Black & Decker 2011 Annual Report Download - page 45

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The assets held by the Company’s defined benefit plans are exposed to fluctuations in the market value of securities, primarily global
stocks and fixed-income securities. The funding obligations for these plans would increase in the event of adverse changes in the plan
asset values, although such funding would occur over a period of many years. In 2011, 2010 and 2009, there were $119 million, $138
million and $48 million in investment returns on pension plan assets, respectively. The Company expects funding obligations on its
defined benefit plans to be approximately $110 million in 2012. The Company employs diversified asset allocations to help mitigate
this risk. Management has worked to minimize this exposure by freezing and terminating defined benefit plans where appropriate.
The Company has access to financial resources and borrowing capabilities around the world. There are no instruments within the debt
structure that would accelerate payment requirements due to a change in credit rating.
The Company’s existing credit facilities and sources of liquidity, including operating cash flows, are considered more than adequate to
conduct business as normal. Accordingly, based on present conditions and past history, management believes it is unlikely that
operations will be materially affected by any potential deterioration of the general credit markets that may occur. The Company
believes that its strong financial position, operating cash flows, committed long-term credit facilities and borrowing capacity, and
ready access to equity markets provide the financial flexibility necessary to continue its record of annual dividend payments, to invest
in the routine needs of its businesses, to make strategic acquisitions and to fund other initiatives encompassed by its growth strategy
and maintain its strong investment grade credit ratings.
OTHER MATTERS
Employee Stock Ownership Plan As detailed in Note L, Employee Benefit Plans, of the Notes to the Consolidated Financial
Statements, the Company has an ESOP under which the ongoing U.S. Cornerstone and 401(K) defined contribution plans are funded.
Overall ESOP expense is affected by the market value of the Company’s stock on the monthly dates when shares are released, among
other factors. The Company’s net ESOP activity resulted in expense of $28.4 million in 2011, expense of $3.4 million in 2010 and
income of $8.0 million in 2009. The ESOP expense increased in 2011 compared to 2010 due to the merger of Black & Decker U.S.
defined contribution plan into the ESOP in 2011. The ESOP income in 2009 stems from the suspension of the Cornerstone benefits
and the reduction of the 401(K) match, as a percentage of employee contributions, as part of cost saving actions. ESOP expense could
increase in the future if the market value of the Company’s common stock declines.
CRITICAL ACCOUNTING ESTIMATES — Preparation of the Company’s Consolidated Financial Statements requires
management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Significant accounting policies used in the preparation of the Consolidated Financial Statements are described in Note A, Significant
Accounting Policies. Management believes the most complex and sensitive judgments, because of their significance to the
Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters with inherent
uncertainty. The most significant areas involving management estimates are described below. Actual results in these areas could differ
from management’s estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS — The Company’s estimate for its allowance for doubtful accounts related to trade
receivables is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount
reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an
inability to meet financial obligations. In these cases, management uses its judgment, based on the surrounding facts and
circumstances, to record a specific reserve for those customers against amounts due to reduce the receivable to the amount expected to
be collected. These specific reserves are reevaluated and adjusted as additional information is received. Second, a reserve is
determined for all customers based on a range of percentages applied to receivable aging categories. These percentages are based on
historical collection and write-off experience.
If circumstances change, for example, due to the occurrence of higher than expected defaults or a significant adverse change in a
major customer’s ability to meet its financial obligation to the Company, estimates of the recoverability of receivable amounts due
could be reduced.
INVENTORIES — LOWER OF COST OR MARKET, SLOW MOVING AND OBSOLETE — Inventories in the U.S. are
predominantly valued at the lower of LIFO cost or market, while non-U.S. inventories are valued at the lower of FIFO cost or market.
The calculation of LIFO reserves, and therefore the net inventory valuation, is affected by inflation and deflation in inventory
components. The Company ensures all inventory is valued at the lower of cost or market, and continually reviews the carrying value
of discontinued product lines and stock-keeping-units (“SKUs”) to determine that these items are properly valued. The Company also
continually evaluates the composition of its inventory and identifies obsolete and/or slow-moving inventories. Inventory items
identified as obsolete and/or slow-moving are evaluated to determine if write-downs are required. The Company assesses the ability to
dispose of these inventories at a price greater than cost. If it is determined that cost is less than market value, cost is used for inventory
valuation. If market value is less than cost, the Company writes down the related inventory to that value. If a write down to the current
market value is necessary, the market value cannot be greater than the net realizable value, or ceiling (defined as selling price less
costs to sell and dispose), and cannot be lower than the net realizable value less a normal profit margin, also called the floor. If the
Company is not able to achieve its expectations regarding net realizable value of inventory at its current value, further write-downs
would be recorded.