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 ESG: •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 and expanding the outdoor products category, expanding the Industrial platform in Engineered Fastening and Infrastructure, and pursuing adjacencies with sound industrial logic. Execution of the above strategy has resulted in approximately$13.5 billion of acquisitions since 2002 (excluding theBlack & Decker merger), 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 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. The operating model underpins 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:
28
--------------------------------------------------------------------------------
•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;
•Deliver 10+ working capital turns; and
•Cash Flow Return On Investment ("CFROI") between 12-15%.
In terms of capital allocation, the Company remains committed, over time, to
returning approximately 50% of excess capital to shareholders through a strong
and growing dividend as well as opportunistically repurchasing shares. The
remaining capital (approximately 50%) will be deployed towards acquisitions.
Pending Sale of Convergent Security Solutions ("CSS")
InDecember 2021 , the Company announced that it had reached a definitive agreement for the sale of most of its Security assets to Securitas AB for$3.2 billion in cash. The proposed transaction includes the Company's CSS business comprising of commercial electronic security and healthcare businesses. The transaction does not include the Company's automatic doors business. The sale is subject to regulatory approvals and other customary closing conditions, and is expected to close in the first half of 2022. Net proceeds from the sale are expected to be used to fund, in part, an approximately$4 billion share repurchase which is planned to be completed in 2022. The use of net proceeds towards a planned share repurchase program is consistent with the Company's long-term capital allocation strategy focused on value maximization.
Acquisitions and Investments
OnDecember 1, 2021 , the Company acquired the remaining 80 percent ownership stake inMTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment. The Company previously acquired a 20 percent interest in MTD inJanuary 2019 . With over$2.6 billion of revenue in 2021, MTD designs, manufactures and distributes lawn tractors, zero turn ride on mowers, walk behind mowers, snow blowers, residential robotic mowers, handheld outdoor power equipment and garden tools for both residential and professional consumers under well-known brands like Cub Cadet® and Troy-Bilt®. OnNovember 12, 2021 , the Company acquired Excel Industries ("Excel"). Excel is a leading designer and manufacturer of premium commercial and residential turf-care equipment under the brands of Hustler Turf Equipment® and BigDog Mower Co®. The Company believes this is a strategically important bolt-on acquisition that bolsters the presence in the independent dealer network. The Company expects the combination of MTD, Excel and its existing outdoor strategic business unit in Tools & Storage will create a global leader in the$25 billion and growing outdoor category, with strong brands and growth opportunities. As part of the integration of these businesses, the Company plans to design, develop and manufacture battery and electric-powered solutions for professional and residential users. This will position the combined businesses to be a leader as preferences shift from gas powered equipment toward electrified solutions in outdoor power equipment. OnFebruary 24, 2020 , the Company acquiredConsolidated Aerospace Manufacturing, LLC ("CAM"), an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets. The acquisition further diversified the Company's presence in the industrial markets and expanded its portfolio of specialty fasteners in the aerospace and defense markets. OnMarch 8, 2019 , the Company acquired theInternational Equipment Solutions Attachments businesses, Paladin and Pengo, ("IES Attachments"), manufacturers of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition further diversified the Company's presence in the industrial markets, expanded its portfolio of attachment solutions and provided a meaningful platform for growth.
Refer to Note E, Acquisitions and Investments, for further discussion.
Divestitures
OnMay 30, 2019 , the Company sold itsSargent and Greenleaf mechanical locks business within the Security segment. The Company has also divested several smaller businesses in recent years that did not fit into its long-term strategic objectives. These divestitures allow the Company to invest in other areas of the Company that fit into its long-term growth strategy.
Refer to Note T, Divestitures, for further discussion of the Company's divestitures.
COVID-19 Pandemic
29
--------------------------------------------------------------------------------
The novel coronavirus ("COVID-19") outbreak has adversely affected the Company's
workforce and operations, as well as the operations of its customers,
distributors, suppliers and contractors. The COVID-19 pandemic has also resulted
in significant volatility and uncertainty in the markets in which the Company
operates. To successfully navigate through this unprecedented period, the
Company has remained focused on the following key priorities:
•Ensuring the health and safety of its employees and supply chain partners;
•Maintaining business continuity and financial strength and stability;
•Serving its customers as they provide essential products and services to the
world; and
•Doing its part to mitigate the impact of the virus across the globe.
To respond to the volatile and uncertain environment, the Company implemented a
comprehensive cost reduction and efficiency program in 2020, which delivered
approximately $625 million of net savings across 2021 and 2020. Cost actions
executed under the program included headcount reductions, furloughs, reduced
employee work schedules, a voluntary retirement program, and footprint
rationalizations. The Company took steps in 2020 to make some of the cost
actions permanent while certain employees were returned to full-time status.
This ensured the sustainability of the cost reduction program into 2021 while
providing more employment stability for the Company's remaining associates.
Driving Further Profitable Growth by Fully Leveraging
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, outdoor products, 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.
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 &
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®, Powers®, LISTA®, Vidmar®, GQ® and through the 2021 acquisitions of MTD and Excel added Cub Cadet®, Troy-Bilt® and Hustler® in theAmericas . Among the Company's most valuable assets, STANLEY®, BLACK+DECKER® and DEWALT® are recognized as three of the world's great brands, while CRAFTSMAN® is recognized as a premier American brand. TheNational Collegiate Athletic Association sponsorship delivered an estimated 308+ million views through TV-visible DEWALT® branding at 25 colleges and universities across five (Atlantic Coast Conference , Big Ten, Big 12, Pac-12 and Mountain West) Division 1 conferences. During 2021, the Company also announced its "Official Tools" sponsorship withMcLaren Racing in Formula 1 - a partnership well on track for 2022. In 2021, the McLaren team sported the DEWALT® logo on the car for 16 races starting at the British Grand Prix in July. The STANLEY®, DEWALT® and CRAFTSMAN® brands continue to have 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 2021 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. 30 -------------------------------------------------------------------------------- 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 - an annual increase of 110% - from digital and traditional advertising and strong brand awareness. Allocating brand and advertising spend judiciously will continue to be the Company's focus. Among the goals: being front and center in an emerging digital landscape, evolving proven marketing programs that tie trusted global brands with societal purpose and tapping into technologies to build meaning 1:1 experiences with customers, consumers, employees and shareholders in line with the Company's mission and vision.
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. The latest evolution occurred in 2020, when the
Company launched the SBD Operating Model: Winning in the 2020s, which recognized
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.
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, Internet of Things 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 in a variety of 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, Xtreme, and the launch of DEWALT PowerStack in December 2021 . 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 to manufacture closer to its
customers. This "Make Where We Sell" strategy will improve customer
responsiveness, lower lead times, reduce costs and mitigate geopolitical and
currency risk while facilitating improvements in carbon footprint.
Extraordinary Customer Experience
31
--------------------------------------------------------------------------------
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. Each of the
Company's businesses evaluates and works to systematically improve its various
customer journeys and acts on customer insights to continuously deliver an
extraordinary customer experience. 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, the Stanley 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, a
Silicon 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 in the long-term as well as
expanded operating margin rates over the next 3 to 5 years as the Company
leverages the growth and pursues structural cost reductions with the margin
resiliency initiatives.
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 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.
SegmentsThe Company's operations are classified into two reportable business segments: Tools & Storage and Industrial. The Company has one non-reportable business operating segment, Mechanical Access Solutions ("MAS").
Tools & Storage
The Tools & Storage segment is comprised of thePower Tools Group ("PTG"), Hand Tools, Accessories & Storage ("HTAS"), and Outdoor Power Equipment ("Outdoor") businesses. The PTG 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, 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. 32 -------------------------------------------------------------------------------- The Outdoor business primarily sells corded and cordless electric lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, pressure washers and related accessories, and gas powered lawn and garden products, including lawn tractors, zero turn ride on mowers, walk behind mowers, snow blowers, residential robotic mowers, utility terrain vehicles (UTVs), handheld outdoor power equipment, garden tools, and parts and accessories to professionals and consumers under the DEWALT®, CUB CADET®, BLACK+DECKER®, CRAFTSMAN®, TROY-BILT®, and HUSTLER® brand names.
Industrial
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses.
The Engineered Fastening business primarily sells highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals. The product lines include externally threaded fasteners, 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, high-strength structural fasteners, axel swage, latches, heat shields, pins, and couplings. The Infrastructure business consists of the Attachment Tools and Oil & Gas product lines. Attachment Tools sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications. 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.
RESULTS OF OPERATIONS
The Company's results represent continuing operations and exclude the commercial electronic security and healthcare businesses following the aforementioned announced divestiture inDecember 2021 , unless specifically noted. The operating results of these businesses previously were included in the Security segment and have been classified as discontinued operations.
Certain Items Impacting Earnings
The Company has provided a discussion of its results both inclusive and
exclusive of acquisition-related and other charges. Organic growth is also
utilized to describe results aside from the impacts of foreign currency
fluctuations, acquisitions during their initial 12 months of ownership, and
divestitures. The results and measures, including gross profit, selling,
general, and administrative ("SG&A"), Other, net, and segment profit, on a basis
excluding acquisition-related and other charges, and organic growth are Non-GAAP
financial measures. The Company considers the use of Non-GAAP financial measures
relevant to aid analysis and understanding of the Company's results and business
trends aside from the material impact of these items and ensures appropriate
comparability to operating results of prior periods.
The Company's operating results at the consolidated level as discussed below
include and exclude acquisition-related and other charges impacting gross
profit, SG&A, and Other, net. The Company's business segment results as
discussed below include and exclude acquisition-related and other charges
impacting gross profit and SG&A. These amounts for the year-to-date periods of
2021, 2020 and 2019 are as follows:
33
--------------------------------------------------------------------------------
2021
Acquisition-
Related Charges &
GAAP Other Non-GAAP
Gross profit $
5,194.2 $ 39.0
Selling, general and administrative1 3,240.4 (184.5) 3,055.9
Operating profit 1,953.8 223.5 2,177.3
Earnings from continuing operations before income taxes
and equity interest 1,641.0 194.7 1,835.7
Income taxes on continuing operations 61.4 64.4 125.8
Share of net earnings of equity method investment 19.0 11.2 30.2
Net Earnings from Continuing Operations Attributable to
Common Shareowners - Diluted 1,587.4 141.5 1,728.9
Diluted earnings per share of common stock - Continuing
operations $
9.62 $ 0.86
1 Includes provision for credit losses
The Acquisition-Related Charges and Other in the table above relate to the following:
•Charges reducing Gross profit pertaining to inventory step-up charges and
facility-related costs;
•Charges in SG&A primarily related to a non-cash fair-value adjustment and
functional transformation initiatives;
•Other charges included in Earnings from continuing operations before income
taxes and equity interest consisting of:
•$24.1 million in Other, net primarily related to deal transactions costs;
•$0.6 million net loss pertaining to divested businesses;
•$14.5 million of restructuring charges pertaining to severance and facility
closures; and
•$68.0 million gain recognized on the MTD equity method investment upon
acquisition;
•Income taxes on continuing operations include the tax effect on the above net
charges; and
•An after-tax, pre-acquisition charge related to the Company's share of MTD's
net earnings related primarily to a one-time retroactive duty on imports of a
specific component.
2020
Acquisition-
Related Charges &
GAAP Other Non-GAAP
Gross profit $
4,405.4 $ 61.7
Selling, general and administrative1 2,628.5 (123.2) 2,505.3
Operating profit 1,776.9 184.9 1,961.8
Earnings from continuing operations before income taxes
and equity interest 1,219.8 325.9 1,545.7
Income taxes on continuing operations 43.0 192.5 235.5
Share of net earnings of equity method investment 9.1 9.8 18.9
Net Earnings from Continuing Operations Attributable to
Common Shareowners - Diluted 1,162.6 143.2 1,305.8
Diluted earnings per share of common stock - Continuing
operations $
7.16 $ 0.88
1 Includes provision for credit losses
The Acquisition-Related Charges and Other in the table above relate to the following:
•Charges reducing Gross profit pertaining to inventory step-up charges, a cost
reduction program and facility-related costs;
•Charges in SG&A primarily for a cost reduction program and margin resiliency
initiatives;
•Other charges included in Earnings from continuing operations before income
taxes and equity interest consisting of:
•$7.1 million in Other, net primarily related to a cost reduction program, loss
on interest rate swaps in connection with the extinguishment of debt, and deal
transactions costs, partially offset by a release of a contingent consideration
liability relating to the CAM acquisition;
•$13.5 million net loss pertaining to divested businesses;
•$73.5 million of restructuring charges pertaining to severance and facility
closures; and
34
--------------------------------------------------------------------------------
•$46.9 million charge related to a loss on the extinguishment of debt;
•Income taxes on continuing operations include the tax effect on the above net
charges, as well as a one-time tax benefit of $119 million associated with a
supply chain reorganization; and
•An after-tax, pre-acquisition charge related to the Company's share of MTD's
net earnings related primarily to restructuring charges.
2019
Acquisition-
Related Charges &
GAAP Other Non-GAAP
Gross profit $
4,233.4 $ 28.0
Selling, general and administrative1 2,568.3 (71.2) 2,497.1
Operating profit 1,665.1 99.2 1,764.3
Earnings from continuing operations before income taxes
and equity interest 1,094.4 262.4 1,356.8
Income taxes on continuing operations 126.8 54.4 181.2
Share of net losses of equity method investment (11.2) 24.3 13.1
Net Earnings from Continuing Operations Attributable to
Common Shareowners - Diluted 954.1 232.3 1,186.4
Diluted earnings per share of common stock - Continuing
operations $
6.10 $ 1.49
1 Includes provision for credit losses
The Acquisition-Related Charges and Other in the table above relate to the following:
•Charges reducing Gross profit pertaining to facility-related and inventory step-up charges; •Charges in SG&A primarily for integration-related costs and margin resiliency initiatives; •Other charges included in Earnings from continuing operations before income taxes and equity interest consisting of: •$27.6 million in Other, net primarily related to deal transaction costs; •$17.0 million gain related to the sale of theSargent & Greenleaf business; •$134.7 million of restructuring charges pertaining to severance and facility closures associated with a cost reduction program; and •$17.9 million non-cash loss on the extinguishment of debt; •Income taxes on continuing operations include the tax effect on the above net charges; and •An after-tax, pre-acquisition charge related to the Company's share of MTD's net earnings related primarily to an inventory step-up adjustment.
Below is a summary of the Company's operating results at the consolidated level, followed by an overview of business segment performance.
Consolidated Results
Net Sales : Net sales were$15.617 billion in 2021 compared to$13.058 billion in 2020, representing an increase of 20% with organic growth of 17%, driven by a 14% increase in volume and 3% increase in price, 2% increases from both acquisitions and foreign currency, partially offset by a 1% decrease from divestitures. Tools & Storage net sales increased 24% compared to 2020 due to a 17% increase in volume, a 3% increase in price and 2% increases from both acquisitions and foreign currency. Industrial net sales increased 5% compared to 2020 primarily due to a 2% increase in volume, a 1% increase in price, and 1% increases from both acquisitions and foreign currency. Net sales were$13.058 billion in 2020 compared to$12.913 billion in 2019, representing an increase of 1% driven by a 2% increase from acquisitions, primarily CAM, and a 1% increase in price, partially offset by pandemic-related volume decreases of 1% and foreign currency of 1%. Organic growth of 12% in the second half of 2020 and acquisitions more than offset first half pandemic related market impacts. Tools & Storage net sales increased 3% compared to 2019 due to 2% increases in both volume and price, partially offset by a decrease of 1% from foreign currency. Industrial net sales decreased 3% compared to 2019 primarily due to volume decreases of 15%, partially offset by acquisition growth of 12%. Gross Profit: The Company reported gross profit of$5.194 billion , or 33.3% of net sales, in 2021 compared to$4.405 billion , or 33.7% of net sales, in 2020. Acquisition-related and other charges, which reduced gross profit, were$39.0 million in 2021 35 -------------------------------------------------------------------------------- and$61.7 million in 2020. Excluding these charges, gross profit was 33.5% of net sales in 2021 compared to 34.2% in 2020, as higher volume, productivity, price realization, and mix benefits from innovation were more than offset primarily by commodity inflation and higher supply chain costs to serve demand. The Company reported gross profit of$4.405 billion , or 33.7% of net sales, in 2020 compared to$4.233 billion , or 32.8% of net sales, in 2019. Acquisition-related and other charges, which reduced gross profit, were$61.7 million in 2020 and$28.0 million in 2019. Excluding these charges, gross profit was 34.2% of net sales in 2020, compared to 33.0% in 2019, driven by productivity, margin resiliency initiatives and price realization. SG&A Expenses: Selling, general and administrative expenses, inclusive of the provision for credit losses ("SG&A"), were$3.240 billion , or 20.7% of net sales, in 2021 compared to$2.629 billion , or 20.1% of net sales, in 2020. Within SG&A, acquisition-related and other charges totaled$184.5 million in 2021 and$123.2 million in 2020. Excluding these charges, SG&A was 19.6% of net sales in 2021 compared to 19.2% in 2020, reflecting growth investments deployed across the businesses. SG&A expenses were$2.629 billion , or 20.1% of net sales, in 2020 compared to$2.568 billion , or 19.9% of net sales, in 2019. Within SG&A, acquisition-related and other charges totaled$123.2 million in 2020 and$71.2 million in 2019. Excluding these charges, SG&A was 19.2% of net sales in 2020 compared to 19.3% in 2019, primarily reflecting the benefits of cost management programs implemented in response to the global pandemic, partially offset by growth investments to pursue market recoveries and opportunities across the businesses that emerged during the pandemic. 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$416.5 million ,$347.3 million and$326.5 million in in 2021, 2020 and 2019, respectively. Other, net: Other, net totaled$190.1 million ,$217.8 million , and$201.1 million in 2021, 2020, and 2019, respectively. Excluding acquisition-related and other charges, Other, net totaled$166.0 million ,$210.7 million , and$173.5 million in 2021, 2020, and 2019, respectively. The year-over-year decrease in 2021 was primarily due to appreciation ofStanley Ventures' investments. The year-over-year increase in 2020 driven by higher intangible asset amortization and negative impacts from foreign currency. Loss (gain) on Sales of Businesses: During 2021, the Company reported a$0.6 million net loss on divestitures. During 2020, the Company reported a$13.5 million net loss primarily relating to the sale of a product line within Oil & Gas. During 2019, the Company reported a$17.0 million gain relating to the sale of theSargent and Greenleaf business. Gain on equity method investment: Upon the acquisition of MTD in the fourth quarter of 2021, the Company recognized a$68.0 million gain on its previously held equity method investment. Refer to Note E, Acquisitions and Investments, for further discussion. Loss on Debt Extinguishments: During the fourth quarter of 2020, the Company extinguished$1.154 billion of its notes payable and recognized a$46.9 million pre-tax loss primarily due to a make-whole premium payment. In 2019, the Company extinguished$750 million of its notes payable and recognized a$17.9 million pre-tax loss primarily related to the write-off of deferred financing fees. Interest, net: Net interest expense in 2021 was$175.6 million compared to$205.1 million in 2020 and$230.3 million in 2019. The decrease in 2021 compared to 2020 was primarily driven by lowerU.S. interest rates on commercial paper borrowings and lower interest expense related to the extinguishment of notes payable in the fourth quarter of 2020, partially offset by lower interest income due to a decline in rates. The decrease in net interest expense in 2020 versus 2019 was primarily driven by lowerU.S. interest rates and lower average balances relating to the Company's commercial paper borrowings, partially offset by lower interest income due to a decline in rates. Income Taxes: OnMarch 11, 2021 , the American Rescue Plan Act of 2021 (the "ARPA") was enacted. The ARPA, among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations, provide a 100% COBRA subsidy, temporarily increase the income exclusion for dependent care assistance, and to extend and modify the employee retention credit and the Families First Coronavirus Response Act paid leave credit. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social 36 -------------------------------------------------------------------------------- security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company completed its evaluation of the ARPA and CARES Act, and concluded that they did not have a material impact on the Company's consolidated financial statements. The Company's effective tax rate on continuing operations was 3.7% in 2021, 3.5% in 2020, and 11.6% in 2019. Excluding the impact of acquisition-related and other charges, the effective tax rate in 2021 on continuing operations was 6.9%. This effective tax rate differs from theU.S. statutory tax rate primarily due to a benefit associated with the Company's supply chain reorganization, tax on foreign earnings, the remeasurement of uncertain tax position reserves, the remeasurement of deferred tax assets and liabilities due to foreign corporate income tax rate changes, and the tax benefit of equity-based compensation. Excluding the one-time tax benefit of$118.8 million recorded in the second quarter 2020 to reverse a deferred tax liability previously established related to certain unremitted earnings of foreign subsidiaries not permanently reinvested as a result of initiating a supply chain reorganization and the impact of acquisition-related and other charges, the effective tax rate on continuing operations in 2020 was 15.2%. This effective tax rate differs from theU.S. statutory tax rate primarily due to tax on foreign earnings at tax rates different than theU.S. rate, the remeasurement of uncertain tax position reserves, the tax benefit of equity compensation, and tax benefits arising from an increase in deferred tax assets associated with the Company's supply chain reorganization and partial realignment of the Company's legal structure. Excluding the impact of acquisition-related and other charges, the effective tax rate on continuing operations in 2019 was 13.3%. This effective tax rate differed from theU.S. statutory tax rate primarily due to a portion of the Company's earnings being realized in lower-taxed foreign jurisdictions and the favorable effective settlements of income tax audits.
Business Segment Results
The Company's reportable segments are aggregations of businesses that have similar products, services and end markets, among other factors. The Company utilizes segment profit which is defined as net sales minus cost of sales and SG&A inclusive of the provision for credit losses (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment.
The Company's operations are classified into two reportable business segments: Tools & Storage and Industrial.
Tools & Storage: (Millions of Dollars) 2021 2020 2019 Net sales$ 12,817 $ 10,330 $ 10,062 Segment profit$ 1,985 $ 1,820 $ 1,517 % of Net sales 15.5 % 17.6 % 15.1 % Tools & Storage net sales increased$2.488 billion , or 24%, in 2021 compared to 2020 due to a 17% increase in volume, a 3% increase in price and 2% increases from both acquisitions and favorable currency. The 20% organic growth was driven by stronger volumes due to the consumer reconnection with the home and garden, eCommerce and strong professional demand as well as price. Segment profit amounted to$1.985 billion , or 15.5% of net sales, in 2021 compared to$1.820 billion , or 17.6% of net sales, in 2020. Excluding acquisition-related and other charges of$178.4 million and$46.4 million in 2021 and 2020, respectively, segment profit amounted to 16.9% of net sales in 2021 compared to 18.1% in 2020, as volume and price benefits were more than offset by inflation, higher pandemic-related supply chain costs and growth investments. Tools & Storage net sales increased$267.6 million , or 3%, in 2020 compared to 2019 due to a 2% increase in both volume and price, partially offset by unfavorable currency of 1%. The 4% organic growth was driven by a strong second half organic performance of 18% from a consumer reconnection with the home and garden and a shift to eCommerce that emerged from the pandemic and was accelerated by a robust lineup of new and innovative products. Double digit growth was realized across all regions in the second half of 2020. For the full year,North America andEurope organic growth more than offset a decline in emerging markets. Segment profit amounted to$1.820 billion , or 17.6% of net sales, in 2020 compared to$1.517 billion , or 15.1% of net sales, in 2019. Excluding acquisition-related and other charges of$46.4 million and$44.3 million in 2020 and 2019, respectively, segment profit amounted to 18.1% of net sales in 2020 compared to 15.5% in 2019, as volume, productivity, cost control and price were partially offset by new growth investments, tariffs and currency. 37 --------------------------------------------------------------------------------
Industrial: (Millions of Dollars) 2021 2020 2019 Net sales$ 2,463 $ 2,353 $ 2,435 Segment profit$ 257 $ 221 $ 330 % of Net sales 10.4 % 9.4 % 13.6 % Industrial net sales increased$110.4 million , or 5%, in 2021 compared to 2020, due to a 2% increase in volume, a 1% increase in price, and 1% increases from both acquisitions and foreign currency. Engineered Fastening organic revenues increased 5% for the full year, as general industrial growth and a strong first half in automotive more than offset the market-driven aerospace declines. Infrastructure organic revenues were down 1% as mid-teen growth in Attachment Tools was more than offset by lower pipeline activity in Oil & Gas. Segment profit totaled$256.6 million , or 10.4% of net sales, in 2021 compared to$220.6 million , or 9.4% of net sales, in 2020. Excluding acquisition-related and other charges of$13.1 million and$67.1 million in 2021 and 2020, respectively, segment profit amounted to 10.9% of net sales in 2021 compared to 12.2% in 2020, as volume, price and productivity was more than offset by commodity inflation, growth investments and unfavorable mix. Industrial net sales decreased$82.0 million , or 3%, in 2020 compared to 2019, due to pandemic-related market declines in volume of 15%, partially offset by acquisition growth of 12%. Engineered Fastening organic revenues decreased 15% for the full year, due to the significant impacts from the pandemic to automotive and general industrial production. Infrastructure organic revenues were down 15% from lower volumes in Attachment Tools and a sharp decline in Oil & Gas pipeline construction. The deepest segment organic revenue decline was the second quarter and each quarter thereafter delivered stronger revenue as markets recovered. Segment profit totaled$220.6 million , or 9.4% of net sales, in 2020 compared to$330.0 million , or 13.6% of net sales, in 2019. Excluding acquisition-related and other charges of$67.1 million and$25.8 million in 2020 and 2019, respectively, segment profit amounted to 12.2% of net sales in 2020 compared to 14.6% in 2019, as productivity gains and cost control were more than offset by market driven volume declines.
Corporate Overhead & Other
Corporate Overhead & Other includes the results of the commercial electronic security business in five countries inEurope and emerging markets through its disposition in the fourth quarter of 2020 and the Mechanical Access Solutions business, a non-reportable business operating segment, as well as the corporate overhead element of SG&A, which is not allocated to the business segments. Corporate Overhead & Other amounted to$288.2 million ,$264.0 million , and$181.9 million in 2021, 2020 and 2019, respectively, which includes$45.5 million ,$33.7 million and$47.5 million of operating profit from the MAS business in 2021, 2020 and 2019, respectively. Excluding acquisition-related charges, Corporate Overhead & Other is$256.2 million ,$192.6 million and$152.9 million in 2021, 2020 and 2019, respectively. The year-over-year increase in 2021 compared to 2020 was driven by functional investments. The year-over-year increase in 2020 compared to 2019 was driven by higher employee-related costs. 38 --------------------------------------------------------------------------------
RESTRUCTURING ACTIVITIES
A summary of the restructuring reserve activity from
January 2, January 1,
(Millions of Dollars) 2021 Net Additions Usage Currency 2022
Severance and related costs $ 77.8 $ (3.5) $ (47.9) $ 2.0 $ 28.4
Facility closures and asset
impairments 2.0 18.0 (16.5) - 3.5
Total $ 79.8 $ 14.5 $ (64.4) $ 2.0 $ 31.9
During 2021, the Company recognized net restructuring charges of $14.5 million ,
primarily related to facility closures and asset impairments. The Company
expects to achieve annual net cost savings of approximately $24 million by the
end of 2022 related to restructuring costs incurred during 2021. The majority of
the $31.9 million of reserves remaining as of January 1, 2022 is expected to be
utilized within the next twelve months.
During 2020, the Company recognized net restructuring charges of $73.8 million ,
primarily related to severance costs associated with a cost reduction program
announced in the second quarter of 2020. The 2020 actions resulted in net cost
savings of approximately $125 million in 2021.
During 2019, the Company recognized net restructuring charges of $138.4 million ,
primarily related to severance costs associated with a cost reduction program
announced in the third quarter of 2019. The 2019 actions resulted in annual net
cost savings of approximately $185 million , primarily in the Tools & Storage
segment.
Segments: The
The anticipated annual net cost savings of approximately
2022 OUTLOOK
This outlook discussion is intended to provide broad insight into the Company's near-term earnings and cash flow generation prospects. The Company expects 2022 diluted earnings per share to approximate$10.10 to$10.70 ($12.00 to$12.50 excluding acquisition-related and other charges) reflecting year-over-year adjusted EPS growth of 15% to 19%. Free cash flow is expected to approximate$2.0 billion as the Company focuses on serving its customers while leveraging the SBD Operating Model to drive working capital efficiency. The 2022 outlook for adjusted diluted earnings per share assumes approximately$1.20 to$1.30 of accretion related to 6% to 7% price increases to exceed carryover headwinds, approximately$0.20 of dilution related to carryover growth investments, net of cost containment, approximately$0.60 accretion from Outdoor acquisitions, and approximately$0.10 of accretion from the impact of the 2022 share repurchase program, offsetting tax rate impacts and other below the line items. The difference between 2022 diluted earnings per share outlook and the diluted earnings per share range, excluding charges, is$1.80 to$1.90 , consisting of acquisition-related and other charges. These forecasted charges primarily relate to integration costs and cost reduction actions.
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$663.1 million in 2021 compared to$2.022 billion in 2020. The year-over-year decrease was mainly attributable to higher inventory levels to meet demand within the Tools and Storage segment, coupled with longer lead times related to the challenged global supply chain. In 2020, cash flows provided by operations were$2.022 billion compared to$1.506 billion in 2019. The year-over-year increase was mainly attributable to higher earnings driven by increased demand in the Tools & Storage segment and strong cost control.
Free Cash Flow: Free cash flow, as defined in the table below, was
39
--------------------------------------------------------------------------------
excluding acquisitions, to support the strong demand outlook and longer lead
times related to the challenged global supply chain. This included a substantial
increase in inventory in transit of $600 million as well as higher unit costs
associated with inflation. At least $500 million of this inventory increase is
anticipated to reverse in 2022. 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, and is useful information for investors. Free
cash flow does not include deductions for mandatory debt service, other
borrowing activity, discretionary dividends on the Company's common and
preferred stock and business acquisitions, among other items.
(Millions of Dollars) 2021 2020 2019
Net cash provided by operating activities $ 663 $ 2,022 $ 1,506
Less: capital and software expenditures (519) (348) (425)
Free cash flow $ 144 $ 1,674 $ 1,081
Investing Activities: Cash flows used in investing activities totaled $2.624
billion in 2021, driven by business acquisitions of $2.044 billion , net of cash
acquired, primarily related to the MTD and Excel acquisitions, and capital and
software expenditures of $519 million .
Cash flows used in investing activities in 2020 totaled $1.577 billion , driven
by business acquisitions of $1.324 billion , net of cash acquired, primarily
related to the CAM acquisition, and capital and software expenditures of $348
million .
Cash flows used in investing activities in 2019 totaled $1.209 billion , driven
by business acquisitions of $685 million , mainly 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.
Financing Activities: Cash flows provided by financing activities totaled $919
million in 2021 primarily driven by net short-term borrowings of $2.225 billion
and $131 million of proceeds from issuances of common stock, partially offset by
the redemption and conversion of preferred stock for $750 million , cash dividend
payments on common stock of $475 million , and $75 million related to the
termination of interest rate swaps.
Cash flows provided by financing activities totaled $616 million in 2020
primarily driven by net proceeds from debt issuances of $2.223 billion , proceeds
generated from the remarketing of the Series C Preferred Stock of $750 million
and $147 million of proceeds from issuances of common stock, partially offset by
payments on long-term debt of $1.154 billion , cash dividend payments of $432
million , net repayments of short-term borrowings of $343 million under the
Company's commercial paper program, and a $250 million Craftsman deferred
purchase price payment.
Cash flows used in financing activities in 2019 totaled $293 million primarily
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 .
Fluctuations in foreign currency rates negatively impacted cash by $62 million
in 2021 and $1 million in 2019 due to the strengthening of the U.S. Dollar
against other currencies. Fluctuations in foreign currency rates positively
impacted cash by $23 million in 2020 due to the weakening of the U.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). There were no changes to any of the Company's credit ratings during 2021, however, S&P and Fitch revised their outlooks to 'stable' from 'negative'in the first half of 2021 as a result of the Company's strong performance during the COVID-19 pandemic. Refer to Item 1A. Risk Factors in Part I of this Form 10-K for further discussion of the risks associated with the ongoing COVID-19 pandemic. 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.
Cash and cash equivalents totaled
40
--------------------------------------------------------------------------------
As a result of the Tax Cuts and Jobs Act ("Act"), the Company's tax liability
related to the one-time transition tax associated with unremitted foreign
earnings and profits totaled $296 million at January 1, 2022 . The Act permits a
U.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.
In October 2021 , the Company increased its commercial paper program from $3.0
billion to $3.5 billion , which includes Euro denominated borrowings in addition
to U.S. Dollars. As of January 1, 2022 , the Company had $2.2 billion of
borrowings outstanding. As of January 2, 2021 , the Company had no borrowings
outstanding, Refer to Note I, Financial Instruments, for further discussion.
In September 2021 , the Company amended and restated its existing a five-year
$2.0 billion committed credit facility with the concurrent execution of a new
five year $2.5 billion committed credit facility (the "5-year Credit
Agreement"). Borrowings under the 5-Year Credit Agreement may be made in U.S.
Dollars, Euros or Pounds Sterling. A sub-limit amount of $814.3 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 of September 8, 2026
or upon termination. The 5-Year Credit Agreement is designated to be a liquidity
back-stop for the Company's $3.5 billion U.S. Dollar and Euro commercial paper
program. As of January 1, 2022 and January 2, 2021 , the Company had not drawn on
its five-year committed credit facility.
In September 2021 , the Company terminated its 364-day $1.0 billion credit
facility and concurrently executed a new 364-Day $1.0 billion committed credit
facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit
Agreement may be made in U.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 364-Day Credit Agreement. The Company must
repay all advances under the 364-Day Credit Agreement by the earlier of
September 7, 2022 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 364-Day Credit Agreement serves as part of the
liquidity back-stop for the Company's $3.5 billion U.S. Dollar and Euro
commercial paper program. As of January 1, 2022 and January 2, 2021 , the Company
had not drawn on this 364-Day committed credit facility.
In November 2021 , the Company executed a second 364-Day $1.0 billion committed
credit facility (the "Second 364-Day Credit Agreement"). Borrowings under the
Second 364-Day Credit Agreement may be made in U.S. Dollars and Euros and bear
interest at a base rate plus an applicable margin determined at the time of the
borrowing. The Company must repay all advances under the Second 364-Day Credit
Agreement by the earlier of November 15, 2022 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. As of January 1, 2022 ,
the Company had not drawn on this 364-Day committed credit facility.
In January 2022 , the Company executed a third 364-Day $2.5 billion committed
credit facility (the "Third 364-Day Credit Agreement"). Borrowings under the
Third 364-Day Credit Agreement shall be made in U.S. Dollars and bear interest
at a base rate plus an applicable margin determined at the time of the
borrowing. The Company must repay all advances under the Third 364-Day Credit
Agreement by the earlier of January 25, 2023 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 Company has not
drawn on this 364-Day committed credit facility.
In addition, the Company has other short-term lines of credit that are primarily
uncommitted, with numerous banks, aggregating
AtJanuary 1, 2022 , the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was approximately$4.9 billion . AtJanuary 1, 2022 ,$2.2 billion was recorded as short-term borrowings. In addition,$91 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 rates onU.S. dollar denominated short-term borrowings for 2021 and 2020 were 0.1% and 1.3%, respectively. The weighted-average interest rate on Euro denominated short-term borrowings for 2021 and 2020 were negative 0.5% and 0.2%, respectively. 41 --------------------------------------------------------------------------------
In the fourth quarter of 2021, the Company assumed
InNovember 2020 , the Company issued$750.0 million of senior unsecured term notes maturingNovember 15, 2050 ("2050 Term Notes"). The 2050 Term Notes will accrue interest at a fixed rate of 2.75% 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 unsubordinated debt. The Company received total net proceeds from this offering of approximately$740 million , net of 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. Contemporaneously with the issuance of the 2050 Term Notes, the Company redeemed the 3.4% senior unsecured term notes due 2021 ("2021 Term Notes") and the 2.9% senior unsecured term notes due 2022 ("2022 Term Notes") for approximately$1.2 billion representing the outstanding principal amounts, accrued and unpaid interest, and a make-whole premium. The Company recognized a net pre-tax loss of$47 million from the extinguishment, which was comprised of the$49 million make-whole premium payment and a$2 million loss related to the write-off of deferred financing fees, partially offset by a$4 million gain relating to the write-off of unamortized fair value swap terminations. The Company also recognized a pre-tax loss of$20 million relating to the unamortized loss on cash flow swap terminations related to the 2022 Term Notes. Refer to Note I, Financial Instruments, for further discussion. InFebruary 2020 , the Company issued$750 million of senior unsecured term notes maturingMarch 15, 2030 ("2030 Term Notes") and$750.0 million of fixed-to-fixed reset rate junior subordinated debentures maturingMarch 15, 2060 ("2060 Junior Subordinated Debentures"). The 2030 Term Notes 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 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$1.5 billion , net of underwriting expenses and other fees associated with the transactions. The net proceeds from the offering were used for general corporate purposes, including acquisition funding. 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 consists 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 offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series D Preferred Stock. The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures inDecember 2019 . 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 a successful remarketing of the Series D Preferred Stock (the "Remarketed Series D Preferred Stock"), the Company will receive additional cash proceeds of$750 million and issue shares of Remarketed Series D Preferred Stock. The Company pays the holders of the 2022 Purchase Contracts quarterly contract adjustment payments, which commencedFebruary 15, 2020 . As ofJanuary 1, 2022 , the present value of the contract adjustment payments was approximately$38 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 . InFebruary 2020 , the Company net-share settled 0.6 million of the 3.2 million capped options on its common stock and received 61,767 shares using an average reference price of$162.26 per common share. OnJune 9, 2020 , the Company amended the 2018 capped call options to align with and offset the potential economic dilution associated with the common shares issuable upon conversion of the Remarketed Series C Preferred Stock, as further discussed below. Subsequent to the amendment, the capped call options had an initial lower strike price of$148.34 and an upper strike price of$165.00 , 42 -------------------------------------------------------------------------------- which was approximately 30% higher than the closing price of the Company's common stock onJune 9, 2020 . During the second quarter of 2021, the Company net share settled the remaining capped call options on its common stock and received 344,004 shares using an average reference price of$209.80 per common share. InMay 2017 , the Company issued 7,500,000 Equity Units with a total notional value of$750 million ("2017 Equity Units"). Each unit had 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$727 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. 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. InMay 2020 , the Company generated cash proceeds of$750 million from the successful remarketing of the Series C Preferred Stock (the "Remarketed Series C Preferred Stock"), as described more fully in Note J, Capital Stock. Upon completion of the remarketing, the holders of the 2017 Equity Units received 5,463,750 common shares and the Company issued 750,000 shares of Remarketed Series C Preferred Stock. Holders of the Remarketed Series C Preferred Stock are entitled to receive cumulative dividends, if declared by the Board of Directors, at an initial fixed rate equal to 5.0% per annum of the$1,000 per share liquidation preference (equivalent to$50.00 per annum per share). In connection with the remarketing, the conversion rate was reset to 6.7352 shares of the Company's common stock, which was equivalent to a conversion price of approximately$148.47 per share. Beginning onMay 15, 2020 , the holders have the option to convert the Remarketed Series C Preferred Stock into common stock. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. The Company did not have the right to redeem the Remarketed Series C Preferred Stock prior toMay 15, 2021 . OnApril 28, 2021 , the Company informed holders that it would redeem all outstanding shares of the Remarketed Series C Preferred Stock onJune 3, 2021 (the "Redemption date") at$1,002.50 per share in cash ("Redemption price"), which was equal to 100% of the liquidation preference of a share of Remarketed Series C Preferred Stock, plus accumulated and unpaid dividends to, but excluding, the Redemption Date. If a holder elected to convert its shares of Remarketed Series C Preferred Stock prior to the Redemption Date, the Company elected a combination settlement with a specified cash amount of$1,000 per share. InJune 2021 , the Company redeemed the Remarketed Series C Preferred Stock and settled all conversions, paying$750 million in cash and issuing 1,469,055 common shares. 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.
43
--------------------------------------------------------------------------------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 2022 2023-2024 2025-2026 Thereafter
Long-term debt (a) $ 4,408 $ 1 $ 2 $ 555 $ 3,850
Interest payments on long-term debt
(b) 3,241 165 330 330 2,416
Short-term borrowings 2,241 2,241 - - -
Lease obligations (c) 577 146 198 120 113
Inventory purchase commitments (d) 802 799 3 - -
Deferred compensation 30 1 1 1 27
Marketing commitments (e) 77 54 23 - -
Forward stock purchase contract (f) 350 350 - - -
Pension funding obligations (g) 41 41 - - -
Contract adjustment fees (h) 39 39 - - -
U.S. income tax (i) 296 33 151 112 -
Supplier agreement (j) 78 78 - - -
Total contractual cash obligations
708
(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 discussed further in Note H, Long-Term Debt and Financing Arrangements. (b)Future interest payments on long-term debt reflect the applicable interest rate in effect atJanuary 1, 2022 . (c)Future lease obligations in the table above include$81 million for discontinued operations,$25 million in 2022,$19 million in 2023,$14 million in 2024,$10 million in 2025,$6 million in 2026, and$7 million thereafter. (d)Inventory purchase commitments primarily consist of open purchase orders to purchase raw materials, components, and sourced products. (e)Future marketing commitments in the table above include$1.0 million in 2022 attributable to discontinued operations. (f)InMarch 2015 , the Company entered into a forward share purchase contract 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. InFebruary 2020 , the Company amended the settlement date toApril 2022 , or earlier at the Company's option. See Note J, Capital Stock, for further discussion. (g)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 2022 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. (h)These amounts represent future contract adjustment payments to holders of the Company's 2022 Purchase Contracts. See Note J, Capital Stock, for further discussion. (i)Income tax liability for the one-time deemed repatriation tax on unremitted foreign earnings and profits. (j)Prepayment to vendor to support dedicated production of key material. 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$289 million and$548 million , respectively, atJanuary 1, 2022 , the Company is unable to make a reliable estimate of when (if at all) these amounts may be paid. Refer to Note M, Fair Value Measurements, 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, 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. 44 --------------------------------------------------------------------------------
Other Significant Commercial Commitments:
Amount of Commitment Expirations Per Period
(Millions of Dollars) Total 2022 2023-2024 2025-2026 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, Chinese Renminbi 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 2021 would have been an incremental pre-tax loss of approximately$30 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 intoU.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 aU.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$209 million , or approximately$1.18 per diluted share. In 2021, translational and transactional foreign currency fluctuations negatively impacted pre-tax earnings from continuing operations by approximately$17 million , or approximately$0.10 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 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-termU.S. interest rates. AtJanuary 1, 2022 , 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. 45 -------------------------------------------------------------------------------- The Company has$136 million of liabilities as ofJanuary 1, 2022 pertaining to unfunded defined contribution plans for certainU.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 2021, 2020, and 2019, investment returns on pension plan assets resulted in increases of$81 million ,$280 million , and$323 million , respectively. The Company expects funding obligations on its defined benefit plans to be approximately$41 million in 2022. 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 solely 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 have been funded. Overall ESOP expense was affected
by the market value of the Company's stock on the monthly dates when shares were
released, among other factors. The Company's net ESOP activity resulted in
expense of $59.1 million and $4.4 million in 2021 and 2020, respectively, and
income of $5.1 million in 2019. U.S. defined contribution retirement plan
expense increased in 2021 as all remaining unallocated shares in the ESOP were
released in the first quarter of 2020. In addition, employer contributions to
the plan were suspended for the last three quarters 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.
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 January 1, 2022 , the Company reported $8.784 billion
of goodwill, $2.525 billion of indefinite-lived trade names and $2.175 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 charge would be recorded for the amount that the
carrying amount of the reporting unit exceeded its fair value.
As required by the Company's policy, goodwill was tested for impairment in the
third quarter of 2021. 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
46
--------------------------------------------------------------------------------
fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform a quantitative goodwill
impairment test. Impairment tests are completed separately with respect to the
goodwill of each of the Company's reporting units. For its annual impairment
testing performed in the third quarter of 2021, the Company applied the
qualitative assessment for two of its reporting units, while performing the
quantitative test for three of its reporting units. 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 three 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 7.0% to 8.0%, near-term revenue growth rates over the next six
years, which represented cumulative annual growth rates ranging from
approximately 4% 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 50%.
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 2021 utilizing a discounted cash flow model. The key
assumptions used included discount rates, royalty rates, and perpetual growth
rates applied to the projected sales. The Company determined that the fair
values of its 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
January 1, 2022 for the United States and international pension plans were 2.80%
and 1.78%, respectively. The Company's weighted-average discount rates used to
determine benefit obligations at January 2, 2021 for the United States and
international pension plans were 2.39% and 1.31%, 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 4.75% and 3.25%, respectively, at January 1,
2022 . The Company will use a 4.07% weighted-average expected rate of return
assumption to determine the 2022 net periodic benefit cost. A 25 basis point
reduction in the expected rate of return assumption would increase 2022 net
periodic benefit cost by approximately $6 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 $432 million at January 1, 2022 . A 25 basis point reduction in
the discount rate would have increased the projected benefit obligation by
approximately $101 million at January 1, 2022 . 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
47
--------------------------------------------------------------------------------
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 $8 million of defined benefit plan income
in 2021, 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.
As of January 1, 2022 , the Company had reserves of $159 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 $94 million to $229 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 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, litigation, or
other proceedings with taxing authorities. 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.
48
--------------------------------------------------------------------------------
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 deflation, 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, data privacy, anti-bribery,
anti-corruption, government contracts and trade controls such as section 301
tariffs and section 232 steel and aluminum tariffs; (iv) the economic,
political, cultural and legal 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;
(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 and
change to LIBOR and other benchmark rates 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, pandemics, sanctions, political unrest, war, terrorism
or natural disasters; (xii) the continued consolidation of customers,
particularly in consumer channels and the Company's continued reliance on
significant customers; (xiii) managing franchisee relationships; (xiv) the
impact of poor weather conditions and climate change; (xv) maintaining or
improving production rates in the Company's manufacturing facilities, responding
to significant changes in customer preferences, product demand and fulfilling
demand for new and existing products, and learning, adapting and integrating new
technologies into products, services and processes; (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) the incurrence of debt and 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 regulatory liabilities, including environmental,
privacy, data breach, workers compensation and product liabilities; (xxiii)
attracting and retaining key employees, managing a workforce in many
jurisdictions, work stoppages or other labor disruptions; (xxiv) the Company's
ability to keep abreast with the pace of technological change; (xxv) changes in
accounting estimates; (xxvi) the Company's ability to protect its intellectual
property rights and associated reputational impacts; (xxvii) the continued
adverse effects of the COVID-19 pandemic and an indeterminate recovery period;
(xxviii) the possibility that the Company does not achieve the intended
financial benefits from the acquisition of MTD; (xxix) the failure to
consummate, or a delay in the consummation of, the Security sale transaction for
various reasons (including but not limited to failure to receive, or delay in
receiving, required regulatory approvals and meet customary closing conditions);
(xxx) the failure to undertake or complete, or a delay in the timing of, the
share repurchase program; and (xxxi) failure to realize the expected benefits of
the Company's capital allocation strategy and share repurchase program.
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.
49
--------------------------------------------------------------------------------
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.
50
--------------------------------------------------------------------------------ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company incorporates by reference the material captioned "Market Risk" in Item 7 and in Note I, Financial Instruments, of the Notes to Consolidated Financial Statements in Item 8.
© Edgar Online, source
