For the quarterly period ended April 3, 2010.

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  [          ] to [          ]

Commission File Number 001-05224

1000 STANLEY DRIVE
NEW BRITAIN, CONNECTICUT		06053
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

(860) 225-5111 (REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  þ

160,394,923 shares of the registrant’s common stock were outstanding as of May 11, 2010

 

 

TABLE OF CONTENTS

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 2010

A. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Operating results for the quarter ended April 3, 2010, are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in The Stanley Works and Subsidiaries’ (collectively, the “Company”) Form 10-K for the year ended January 2, 2010.

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 The Black & Decker Corporation became a wholly owned subsidiary of The Stanley Works (the “Merger”). In connection with the Merger, The Stanley Works changed its name to Stanley Black & Decker, Inc. The results of the operations and cash flows of Black & Decker have been included in the Company’s condensed consolidated financial statements from the time of the consummation of the Merger on March 12, 2010 (See Note F, Merger and Acquisitions).

B. New Accounting Standards

Implemented:

In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16, “Accounting for Transfers of Financial Assets”. This ASU eliminates the concept of a “qualifying special-purpose entity,” clarifies when a transferor of financial assets has surrendered control over the transferred financial assets, defines specific conditions for reporting a transfer of a portion of a financial asset as a sale, requires that a transferor recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale, and requires enhanced disclosures to provide financial statement users with greater transparency about a transferor’s continuing involvement with transferred financial assets. The adoption of this ASU did not have any impact on the consolidated financial statements.

In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU eliminates the concept of a “qualifying special-purpose entity,” replaces the quantitative approach for determining which enterprise has a controlling financial interest in a variable interest entity with a qualitative approach focused on identifying which enterprise has a controlling financial interest through the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. Additionally, this ASU requires enhanced disclosures that will provide users of financial statements with more information about an enterprise’s involvement in a variable interest entity. The adoption of the ASU did not have any significant impact on the consolidated financial statements.

Not Yet Implemented:

In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements.” This ASU eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the consideration that is attributable to items that already have been delivered. This may allow some companies to recognize revenue on transactions that involve multiple deliverables earlier than under the current requirements. Additionally, under the new guidance, the relative selling price method is required to be used in allocating consideration between deliverables and the residual value method will no longer be permitted. This ASU is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal 2011. A company may elect, but will not be required, to adopt the amendments in this ASU retrospectively for all prior periods. Management is currently evaluating the requirements of this ASU and has not yet determined the impact, if any, that it will have on the consolidated financial statements.

In connection with the Merger, the Company issued 78.5 million shares, 5.8 million options and 0.4 million restricted stock awards and restricted stock units to former Black & Decker shareowners and employees. These outstanding shares and equity awards were included in the calculation of weighted average shares outstanding from the period from the merger date to the end of the quarter. In future periods these shares will be outstanding for the full reporting period and will be weighted accordingly. At the end of the first quarter, there were 159.6 million basic shares outstanding.

The following weighted-average stock options, restricted shares and awards, other equity awards, warrants, and Equity Purchase Contracts to purchase the Company’s common stock were outstanding during the three months ended April 3, 2010 and April 4, 2009, but were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive (in thousands):

The Equity Purchase Contracts will not be dilutive at any time prior to their maturity in May 2010 because the holders must pay the Company the higher of approximately $54.17 or then market price. Additionally, the Company has Convertible Notes outstanding which may require the Company to deliver shares of common stock in May 2012. As of April 3, 2010 and April 4, 2009, there were no shares related to the Convertible Notes included in the calculation of diluted earnings per share because the effect of these conversion options was not dilutive. The Company intends to net share settle the conversion value, if any, of these Convertible Notes at their maturity in May 2012. Furthermore, there is a convertible notes hedge in place which would fully offset any such shares that may be delivered pertaining to the Convertible Notes. These Convertible Notes as well as the related Equity Purchase Contracts and convertible notes hedge are discussed more fully in Note H, Long-Term Debt and Financing Arrangements of this Form 10-Q, as well as in the Company’s Form 10-K for the year ended January 2, 2010.

D. Accounts and Notes Receivable

In December 2009, the Company entered into an accounts receivable sale program that is scheduled to expire on December 28, 2010, whereby it is required to sell certain of its trade accounts receivables at fair value to a wholly-owned, 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 maximum cash investment in the receivables at any time is $100.0 million.

The purpose of the program is to provide liquidity to the Company. The Company accounts for these transfers as sales under Accounting Standards Codification (“ASC”) 860 “Transfers and Servicing”. 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 April 3, 2010, 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.

Net receivables sold amounted to $110.0 million for the three months ended April 3, 2010, which resulted in a $0.3 million pre-tax loss for the quarter. Cash flows related to new transfers, collections of previously sold receivables, including deferred purchase price receivables, and all fees are settled one month in arrears, and netted to $3.6 million of payments to the Purchaser for the three months ended April 3, 2010. Servicing fees amounted to $0.1 million for the first quarter of 2010. The Company’s risk of loss following the sale of the receivables is limited to the deferred purchase price, which was $25.8 million at April 3, 2010. The deferred purchase price receivable will be repaid in cash as receivables are collected, generally within 30 days, and as such the carrying value of the receivable recorded approximates fair value. Delinquencies and credit losses on receivables sold in 2010 were $0.1 million. Cash inflows related to the deferred purchase price receivable totaled $36 million for the first quarter of 2010. All cash flows under the program are reported as a component of changes in working capital within operating activities in the condensed consolidated statement of cash flows since all the cash from the purchaser is either: 1) received upon the initial sale of the receivable or 2) 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.

E. Inventories

The components of inventories at April 3, 2010 and January 2, 2010 are as follows (in millions):

As more fully disclosed in Note F, in connection with the Merger, the Company acquired inventory with a fair value of $1.068 billion which included a non-cash inventory step-up of $170.5 million. During the first quarter of 2010, $41.6 million of this inventory step-up was amortized and recognized as cost of sales in the consolidated statement of operations as the corresponding inventory was sold.

F. Merger and Acquisitions

MERGER WITH BLACK & DECKER

On March 12, 2010 (the “merger date”), 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. As part of the Merger, Black & Decker stockholders received 1.275 shares of Stanley stock for each share outstanding as of the merger date. All of the outstanding Black & Decker shares and equity based awards were exchanged for Stanley shares and equity awards as part of the Merger. Fractional shares generated by the conversion ratio were cash settled for $0.3 million. After the exchange was completed, pre-merger Stanley shareowners retained ownership of 50.5% of the combined company. In conjunction with consummating the Merger, the name of the combined Company was changed to “Stanley Black & Decker, Inc”.

Black & Decker is a global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. The Merger creates a larger and more globally diversified company with a broad array of products and services with significant exposure to growing and profitable product areas. Stanley and Black & Decker’s product lines are generally complementary, and do not present areas of significant overlap. By combining the two companies, there will be significant cost saving opportunities through reductions in corporate overhead, business unit and purchasing consolidation, and by combining elements of manufacturing and distribution.

Based on the closing price of Stanley common stock on the merger date, the consideration received by Black & Decker shareholders in the Merger had a value of approximately $4.656 billion as detailed below.

The following assumptions were used for the Black Scholes valuation of the pre-merger Black & Decker stock options in the determination of consideration paid:

The expected volatility is based on two equally weighted components: the first component is the average historical volatility which is based on daily observations and duration consistent with the expected life assumption; the second component is the market implied volatility of traded options. The average expected term of the option is based on historical employee stock option exercise behavior as well as the remaining contractual exercise term. The risk-free interest rate is based on U.S. treasury securities with maturities equal to the expected life of the option. The fair value of restricted stock and restricted stock units and other vested equity awards was $57.86 per share. Total compensation expense recognized during the first quarter for the options, restricted stock, and restricted stock awards that were assumed as part of the Merger was $0.6 million.

The transaction has been 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 merger date. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed as part of the Merger:

As of the merger date, the expected fair value of accounts receivable approximated the historical cost. The gross contractual receivable was $951.7 million, of which $44.5 million is not expected to be collectable.

The amount allocated to trade names includes $1.361 billion associated with the indefinite-lived trade names which have been determined to have indefinite lives. The weighted average useful lives assigned to the finite lived intangible assets are trade names — 14 years; customer relationships — 16 years; and licenses, technology and patents — 11 years.

Black & Decker has three primary areas of contingent liabilities: environmental, risk insurance (predominantly product liability and workers compensation) and uncertain tax liabilities. Additionally, Black & Decker is involved in various lawsuits in the ordinary course of business, including litigation and administrative proceedings involving commercial disputes and employment matters. Some of these lawsuits include claims for punitive as well as compensatory damages. The Company believes the majority of the contingent liabilities will ultimately be recorded at fair value in purchase accounting, aside from those pertaining to uncertainty in income taxes which are an exception to the fair value basis of accounting; however certain environmental matters that are inherently legal contingencies in nature will be adjusted at the probable and estimable amount.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business, assembled workforce, and the going concern nature of Black & Decker. It is estimated that $167.7 million of goodwill, relating to Black & Decker’s pre-merger historical tax basis, will be deductible for tax purposes.

The purchase price allocation for Black & Decker is preliminary in all respects. Adjustments are possible pertaining to the following, among other items:

	•		Intangible assets — pending finalization of valuation efforts for acquired intangible assets.
	•		Property, Plant, and Equipment —completion of physical observations of property, plant and equipment and valuation efforts to determine their fair value.
	•		Environmental remediation, income tax contingencies, product liability and other risk insurance reserves — completion of the assessment of these matters.

	•		Tax liabilities relating to the repatriation of unremitted earnings — As of December 31, 2009 Black & Decker had not provided for income taxes on unremitted earnings of approximately $2.1 billion from its international subsidiaries. Concurrent with the Merger the Company has made a determination to repatriate certain of these funds, making such amounts subject to both U.S. income and foreign withholding taxes. The Company is in the process of determining the tax consequence of such repatriation in accordance with ASC 740-30 and therefore no tax liability has currently been provided.
	•		Other income tax assets and liabilities
	•		Pensions and Other Post Employment Benefits — pending finalization of actuarial reviews as of the merger date.
	•		Allocation of goodwill between reporting units

A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results from operations. The Company will finalize the Black & Decker purchase accounting for the various open items as soon as reasonably possible during the measurement period. The finalization of the Company’s purchase accounting assessment will result in changes in the valuation of assets and liabilities acquired which could be material.

ACQUISITION OF ADT FRANCE

In March 2010, the Company completed the acquisition of ADT France for $8.0 million, net of cash acquired. ADT France is a leading provider of security services, primarily for commercial businesses located in France. ADT France has been consolidated into the Company’s Security segment. This acquisition gives the Company the leading market share in France and expands the Company’s security footprint in Europe. The purchase accounting for this recent acquisition is preliminary, principally with respect to finalization of intangible asset valuations, contingencies, deferred taxes, and certain other items.

2009 ACQUISITIONS

During 2009, the Company completed six minor acquisitions, primarily relating to the Company’s convergent security solutions business, for a combined purchase price of $24.2 million. The purchase price allocation for these acquisitions is complete.

The following table presents supplemental pro forma information as if the Merger had occurred on January 3, 2010 for the quarter ended April 3, 2010. The comparative 2009 column was prepared as if the Merger had occurred on January 2, 2009 for the quarter ended April 2, 2009. As such, both years presented include merger related charges. The pro forma consolidated results are not necessarily indicative of what the Company’s consolidated net earnings would have been had the Company completed the Merger on January 3, 2010, or January 2, 2009. In addition the pro forma consolidated results do not purport to project the future results of the combined Company nor do they reflect the expected realization of any cost savings associated with the Merger.

2010 Pro forma Results

The 2010 pro forma results were calculated by combining the results of Stanley Black & Decker with Black & Decker’s stand-alone results from January 3, 2010 through March 12, 2010. Additionally the following adjustments were made to account for certain costs which would have been incurred during this pre-acquisition period.

	•		Elimination of historical Black & Decker 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 expense for the inventory step-up which would have been amortized as the corresponding inventory was sold.
	•		Reduced interest expense for the debt fair value adjustment which would have been amortized from January 3, 2010 to March 12, 2010.
	•		The modifications above were adjusted for the applicable tax impact.

2009 Pro forma Results

The 2009 pro forma results were calculated by taking the historical financial results of Stanley and adding the historical results of Black & Decker. Additionally the following adjustments were made to account for certain costs that would have been incurred in 2009 had the acquisition commenced on January 2, 2009.

	•		Elimination of historical Black & Decker intangible asset amortization expense and addition of a full quarter of intangible asset amortization expense relating to intangibles valued as part of the Merger.
	•		Added a full quarter of expense for the inventory step-up which would have been amortized as the corresponding inventory was sold.
	•		Added the costs that were incurred to consummate the Merger during the first quarter of 2010.
	•		Added the merger related restructuring charges which were incurred during the first quarter of 2010.
	•		Added compensation expense for merger related equity awards granted to key executives.
	•		Reduced interest expense for the debt fair value adjustment which would have been amortized during the quarter.
	•		The modifications above were adjusted for the applicable tax impact.

G. Goodwill and Intangible Assets

Goodwill

In the first quarter of 2010, goodwill increased by approximately $3.486 billion associated with the Merger. This amount is subject to change based upon the allocation of the consideration transferred to the assets acquired and liabilities assumed from Black & Decker (See Note F, Merger and Acquisitions). The allocation of goodwill among segments has not been completed but will be completed within the measurement period. Goodwill attributable to the Merger is shown in the table below in the unallocated column.

Changes in the carrying amount of goodwill by segment are as follows (in millions):

Total indefinite-lived trade names are $1.653 billion at April 3, 2010 and $304.6 million at January 2, 2010. This increase is attributable to the Merger.

Aggregate intangible assets amortization expense by segment was as follows (in millions):

Future amortization expense of the next five years amounts to $122.6 million for the remaining three quarters of 2010, $153.9 million for 2011, $147.7 million for 2012, $132.6 million for 2013, and $119.1 million for 2014.

H. Long-Term Debt and Financing Arrangements

At April 3, 2010 and January 2, 2010, short-term borrowings are as follows (in millions):

On March 12, 2010, the Company amended its $800.0 million committed credit facility to include adjustments to the interest coverage ratio covenant for restructuring and merger-related items resulting from the Merger. The Company also entered into a $700.0 million, 364-day revolving credit facility totaling $700.0 million effective March 12, 2010. The credit facilities are designated as a liquidity back-stop for the Company’s commercial paper program which was increased on March 12, 2010 to $1.5 billion. These changes to the Company’s short-term borrowing capacity were related to the Merger.

At April 3, 2010 and January 2, 2010, long-term debt is as follows (in millions):

As discussed in Note F, Merger & Acquisitions, the Company acquired $1.832 billion in total debt in connection with the Merger which includes $157.1 million to adjust the debt balance to its estimated fair value. Principal amounts of the notes acquired in the Merger are: $400.0 million notes payable due in 2011, $300.0 million due in 2014, $350.0 million due in 2014 and $300.0 million due in 2016. The Company also acquired debt of a Black & Decker subsidiary in the aggregate principal amount of $150.0 million due in 2028, and other short-term borrowings in the aggregate principal amount of $175.0 million. The Company has executed a full and unconditional guarantee of the existing debt of The Black & Decker Corporation and Black & Decker Holdings, LLC., and Black & Decker executed a full and unconditional guarantee of the existing debt of the Company, excluding the Company’s Junior Subordinated Debt, including for payments of principal and interest and as such these notes rank equally in priority with the Company’s unsecured and unsubordinated debt. Refer to Note U, Parent and Subsidiary Debt Guarantees, for additional information pertaining to these debt guarantees.

Aggregate annual principal maturities of long-term debt for each of the years from 2010 to 2014 are $7.1 million, $406.3 million, $524.1 million, $252.8 million, $653.4 million, respectively and $762.7 million thereafter. These debt maturities represent the principal amounts to be paid and accordingly exclude $154.4 million of unamortized debt fair value adjustment as of April 3, 2010 which increased the Black & Decker debt, as well as $13.0 million of unamortized interest rate swap termination gains as described in Note I, Derivative Financial Instruments. These amounts are offset by $22.9 million of remaining accretion on the Stanley Convertible Note as of April 3, 2010 that will gradually increase the debt to its $320.0 million principal amount due in May 2012 as discussed further in Note H of The Stanley Works Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

I. Derivative Financial Instruments

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, it uses a variety of financial instruments such as interest rate swap agreements, currency swap agreements, purchased currency options, foreign exchange contracts and commodity contracts to mitigate interest rate exposure, foreign currency exposure and commodity price exposure.

Financial instruments are not utilized for speculative purposes. If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges.

For derivative instruments that are so designated at inception and qualify as cash flow and net investment hedges, the Company records the effective portions of the gain or loss on the derivative instrument in Accumulated other comprehensive income, a separate component of Shareowners’ equity, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in earnings. For designated fair value hedges, the Company records the changes in the fair value of the derivative instrument as well as the hedged item in the Consolidated Statements of Operations within the same caption. The Company measures hedge effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item, both of which are based on forward rates. For interest rate swaps designated as cash flow hedges, the Company measures the hedge effectiveness by offsetting the change in the variable portion of the interest rate swap with the change in the expected interest flows due to fluctuations in the LIBOR-based interest rate. The ineffective portion of the gain or loss, if any, is immediately recognized in the same caption where the hedged items are recognized in the Consolidated Statements of Operations.

In the first quarter of 2010, the Company acquired a portfolio of derivative financial instruments related to the Merger, which Black & Decker entered into in the ordinary course of business and which may have been previously designated as hedges. At the March 12, 2010 merger date, these instruments became undesignated and the Company established its intent for each derivative strategy. The Company decided to terminate all outstanding interest rate swaps and forwards hedging future purchases of inventory denominated in a foreign currency. For other currency forwards and commodities, the Company elected to leave the instruments in place as an economic hedge only and account for them as undesignated. Net investment hedges were re-designated.

A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance Sheets are as follows (in millions):

The counterparties to all of the Company’s derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.

During the first quarter of 2010, significant cash flows related to derivatives included cash paid of $16.1 million on a foreign exchange contract hedging a euro denominated net investment that matured and cash received of $17.6 million related to two currency swaps that were terminated. The Company also received $30.2 million in March 2010 from the termination of $325.0 million notional of fixed to variable interest rates swaps. In the first quarter of 2009, significant cash flows related to derivatives included a cash payment of $10.5 million on a Great Britain pound currency swap maturity.

CASH FLOW HEDGES There was a $3.3 million after-tax gain and a $4.8 million after-tax gain reported for cash flow hedge effectiveness in Accumulated other comprehensive income as of April 3, 2010 and January 2, 2010, respectively. A loss of $0.3 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next 12 months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies through the maturity dates. The tables below detail pre-tax amounts reclassified from Accumulated other comprehensive income into earnings during the periods in which the underlying hedged transactions affected earnings for the three months ended April 3, 2010 and April 4, 2009 (in millions).

For the first three months of 2010, the hedged items’ impact to the income statement was a loss of $9.4 million in Other, net. For the first three months of 2009, the hedged items’ impact to the income statement was a loss of approximately $2.9 million in Cost of sales and a loss of $6.4 million in Other, net. There was no impact related to the interest rate contracts’ hedged items. The impact of de-designated hedges was immaterial for the first quarter of 2010. The impact of de-designated hedges was a pre-tax gain of $0.6 million for the first quarter of 2009.

During the three months ended April 3, 2010 and April 4, 2009, an after-tax gain of $5.5 million and $7.2 million, respectively, was reclassified from Accumulated other comprehensive income into earnings during the periods in which the underlying hedged transactions affected earnings.

Interest Rate Contracts

The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-rate debt proportions. At April 3, 2010 and January 2, 2010, the Company had outstanding contracts fixing the interest rate on its $320.0 million floating rate convertible notes and $400.0 million of forward starting swaps outstanding fixing the interest rate on the expected refinancing of debt in 2012.

Foreign Currency Contracts

Forward contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from non-United States dollar subsidiaries which creates volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases of inventory. Gains and losses reclassified from Accumulated other comprehensive income for the effective and ineffective portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in Cost of sales. At April 3, 2010, the notional value of the hedge contracts outstanding was $67.0 million, of which $10.5 million has been de-designated, maturing at various dates through 2010. As of January 2, 2010, there were no outstanding hedge contracts.

Currency swaps: The Company and its subsidiaries have entered into various inter-company transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its inter-company obligations with cash flows from operations, the Company enters into currency swaps. The notional value of the United States dollar exposure and the related hedge contracts outstanding as of April 3, 2010 and January 2, 2010 was $150.0 million, maturing November 2010.

FAIR VALUE HEDGES

Interest Rate Risk In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In January 2009, the Company entered into interest rate swaps with notional values that equaled the Company’s $200.0 million 4.9% notes due in 2012 and $250.0 million 6.15% notes due in 2013. The interest rate swaps effectively convert the Company’s fixed-rate debt to floating-rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest rates. The changes in fair value of the interest rate swaps were recognized in earnings as was the offsetting changes in fair value of the underlying notes. A summary of the fair value adjustments relating to these swaps for the first three months of 2010 and 2009 is as follows (in millions):

In addition to the amounts in the table above, the net swap settlements that occur each period and amortization of the gains on terminated swaps are also reported in interest expense and totaled $3.0 million as a reduction of interest expense for the first three months of both 2010 and 2009. Interest expense on the underlying debt was $6.3 million and $6.4 million for the first three months of 2010 and 2009, respectively.

NET INVESTMENT HEDGES

Foreign Exchange Contracts The Company utilizes net investment hedges to offset the translation adjustment arising from remeasurement of its investment in the assets, liabilities, revenues, and expenses of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive income were losses of $0.1 million and $11.8 million at April 3, 2010 and January 2, 2010, respectively. As of April 3, 2010, the Company had foreign exchange contracts with notional values totaling $1.291 billion outstanding hedging a portion of its euro denominated net investment that mature in September 2010 and its pound sterling denominated net investment that mature at various dates through January 2011. The Company had a foreign exchange contract mature in February 2010 resulting in a loss of $16.1 million that will remain in Accumulated other comprehensive income until disposal of the underlying assets. The details of the pre-tax amounts are below (in millions):

UNDESIGNATED HEDGES

Foreign Exchange Contracts Currency swaps and foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables, receivables). The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the contracts outstanding at April 3, 2010 was $4.112 billion of forward contracts and $258.1 million in currency swaps, maturing at various dates primarily through January 2011 with some to December 2014. Included in this amount is $3.924 billion of forward contracts assumed in conjunction with the Merger. The income statement impacts related to derivatives not designated as hedging instruments for the first quarter of 2010 and 2009 are as follows (in millions):

Commodity Contracts Commodity contracts are used to manage price risks related to material purchases — primarily zinc and copper — used in the manufacturing process. The objective of the hedge is to reduce the variability of cash flows associated with the forecasted purchase of these commodities. In conjunction with the Merger, the Company assumed commodity contracts with a total notional amount of 7.4 million pounds outstanding at April 3, 2010. The contracts mature at various dates through December 2010. The income statement impacts related to commodity contracts not designated as hedging instruments for the first quarter of 2010 are as follows (in millions):

J. Stock-Based Compensation

In addition to the equity awards exchanged as part of the Merger, key executives were granted stock options and restricted shares.

Stock Options: One million options were granted in conjunction with the Merger. These options will vest in full on the third anniversary of the Merger. The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model. Assumptions used for the Black Scholes valuation of these options were:

The expected volatility is based on two equally weighted components: the first component is the average historical volatility which is based on daily observations and duration consistent with the expected life assumption; the second component is the market implied volatility of traded options. The average expected term of the option is based on historical stock option exercise behavior as well as the remaining contractual exercise term. The risk free interest rate is based on U.S. treasury securities with maturities equal to the expected life of the option. Total compensation expense incurred during the quarter for this option grant was $0.2 million. Total remaining unrecognized compensation expense relating to this award is $16.1 million which will be expensed over the remaining three year vesting period.

Additionally, the Company expensed $0.3 million in stock-based compensation for the quarter related to the options that were exchanged as part of the Merger. Refer to Note F, Merger and Acquisitions for further details.

Restricted Share Units: During March 2010, merger grants of restricted stock units (“RSUs”) were made totaling 935,000 stock units. These RSU grants vest 50% at the end of the fourth year and 50% on the fifth anniversary of the grant date. Certain employees are retirement-eligible, such that under the terms of the grant they retain their awards even if they retire prior to the end of the vesting period, and consequently such awards are expensed immediately on the grant date. The weighted-average grant date fair value of RSUs is $57.82 resulting in total compensation expense to be recognized of $54.1 million over the service period. During the first quarter of 2010, $22.5 million of expense was recognized for these RSUs. Approximately $22.0 million of this first quarter expense relates to employees who were either retirement eligible at the grant date or become retirement eligible early in the vesting period. Additionally, the Company expensed $0.3 million in stock-based compensation for the quarter related to the RSUs that were exchanged as part of the Merger.

K. Equity Option

In January 2009, the Company purchased from financial institutions over the counter 15 month capped call options, subject to adjustments for standard anti-dilution provisions, on 3.0 million shares of its common stock for an aggregate premium of $16.4 million, or an average of $5.47 per option. The purpose of the capped call options was to reduce share price volatility on potential future share repurchases by establishing the prices at which the Company may elect to repurchase 3 million shares in the 15 month term. In accordance with ASC 815-40, the premium paid was recorded as a reduction to Shareowners’ equity. The contracts for each of the three series of options generally provided that the options may, at the Company’s election, be cash settled, physically settled or net-share settled (the default settlement method). Each series of options had various expiration dates within the month of March 2010. In August 2009, 886,629 options were terminated and in December 2009, an additional 2,000,000 options were terminated as more fully described in Note J of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010. There were 113,371 options outstanding at January 2, 2010. Because the market price of the Company’s common stock was above the applicable upper strike price, the value per option to the Company was the difference between the applicable upper strike price and lower strike price. The remaining options were automatically exercised and net share settled in March 2010 using an average share price of $58.76 and a fair value of $1,673,265. The terminations occurred above the upper strike price, maximizing the intrinsic value of the contracts. These terminations resulted in 28,447 shares being delivered to the Company which was recorded to Shareowners’ equity.

L. Net Periodic Benefit Cost — Defined Benefit Plans

Following are the components of net periodic benefit cost for the three months ended April 3, 2010 and April 4, 2009 (in millions):

As discussed in Note F, Merger and Acquisitions, the Company assumed obligations for pension and post-retirement benefits associated with the Merger. The preliminary estimate of the Black & Decker plan assets and projected benefit obligations is $1.1 billion and $1.9 billion, respectively. The Black & Decker defined benefit plan assets are primarily invested in equity securities and fixed income securities. The Company does not believe there is a significant concentration risk within the plan assets given the diversification of asset types, fund strategies, and fund managers. The Company is using a weighted-average long-term rate of return assumption of 8.0% for the U.S. plans and 7.0% for the non-U.S. plans in the determination of fiscal 2010 net periodic benefit expense. The Company expects to contribute approximately $100 million to its pension and post retirement benefit plans in 2010.

M. 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.

The Company holds various derivative financial instruments that are employed to manage risks, including foreign currency and interest rate exposures. These financial instruments are carried at fair value and are included within the scope of ASC 820. The Company determines the fair value of derivatives through the use of matrix or model pricing, which utilizes verifiable inputs such as market interest and currency rates. When determining the fair value of these financial instruments for which Level 1 evidence does not exist, the Company considers various factors including the following: exchange or market price quotations of similar instruments, time value and volatility factors, the Company’s own credit rating and the credit rating of the counter-party.

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis for each of the hierarchy levels (millions of dollars):

The following table presents the fair value and the hierarchy levels for assets and liabilities that were measured at fair value on a non-recurring basis during 2010 (millions of dollars):