STANLEY BLACK & DECKER, INC. The financial and business analysis below provides information which the Company believes is relevant to an assessment and understanding of its consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the Consolidated Financial Statements and related notes. All references to "Notes" in this Item 7 refer to the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report. The following discussion and certain other sections of this Annual Report on Form 10-K contain statements reflecting the Company's views about its future performance that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates as well as management's beliefs and assumptions. Any statements contained herein (including without limitation statements to the effect thatStanley Black & Decker, Inc. or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth, or incorporated by reference, below under the heading "Cautionary Statements Under The Private Securities Litigation Reform Act Of 1995." The Company does not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Strategic Objectives The Company continues to pursue a growth and acquisition strategy, which involves industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth, and employ the following strategic framework in pursuit of its vision to deliver top-quartile financial performance, become known as one of the world's leading innovators and elevate its commitment to social responsibility: • Continue organic growth momentum by leveraging the SBD Operating Model to drive innovation and commercial excellence, while diversifying toward higher-growth, higher-margin businesses;
• Be selective and operate in markets where brand is meaningful, the value
proposition is definable and sustainable through innovation, and global
cost leadership is achievable; and
• Pursue acquisitive growth on multiple fronts by building upon its existing
global tools platform, expanding the Industrial platform in Engineered
Fastening and Infrastructure, consolidating the commercial electronic
security industry, and pursuing adjacencies with sound industrial logic.
Execution of the above strategy has resulted in approximately$10.1 billion of acquisitions since 2002 (excluding theBlack & Decker merger and pending acquisition ofConsolidated Aerospace Manufacturing, LLC , as discussed below), a 20 percent investment inMTD Holdings Inc. ("MTD"), several divestitures, improved efficiency in the supply chain and manufacturing operations, and enhanced investments in organic growth, enabled by cash flow generation and increased debt capacity. In addition, the Company's continued focus on diversification and organic growth has resulted in improved financial results and an increase in its global presence. The Company also remains focused on leveraging its SBD Operating Model to deliver success in the 2020s and beyond. The latest evolution of the SBD Operating Model, formerly Stanley Fulfillment System ("SFS") 2.0, builds on the strength of the Company's past while embracing changes in the external environment to ensure the Company has the right skillsets, incorporates technology advances in all areas, maintains operational excellence, drives efficiency in business processes and resiliency into its culture, delivers extreme innovation and ensures the customer experience is world class. As it has in the past, the new operating model will underpin the Company's ability to deliver above-market organic growth with margin expansion, maintain efficient levels of selling, general and administrative expenses ("SG&A") and deliver top-quartile asset efficiency. The Company's long-term financial objectives remain as follows: 25 --------------------------------------------------------------------------------
• 4-6% organic revenue growth;
• 10-12% total revenue growth;
• 10-12% total EPS growth (7-9% organically) excluding acquisition-related
charges;
• Free cash flow equal to, or exceeding, net income;
• Sustain 10+ working capital turns; and
•
In terms of capital allocation, the Company remains committed, over time, to returning approximately 50% of free cash flow to shareholders through a strong and growing dividend as well as opportunistically repurchasing shares. The remaining free cash flow (approximately 50%) will be deployed towards acquisitions.
Share Repurchases
In
Acquisitions and Investments OnMarch 8, 2019 , the Company acquired theInternational Equipment Solutions Attachments businesses, Paladin and Pengo, ("IES Attachments"), a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition further diversifies the Company's presence in the industrial markets, expands its portfolio of attachment solutions and provides a meaningful platform for continued growth. OnJanuary 2, 2019 , the Company acquired a 20 percent interest in MTD, a privately held global manufacturer of outdoor power equipment. MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning onJuly 1, 2021 and ending onJanuary 2, 2029 . In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD's 2018 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), with an equitable sharing arrangement for future EBITDA growth. The investment in MTD increases the Company's presence in the$20 billion outdoor power equipment market and allows the two companies to work together to pursue revenue and cost opportunities, improve operational efficiency, and introduce new and innovative products for professional and residential outdoor equipment customers, utilizing each company's respective portfolios of strong brands. OnApril 2, 2018 , the Company acquired Nelson Fastener Systems ("Nelson"), which excluded Nelson's automotive stud welding business. This acquisition, which has been integrated into the Engineered Fastening business, is complementary to the Company's product offerings, enhances its presence in the general industrial end markets, expands its portfolio of highly-engineered fastening solutions, and is delivering cost synergies. OnMarch 9, 2017 , the Company acquired the Tools business of Newell Brands ("Newell Tools") which included the highly attractive industrial cutting, hand tool and power tool accessory brands IRWIN® and LENOX®. The acquisition enhanced the Company's position within the global tools & storage industry and broadened the Company's product offerings and solutions to customers and end users, particularly within power tool accessories. OnMarch 8, 2017 , the Company purchased the Craftsman® brand from Sears Holdings Corporation ("Sears Holdings "). The acquisition provided the Company with the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels. The acquisition significantly increased the availability of Craftsman®-branded products to consumers in previously underpenetrated channels, enhanced innovation, and added manufacturing jobs in theU.S. to support growth.
Pending Acquisition
OnJanuary 3, 2020 , the Company entered into an agreement to purchaseConsolidated Aerospace Manufacturing, LLC ("CAM"). CAM is an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets. The Company expects the acquisition to further diversify the Company's presence in the industrial markets and expand its portfolio of specialty fasteners in the high-growth, high-margin aerospace and defense market. The acquisition will provide well-recognized brands, a proven business model, deep customer relationships, an experienced management team and compelling cash flow characteristics, which will create an attractive pathway for profitable organic and acquisitive growth and shareholder returns. This transaction is subject to customary closing conditions, including regulatory approval, and is expected to close in lateFebruary 2020 . 26 --------------------------------------------------------------------------------
Refer to Note E, Acquisitions and Investments, for further discussion.
Divestitures
On
OnFebruary 22, 2017 , the Company sold the majority of its mechanical security businesses, which included the commercial hardware brands of Best Access, phi Precision and GMT. The sale allowed the Company to deploy capital in a more accretive and growth-oriented manner.
Refer to Note T, Divestitures, for further discussion of the Company's divestitures.
Certain Items Impacting Earnings
Throughout MD&A, the Company has provided a discussion of the outlook and results both inclusive and exclusive of acquisition-related and other charges. The results and measures, including gross profit and segment profit, on a basis excluding these amounts are considered relevant to aid analysis and understanding of the Company's results aside from the material impact of these items. These amounts are as follows:
2019
The Company reported
•$40 million reducing Gross Profit pertaining to facility-related and inventory step-up charges;
•
business transformation and margin resiliency initiatives;
•
•
•
closures associated with a cost reduction program; and
•
The tax effect on the above net charges was approximately$78 million . In addition, the Company's share of MTD's net earnings included an after-tax charge of approximately$24 million primarily related to an inventory step-up adjustment. The amounts above resulted in net after-tax charges of$309 million , or$2.05 per diluted share. 2018
The Company reported
•
step-up charges for the Nelson acquisition and an incremental freight
charge due to nonperformance by a third-party service provider;
•
fees, and a non-cash fair value adjustment;
•
a settlement with the
•
•$117 million in Restructuring charges which primarily related to a cost reduction program. The Company also recorded a net tax charge of$181 million , which was comprised of charges related to the Tax Cuts and Jobs Act ("the Act") partially offset by the tax benefit of the above pre-tax charges. The above amounts resulted in net after-tax charges of$631 million , or$4.16 per diluted share.
2017
The Company reported
27
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•
step-up charges for the Newell Tools acquisition;
•
fees;
•
costs; and
•
employee severance.
The Company also reported a $264 million pre-tax gain on sales of businesses in
2017, primarily relating to the sale of the majority of the mechanical security
businesses. The net tax benefit of the acquisition-related charges and gain on
sales of businesses was $7 million . Furthermore, the Company recorded a $24
million net tax charge relating to the Act.
The acquisition-related charges, gain on sales of businesses, and net tax charge
relating to the Act resulted in a net after-tax gain of $91 million , or $0.59
per diluted share.
Driving Further Profitable Growth by Fully Leveraging Our Core Franchises
Each of the Company's franchises share common attributes: they have world-class brands and attractive growth characteristics, they are scalable and defensible, they can differentiate through innovation, and they are powered by the SBD Operating Model. • The Tools & Storage business is the tool company to own, with strong
brands, proven innovation, global scale, and a broad offering of power
tools, hand tools, accessories, and storage & digital products across many
channels in both developed and developing markets.
• The Engineered Fastening business is a highly profitable, GDP+ growth
business offering highly engineered, value-added innovative solutions with
recurring revenue attributes and global scale.
• The Security business, with its attractive recurring revenue, presents a
significant margin accretion opportunity over the longer term and has
historically provided a stable revenue stream through economic cycles, is
a gateway into the digital world and an avenue to capitalize on rapid
digital changes. Security has embarked on a business transformation whichwill apply technology to lower its cost to serve and create new commercial
offerings for its small to medium enterprise and large key account
customers.
While diversifying the business portfolio through strategic acquisitions remains important, management recognizes that the core franchises described above are important foundations that continue to provide strong cash flow and growth prospects. Management is committed to growing these businesses through innovative product development, brand support, continued investment in emerging markets and a sharp focus on global cost competitiveness. Continuing to Invest in the Stanley Black &Decker Brands The Company has a strong portfolio of brands associated with high-quality products including STANLEY®, BLACK+DECKER®, DEWALT®, FLEXVOLT®, IRWIN®, LENOX®, CRAFTSMAN®, PORTER-CABLE®, BOSTITCH®, PROTO®, MAC TOOLS®, FACOM®, AeroScout®, Powers®, LISTA®, SIDCHROME®, Vidmar®, SONITROL®, and GQ®. Among the Company's most valuable assets, the STANLEY®, BLACK+DECKER® and DEWALT® brands are recognized as three of the world's great brands, while the CRAFTSMAN® brand is recognized as a premier American brand. During 2019, the STANLEY®, DEWALT® and CRAFTSMAN® brands had prominent signage in MajorLeague Baseball ("MLB") stadiums appearing in many MLB games. The Company has also maintained long-standingNASCAR and NHRA racing sponsorships, which provided brand exposure during nearly 60 events in 2019 with the STANLEY®, DEWALT®, CRAFTSMAN®, IRWIN® and MAC TOOLS® brands. The Company also advertises in theEnglish Premier League , which is the number one soccer league in the world, featuring STANLEY®, BLACK+DECKER® and DEWALT® brands to a global audience. In 2014, the Company became a sponsor for one of the world's most popular football clubs, FC Barcelona ("FCB"), including player image rights, hospitality assets and stadium signage. In 2018, the Company was announced as the first ever shirt sponsor for the FCB Women's team in support of its commitment to global diversity and inclusion. In addition, the Company continues to sponsor the Envision Virgin Racing Formula E team in support of the Company's commitment to sustainability and the future of electric mobility. The above marketing initiatives highlight the Company's strong emphasis on brand building and commercial support, which has resulted in more than 300 billion global brand impressions annually via digital and traditional advertising and strong brand awareness. The Company will continue allocating its brand and advertising spend wisely to capture the emerging digital landscape, whilst continuing to evolve proven marketing programs to deliver famous global brands that are deeply committed to societal improvement, along with transformative technologies to build relevant and meaningful 1:1 customer, consumer, employee and shareholder relationships in support of the Company's long-term vision. 28 -------------------------------------------------------------------------------- The SBD Operating Model: Winning in the 2020s Over the past 15 years, the Company has successfully leveraged its proven and continually evolving operating model to focus the organization to sustain top-quartile performance, resulting in asset efficiency, above-market organic growth and expanding operating margins. In its first evolution, the Stanley Fulfillment System ("SFS") focused on streamlining operations, which helped reduce lead times, realize synergies during acquisition integrations, and mitigate material and energy price inflation. In 2015, the Company launched a refreshed and revitalized SFS operating system, entitled SFS 2.0, to drive from a more programmatic growth mentality to a true organic growth culture by more deeply embedding breakthrough innovation and commercial excellence into its businesses, and at the same time, becoming a significantly more digitally-enabled enterprise. Now in 2020, recognizing the changing dynamics of the world in which the Company operates, including the acceleration of technological change, geopolitical instability and the changing nature of work, the Company has launched the new SBD Operating Model: Winning in the 2020s. At the center of the model is the concept of the interrelationship between people and technology. The remaining four categories are: Performance Resiliency; Extreme Innovation; Operations Excellence and Extraordinary Customer Experience. Each of these elements co-exists synergistically with the others in a systems-based approach. People and Technology This pillar emphasizes the Company's belief that the right combination of digitally proficient people applying technology such as artificial intelligence, machine learning, advanced analytics, IOT and others in focused ways can be an enormous source of value creation and sustainability for the Company. It also brings to light the changing nature of work and the talent and skillsets required for individuals and institutions to thrive in the future. With technology infiltrating the workplace at an increasingly rapid pace, the Company believes that the winners in the 2020s will invest heavily in reskilling, upskilling and lifelong learning with an emphasis on the places where people and technology intersect. In other words, technology can make humans more powerful and productive if, and only if, humans know how to apply the technology to maximum advantage. The Company has created plans and programs, as well as a new leadership model to ensure people have the right skills, tools and mindsets to thrive in this era. The ability for employees to embrace technology, learn and relearn new skills and take advantage of the opportunities presented in this new world will be critical to the Company's success. Performance Resiliency The Company views performance resiliency as the agility, flexibility and adaptability to sustain strong performance regardless of the operating environment conditions, which requires planning for the unexpected and anticipating exogenous volatility as the new normal. Technology, applied to key business processes, products and business models, will be a key enabler for value creation and performance resiliency as the Company executes sustainable, ongoing transformation across the enterprise. Extreme Innovation The Company has a historically strong foundation in innovation, launching more than 1,000 products a year, including breakthroughs such as DEWALT Flexvolt, Atomic and Xtreme. In recent years, the Company has expanded its innovation-focused internal teams and external partnerships, but now it is growing that innovation ecosystem at a rapid pace, expanding the number of external collaborations with start-ups and entrepreneurs, academic institutions, research labs and others. This innovation culture, which includes a focus on social impact in addition to the Company's traditional product and customer focus, enables the Company to introduce products to market faster and reimagine how to operate in today's technology-enabled, fast-paced world. Operations Excellence An intense focus on operations excellence and asset efficiency is mandatory in a dynamic world in which the bar for competitiveness is always moving higher. To help maintain the Company's edge, a much more agile, adaptable and technology-enabled supply chain is necessary. Industry 4.0 is essential to this transformation. For several years, the Company has been moving to a "Make Where We Sell" and "Buy Where We Make" system, where more products are being manufactured in local markets. Today, about 50% of the products sold inNorth America are made inNorth America and the target is to continue to push that higher. This will improve customer responsiveness, lower lead times, reduce costs and mitigate geopolitical and currency risk while facilitating major improvements in carbon footprint. Extraordinary Customer Experience Customers are increasingly demanding world-class experiences from their brands and expectations for execution at the customer level are growing every day. It is no longer sufficient to have great products on the shelf or in the catalog. The Company knows that to sustain market share growth, it needs to evolve and adapt to provide the types of experiences that customers now expect. While commercial excellence has always been an important part of SFS 2.0 and will continue to be part of the Company's new model, the Company's new thrust in this area takes it to another level. Each of the Company's businesses 29 -------------------------------------------------------------------------------- is making a baseline assessment and segmentation of its various customer experiences while systematically gaining insights into what can be done to elevate those customer experiences to the extraordinary level. As previously noted, the interaction between people and technology will define success in this area. Leveraging the SBD Operating Model, the Company is building a culture in which it strives to become known as one of the world's great innovative companies by embracing the current environment of rapid innovation and digital transformation. The Company continues to build a vast innovation focused ecosystem to pursue faster innovation and to remain aware of and open to new technologies and advances by leveraging both internal initiatives and external partnerships. The innovation ecosystem used in concert with the SBD Operating Model is anticipated to allow the Company to apply innovation to its core processes in manufacturing and back office functions to reduce operating costs and inefficiencies, develop core and breakthrough product innovations within each of its businesses, and pursue disruptive business models to either push into new markets or change existing business models before competition or new market entrants capture the opportunity. The Company continues to make progress towards this vision, as evidenced by the creation of Innovation Everywhere, a program that encourages and empowers all employees to implement value creation and cost savings using collaborative and innovative solutions, breakthrough innovation teams in each business, theStanley Ventures group, which invests capital in new and emerging start-ups in core focus areas, the Techstars partnership, which selects start-ups from around the world with the goal of bringing breakthrough technologies to market, the Manufactory 4.0, which is the Company's epicenter for Industry 4.0 technology development and partnership, and STANLEY X, aSilicon Valley based team, which is building its own set of disruptive initiatives and exploring new business models. The Company has made a significant commitment to the SBD Operating Model and management believes that its success will be characterized by continued asset efficiency, organic growth in the 4-6% range as well as expanded operating margin rates over the next 3 to 5 years as the Company leverages the growth and reduces structural SG&A levels. The Company believes that the SBD Operating Model will serve as a powerful value driver in the years ahead, ensuring the Company is positioned to win in the 2020s by developing and obtaining the right people and technology to deliver performance resiliency, extreme innovation, operations excellence and an extraordinary customer experience. The new operating model, in concert with the Company's innovation ecosystem, will enable the Company to change as rapidly as the external environment which directly supports achievement of the Company's long-term financial objectives, including its vision, and further enables its shareholder-friendly capital allocation approach, which has served the Company well in the past and will continue to do so in the future. Outlook for 2020 This outlook discussion is intended to provide broad insight into the Company's near-term earnings and cash flow generation prospects. The Company expects 2020 diluted earnings per share to approximate$8.05 to$8.35 ($8.80 to$9.00 excluding acquisition-related and other charges), and free cash flow conversion, defined as free cash flow divided by net income, to approximate 90% to 100%, reflecting the impact of restructuring payments associated with the 2019 cost reduction program. The 2020 outlook for adjusted diluted earnings per share assumes approximately$0.95 of accretion due to the benefit from the cost reduction program; approximately$0.40 to$0.50 of accretion related to organic growth; approximately$0.60 to$0.70 of dilution from incremental tariffs and currency headwinds; and approximately$0.25 of dilution due to the expected tax rate, financing costs and other items below operating margin.
The difference between the 2020 diluted earnings per share outlook and the
diluted earnings per share range, excluding charges, is
30
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RESULTS OF OPERATIONS
Below is a summary of the Company's operating results at the consolidated level,
followed by an overview of business segment performance.
Terminology: The term "organic" is utilized to describe results aside from the
impacts of foreign currency fluctuations, acquisitions during their initial
12 months of ownership, and divestitures. This ensures appropriate comparability
to operating results of prior periods.
Net Sales : Net sales were $14.442 billion in 2019 compared to $13.982 billion in
2018, representing an increase of 3% driven by organic growth of 3%, including a
2% increase in volume and 1% increase in price. Acquisitions, primarily IES
Attachments, increased sales by 2%, while the impact of foreign currency
decreased sales by 2%. Tools & Storage net sales increased 3% compared to 2018
due to increases in volume and price of 4% and 1%, respectively, partially
offset by a 2% decrease from foreign currency. Industrial net sales increased
11% compared to 2018 primarily due to acquisition growth of 16%, partially
offset by decreases of 3% from lower volumes and 2% from foreign currency.
Security net sales declined 2% compared to 2018 as 1% increases in both price
and small bolt-on commercial electronic security acquisitions were more than
offset by a 3% decrease due to foreign currency and a 1% decrease from the sale
of the Sargent & Greenleaf business.
Net sales were $13.982 billion in 2018 compared to $12.967 billion in 2017,
representing an increase of 8% with strong organic growth of 5%. Acquisitions,
primarily Newell Tools and Nelson, increased sales by 3%. Tools & Storage net
sales increased 9% compared to 2017 due to strong organic growth of 7%, fueled
by solid growth across all regions, and acquisition growth of 2%. Industrial net
sales increased 11% compared to 2017 primarily due to acquisition growth of 9%
and favorable currency of 2%. Security net sales increased 2% compared to 2017
due to increases of 1% in price, 3% in small bolt-on commercial electronic
security acquisitions and 1% in foreign currency, partially offset by declines
of 1% from the sale of the majority of the mechanical security businesses and 2%
from lower volumes.
Gross Profit: The Company reported gross profit of $4.806 billion , or 33.3% of
net sales, in 2019 compared to $4.851 billion , or 34.7% of net sales, in 2018.
Acquisition-related and other charges, which reduced gross profit, were $39.7
million in 2019 and $65.7 million in 2018. Excluding these charges, gross profit
was 33.5% of net sales in 2019 compared to 35.2% in 2018, as volume,
productivity and price were more than offset by tariffs, commodity inflation and
foreign exchange.
The Company reported gross profit of $4.851 billion , or 34.7% of net sales, in
2018 compared to $4.778 billion , or 36.9% of net sales, in 2017.
Acquisition-related and other charges, which reduced gross profit, were $65.7
million in 2018 and $46.8 million in 2017. Excluding these charges, gross profit
was 35.2% of net sales in 2018, compared to 37.2% in 2017, as volume leverage,
productivity and price were more than offset by external headwinds, including
commodity inflation, foreign exchange and tariffs.
SG&A Expense: Selling, general and administrative expenses, inclusive of the
provision for doubtful accounts ("SG&A"), were $3.041 billion , or 21.1% of net
sales, in 2019 compared to $3.172 billion , or 22.7% of net sales, in 2018.
Within SG&A, acquisition-related and other charges totaled $139.5 million in
2019 and $157.8 million in 2018. Excluding these charges, SG&A was 20.1% of net
sales in 2019 compared to 21.6% in 2018, primarily reflecting disciplined cost
management and actions taken in response to external headwinds.
SG&A expenses were $3.172 billion , or 22.7% of net sales, in 2018 compared to
$2.999 billion , or 23.1% of net sales, in 2017. Acquisition-related and other
charges totaled $157.8 million in 2018 and $37.7 million in 2017. Excluding
these charges, SG&A was 21.6% of net sales in 2018 compared to 22.8% in 2017,
due primarily to prudent cost management and volume leverage.
Distribution center costs (i.e. warehousing and fulfillment facility and
associated labor costs) are classified within SG&A. This classification may
differ from other companies who may report such expenses within cost of sales.
Due to diversity in practice, to the extent the classification of these
distribution costs differs from other companies, the Company's gross margins may
not be comparable. Such distribution costs classified in SG&A amounted to $326.7
million in 2019, $316.0 million in 2018 and $279.8 million in 2017.
Corporate Overhead: The corporate overhead element of SG&A, which is not
allocated to the business segments, amounted to $229.5 million , or 1.6% of net
sales, in 2019, $202.8 million , or 1.5% of net sales, in 2018 and $217.4
million , or 1.7% of net sales, in 2017. Excluding acquisition-related charges of
$23.4 million in 2019, $12.7 million in 2018, and $0.7 million in 2017, the
corporate overhead element of SG&A was 1.4% of net sales in 2019 and 2018,
compared to 1.7% in 2017, reflecting continued cost management.
31
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Other, net: Other, net totaled $249.1 million in 2019 compared to $287.0
million in 2018 and $269.2 million in 2017. Excluding acquisition-related and
other charges, Other, net totaled $218.9 million , $178.9 million , and $211.0
million in 2019, 2018, and 2017, respectively. The year-over-year increase in
2019 was driven by higher intangible amortization and a favorable resolution of
a prior claim in 2018. The year-over-year decrease in 2018 was driven by an
environmental remediation charge of $17 million in 2017 relating to a legacy
Black & Decker site and a favorable resolution of a prior claim in 2018, which
more than offset higher intangible amortization expense in 2018.
(Gain) Loss on Sales of Businesses: During 2019, the Company reported a $17.0
million gain relating to the sale of the Sargent and Greenleaf business. During
2018, the Company reported a $0.8 million loss relating to a previously divested
business. During 2017, the Company reported a $264.1 million gain primarily
relating to the sale of the majority of the Company's mechanical security
businesses.
Pension Settlement: Pension settlement of $12.2 million in 2017 reflects losses
previously reported in Accumulated other comprehensive loss related to a
non-U.S. pension plan for which the Company settled its obligation by purchasing
an annuity and making lump sum payments to participants.
Loss on Debt Extinguishment: During the fourth quarter of 2019, the Company
extinguished
Interest, net: Net interest expense in 2019 was$230.4 million compared to$209.2 million in 2018 and$182.5 million in 2017. The increase in 2019 compared to 2018 was primarily driven by interest on the senior unsecured notes issued inNovember 2018 and lower interest income on deposits due to a decline in rates. The increase in net interest expense in 2018 versus 2017 was primarily due to higher interest rates and higher average balances relating to the Company'sU.S. commercial paper borrowings partially offset by higher interest income. Income Taxes: The Company's effective tax rate was 14.2% in 2019, 40.7% in 2018, and 19.7% in 2017. Excluding the impact of divestitures and acquisition-related and other charges previously discussed, the effective tax rate in 2019 is 16.0%. This effective tax rate differs from theU.S. statutory tax rate primarily due to a portion of the Company's earnings being realized in lower-taxed foreign jurisdictions, and the favorable effective settlements of income tax audits. The 2018 effective tax rate included net charges associated with the Act, which primarily related to the re-measurement of existing deferred tax balances, adjustments to the one-time transition tax, and the provision of deferred taxes on unremitted foreign earnings and profits for which the Company no longer asserted indefinite reinvestment. Excluding the impacts of the net charge related to the Act as well as the acquisition-related and other charges previously discussed, the effective tax rate in 2018 was 16.0%. This effective tax rate differed from theU.S. statutory tax rate primarily due to a portion of the Company's earnings being realized in lower-taxed foreign jurisdictions and the favorable effective settlements of income tax audits. The 2017 effective tax rate included a one-time net charge relating to the provisional amounts recorded associated with the Act, which was enacted inDecember 2017 . The net charge primarily related to the re-measurement of existing deferred tax balances and the one-time transition tax. Excluding the impact of the divestitures, acquisition-related charges, and the net charge related to the Act, the effective tax rate was 20.0% in 2017. This effective tax rate differed from theU.S. statutory rate primarily due to a portion of the Company's earnings being realized in lower-taxed foreign jurisdictions, the favorable settlement of certain income tax audits, and the acceleration of certain tax credits resulting in a tax benefit. Business Segment Results The Company's reportable segments are aggregations of businesses that have similar products, services and end markets, among other factors. The Company utilizes segment profit which is defined as net sales minus cost of sales and SG&A inclusive of the provision for doubtful accounts (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), gain or loss on sales of businesses, pension settlement, restructuring charges, loss on debt extinguishment, interest income, interest expense, income taxes and share of net loss of equity method investment. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Refer to Note F,Goodwill and Intangible Assets, and Note O, Restructuring Charges, for the amount of intangible asset amortization expense and net restructuring charges, respectively, attributable to each segment. 32 -------------------------------------------------------------------------------- The Company classifies its business into three reportable segments, which also represent its operating segments: Tools & Storage, Industrial and Security. Tools & Storage: The Tools & Storage segment is comprised of the Power Tools & Equipment ("PTE") and Hand Tools, Accessories & Storage ("HTAS") businesses. The PTE business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors. Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKER® brand, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories, and home products such as hand-held vacuums, paint tools and cleaning appliances. The HTAS business sells hand tools, power tool accessories and storage products. Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and threading products. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products. (Millions of Dollars) 2019 2018 2017 Net sales$ 10,062 $ 9,814 $ 9,045 Segment profit$ 1,533 $ 1,393 $ 1,439 % of Net sales 15.2 % 14.2 % 15.9 % Tools & Storage net sales increased$248.1 million , or 3%, in 2019 compared to 2018 due to a 4% increase in volume and 1% increase in price, partially offset by unfavorable currency of 2%. The 5% organic growth was led byNorth America andEurope , more than offsetting a decline in emerging markets.North America organic growth was driven by the roll-out of the Craftsman brand and new product innovation, such as DEWALT Flexvolt, Atomic and Xtreme, partially offset by declines inCanada and industrial-focused businesses.Europe growth was supported by new products and successful commercial actions. The organic decline in emerging markets was driven by weak market conditions inTurkey ,China and certain countries inLatin America , which more than offset the benefits from price, new product launches and e-commerce expansion. Segment profit amounted to$1.533 billion , or 15.2% of net sales, in 2019 compared to$1.393 billion , or 14.2% of net sales, in 2018. Excluding acquisition-related and other charges of$44.3 million and$142.6 million in 2019 and 2018, respectively, segment profit amounted to 15.7% of net sales in 2019 compared to 15.6% in 2018, as the benefits from volume leverage, actions taken in response to external headwinds and price were partially offset by tariffs, commodity inflation, and foreign exchange. Tools & Storage net sales increased$769.0 million , or 9%, in 2018 compared to 2017. Organic sales increased 7%, with a 6% increase in volume and 1% increase in price, reflecting strong growth in each of the regions, and acquisitions, primarilyNewell Tools , increased net sales by 2%.North America growth was driven by new product innovation, the roll-out of the Craftsman brand and price realization.Europe growth was supported by new products and successful commercial actions. The growth in emerging markets was driven by mid-price-point product releases, e-commerce strategies and pricing actions. Segment profit amounted to$1.393 billion , or 14.2% of net sales, in 2018 compared to$1.439 billion , or 15.9% of net sales, in 2017. Excluding acquisition-related and other charges of$142.6 million and$81.8 million in 2018 and 2017, respectively, segment profit amounted to 15.6% of net sales in 2018 compared to 16.8% in 2017, as the benefits from volume leverage, pricing and cost control were more than offset by the impacts from currency, commodity inflation and tariffs. Industrial: The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. The Engineered Fastening business primarily sells engineered fastening products and systems designed for specific applications. The product lines include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners. The Infrastructure business consists of the Oil & Gas and Attachment Tools product lines. Oil & Gas sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines, and provides pipeline inspection services. Attachment Tools sells hydraulic tools, attachments and accessories. 33 -------------------------------------------------------------------------------- (Millions of Dollars) 2019 2018 2017 Net sales$ 2,435 $ 2,188 $ 1,974 Segment profit$ 334 $ 320 $ 346 % of Net sales 13.7 % 14.6 % 17.5 % Industrial net sales increased$246.9 million , or 11%, in 2019 compared to 2018, due to acquisition growth of 16%, partially offset by declines of 3% in volume and 2% from foreign currency. Engineered Fastening organic revenues decreased 3% as fastener penetration gains were more than offset by inventory reductions and lower production levels within industrial and automotive customers. Infrastructure organic revenues were down 2%, as growth within Oil & Gas was offset by declines in hydraulic tools from a difficult scrap steel market. Segment profit totaled$334.1 million , or 13.7% of net sales, in 2019 compared to$319.8 million , or 14.6% of net sales, in 2018. Excluding acquisition-related and other charges of$25.8 million and$26.0 million in 2019 and 2018, respectively, segment profit amounted to 14.8% of net sales in 2019 compared to 15.8% in 2018, as productivity gains and cost control were more than offset by lower volume and externally driven cost inflation. Industrial net sales increased$213.5 million , or 11%, in 2018 compared to 2017, due to acquisition growth of 9% and favorable foreign currency of 2%. Engineered Fastening organic revenues increased 1% due primarily to industrial and automotive fastener penetration gains which were partially offset by the expected impact from lower automotive system shipments. Infrastructure organic revenues were down 1% due to anticipated lower pipeline project activity in Oil & Gas, partially offset by volume growth in hydraulic tools. Segment profit totaled$319.8 million , or 14.6% of net sales, in 2018 compared to$345.9 million , or 17.5% of net sales, in 2017. Excluding acquisition-related and other charges of$26.0 million in 2018, segment profit amounted to 15.8% of net sales in 2018 compared to 17.5% in 2017, as productivity gains and cost control were more than offset by commodity inflation and the modestly dilutive impact from the Nelson acquisition.
Security:
The Security segment is comprised of the Convergent Security Solutions ("CSS")
and the Mechanical Access Solutions ("MAS") businesses. The CSS business
designs, supplies and installs commercial electronic security systems and
provides electronic security services, including alarm monitoring, video
surveillance, fire alarm monitoring, systems integration and system maintenance.
Purchasers of these systems typically contract for ongoing security systems
monitoring and maintenance at the time of initial equipment installation. The
business also sells healthcare solutions, which include asset tracking, infant
protection, pediatric protection, patient protection, wander management, fall
management, and emergency call products. The MAS business primarily sells
automatic doors.
(Millions of Dollars) 2019 2018 2017
Net sales $ 1,945 $ 1,981 $ 1,947
Segment profit $ 127 $ 169 $ 212
% of Net sales 6.5 % 8.5 % 10.9 %
Security net sales decreased $35.2 million , or 2%, in 2019 compared to 2018, as
1% increases in both price and small bolt-on commercial electronic security
acquisitions were more than offset by a 3% decrease due to foreign currency and
a 1% decrease from the sale of the Sargent & Greenleaf business. Organic sales
for North America increased 3% driven by increased installations within
commercial electronic security and higher volumes in healthcare and automatic
doors. Europe declined 1% organically as growth in France was offset by
continued market weakness in the Nordics and the UK .
Segment profit amounted to $126.6 million , or 6.5% of net sales, in 2019
compared to $169.3 million , or 8.5% of net sales, in 2018. Excluding
acquisition-related and other charges of $85.7 million and $42.2 million in 2019
and 2018, respectively, segment profit amounted to 10.9% of net sales in 2019
compared to 10.7% in 2018, as the benefits of organic growth and a focus on cost
containment were partially offset by investments to support the business
transformation in commercial electronic security and the dilutive impact from
the Sargent & Greenleaf divestiture.
Security net sales increased $33.3 million , or 2%, in 2018 compared to 2017,
primarily due to increases of 1% in price, 3% in small bolt-on commercial
electronic security acquisitions and 1% in foreign currency, partially offset by
declines of 1% from the sale of the majority of the mechanical security
businesses and 2% from lower volumes. Organic sales for North America
34
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decreased 1% as higher volumes within automatic doors were offset by lower
installations in commercial electronic security.
Segment profit amounted to$169.3 million , or 8.5% of net sales, in 2018 compared to$211.7 million , or 10.9% of net sales, in 2017. Excluding acquisition-related and other charges of$42.2 million and$2.0 million in 2018 and 2017, respectively, segment profit amounted to 10.7% of net sales in 2018 compared to 11.0% in 2017. The year-over-year change in segment profit rate reflects investments to support business transformation in commercial electronic security and the impact from the sale of the majority of the mechanical security business, partially offset by a continued focus on cost containment.
RESTRUCTURING ACTIVITIES
A summary of the restructuring reserve activity from
December 29, December 28,
(Millions of Dollars) 2018 Net Additions Usage Currency 2019
Severance and related costs $ 105.7 $ 131.9 $ (97.4 ) $ 0.1 $ 140.3
Facility closures and asset
impairments 3.1 22.2 (17.9 ) 0.1 7.5
Total $ 108.8 $ 154.1 $ (115.3 ) $ 0.2 $ 147.8
During 2019, the Company recognized net restructuring charges of $154.1 million ,
primarily related to severance costs associated with a cost reduction program
announced in the third quarter of 2019. Current and expected actions of the
program include headcount reductions across the Company as well as footprint
rationalization opportunities. The Company expects the 2019 actions to result in
annual net cost savings of approximately $185 million by the end of 2020.
The majority of the
During 2018, the Company recognized net restructuring charges of$160.3 million , which primarily related to a cost reduction program executed in the fourth quarter of 2018. This amount reflected$151.0 million of net severance charges associated with the reduction of 4,184 employees and$9.3 million of facility closure and other restructuring costs. The 2018 actions resulted in annual net cost savings of approximately$230 million , primarily in the Tools & Storage and Security segments. During 2017, the Company recognized net restructuring charges of$51.5 million . This amount reflected$40.6 million of net severance charges associated with the reduction of 1,584 employees and$10.9 million of facility closure and other restructuring costs. The 2017 actions resulted in annual net cost savings of approximately$45 million in 2018, primarily in the Tools & Storage and Security segments. Segments: The$154 million of net restructuring charges in 2019 includes:$63 million pertaining to the Tools & Storage segment;$27 million pertaining to the Industrial segment;$18 million pertaining to the Security segment; and$46 million pertaining to Corporate. The anticipated annual net cost savings of approximately$185 million related to the 2019 restructuring actions include:$89 million in the Tools & Storage segment;$34 million in the Industrial segment;$28 million in the Security segment; and$34 million in Corporate. FINANCIAL CONDITION Liquidity, Sources and Uses of Capital: The Company's primary sources of liquidity are cash flows generated from operations and available lines of credit under various credit facilities. Operating Activities: Cash flows provided by operations were$1.506 billion in 2019 compared to$1.261 billion in 2018. The year-over-year increase was mainly attributable to improved working capital (accounts receivable, inventory, accounts payable and deferred revenue) as a result of an intense focus on working capital management and lower inventory investment associated with recent Tools & Storage brand roll-outs. In 2018, cash flows from operations were$1.261 billion compared to$669 million in 2017. The year-over-year increase related primarily to the retrospective adoption of new cash flow accounting standards in the first quarter of 2018, which decreased 2017 operating cash flows by approximately$750 million . Excluding the impact of these new standards, cash flows provided by operations in 2018 decreased year-over-year primarily due to higher income tax payments and higher payments associated with acquisition-related and other charges. 35 -------------------------------------------------------------------------------- Free Cash Flow: Free cash flow, as defined in the table below, was$1.081 billion in 2019 compared to$769 million in 2018 and$226 million in 2017. Excluding the retrospective impacts of the previously discussed new cash flow standards adopted in the first quarter of 2018, free cash flow totaled$976 million in 2017. The improvement in free cash flow in 2019 was driven by higher operating cash flows as discussed above and lower capital expenditures due to higher investments in the Company's supply chain and SFS 2.0 initiatives in both 2018 and 2017. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company's common stock and business acquisitions, among other items. (Millions of Dollars) 2019 2018 2017
Net cash provided by operating activities
$ 1,081 $ 769 $ 226 Investing Activities: Cash flows used in investing activities totaled$1.209 billion in 2019, driven by business acquisitions of$685 million , primarily related to IES Attachments, capital and software expenditures of$425 million and purchases of investments of$261 million , which mainly related to the 20 percent investment in MTD. Cash flows used in investing activities in 2018 totaled$989 million , primarily due to business acquisitions of$525 million , mainly related to the Nelson acquisition, and capital and software expenditures of$492 million . The increase in capital and software expenditures in 2018 was primarily due to technology-related and capacity investments to support the Company's strong organic growth and its SFS 2.0 initiatives. Cash flows used in investing activities in 2017 totaled$1.567 billion , which primarily consisted of business acquisitions of$2.584 billion , mainly related to the Newell Tools and Craftsman acquisitions, and capital and software expenditures of$443 million , partially offset by proceeds of$757 million from sales of businesses and$705 million from the deferred purchase price receivable related to an accounts receivable sales program, which was terminated inFebruary 2018 . Financing Activities: Cash flows used in financing activities totaled$293 million in 2019 driven by payments on long-term debt of$1.150 billion and cash dividend payments of$402 million , partially offset by$735 million in net proceeds from the issuance of equity units and net proceeds from debt issuances of$496 million . Cash flows used in financing activities totaled$562 million in 2018 primarily related to the repurchase of common shares for$527 million and cash dividend payments of$385 million , partially offset by$433 million of net proceeds from short-term borrowings under the Company's commercial paper program. Cash flows provided by financing activities in 2017 totaled$295 million , primarily due to$726 million in net proceeds from the issuance of equity units, partially offset by$363 million of cash payments for dividends and$77 million of net repayments of short-term borrowings under the Company's commercial paper program. Fluctuations in foreign currency rates negatively impacted cash by$1 million and$54 million in 2019 and 2018, respectively, due to the strengthening of theU.S. Dollar against the Company's other currencies, while positively impacting cash by$81 million in 2017 due to the weakening of theU.S. Dollar against other currencies. Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Capital Stock, for further discussion regarding the Company's debt and equity arrangements. Credit Ratings and Liquidity: The Company maintains strong investment grade credit ratings from the majorU.S. rating agencies on its senior unsecured debt (S&P A, Fitch A-, Moody's Baa1), as well as its commercial paper program (S&P A-1, Fitch F1, Moody's P-2). The Company's Fitch short-term credit rating was upgraded to F1 during the third quarter of 2019 from the previous rating of F2. Failure to maintain strong investment grade rating levels could adversely affect the Company's cost of funds, liquidity and access to capital markets, but would not have an adverse effect on the Company's ability to access its existing committed credit facilities. 36 --------------------------------------------------------------------------------
Cash and cash equivalents totaled
As a result of the Act, the Company's tax liability related to the one-time transition tax associated with unremitted foreign earnings and profits totaled$344 million atDecember 28, 2019 . The Act permits aU.S. company to elect to pay the net tax liability interest-free over a period of up to eight years. See the Contractual Obligations table below for the estimated amounts due by period. The Company has considered the implications of paying the required one-time transition tax, and believes it will not have a material impact on its liquidity. Refer to Note Q, Income Taxes, for further discussion of the impacts of the Act. The Company has a$3.0 billion commercial paper program which includes Euro denominated borrowings in addition toU.S. Dollars. As ofDecember 28, 2019 , the Company had approximately$336 million of borrowings outstanding representing Euro denominated commercial paper, which was designated as a net investment hedge. As ofDecember 29, 2018 , the Company had approximately$373 million of borrowings outstanding, of which approximately$229 million in Euro denominated commercial paper was designated as a net investment hedge. Refer to Note I, Financial Instruments, for further discussion. The Company has a five-year$2.0 billion committed credit facility (the "5-Year Credit Agreement"). Borrowings under the 5-Year Credit Agreement may be made inU.S. Dollars, Euros or Pounds Sterling. A sub-limit amount of$653.3 million is designated for swing line advances which may be drawn in Euros pursuant to the terms of the 5-Year Credit Agreement. Borrowings bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and specific terms of the 5-Year Credit Agreement. The Company must repay all advances under the 5-Year Credit Agreement by the earlier ofSeptember 12, 2023 or upon termination. The 5-Year Credit Agreement is designated to be part of the liquidity back-stop for the Company's$3.0 billion U.S. Dollar and Euro commercial paper program. As ofDecember 28, 2019 , andDecember 29, 2018 , the Company had not drawn on its five-year committed credit facility. InSeptember 2019 , the Company terminated its 364-Day$1.0 billion committed credit facility and concurrently executed a new 364-Day$1.0 billion committed credit facility (the "September 364-Day Credit Agreement"). Borrowings under the September 364-Day Credit Agreement may be made inU.S. Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the September 364-Day Credit Agreement. The Company must repay all advances under the September 364-Day Credit Agreement by the earlier ofSeptember 9, 2020 or upon termination. The Company may, however, convert all advances outstanding upon termination into a term loan that shall be repaid in full no later than the first anniversary of the termination date provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. The September 364-Day Credit Agreement serves as part of the liquidity back-stop for the Company's$3.0 billion U.S. Dollar and Euro commercial paper program previously discussed. As ofDecember 28, 2019 , andDecember 29, 2018 , the Company had not drawn on its 364-Day committed credit facilities.
In addition, the Company has other short-term lines of credit that are primarily
uncommitted, with numerous banks, aggregating
AtDecember 28, 2019 , the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was$3.5 billion . AtDecember 28, 2019 ,$337 million was recorded as short-term borrowings relating to commercial paper and amounts outstanding against uncommitted lines. In addition,$89 million of the short-term credit lines was utilized primarily pertaining to outstanding letters of credit for which there are no required or reported debt balances. The weighted-average interest rate onU.S. dollar denominated short-term borrowings for 2019 and 2018 was 2.3%. The weighted-average interest rate on Euro denominated short-term borrowings for 2019 and 2018 was negative 0.3%. InFebruary 2020 , the Company issued$750 million of senior unsecured term notes maturingMarch 15, 2030 ("2030 Term Notes") and$750 million of fixed-to-fixed reset rate junior subordinated debentures maturingMarch 15, 2060 ("2060 Junior Subordinated Debentures"). The 2030 Term Notes will accrue interest at a fixed rate of 2.3% per annum, with interest payable semi-annually in arrears, and rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated debt. The 2060 Junior Subordinated Debentures will bear interest at a fixed rate of 4.0% per annum, payable semi-annually in arrears, up to but excludingMarch 15, 2025 . From and includingMarch 15, 2025 , the interest rate will be reset for each subsequent five-year reset period equal to the Five-Year Treasury Rate plus 2.657%. The Five-Year Treasury Rate is based on the average yields on actively tradedU.S. treasury securities adjusted to constant maturity, for five-year maturities. On each five-year reset date, the 2060 Junior Subordinated Debentures can be called at par value. The 2060 Junior Subordinated Debentures are unsecured and rank subordinate and junior in right of payment to all of the Company's existing and future senior debt. The Company received total net proceeds from these offerings of approximately$1.487 billion , which 37 -------------------------------------------------------------------------------- reflected approximately$13 million of underwriting expenses and other fees associated with the transactions. The net proceeds from the offering will be used for general corporate purposes, including acquisition funding and repayment of short-term borrowings.
In
InMarch 2019 , the Company issued$500 million of senior unsecured notes, maturing onMarch 1, 2026 ("2026 Term Notes"). The 2026 Term Notes accrue interest at a fixed rate of 3.40% per annum with interest payable semi-annually in arrears. The 2026 Term Notes rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated debt. The Company received net cash proceeds of$496 million which reflects the notional amount offset by a discount, underwriting expenses, and other fees associated with the transaction. The Company used the net proceeds from the offering for general corporate purposes, including repayment of other borrowings.
In
InNovember 2019 , the Company issued 7,500,000 Equity Units with a total notional value of$750 million ("2019 Equity Units"). Each unit has a stated amount of$100 and initially consisted of a three-year forward stock purchase contract ("2022 Purchase Contracts") for the purchase of a variable number of shares of common stock, onNovember 15, 2022 , for a price of$100 , and a 10% beneficial ownership interest in one share of 0% Series D Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of$1,000 per share ("Series D Preferred Stock"). The Company received approximately$735 million in cash proceeds from the 2019 Equity Units, net of underwriting costs and commissions, before offering expenses, and issued 750,000 shares of Series D Preferred Stock, recording$750 million in preferred stock. The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures inDecember 2019 , as previously discussed. The Company also used$19 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. On and afterNovember 15, 2022 , the Series D Preferred Stock may be converted into common stock at the option of the holder. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. On or afterDecember 22, 2022 , the Company may elect to redeem for cash, all or any portion of the outstanding shares of the Series D Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series D Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date. Upon settlement of the 2022 Purchase Contracts, the Company will receive additional cash proceeds of$750 million . The Company will pay the holders of the 2022 Purchase Contracts quarterly contract adjustment payments, which will commenceFebruary 15, 2020 . As ofDecember 28, 2019 , the present value of the contract adjustment payments was approximately$114 million . InMarch 2018 , the Company purchased from a financial institution "at-the-money" capped call options with an approximate term of three years, on 3.2 million shares of its common stock (subject to customary anti-dilution adjustments) for an aggregate premium of$57 million . As ofDecember 28, 2019 , the capped call has an adjusted lower strike price of$156.59 and an adjusted upper strike price of$203.57 . The purpose of the capped call options was to hedge the risk of stock price appreciation between the lower and upper strike prices of the capped call options for a future share repurchase. InMay 2017 , the Company issued 7,500,000 Equity Units with a total notional value of$750 million ("2017 Equity Units"). Each unit has a stated amount of$100 and initially consisted of a three-year forward stock purchase contract ("2020 Purchase Contracts") for the purchase of a variable number of shares of common stock, onMay 15, 2020 , for a price of$100 , and a 10% beneficial ownership interest in one share of 0% Series C Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of$1,000 per share ("Series C Preferred Stock"). The Company received approximately$726 million in cash proceeds from the 2017 Equity Units, net of underwriting costs and commissions, before offering expenses, and issued 750,000 shares of Series C Preferred Stock, recording$750 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used$25 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. On and afterMay 15, 2020 , the Series C Preferred Stock may be converted into common stock at the option of the holder. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. On or afterJune 22, 2020 , the Company may elect to redeem for cash, all or any portion of the outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series C Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date. Upon settlement of the 2020 Purchase Contracts, the Company will receive additional cash proceeds of$750 million . The Company pays the holders of the 2020 Purchase Contracts quarterly contract adjustment payments, which commenced inAugust 2017 . As ofDecember 28, 2019 , the present value of the contract adjustment payments was approximately$20 million . 38 -------------------------------------------------------------------------------- InMarch 2015 , the Company entered into a forward share purchase contract with a financial institution counterparty for 3,645,510 shares of common stock. The contract obligates the Company to pay$350 million , plus an additional amount related to the forward component of the contract. InFebruary 2020 , the Company amended the settlement date toApril 2022 , or earlier at the Company's option. Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Capital Stock, for further discussion regarding the Company's debt and equity arrangements. Contractual Obligations: The following table summarizes the Company's significant contractual obligations and commitments that impact its liquidity: Payments Due by Period (Millions of Dollars) Total 2020 2021-2022 2023-2024 Thereafter Long-term debt (a)$ 4,704 $ -$ 1,154 $ -$ 3,550 Interest payments on long-term debt (b) 2,224 177 340 282 1,425 Short-term borrowings 336 336 - - - Lease obligations 607 144 193 113 157 Inventory purchase commitments (c) 523 523 - - - Deferred compensation 30 4 1 1 24 Marketing commitments 34 25 9 - - Derivatives (d) 41 - 41 - - Forward stock purchase contract (e) 350 - 350 - - Pension funding obligations (f) 38 38 - - - Contract adjustment fees (g) 138 59 79 - - Purchase price (h) 250 250 - - - U.S. income tax (i) 344 9 70 153 112 Total contractual cash obligations$ 9,619 $ 1,565 $ 2,237 $ 549 $ 5,268 (a) Future payments on long-term debt encompass all payments related to aggregate debt maturities, excluding certain fair value adjustments
included in long-term debt. As previously discussed, the Company issued the
2030 Term Notes and 2060 Junior Subordinated Debentures in
Accordingly, the future payments related to these issuances have been
reflected in the table above. Refer to Note H, Long-Term Debt and Financing
Arrangements.
(b) Future interest payments on long-term debt reflect the applicable interest
rate in effect at
future interest payments associated with the previously discussed 2030 Term
Notes and 2060 Junior Subordinated Debentures issued in
(c) Inventory purchase commitments primarily consist of open purchase orders to
purchase raw materials, components, and sourced products.
(d) Future cash flows on derivative instruments reflect the fair value and
accrued interest as of
instruments will differ, perhaps significantly, based on applicable market
interest and foreign currency rates at their maturity.
(e) In
with a financial institution counterparty which obligates the Company to
pay $350 million , plus an additional amount related to the forward
component of the contract. In February 2020 , the Company amended the
settlement date to
J, Capital Stock, for further discussion.
(f) This amount principally represents contributions either required by
regulations or laws or, with respect to unfunded plans, necessary to fund
current benefits. The Company has not presented estimated pension and
post-retirement funding beyond 2020 as funding can vary significantly from
year to year based upon changes in the fair value of the plan assets,
actuarial assumptions, and curtailment/settlement actions.
(g) These amounts represent future contract adjustment payments to holders of
the Company's 2020 and 2022 Purchase Contracts. See Note J, Capital Stock,
for further discussion.
(h) The Company acquired the Craftsman® brand from Sears Holdings in March
2017. As part of the purchase price, the Company is obligated to pay
million in
further discussion.
(i) Income tax liability for the one-time deemed repatriation tax on unremitted
foreign earnings and profits. See Note Q, Income Taxes, for further
discussion.
39-------------------------------------------------------------------------------- To the extent the Company can reliably determine when payments will occur, the related amounts will be included in the table above. However, due to the high degree of uncertainty regarding the timing of potential future cash flows associated with the contingent consideration liability related to the Craftsman acquisition and the unrecognized tax liabilities of$196 million and$454 million , respectively, atDecember 28, 2019 , the Company is unable to make a reliable estimate of when (if at all) these amounts may be paid. Refer to Note E, Acquisitions and Investments, Note M, Fair Value Measurements, and Note Q, Income Taxes, for further discussion. Payments of the above contractual obligations (with the exception of payments related to debt principal, the forward stock purchase contract, contract adjustment fees, theMarch 2020 purchase price, and tax obligations) will typically generate a cash tax benefit such that the net cash outflow will be lower than the gross amounts summarized above.
Other Significant Commercial Commitments:
Amount of Commitment Expirations Per Period
(Millions of Dollars) Total 2020 2021-2022 2023-2024
Thereafter
Short-term borrowings, long-term debt and lines of credit are explained in
detail within Note H, Long-Term Debt and Financing Arrangements.
MARKET RISK
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments, currencies, commodities and other
items traded in global markets. The Company is exposed to market risk from
changes in foreign currency exchange rates, interest rates, stock prices, bond
prices and commodity prices, amongst others.
Exposure to foreign currency risk results because the Company, through its
global businesses, enters into transactions and makes investments denominated in
multiple currencies. The Company's predominant currency exposures are related to
the Euro, Canadian Dollar, British Pound, Australian Dollar, Brazilian Real,
Argentine Peso, Chinese Renminbi ("RMB") and the Taiwan Dollar. Certain
cross-currency trade flows arising from both trade and affiliate sales and
purchases are consolidated and netted prior to obtaining risk protection through
the use of various derivative financial instruments which may include: purchased
basket options, purchased options, collars, cross-currency swaps and currency
forwards. The Company is thus able to capitalize on its global positioning by
taking advantage of naturally offsetting exposures and portfolio efficiencies to
reduce the cost of purchasing derivative protection. At times, the Company also
enters into foreign exchange derivative contracts to reduce the earnings and
cash flow impacts of non-functional currency denominated receivables and
payables, primarily for affiliate transactions. Gains and losses from these
hedging instruments offset the gains or losses on the underlying net exposures.
Management determines the nature and extent of currency hedging activities, and
in certain cases, may elect to allow certain currency exposures to remain
un -hedged. The Company may also enter into cross-currency swaps and forward
contracts to hedge the net investments in certain subsidiaries and better match
the cash flows of operations to debt service requirements. Management estimates
the foreign currency impact from its derivative financial instruments
outstanding at the end of 2019 would have been an incremental pre-tax loss of
approximately $37 million based on a hypothetical 10% adverse movement in all
net derivative currency positions. The Company follows risk management policies
in executing derivative financial instrument transactions, and does not use such
instruments for speculative purposes. The Company generally does not hedge the
translation of its non-U.S. dollar earnings in foreign subsidiaries, but may
choose to do so in certain instances in future periods.
As mentioned above, the Company routinely has cross-border trade and affiliate
flows that cause an impact on earnings from foreign exchange rate movements. The
Company is also exposed to currency fluctuation volatility from the translation
of foreign earnings into U.S. dollars and the economic impact of foreign
currency volatility on monetary assets held in foreign currencies. It is more
difficult to quantify the transactional effects from currency fluctuations than
the translational effects. Aside from the use of derivative instruments, which
may be used to mitigate some of the exposure, transactional effects can
potentially be influenced by actions the Company may take. For example, if an
exposure occurs from a European entity sourcing product from a U.S. supplier it
may be possible to change to a European supplier. Management estimates the
combined translational and transactional impact, on pre-tax earnings, of a 10%
overall movement in exchange rates is approximately $158 million , or
approximately $0.88 per diluted share. In 2019, translational and transactional
foreign currency fluctuations negatively impacted pre-tax earnings by
approximately $120 million , or approximately $0.67 per diluted share.
The Company's exposure to interest rate risk results from its outstanding debt
and derivative obligations, short-term investments, and derivative financial
instruments employed in the management of its debt portfolio. The debt portfolio
40
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including both trade and affiliate debt, is managed to achieve capital structure
targets and reduce the overall cost of borrowing by using a combination of fixed
and floating rate debt as well as interest rate swaps, and cross-currency swaps.
The Company's primary exposure to interest rate risk comes from its commercial
paper program in which the pricing is partially based on short-term U.S.
interest rates. At December 28, 2019 , the impact of a hypothetical 10% increase
in the interest rates associated with the Company's commercial paper borrowings
would have an immaterial effect on the Company's financial position and results
of operations.
The Company has exposure to commodity prices in many businesses, particularly
brass, nickel, resin, aluminum, copper, zinc, steel, and energy used in the
production of finished goods. Generally, commodity price exposures are not
hedged with derivative financial instruments, but instead are actively managed
through customer product and service pricing actions, procurement-driven cost
reduction initiatives and other productivity improvement projects.
Fluctuations in the fair value of the Company's common stock affect domestic
retirement plan expense as discussed below in the Employee Stock Ownership Plan
("ESOP") section of MD&A. Additionally, the Company has $108 million of
liabilities as of December 28, 2019 pertaining to unfunded defined contribution
plans for certain U.S. employees for which there is mark-to-market exposure.
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 2019, 2018, and 2017, investment
returns on pension plan assets resulted in a $323 million increase, a $72
million decrease, and a $217 million increase, respectively. The Company expects
funding obligations on its defined benefit plans to be approximately $38 million
in 2020. 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 ability to
access 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 ("ESOP") - As detailed in Note L, Employee Benefit
Plans, the Company has an ESOP under which the ongoing U.S. Core 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
income of $0.5 million in 2019 and expense of $0.4 million in 2018 and $1.3
million in 2017. ESOP expense could increase in the future if the market value
of the Company's common stock declines. In addition, ESOP expense will increase
once all remaining unallocated shares are released, which will occur in the
first quarter of 2020.
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.
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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 - Inventories in the U.S. are primarily valued at the lower of
Last-In First-Out ("LIFO") cost or market, while non-U.S. inventories are
primarily valued at the lower of First-In, First-Out ("FIFO") cost and net
realizable value. The calculation of LIFO reserves, and therefore the net
inventory valuation, is affected by inflation and deflation in inventory
components. The Company 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 or net realizable value, as applicable, cost is used for inventory
valuation. If market value or net realizable value, as applicable, is less than
cost, the Company writes down the related inventory to that value.
GOODWILL AND INTANGIBLE ASSETS - The Company acquires businesses in purchase
transactions that result in the recognition of goodwill and intangible assets.
The determination of the value of intangible assets requires management to make
estimates and assumptions. In accordance with Accounting Standards Codification
("ASC") 350-20, Goodwill , acquired goodwill and indefinite-lived intangible
assets are not amortized but are subject to impairment testing at least annually
or when an event occurs or circumstances change that indicate it is more likely
than not an impairment exists. Definite-lived intangible assets are amortized
and are tested for impairment when an event occurs or circumstances change that
indicate it is more likely than not that an impairment exists. Goodwill
represents costs in excess of fair values assigned to the underlying net assets
of acquired businesses. At December 28, 2019 , the Company reported $9.238
billion of goodwill, $2.186 billion of indefinite-lived trade names and $1.436
billion of net definite-lived intangibles.
Management tests goodwill for impairment at the reporting unit level. A
reporting unit is an operating segment as defined in ASC 280, Segment Reporting,
or one level below an operating segment (component level) as determined by the
availability of discrete financial information that is regularly reviewed by
operating segment management or an aggregate of component levels of an operating
segment having similar economic characteristics. If the carrying value of a
reporting unit (including the value of goodwill) is greater than its estimated
fair value, an impairment may exist. An impairment charge would be recorded to
the extent that the recorded value of goodwill exceeded the implied fair value.
As required by the Company's policy, goodwill was tested for impairment in the
third quarter of 2019. In accordance with Accounting Standards Update ("ASU")
2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for
Impairment, companies are permitted to first assess qualitative factors to
determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount as a basis for determining whether it is
necessary to perform the two-step quantitative goodwill impairment test. Under
the two-step quantitative goodwill impairment test, the fair value of the
reporting unit is compared to its respective carrying amount including goodwill.
If the fair value exceeds the carrying amount, then no impairment exists. If the
carrying amount exceeds the fair value, further analysis is performed to assess
impairment. Such tests are completed separately with respect to the goodwill of
each of the Company's reporting units. Accordingly, for its annual impairment
testing performed in the third quarter of 2019, the Company applied the
qualitative assessment for three of its reporting units, while performing the
quantitative test for two of its reporting units. For the reporting units in
which a quantitative test was performed, it was noted that the fair value for
each of these reporting units exceeded its carrying amount by in excess of 45%.
Based on the results of the Company's annual impairment testing, it was
determined that the fair value of each of its reporting units is substantially
in excess of its carrying amount.
In performing the qualitative assessments, the Company identified and considered
the significance of relevant key factors, events, and circumstances that could
affect the fair value of each reporting unit. These factors include external
factors such as macroeconomic, industry, and market conditions, as well as
entity-specific factors, such as actual and planned financial performance. The
Company also assessed changes in each reporting unit's fair value and carrying
value since the most recent date a fair value measurement was performed. As a
result of the qualitative assessments performed, the Company concluded that it
is more likely than not that the fair value of each of these reporting units
exceeded its respective carrying value and therefore, no additional quantitative
impairment testing was performed.
With respect to the quantitative tests, the Company assessed the fair values of
the two reporting units based on a discounted cash flow valuation model. The key
assumptions applied to the cash flow projections were discount rates, which
ranged from 7.5% to 9.5%, near-term revenue growth rates over the next five
years, which represented cumulative annual growth rates
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ranging from approximately 2% to 7%, and perpetual growth rates of 3%. These
assumptions contemplated business, market and overall economic conditions. Based
on the results of this testing, the Company determined that the fair value for
each of these reporting units exceeded its carrying amount by in excess of 45%.
Furthermore, management performed sensitivity analyses on the estimated fair
values from the discounted cash flow valuation models utilizing more
conservative assumptions that reflect reasonably likely future changes in the
discount rate and perpetual growth rate. The discount rate was increased by
100 basis points with no impairment indicated. The perpetual growth rate was
decreased by 150 basis points with no impairment indicated.
The Company also tested its indefinite-lived trade names for impairment during
the third quarter of 2019 utilizing a discounted cash flow model. The key
assumptions used included discount rates, royalty rates, and perpetual growth
rates applied to the projected sales. Based on these quantitative impairment
tests, the Company determined that the fair values of the indefinite-lived trade
names exceeded their respective carrying amounts.
In the event that future operating results of any of the Company's reporting
units or indefinite-lived trade names do not meet current expectations,
management, based upon conditions at the time, would consider taking
restructuring or other strategic actions, as necessary, to maximize revenue
growth and profitability. A thorough analysis of all the facts and circumstances
existing at that time would need to be performed to determine if recording an
impairment loss would be appropriate.
DEFINED BENEFIT OBLIGATIONS - The valuation of pension and other postretirement
benefits costs and obligations is dependent on various assumptions. These
assumptions, which are updated annually, include discount rates, expected return
on plan assets, future salary increase rates, and health care cost trend rates.
The Company considers current market conditions, including interest rates, to
establish these assumptions. Discount rates are developed considering the yields
available on high-quality fixed income investments with maturities corresponding
to the duration of the related benefit obligations. The Company's
weighted-average discount rates used to determine benefit obligations at
December 28, 2019 for the United States and international pension plans were
3.20% and 1.80%, respectively. The Company's weighted-average discount rates
used to determine benefit obligations at December 29, 2018 for the United States
and international pension plans were 4.20% and 2.62%, respectively. As discussed
further in Note L, Employee Benefit Plans, the Company develops the expected
return on plan assets considering various factors, which include its targeted
asset allocation percentages, historic returns, and expected future returns. The
Company's expected rate of return assumptions for the United States and
international pension plans were 6.25% and 4.73%, respectively, at December 28,
2019 . The Company will use a 4.70% weighted-average expected rate of return
assumption to determine the 2020 net periodic benefit cost. A 25 basis point
reduction in the expected rate of return assumption would increase 2020 net
periodic benefit cost by approximately $5 million on a pre-tax basis.
The Company believes that the assumptions used are appropriate; however,
differences in actual experience or changes in the assumptions may materially
affect the Company's financial position or results of operations. To the extent
that actual (newly measured) results differ from the actuarial assumptions, the
difference is recognized in accumulated other comprehensive loss, and, if in
excess of a specified corridor, amortized over future periods. The expected
return on plan assets is determined using the expected rate of return and the
fair value of plan assets. Accordingly, market fluctuations in the fair value of
plan assets can affect the net periodic benefit cost in the following year. The
projected benefit obligation for defined benefit plans exceeded the fair value
of plan assets by $631 million at December 28, 2019 . A 25 basis point reduction
in the discount rate would have increased the projected benefit obligation by
approximately $93 million at December 28, 2019 . The primary Black & Decker U.S.
pension and post employment benefit plans were curtailed in late 2010, as well
as the only material Black & Decker international plan, and in their place the
Company implemented defined contribution benefit plans. The vast majority of the
projected benefit obligation pertains to plans that have been frozen; the
remaining defined benefit plans that are not frozen are predominantly small
domestic union plans and those that are statutorily mandated in certain
international jurisdictions. The Company recognized approximately $15 million of
defined benefit plan expense in 2019, which may fluctuate in future years
depending upon various factors including future discount rates and actual
returns on plan assets.
ENVIRONMENTAL - The Company incurs costs related to environmental issues as a
result of various laws and regulations governing current operations as well as
the remediation of previously contaminated sites. The Company's policy is to
accrue environmental investigatory and remediation costs for identified sites
when it is probable that a liability has been incurred and the amount of loss
can be reasonably estimated. The amount of liability recorded is based on an
evaluation of currently available facts with respect to each individual site and
includes such factors as existing technology, presently enacted laws and
regulations, and prior experience in remediation of contaminated sites. The
liabilities recorded do not take into account any claims for recoveries from
insurance or third parties. As assessments and remediation progress at
individual sites, the amounts recorded are reviewed periodically and adjusted to
reflect additional technical and legal information that becomes available.
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As of December 28, 2019 , the Company had reserves of $213.8 million for
remediation activities associated with Company-owned properties as well as for
Superfund sites, for losses that are probable and estimable. The range of
environmental remediation costs that is reasonably possible is $149.1 million to
$286.1 million which is subject to change in the near term. The Company may be
liable for environmental remediation of sites it no longer owns. Liabilities
have been recorded on those sites in accordance with this policy.
INCOME TAXES - The Company accounts for income taxes under the asset and
liability method in accordance with ASC 740, Income Taxes, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements.
Deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax basis of assets and liabilities using
the enacted tax rates in effect for the year in which the differences are
expected to reverse. Any changes in tax rates on deferred tax assets and
liabilities are recognized in income in the period that includes the enactment
date.
The Company records net deferred tax assets to the extent that it is more likely
than not that these assets will be realized. In making this determination,
management considers all available positive and negative evidence, including
future reversals of existing temporary differences, estimates of future taxable
income, tax-planning strategies, and the realizability of net operating loss
carryforwards. In the event that it is determined that an asset is not more
likely that not to be realized, a valuation allowance is recorded against the
asset. Valuation allowances related to deferred tax assets can be impacted by
changes to tax laws, changes to statutory tax rates and future taxable income
levels. In the event the Company were to determine that it would not be able to
realize all or a portion of its deferred tax assets in the future, the
unrealizable amount would be charged to earnings in the period in which that
determination is made. Conversely, if the Company were to determine that it
would be able to realize deferred tax assets in the future in excess of the net
carrying amounts, it would decrease the recorded valuation allowance through a
favorable adjustment to earnings in the period that the determination was made.
The Act subjects a U.S. shareholder to current tax on global intangible
low-taxed income ("GILTI") earned by certain foreign subsidiaries. The Financial
Accounting Standards Board ("FASB") Staff Q&A, Topic 740 No. 5, Accounting for
Global Intangible Low-Taxed Income, states that an entity can make an accounting
policy election to either recognize deferred taxes for temporary differences
expected to reverse as GILTI in future years or provide for the tax expense
related to GILTI in the year the tax is incurred. The Company has elected to
recognize the tax on GILTI as a period expense in the period the tax is
incurred.
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 Income taxes in the Consolidated Statements of Operations.
The Company is subject to income tax in a number of locations, including many
state and foreign jurisdictions. Significant judgment is required when
calculating the worldwide provision for income taxes. Many factors are
considered when evaluating and estimating the Company's tax positions and tax
benefits, which may require periodic adjustments, and which may not accurately
anticipate actual outcomes. It is reasonably possible that the amount of the
unrecognized benefit with respect to certain of the Company's unrecognized tax
positions will significantly increase or decrease within the next twelve months.
These changes may be the result of settlements of ongoing audits or final
decisions in transfer pricing matters. The Company periodically assesses its
liabilities and contingencies for all tax years still subject to audit based on
the most current available information, which involves inherent uncertainty.
Additional information regarding income taxes is available in Note Q, Income
Taxes.
RISK INSURANCE - To manage its insurance costs efficiently, the Company self
insures for certain U.S. business exposures and generally has low deductible
plans internationally. For domestic workers' compensation, automobile and
product liability (liability for alleged injuries associated with the Company's
products), the Company generally purchases insurance coverage only for severe
losses that are unlikely, and these lines of insurance involve the most
significant accounting estimates. While different self insured retentions, in
the form of deductibles and self insurance through its captive insurance
company, exist for each of these lines of insurance, the maximum self insured
retention is set at no more than $5 million per occurrence. The process of
establishing risk insurance reserves includes consideration of actuarial
valuations that reflect the Company's specific loss history, actual claims
reported, and industry trends among statistical and other factors to estimate
the range of reserves required. Risk insurance reserves are comprised of
specific reserves for individual claims and additional amounts expected for
development of these claims, as well as for incurred but not yet reported claims
discounted to present value. The cash outflows related to risk insurance claims
are expected to occur over a period of approximately 15 years. The Company
believes the
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liabilities recorded for these U.S. risk insurance reserves, totaling $87
million and $86 million as of December 28, 2019 , and December 29, 2018 ,
respectively, are adequate. Due to judgments inherent in the reserve estimation
process, it is possible the ultimate costs will differ from this estimate.
WARRANTY - The Company provides product and service warranties which vary across
its businesses. The types of warranties offered generally range from one year to
limited lifetime, and certain branded products carry a lifetime warranty. There
are also certain products with no warranty. Further, the Company sometimes
incurs discretionary costs to service its products in connection with product
performance issues. Historical warranty and service claim experience forms the
basis for warranty obligations recognized. Adjustments are recorded to the
warranty liability as new information becomes available. The Company believes
the $100 million reserve for expected product warranty claims as of December 28,
2019 is adequate, but due to judgments inherent in the reserve estimation
process, including forecasting future product reliability levels and costs of
repair as well as the estimated age of certain products submitted for claims,
the ultimate claim costs may differ from the recorded warranty liability. The
Company also establishes a reserve for product recalls on a product-specific
basis during the period in which the circumstances giving rise to the recall
become known and estimable for both company-initiated actions and those required
by regulatory bodies.
OFF-BALANCE SHEET ARRANGEMENT
The Company has no off-balance sheet arrangements as of December 28, 2019 .
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CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact are "forward-looking statements" for purposes of
federal and state securities laws, including any projections or guidance of
earnings, revenue or other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements
concerning proposed new products, services or developments; any statements
regarding future economic conditions or performance; any statements of belief;
and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include, among others, the words "may," "will,"
"estimate," "intend," "continue," "believe," "expect," "anticipate" or any other
similar words.
Although the Company believes that the expectations reflected in any of its
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of its forward-looking
statements. The Company's future financial condition and results of operations,
as well as any forward-looking statements, are subject to change and to inherent
risks and uncertainties, such as those disclosed or incorporated by reference in
the Company's filings with the Securities and Exchange Commission .
Important factors that could cause the Company's actual results, performance and
achievements, or industry results to differ materially from estimates or
projections contained in its forward-looking statements include, among others,
the following: (i) successfully developing, marketing and achieving sales from
new products and services and the continued acceptance of current products and
services; (ii) macroeconomic factors, including global and regional business
conditions (such as Brexit), commodity prices, inflation, and currency exchange
rates; (iii) laws, regulations and governmental policies affecting the Company's
activities in the countries where it does business, including those related to
tariffs, taxation, and trade controls, including section 301 tariffs and section
232 steel and aluminum tariffs; (iv) the economic environment of emerging
markets, particularly Latin America , Russia , China and Turkey ; (v) realizing the
anticipated benefits of mergers, acquisitions, joint ventures, strategic
alliances or divestitures, including the closing of the CAM acquisition, its
successful integration into the Company and the return to production of the
Boeing 737 MAX; (vi) pricing pressure and other changes within competitive
markets; (vii) availability and price of raw materials, component parts,
freight, energy, labor and sourced finished goods; (viii) the impact the
tightened credit markets may have on the Company or its customers or suppliers;
(ix) the extent to which the Company has to write off accounts receivable or
assets or experiences supply chain disruptions in connection with bankruptcy
filings by customers or suppliers; (x) the Company's ability to identify and
effectively execute productivity improvements and cost reductions; (xi)
potential business and distribution disruptions, including those related to
physical security threats, information technology or cyber-attacks, epidemics,
sanctions or natural disasters; (xii) the continued consolidation of customers,
particularly in consumer channels; (xiii) managing franchisee relationships;
(xiv) the impact of poor weather conditions; (xv) maintaining or improving
production rates in the Company's manufacturing facilities, responding to
significant changes in product demand and fulfilling demand for new and existing
products; (xvi) changes in the competitive landscape in the Company's markets;
(xvii) the Company's non-U.S. operations, including sales to non-U.S. customers;
(xviii) the impact from demand changes within world-wide markets associated with
homebuilding and remodeling; (xix) potential adverse developments in new or
pending litigation and/or government investigations; (xx) changes in the
Company's ability to obtain debt on commercially reasonable terms and at
competitive rates; (xxi) substantial pension and other postretirement benefit
obligations; (xxii) potential environmental liabilities; (xxiii) work stoppages
or other labor disruptions; and (xxiv) changes in accounting estimates.
Additional factors that could cause actual results to differ materially from
forward-looking statements are set forth in this Annual Report on Form 10-K,
including under the heading "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the
Consolidated Financial Statements and the related Notes.
Forward-looking statements in this Annual Report on Form 10-K speak only as of
the date hereof, and forward-looking statements in documents attached that are
incorporated by reference speak only as of the date of those documents. The
Company does not undertake any obligation to update or release any revisions to
any forward-looking statement or to report any events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events, except as
required by law.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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