States and Canada to subscribe at any time to purchase shares of common stock on a monthly basis at the lower of 85% of the fair market value of the shares on the grant date ($53.00 per share for fiscal year 2011 purchases) or 85% of the fair market value of the shares on the last business day of each month. ESPP compensation cost is recognized ratably over the one-year term based on actual employee stock purchases under the plan.
During 2011 and 2010, 12,092 shares and 5,538 shares were issued to employees of the Company at average prices of $50.85 and $37.53 per share, respectively. Total compensation expense recognized by the Company amounted to $0.3 million and $0.1 million for 2011 and 2010, respectively.
25
The HHI Group
Notes to Combined Financial Statements (continued)
|
J. Stock Based Compensation (continued)
|
Restricted Share Units: Compensation cost for restricted share units (“RSU”) granted to employees of the Company is recognized ratably over the vesting term, which varies but is generally 4 years. RSU grants totaled 9,336 shares and 12,753 shares in 2011 and 2010, respectively. The weighted-average grant date fair value of the RSU’s granted in 2011 and 2010 were $61.79 and $59.99, respectively. Total compensation expense recognized for RSU’s amounted to $0.2 million and $0.1 million for 2011 and 2010, respectively. As of December 31, 2011 unrecognized compensation cost amounted to $1.0 million.
Long-Term Performance Awards: The Parent has granted Long Term Performance Awards (“LTIPs”) under its 1997, 2001 and 2009 Long Term Incentive Plans to senior management employees of the Company for achieving Parent performance measures. Awards are payable in shares of the Parent common stock, which may be restricted if the employee has not achieved certain stock ownership levels, and generally no award is made if the employee terminates employment prior to the payout date.
Working capital incentive plan: In 2010, the Parent initiated a bonus program under its 2009 Long Term Incentive Plan that provides executives the opportunity to receive stock in the event certain working capital turn objectives are achieved by June 2013 and are sustained for a period of at least six months. The ultimate issuances of shares, if any, will be determined based on achievement of objectives during the performance period. A single employee of the Company was issued 2,742 shares under this plan in 2010.
Other Long-Term Performance Awards: A potential maximum of 5,484 LTIP grants were made in 2010 and a potential maximum of 3,851 LTIP grants were made in 2011 to an employee of the Company. Each grant has separate annual performance goals for each year within the respective three year performance period associated with each award. Parent earnings per share and return on capital employed represent 75% of the share payout of each grant, with the remaining 25% a market-based element, measuring the Parent’s common stock return relative to peers over the performance period. The ultimate delivery of shares will occur in 2013 and 2014 for the 2010 and 2011 grants, respectively. Total payouts are based on actual performance in relation to these goals. Total compensation expense recognized for LTIP awards amounted to $0.1 million in both 2011 and 2010.
26
The HHI Group
Notes to Combined Financial Statements (continued)
|
K. Accumulated Other Comprehensive Income
|
Accumulated other comprehensive income at the end of each fiscal year was as follows:
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Currency translation adjustment
|
$ | 36.3 | $ | 49.5 | ||||
|
Pension loss, net of tax
|
(12.0 | ) | (9.9 | ) | ||||
|
Accumulated other comprehensive income
|
$ | 24.3 | $ | 39.6 | ||||
|
L. Employee Benefit Plans
|
|
Employee Stock Ownership Plan (“ESOP”)
|
Most of the Company’s U.S. employees, including Black & Decker employees beginning on January 1, 2011, are allowed to participate in a tax-deferred 401(k) savings plan administered and sponsored by the Parent. Eligible employees may contribute from 1% to 25% of their eligible compensation to a tax-deferred 401(k) savings plan, subject to restrictions under tax laws. Employees generally direct the investment of their own contributions into various investment funds. In 2011 and 2010, an employer match benefit was provided under the plan equal to one-half of each employee’s tax-deferred contribution up to the first 7% of their compensation. Participants direct the entire employer match benefit such that no participant is required to hold the Parent’s common stock in their 401(k) account. The Company’s employer match benefit totaled $2.1 million and $0.3 million in 2011 and 2010, respectively. The increase is attributable to the HHI integration into the ESOP in 2011.
In addition, approximately 1,500 of the Company’s U.S. salaried and non-union hourly employees are eligible to receive a non-contributory benefit under the Core benefit plan. Core benefit allocations range from 2% to 6% of eligible employee compensation based on age. Approximately 1,157 U.S. employees also receive a Core transition benefit, allocations of which range from 1% – 3% of eligible compensation based on age and date of hire. Approximately 207 U.S. employees are eligible to receive an additional average 1.3% contribution actuarially designed to replace previously curtailed pension benefits. The Company’s allocations for benefits earned under the Core plan were $4.5 million in 2011 and $0.8 million in 2010. Assets held in participant Core accounts are invested in target date retirement funds which have an age-based allocation of investments. The increase is attributable to the HHI integration into the Core plan in 2011.
27
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
The Parent accounts for the ESOP under ASC 718-40, “Compensation – Stock Compensation – Employee Stock Ownership Plans”. Net ESOP activity recognized is comprised of the cost basis of shares released, the cost of the aforementioned Core and 401(k) match defined contribution benefits, less the fair value of shares released and dividends on unallocated ESOP shares. The Company’s net ESOP activity resulted in expense of $3.7 million and $1.1 million in 2011 and 2010, respectively. The 401(k) employer match and Core benefit elements of net ESOP expense represent the actual benefits earned by the Company’s participants in each year, while the cost basis of shares released, the fair value of shares released and the dividends on unallocated shares elements are based on the proportion of the Company’s actual earned benefits in relation to the Parent’s ESOP total earned benefits. The increase in net ESOP expense in 2011 is related to the merger of a portion of the U.S. Black & Decker 401(k) defined contribution plan into the ESOP and extending the Core benefit to these employees. ESOP expense is affected by the market value of the Parent’s common stock on the monthly dates when shares are released. The market value of shares released averaged $68.12 per share in 2011 and $58.56 per share in 2010.
|
Parent Sponsored Pension Plans
|
The Company participates in certain U.S. and Canadian plans sponsored solely by the Parent. All participants in the plans are employees or former employees of the Parent, either directly or through its subsidiaries. The primary U.S. plan was curtailed in 2010 and the other plans are generally also curtailed with no additional service benefits to be earned by participants. The Company’s expense associated with the parent sponsored plans was $3.2 million and $5.0 million for 2011 and 2010, respectively.
|
Defined Contribution Plans
|
In addition to the ESOP, various other defined contribution plans are sponsored worldwide, including a tax-deferred 401(k) savings plan covering substantially all Black & Decker U.S. employees. The expense for such defined contribution plans, aside from the earlier discussed ESOP, was $1.5 million and $2.4 million for 2011 and 2010, respectively. The decrease in other defined contribution plan expense in 2011 relative to 2010 pertains to the merger of the Black & Decker U.S. defined contribution plan into the ESOP.
28
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
|
Defined Benefit Plans
|
Pension and other benefit plans – The Company sponsors pension plans covering 284 domestic employees and 3,970 foreign employees (primarily in Mexico). Benefits are generally based on salary and years of service, except for U.S. collective bargaining employees whose benefits are based on a stated amount for each year of service.
The components of net periodic pension expense are as follows:
|
U.S. Plan
|
Non-U.S. Plans
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(In Millions)
|
||||||||||||||||
|
|
||||||||||||||||
|
Service cost
|
$ | 0.2 | $ | 0.3 | $ | 0.7 | $ | 0.4 | ||||||||
|
Interest cost
|
3.4 | 3.5 | 0.5 | 0.4 | ||||||||||||
|
Expected return on plan assets
|
(3.4 | ) | (3.7 | ) | – | – | ||||||||||
|
Amortization of actuarial loss
|
0.3 | 0.7 | 0.1 | – | ||||||||||||
|
Net periodic pension expense
|
$ | 0.5 | $ | 0.8 | $ | 1.3 | $ | 0.8 | ||||||||
The Company provides medical and dental fixed subsidy benefits for certain retired employees in the United States. Approximately 27 participants are covered under this plan. Net periodic post-retirement benefit expense was comprised of the following elements:
|
Other Benefit Plan
|
||||||||
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
|
||||||||
|
Interest cost
|
$ | 0.2 | $ | 0.2 | ||||
|
Prior service credit amortization
|
(0.2 | ) | (0.1 | ) | ||||
|
Net periodic post-retirement benefit (income) expense
|
$ | – | $ | 0.1 | ||||
29
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
Changes in plan assets and benefit obligations recognized in other comprehensive income in 2011 are as follows:
|
2011
|
||||
|
(In Millions)
|
||||
|
|
||||
|
Current year actuarial loss
|
$ | 3.1 | ||
|
Amortization of actuarial loss
|
(0.2 | ) | ||
|
Currency
|
(0.1 | ) | ||
|
Total loss recognized in other comprehensive income (pre-tax)
|
$ | 2.8 | ||
The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit costs during 2012 total $0.4 million, representing the amortization of actuarial losses.
30
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
The changes in the pension and other post-retirement benefit obligations, fair value of plan assets, as well as amounts recognized in the Combined Balance Sheets, are shown below (in millions):
|
U.S. Plan
|
Non-U.S. Plans
|
Other Benefits
|
||||||||||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
|
Change in benefit obligation
|
||||||||||||||||||||||||
|
Benefit obligation at end of prior year
|
$ | 67.3 | $ | 63.3 | $ | 7.2 | $ | 1.3 | $ | 4.4 | $ | 4.7 | ||||||||||||
|
Service cost
|
0.2 | 0.3 | 0.7 | 0.4 | – | – | ||||||||||||||||||
|
Interest cost
|
3.4 | 3.5 | 0.5 | 0.4 | 0.2 | 0.2 | ||||||||||||||||||
|
Settlements/curtailments
|
– | – | (0.1 | ) | – | – | – | |||||||||||||||||
|
Actuarial (gain) loss
|
6.8 | 3.9 | (1.4 | ) | 1.6 | (0.7 | ) | – | ||||||||||||||||
|
Foreign currency exchange rates
|
– | – | (0.7 | ) | 0.2 | – | – | |||||||||||||||||
|
Acquisitions, divestitures and other
|
(0.2 | ) | – | – | 3.7 | – | – | |||||||||||||||||
|
Benefits paid
|
(3.5 | ) | (3.7 | ) | (0.5 | ) | (0.4 | ) | (0.4 | ) | (0.5 | ) | ||||||||||||
|
Benefit obligation at end of year
|
$ | 74.0 | $ | 67.3 | $ | 5.7 | $ | 7.2 | $ | 3.5 | $ | 4.4 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Change in plan assets
|
||||||||||||||||||||||||
|
Fair value of plan assets at end of prior year
|
$ | 53.3 | $ | 50.8 | $ | – | $ | – | $ | – | $ | – | ||||||||||||
|
Actual return on plan assets
|
5.1 | 6.2 | – | – | – | – | ||||||||||||||||||
|
Employer contributions
|
0.5 | – | 0.5 | 0.4 | 0.4 | 0.5 | ||||||||||||||||||
|
Acquisitions, divestitures and other
|
(0.2 | ) | – | – | – | – | – | |||||||||||||||||
|
Benefits paid
|
(3.5 | ) | (3.7 | ) | (0.5 | ) | (0.4 | ) | (0.4 | ) | (0.5 | ) | ||||||||||||
|
Fair value of plan assets at end of plan year
|
55.2 | 53.3 | – | – | – | – | ||||||||||||||||||
|
Funded status – assets less the benefit obligation
|
(18.8 | ) | (14.0 | ) | (5.7 | ) | (7.2 | ) | (3.5 | ) | (4.4 | ) | ||||||||||||
|
Unrecognized net actuarial loss (gain)
|
20.2 | 15.4 | 0.2 | 1.8 | (2.2 | ) | (1.7 | ) | ||||||||||||||||
|
Net amount recognized
|
$ | 1.4 | $ | 1.4 | $ | (5.5 | ) | $ | (5.4 | ) | $ | (5.7 | ) | $ | (6.1 | ) | ||||||||
|
|
||||||||||||||||||||||||
|
Amounts recognized in the Combined Balance Sheets
|
||||||||||||||||||||||||
|
Current benefit liability
|
$ | – | $ | – | $ | (0.2 | ) | $ | (0.2 | ) | $ | (0.5 | ) | $ | (0.6 | ) | ||||||||
|
Non-current benefit liability
|
(18.8 | ) | (14.0 | ) | (5.5 | ) | (7.0 | ) | (3.0 | ) | (3.8 | ) | ||||||||||||
|
Net liability recognized
|
$ | (18.8 | ) | $ | (14.0 | ) | $ | (5.7 | ) | $ | (7.2 | ) | $ | (3.5 | ) | $ | (4.4 | ) | ||||||
|
Accumulated other comprehensive loss (gain) (pre-tax):
|
||||||||||||||||||||||||
|
Actuarial loss (gain)
|
$ | 20.2 | $ | 15.4 | $ | 0.2 | $ | 1.8 | $ | (2.2 | ) | $ | (1.7 | ) | ||||||||||
|
Net amount recognized
|
$ | 1.4 | $ | 1.4 | $ | (5.5 | ) | $ | (5.4 | ) | (5.7 | ) | $ | (6.1 | ) | |||||||||
The increase in the U.S. projected benefit obligation from actuarial losses in 2011 primarily pertains to the 75 basis point decline in the discount rate.
31
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
The accumulated benefit obligation for all defined benefit pension plans was $77.2 million at December 31, 2011 and $71.1 million at January 1, 2011. Information regarding pension plans in which the accumulated benefit obligations exceed plan assets and pension plans in which projected benefit obligations (inclusive of anticipated future compensation increases) exceed plan assets follows:
|
U.S. Plan
|
Non-U.S. Plans
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(In Millions)
|
||||||||||||||||
|
|
||||||||||||||||
|
Projected benefit obligation
|
$ | 74.0 | $ | 67.3 | $ | 5.7 | $ | 7.2 | ||||||||
|
Accumulated benefit obligation
|
$ | 74.0 | $ | 67.3 | $ | 3.2 | $ | 3.8 | ||||||||
|
Fair value of plan assets
|
$ | 55.2 | $ | 53.3 | $ | – | $ | – | ||||||||
The major assumptions used in valuing pension and post-retirement plan obligations and net costs were as follows:
|
Pension Benefits
|
Other Benefits
|
|||||||||||||||||||||||
|
U.S. Plans
|
Non-U.S. Plans
|
U.S. Plan
|
||||||||||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||
|
Weighted-average assumptions used to determine benefit obligations at year end
|
||||||||||||||||||||||||
|
Discount rate
|
4.50 | % | 5.25 | % | 8.75 | % | 7.25 | % | 4.00 | % | 5.00 | % | ||||||||||||
|
Rate of compensation increase
|
– | % | – | % | 4.75 | % | 4.75 | % | – | % | – | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
Weighted-average assumptions used to determine net periodic benefit cost
|
||||||||||||||||||||||||
|
Discount rate
|
5.25 | % | 5.75 | % | 7.25 | % | 9.00 | % | 5.00 | % | 5.50 | % | ||||||||||||
|
Rate of compensation increase
|
– | % | – | % | 4.75 | % | 4.75 | % | – | % | – | % | ||||||||||||
|
Expected return on plan assets
|
6.75 | % | 7.50 | % | – | % | – | % | – | % | – | % | ||||||||||||
The expected rate of return on plan assets is determined considering the returns projected for the various asset classes and the relative weighting for each asset class considering the target asset allocations. In addition the Company considers historical performance, the recommendations from outside actuaries and other data in developing the return assumption. The Company expects to use a weighted-average rate of return assumption of 6.5% for the U.S. plan, in the determination of fiscal 2012 net periodic benefit expense.
32
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
|
Pension Plan Assets
|
Plan assets are invested in equity securities, government and corporate bonds and other fixed income securities, and money market instruments. The Company’s worldwide asset allocations at December 31, 2011 and January 1, 2011 by asset category and the level of the valuation inputs within the fair value hierarchy established by ASC 820 are as follows (in millions):
|
2011
|
Level 1
|
Level 2
|
||||||||||
|
Asset Category
|
||||||||||||
|
Cash and cash equivalents
|
$ | 0.6 | $ | 0.2 | $ | 0.4 | ||||||
|
Equity securities
|
||||||||||||
|
U.S. equity securities
|
16.3 | 2.8 | 13.5 | |||||||||
|
Foreign equity securities
|
9.0 | 9.0 | – | |||||||||
|
Fixed income securities
|
||||||||||||
|
Government securities
|
15.3 | 14.4 | 0.9 | |||||||||
|
Corporate securities
|
13.7 | – | 13.7 | |||||||||
|
Other
|
0.3 | – | 0.3 | |||||||||
|
Total
|
$ | 55.2 | $ | 26.4 | $ | 28.8 | ||||||
|
2010
|
Level 1
|
Level 2
|
||||||||||
|
Asset Category
|
||||||||||||
|
Cash and cash equivalents
|
$ | 12.8 | $ | 5.4 | $ | 7.4 | ||||||
|
Equity securities
|
||||||||||||
|
U.S. equity securities
|
21.9 | 3.7 | 18.2 | |||||||||
|
Foreign equity securities
|
11.2 | 11.2 | – | |||||||||
|
Fixed income securities
|
||||||||||||
|
Government securities
|
3.2 | 3.0 | 0.2 | |||||||||
|
Corporate securities
|
1.6 | – | 1.6 | |||||||||
|
Other
|
2.6 | – | 2.6 | |||||||||
|
Total
|
$ | 53.3 | $ | 23.3 | $ | 30.0 | ||||||
33
The HHI Group
Notes to Combined Financial Statements (continued)
|
L. Employee Benefit Plans (continued)
|
U.S. and foreign equity securities primarily consist of companies with large market capitalizations and to a lesser extent mid and small capitalization securities. Government securities primarily consist of U.S. Treasury securities and foreign government securities with de minimus default risk. Corporate fixed income securities include publicly traded U.S. and foreign investment grade and to a small extent high yield securities. Other investments include U.S. mortgage backed securities. The level 2 investments are primarily comprised of institutional mutual funds that are not publicly traded; the investments held in these mutual funds are generally level 1 publicly traded securities.
The Company’s investment strategy for pension plan assets includes diversification to minimize interest and market risks. Plan assets are rebalanced periodically to maintain target asset allocations. Currently, the Company’s target allocations include 50% in equity securities and 50% in fixed income securities. Maturities of investments are not necessarily related to the timing of expected future benefit payments, but adequate liquidity to make immediate and medium term benefit payments is ensured.
|
Contributions
|
The Company’s funding policy for its defined benefit plans is to contribute amounts determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other regulations. The Company expects to contribute approximately $3.2 million to its pension and other post-retirement benefit plans in 2012.
|
Expected Future Benefit Payments
|
Benefit payments, inclusive of amounts attributable to estimated future employee service, are expected to be paid as follows over the next 10 years:
|
Total
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Years 6-10
|
||||||||||||||||||||||
|
(In Millions)
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Future payments
|
$ | 44.7 | $ | 4.2 | $ | 4.2 | $ | 4.2 | $ | 4.2 | $ | 4.2 | $ | 23.7 | ||||||||||||||
These benefit payments will be funded through a combination of existing plan assets and amounts to be contributed in the future by the Company.
34
The HHI Group
Notes to Combined Financial Statements (continued)
|
M. Other Costs and Expenses
|
Other-net is primarily comprised of intangible asset amortization expense (See Note G Goodwill and Intangible Assets for further discussion), currency related gains or losses, and environmental expense. Research and development costs, which are classified in SG&A, were $7.9 million and $6.9 million for fiscal years 2011 and 2010, respectively.
|
N. Restructuring and Asset Impairments
|
A summary of the restructuring reserve activity from January 1, 2011 to December 31, 2011 is as follows (in millions):
|
January 1,
2011
|
Additions
|
Usage
|
December 31,
2011
|
|||||||||||||
|
2011 Actions
|
||||||||||||||||
|
Severance and related costs
|
$ | – | $ | 2.8 | $ | (0.4 | ) | $ | 2.4 | |||||||
|
Pre-2011 Actions
|
||||||||||||||||
|
Severance and related costs
|
8.9 | 0.4 | (3.9 | ) | 5.4 | |||||||||||
|
Total
|
$ | 8.9 | $ | 3.2 | $ | (4.3 | ) | $ | 7.8 | |||||||
2011 Actions: During 2011, the Company recognized $2.8 million of severance charges associated with the Merger and other cost actions initiated in the current year. The charges relate to the reduction of approximately 100 employees.
Pre-2011 Actions: For the year ended January 1, 2011 the Company initiated restructuring activities associated with the Merger, largely related to employee related actions. As of January 1, 2011, the reserve balance related to these pre-2011 actions totaled $8.9 million. Utilization of the reserve balance related to pre-2011 actions was $3.9 million in 2011. The vast majority of the remaining reserve balance of $5.4 million is expected to be utilized in 2012.
35
The HHI Group
Notes to Combined Financial Statements (continued)
|
N. Restructuring and Asset Impairments (continued)
|
A summary of the restructuring reserve activity from January 3, 2010 to January 1, 2011 is as follows (in millions):
|
January 3,
2010
|
Additions
|
Usage
|
January 1,
2011
|
|||||||||||||
|
2010 Actions
|
||||||||||||||||
|
Severance and related costs
|
$ | – | $ | 11.0 | $ | (2.1 | ) | $ | 8.9 | |||||||
|
Asset Impairment (facility closure)
|
– | 0.9 | (0.9 | ) | – | |||||||||||
|
Severance and related costs
|
– | 11.9 | (3.0 | ) | 8.9 | |||||||||||
|
Pre-2010 Actions
|
||||||||||||||||
|
Severance and related costs
|
0.2 | – | (0.2 | ) | – | |||||||||||
|
Total
|
$ | 0.2 | $ | 11.9 | $ | (3.2 | ) | $ | 8.9 | |||||||
2010 Actions: During 2010, the Company recognized $11.0 million of severance charges associated with the Merger primarily relating to the shut-down of certain U.S. manufacturing facilities and distribution centers. The charges relate to the reduction of approximately 550 employees. Additionally the Company recorded a $0.9 million asset impairment on the related facilities.
|
O. Business Segments and Geographic Areas
|
|
Business Segments
|
The Company operates as one reportable segment, inclusive of its plumbing-related products, lock and hardware products which have been aggregated consistent with the criteria in ASC 280. The Company’s operations are principally managed on a products and services basis. In accordance with ASC 280, Segment Reporting, the Company reports segment information based upon the management approach. The management approach designates the internal reporting used by the chief operating decision maker, or the CODM for making decisions about resource allocations to segments and assessing performance. The CODM allocates resources to and assesses the performance of the operating segment using information based on earnings before interest, taxes, depreciation, and amortization.
36
The HHI Group
Notes to Combined Financial Statements (continued)
|
O. Business Segments and Geographic Areas (continued)
|
|
Geographic Areas
|
Geographic net sales and long-lived assets are attributed to the geographic regions based on the geographic location of each Company subsidiary.
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
Net sales
|
||||||||
|
United States
|
$ | 743.1 | $ | 657.7 | ||||
|
Canada
|
105.3 | 107.7 | ||||||
|
Other Americas
|
91.4 | 71.2 | ||||||
|
Asia
|
35.2 | 27.6 | ||||||
|
Combined
|
$ | 975.0 | $ | 864.2 | ||||
|
|
||||||||
|
Property, plant and equipment
|
||||||||
|
United States
|
$ | 102.6 | $ | 98.5 | ||||
|
Canada
|
4.4 | 4.7 | ||||||
|
Other Americas
|
3.5 | 3.8 | ||||||
|
Asia
|
0.2 | 0.3 | ||||||
|
Combined
|
$ | 110.7 | $ | 107.3 | ||||
37
The HHI Group