STANLEY BLACK & DECKER, INC.
The following discussion contains statements reflecting the Company's views
about its future performance that constitute "forward-looking statements" under
the Private Securities Litigation Act of 1995. There are a number of important
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements. Please read the information under
the caption entitled "Cautionary Statement under the Private Securities
Litigation Reform Act of 1995."
Throughout this Management's Discussion and Analysis ("MD&A"), references to
Notes refer to the "Notes To Unaudited Condensed Consolidated Financial
Statements" in Part 1, Item 1 of this Form 10-Q, unless otherwise indicated.
BUSINESS OVERVIEW
Strategy
The Company is a diversified global industrial provider of hand tools, power
tools, outdoor products and related accessories, engineered fastening systems
and products, services and equipment for oil & gas and infrastructure
applications, commercial electronic security and monitoring systems, healthcare
solutions, and automatic doors. The Company continues to execute a growth and
acquisition strategy over the long-term that involves industry, geographic and
customer diversification to foster sustainable revenue, earnings and cash flow
growth. The Company remains focused on delivering above-market organic growth
with margin expansion by leveraging its proven and long-standing Stanley Black &
Decker Operating Model ("SBD Operating Model") which has continually evolved
over the past 15 years as times have changed. At the center of the SBD Operating
Model is the concept of the interrelationship between people and technology,
which intersect and interact with the other key elements: 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. The Company will leverage the SBD Operating Model to
continue making strides towards achieving its vision of delivering top-quartile
financial performance, becoming known as one of the world's leading innovators
and elevating its commitment to social responsibility.
The Company's growth and acquisition strategy is interdependent with its social
responsibility (ESG) strategy focused on workforce upskilling, product
innovation, and environmental preservation including mitigating the impacts of
climate change. These are core business issues that ensure the long-term
viability of the Company, its customers, suppliers, and communities. The Company
has established environmental, social and corporate governance targets embodied
in its 2030 Corporate Social Responsibility ("CSR") strategy that include
upskilling 10 million makers and creators, enhancing 500 million lives through
purpose driven product innovation, becoming carbon-positive, landfill-free, and
reducing water use in water stressed and scarce areas. The carbon positive
target includes third-party approved science-based targets to reduce absolute
scope 1 and 2 greenhouse gas emissions by greater than 100% by 2030, and to
reduce supply chain emissions by 35%. The Company's CSR strategy considers all
life-cycle stages including material procurement from supply chain partners,
product design, manufacturing, distribution and transportation, product use,
product service and end-of-life. Refer to section "Human Capital Management " in
Item 1 Business of the Company's Form 10-K for the year ended January 2, 2021
for additional information regarding the Company's commitment to upskilling its
employees and improving diversity, equity and inclusion.
In terms of capital allocation, the Company remains committed, over time, to
returning approximately 50% of free cash flow to shareholders through a strong
and growing dividend as well as opportunistically repurchasing shares. The
remaining free cash flow (approximately 50%) will be deployed towards
acquisitions.
COVID-19 Pandemic
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, which delivered approximately$500 million of savings in 2020 and is expected to deliver net savings of 38 -------------------------------------------------------------------------------- Table of Contents approximately$125 million in 2021, primarily realized in the first quarter. 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.
Acquisitions and Investments
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. OnJanuary 2, 2019 , the Company acquired a 20 percent interest in MTD, a privately held global manufacturer of outdoor power equipment. MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning onJuly 1, 2021 and ending onJanuary 2, 2029 . In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD's 2018 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), with an equitable sharing arrangement for future EBITDA growth. The investment in MTD increases the Company's presence in the greater than$20 billion lawn and garden segment and enables the two companies to work together to pursue revenue and cost opportunities, improve operational efficiency, and introduce new and innovative products for professional and residential outdoor equipment customers, utilizing each company's respective portfolios of strong brands. Refer to Note F, Acquisitions and Investments, for further discussion. Segments The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, Industrial and Security. Tools & Storage The Tools & Storage segment is comprised of thePower Tools Group ("PTG"), Hand Tools, Accessories & Storage ("HTAS"), andOutdoor Products Group ("OPG") businesses. Annual revenues in the Tools & Storage segment were$10.3 billion in 2020, representing 71% of the Company's total revenues. 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.
The OPG business primarily sells corded and cordless electric lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, pressure washers and related accessories to professionals and consumers under the BLACK+DECKER®, CRAFTSMAN® and DEWALT® brand names.
Industrial
The Industrial segment is comprised of the Engineered Fastening and
Infrastructure businesses. Annual revenues in the Industrial segment were
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
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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.
Security
The Security segment is comprised of the Convergent Security Solutions ("CSS")
and Mechanical Access Solutions ("MAS") businesses. Annual revenues in the
Security segment were $1.9 billion in 2020, representing 13% of the Company's
total revenues.
The CSS business designs, supplies and installs commercial electronic security
systems and provides electronic security services, including alarm monitoring,
video surveillance, fire alarm monitoring, systems integration and system
maintenance. Purchasers of these systems typically contract for ongoing security
systems monitoring and maintenance at the time of initial equipment
installation. The business also sells healthcare solutions, which include asset
tracking, infant protection, pediatric protection, patient protection, wander
management, fall management, and emergency call products. The MAS business
primarily sells automatic doors.
Certain Items Impacting Earnings
Throughout MD&A, the Company has provided a discussion of its results both
inclusive and exclusive of acquisition-related and other charges. The results
and measures, including gross profit and segment profit, on a basis excluding
these amounts are considered relevant to aid analysis and understanding of the
Company's results and business trends aside from the material impact of these
items. These amounts for the second quarter and year-to-date periods of 2021 and
2020 are as follows:
Second Quarter and Year-To-Date 2021
The Company reported approximately $43 million and $73 million in pre-tax
charges in the second quarter and year-to-date 2021 periods, respectively, which
were comprised of the following:
•$2 million and $7 million for the second quarter and year-to-date 2021 periods,
respectively, reducing Gross Profit pertaining to facility-related charges;
•$24 million and $44 million for the second quarter and year-to-date 2021
periods, respectively, in SG&A primarily for functional transformation
initiatives;
•$2 million for the year-to-date 2021 period in Other, net primarily related to
deal transaction costs;
•$3 million and $4 million net loss for the second quarter and year-to-date 2021
periods, respectively, pertaining to divested businesses; and
•$14 million and $16 million for the second quarter and year-to-date 2021
periods, respectively, in Restructuring charges pertaining to severance and
facility closures.
The tax effect on the above charges during the second quarter and year-to-date
periods of 2021 was approximately $11 million and $18 million , respectively. In
addition, the Company's share of MTD's net earnings included an after-tax charge
during both the second quarter and year-to-date 2021 periods of $11 million
related primarily to a one-time retroactive duty on imports of a specific
component.
The above items resulted in net after-tax charges of approximately $43 million ,
or $0.27 per diluted share, and $66 million , or $0.41 per diluted share,
respectively, for the second quarter and year-to-date 2021 periods.
Second Quarter and Year-To-Date 2020
The Company reported approximately $169 million and $231 million in net pre-tax
charges in the second quarter and year-to-date 2020 periods, respectively, which
were comprised of the following:
•$43 million and
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•$79 million and $109 million for the second quarter and year-to-date 2020
periods, respectively, in SG&A primarily for a cost reduction program, Security
business transformation and margin resiliency initiatives;
•$19 million and $38 million for the second quarter and year-to-date 2020
periods, respectively, in Other, net primarily related to a cost reduction
program and deal transaction costs; and
•$28 million and $32 million for the second quarter and year-to-date 2020
periods, respectively, in Restructuring charges pertaining to severance and
facility closures.
The tax effect on the above charges during the second quarter and year-to-date
periods of 2020 was approximately $40 million and $53 million , respectively. The
Company also recorded a one-time tax benefit of $119 million in the second
quarter of 2020 associated with a supply chain reorganization. In addition, the
Company's share of MTD's net earnings included an after-tax charge during the
second quarter and year-to-date 2020 periods of $3 million and $4 million ,
respectively, related primarily to restructuring charges.
The above items resulted in net after-tax charges of approximately $13 million ,
or $0.08 per diluted share, and $63 million , or $0.41 per diluted share,
respectively, for the second quarter and year-to-date 2020 periods.
2021 Outlook
This outlook discussion is intended to provide broad insight into the Company's
near-term earnings and cash flow generation prospects. The Company is raising
its 2021 diluted earnings per share outlook to $10.80 to $11.20 , from $10.15 to
$10.55 , and its diluted earnings per share range, excluding charges, to $11.35
to $11.65 from $10.70 to $11.00 . The Company is also reiterating free cash flow
to approximate net income. The primary factors for the increased EPS guidance
include stronger organic growth and incremental pricing actions, which are
expected to be partially offset by higher expedited transit costs in Tools &
Storage and an increase in commodity inflation.
The difference between the 2021 diluted earnings per share outlook and the
diluted earnings per share range, excluding charges, is $0.45 - $0.55 ,
consisting of acquisition-related and other charges. These forecasted charges
primarily relate to facility moves, deal and integration costs and functional
transformation initiatives.
RESULTS OF OPERATIONS
Below is a summary of the Company's operating results at the consolidated level,
followed by an overview of business segment performance.
Terminology: The term "organic" is utilized to describe results aside from the
impacts of foreign currency fluctuations, acquisitions during their initial
12 months of ownership, and divestitures. This ensures appropriate comparability
to operating results of prior periods.
Net Sales : Net sales were $4.301 billion in the second quarter of 2021 compared
to $3.147 in the second quarter of 2020, representing an increase of 37% driven
by a 31% increase in volume, 2% increase in price and favorable foreign currency
impacts of 5%, partially offset by a 1% decline related to divestitures. Tools &
Storage net sales increased 46% compared to the second quarter of 2020 due to a
38% increase in volume, favorable currency impacts of 5% and a 3% increase in
price. Industrial net sales increased 16% compared to the second quarter of 2020
primarily due to increased volume of 13%, favorable currency impacts of 3% and a
1% increase in price, partially offset by a 1% decrease from an Oil & Gas
product line divestiture. Net sales in the Security segment increased 16%
compared to the second quarter of 2020 driven by increased volume of 13%,
favorable impacts from foreign currency of 6% and 1% increases from both price
and acquisitions, partially offset by a 5% decline from divestitures.
Net sales were $8.498 billion in the first half of 2021 compared to $6.277
billion in the first half of 2020, representing an increase of 35%, driven by a
30% increase in volume, 2% increase in price and favorable foreign currency
impacts of 4%, partially offset by a 1% decline related to divestitures. Tools &
Storage net sales increased 47% compared to the first half of 2020 due to a 40%
increase in volume, favorable foreign currency impacts of 4% and a 3% increase
in price. Industrial net sales increased 14% compared to the first half of 2020
primarily due to increased volume of 10%, favorable currency impacts of 3% and a
2% increase related to the CAM acquisition, partially offset by a 1% decrease
from an Oil & Gas product line divestiture. Net sales in the Security segment
increased 9% compared to the first half of 2020 driven by a 6% increase in
volume, favorable impacts from foreign currency of 5% and a 1% increase from
both price and acquisitions, partially offset by a 4% decline from divestitures.
Gross Profit: Gross profit was $1.544 billion , or 35.9% of net sales, in the
second quarter of 2021 compared to $1.013 billion , or 32.2% of net sales, in the
second quarter of 2020. Acquisition-related and other charges, which reduced
gross profit, were
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$2.1 million for the three months ended July 3, 2021 and $42.6 million for the
three months ended June 27, 2020 . Excluding these charges, gross profit was
35.9% of net sales for the three months ended July 3, 2021 , compared to 33.5%
for the three months ended June 27, 2020 , as volume, price, productivity and mix
benefits from innovation were partially offset by commodity inflation and higher
expedited transit costs required to meet strong demand.
Gross profit was $3.108 billion , or 36.6% of net sales, in the first half of
2021 compared to $2.036 billion , or 32.4% of net sales, in the first half of
2020. Acquisition-related and other charges, which reduced gross profit, were
$7.3 million for the six months ended July 3, 2021 and $51.7 million for the six
months ended June 27, 2020 . Excluding these charges, gross profit was 36.7% of
net sales for the six months ended July 3, 2021 , compared to 33.3% for the six
months ended June 27, 2020 . The year-over-year change was primarily driven by
savings from the 2020 cost reduction program as well as the factors discussed
above that impacted the second quarter of 2021.
SG&A Expenses: SG&A, inclusive of the provision for credit losses, was $901.6
million , or 21.0% of net sales, in the second quarter of 2021, compared to
$732.0 million , or 23.3% of net sales, in the second quarter of 2020. Within
SG&A, acquisition-related and other charges totaled $23.6 million for the three
months ended July 3, 2021 and $79.2 million for the three months ended June 27,
2020 . Excluding these charges, SG&A was 20.4% of net sales for the three months
ended July 3, 2021 , compared to 20.7% for the three months ended June 27, 2020 ,
as strong operating leverage was partially offset by investments in growth
initiatives across the businesses.
SG&A, inclusive of the provision for credit losses, was $1.755 billion , or 20.6%
of net sales, in the first half of 2021, compared to $1.481 billion , or 23.6% of
net sales, in the first half of 2020. Within SG&A, acquisition-related and other
charges totaled $43.6 million for the six months ended July 3, 2021 and $109.0
million for the six months ended June 27, 2020 . Excluding these charges, SG&A
was 20.1% of net sales for the six months ended July 3, 2021 , compared to 21.9%
for the six months ended June 27, 2020 . The year-over-year change was primarily
driven by savings from the 2020 cost reduction program as well as the factors
discussed above that impacted the second quarter of 2021.
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 profit may
not be comparable.
Corporate Overhead: The corporate overhead element of SG&A, which is not
allocated to the business segments, amounted to $92.4 million , or 2.1% of net
sales, in 2021 compared to $78.7 million , or 2.5% of net sales, in 2020.
Excluding acquisition-related and other charges of $7.5 million for the three
months ended July 3, 2021 and $20.3 million for the three months ended June 27,
2020 , the corporate overhead element of SG&A was 2.0% and 1.9%, in the second
quarter of 2021 and 2020, respectively. The increase in 2021 compared to 2020
was primarily due to higher employee-related costs.
On a year-to-date basis, the corporate overhead element of SG&A amounted to
$168.1 million , or 2.0% of net sales, in 2021 compared to $127.6 million , or
2.0% of net sales, in 2020. Excluding acquisition-related and other charges of
$19.1 million for the six months ended July 3, 2021 and $31.8 million for the
six months ended June 27, 2020 , the corporate overhead element of SG&A was 1.8%
and 1.5%, in the first half of 2021 and 2020, respectively. The year-over-year
change was primarily due to higher employee-related costs.
Other, net: Other, net amounted to $53.8 million and $86.9 million in the second
quarter of 2021 and 2020, respectively. Excluding acquisition-related and other
charges of $0.6 million and $19.8 million in the second quarter of 2021 and
2020, respectively, Other, net totaled $53.2 million and $67.1 million ,
respectively, during these periods.
Other, net amounted to $112.8 million and $161.8 million in the first half of
2021 and 2020, respectively. Excluding acquisition-related and other charges of
$2.1 million and $38.7 million in the first half of 2021 and 2020, respectively,
Other, net totaled $110.7 million and $123.1 million , respectively, during these
periods.
Loss on Sale of Businesses: The Company reported a pre-tax loss on divestitures
of
Interest, net: Net interest expense was$43.8 million in the second quarter of 2021 compared to$54.8 million in the second quarter of 2020. On a year-to-date basis, net interest expense was$88.4 million in 2021 compared to$104.4 million in 2020. The year-over-year decrease 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. 42 -------------------------------------------------------------------------------- Table of Contents Income Taxes: The Company recognized income tax expense of$73.7 million and$193.2 million for the three and six months endedJuly 3, 2021 , respectively, resulting in effective tax rates of 14.0% and 17.1%. Excluding the impacts of the acquisition-related and other charges, the effective tax rates were 14.8% and 17.5% for the three and six months endedJuly 3, 2021 , respectively. These effective tax rates differ from theU.S. statutory tax rate primarily due to tax on foreign earnings, the re-measurement of uncertain tax position reserves, the re-measurement of the deferred tax assets and liabilities due to foreign corporate income tax rate changes, and the tax benefit of equity-based compensation. The Company recognized income tax benefit of$117.3 million and$104.4 million for the three and six months endedJune 27, 2020 , respectively, resulting in effective tax rates of (105.6)% and (40.6)%. In the second quarter of 2020, as a result of initiating a supply chain reorganization, the Company recorded a one-time benefit of$118.8 million to reverse a deferred tax liability previously established related to certain unremitted earnings of foreign subsidiaries not permanently reinvested. Excluding the impacts of this one-time benefit and the acquisition-related and other charges, the effective tax rates were 15.0% and 13.9% for the three and six months endedJune 27, 2020 , respectively. These effective tax rates differ from theU.S. statutory tax rate primarily due to tax on foreign earnings, the re-measurement of uncertain tax position reserves, an intra-entity transfer of certain intellectual property rights, and the tax benefit of equity-based compensation. 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. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), loss on sales of businesses, restructuring charges, interest expense, interest income, income taxes and share of net earnings or losses of equity method investment. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Refer to Note O, Restructuring Charges, for the amount of restructuring charges attributable to each segment. The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, Industrial and Security. Tools & Storage: Second Quarter Year-to-Date (Millions of Dollars) 2021 2020 2021 2020 Net sales$ 3,196.5 $ 2,197.2 $ 6,259.4 $ 4,268.0 Segment profit$ 635.1 $ 345.1 $ 1,286.4 $ 579.9 % of Net sales 19.9 % 15.7 % 20.6 % 13.6 % Tools & Storage net sales increased$999.3 million , or 46%, in the second quarter of 2021 compared to the second quarter of 2020. Sales volume increased by 38%, while foreign currency and price increased sales by 5% and 3%, respectively. All regions delivered extraordinary organic growth and share gain with organic growth inNorth America ,Europe and emerging markets of 30%, 63% and 85%, respectively. All markets benefited from industry-leading innovation and strong professional demand, coupled with secular shifts related to the consumer reconnection with the home and garden, outdoor product electrification and eCommerce.North America growth reflected stronger retail sales as well as a strong performance in the commercial and industrial channels. Point-of-sale demand remained at robust levels inU.S. retail and channel inventory ended below normalized levels.Europe delivered growth in all regions driven by an expansion in commercial, retail brick and mortar and eCommerce channels. Emerging markets growth was due to higher construction-related demand with all regions contributing. Tools & Storage net sales increased$1,991.4 million , or 47%, in the first half of 2021 compared to the first half of 2020. Sales volume increased by 40%, while foreign currency and price increased sales by 4% and 3%, respectively. All regions saw extraordinary organic growth and share gain with organic growth inNorth America ,Europe and emerging markets of 35%, 55% and 75%, respectively. The year-over-year change was primarily driven by the same factors that impacted the second quarter of 2021, as discussed above. Segment profit for the second quarter of 2021 was$635.1 million , or 19.9% of net sales, compared to$345.1 million , or 15.7% of net sales, in the second quarter of 2020. Excluding acquisition-related and other charges of$9.2 million and$28.4 million for 43 -------------------------------------------------------------------------------- Table of Contents the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, segment profit was 20.2% of net sales in the second quarter of 2021 and 17.0% in the second quarter of 2020, as volume, price, productivity and benefits from innovation were partially offset by commodity inflation, higher expedited transit costs required to serve strong demand and new growth investments. Segment profit for the first half of 2021 was$1.286 billion , or 20.6% of net sales, compared to$579.9 million , or 13.6% of net sales, in the first half of 2020. Excluding acquisition-related and other charges of$13.4 million and$31.5 million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively, segment profit was 20.8% of net sales in the first half of 2021 and 14.3% in the first half of 2020. The year-over-year change was primarily driven by benefits from the 2020 cost savings program as well as the factors discussed above that impacted the second quarter of 2021. Industrial: Second Quarter Year-to-Date (Millions of Dollars) 2021 2020 2021 2020 Net sales$ 602.2 $ 517.5 $ 1,259.9 $ 1,108.2 Segment profit$ 62.4 $ 5.1 $ 163.6 $ 72.9 % of Net sales 10.4 % 1.0 % 13.0 % 6.6 % Industrial net sales increased$84.7 million , or 16%, in the second quarter of 2021 compared to the second quarter of 2020, as increases of 13% from volume, 3% from favorable currency and 1% from price were partially offset by a 1% decline related to an Oil & Gas product line divestiture. Engineered Fastening organic growth was up 26% as strong automotive and general industrial markets were partially offset by weaker aerospace demand in addition to automotive OEM production impacts from the global semiconductor shortage. Infrastructure organic revenues declined 11% due to dramatically reduced Oil & Gas pipeline project activity, which muted the 16% growth in Attachment Tools. On a year-to-date basis, Industrial net sales increased$151.7 million , or 14%, in the first half of 2021 compared to the first half of 2020, as increases of 10% from volume, 3% from favorable currency and 2% from acquisitions were partially offset by a 1% decline related to an Oil & Gas product line divestiture. Engineered Fastening organic revenues increased 16% and Infrastructure organic revenues decreased 7% primarily due to the same factors that impacted the second quarter of 2021, as discussed above. Industrial segment profit for the second quarter of 2021 totaled$62.4 million , or 10.4% of net sales, compared to$5.1 million , or 1.0% of net sales, in the corresponding 2020 period. Excluding acquisition-related and other charges of$3.0 million and$40.6 million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, segment profit amounted to 10.9% of net sales in the second quarter of 2021 compared to 8.8% in the second quarter of 2020 as the benefits from volume, price and productivity were partially offset by commodity inflation, growth investments and troughing markets in oil & gas and aerospace. Year-to-date segment profit for the first half of 2021 totaled$163.6 million , or 13.0% of net sales, compared to$72.9 million , or 6.6% of net sales, in the corresponding 2020 period. Excluding acquisition-related and other charges of$6.6 million and$51.0 million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively, segment profit amounted to 13.5% of net sales in the first half of 2021 compared to 11.2% in the first half of 2020. The year-over-year change was primarily driven by benefits from the 2020 cost savings program as well as the factors discussed above that impacted the second quarter of 2021. Security: Second Quarter Year-to-Date (Millions of Dollars) 2021 2020 2021 2020 Net sales$ 502.2 $ 432.7 $ 978.7 $ 900.6 Segment profit$ 36.9 $ 9.2 $ 71.5 $ 30.1 % of Net sales 7.3 % 2.1 % 7.3 % 3.3 % Security net sales increased$69.5 million , or 16%, in the second quarter of 2021 compared to the second quarter of 2020, as an increase of 13% from volume, 6% from favorable currency and 1% from both price and acquisitions was partially offset by a 5% decline from divestitures.North America organic growth was 16% driven by strong backlog conversion in commercial electronic security and growth within automatic doors and healthcare.Europe was up 12% organically as new data-driven product solutions supported growth inFrance and the Nordics. On a year-to-date basis, net sales increased$78.1 million , or 9%, in the first half of 2021 compared to the first half of 2020, as an increase of 6% from volume, favorable impacts from foreign currency of 5% and a 1% increase from both price and 44 -------------------------------------------------------------------------------- Table of Contents acquisitions was partially offset by a 4% decline from divestitures.North America andEurope organic revenues increased 7% and 8%, respectively, primarily due to the same factors that impacted the second quarter of 2021, as discussed above. Security segment profit for the second quarter of 2021 was$36.9 million , or 7.3% of net sales, compared to$9.2 million , or 2.1% of net sales, in the corresponding 2020 period. Excluding acquisition-related and other charges of$6.0 million and$32.5 million for the three months endedJuly 3, 2021 andJune 27, 2020 , respectively, segment profit amounted to 8.5% of net sales in the second quarter of 2021 compared to 9.6% in the second quarter of 2020, as price and volume gains were partially offset by wage inflation, inefficiencies related to pandemic restrictions and the impact from growth investments. Year-to-date segment profit for the first half of 2021 was$71.5 million , or 7.3% of net sales, compared to$30.1 million , or 3.3% of net sales, in the corresponding 2020 period. Excluding acquisition-related and other charges of$11.8 million and$46.4 million for the six months endedJuly 3, 2021 andJune 27, 2020 , respectively, segment profit amounted to 8.5% of net sales in both the first half of 2021 and 2020. RESTRUCTURING ACTIVITIES A summary of the restructuring reserve activity fromJanuary 2, 2021 toJuly 3, 2021 is as follows: January 2, July 3, (Millions of Dollars) 2021 Net Additions Usage Currency 2021 Severance and related costs$ 87.5 $ 5.6$ (36.8) $ 1.2 $ 57.5 Facility closures and asset impairments 2.7 10.7 (9.0) - 4.4 Total$ 90.2 $ 16.3$ (45.8) $ 1.2 $ 61.9 For the three and six months endedJuly 3, 2021 , the Company recognized net restructuring charges of$14.0 million and$16.3 million , respectively, primarily related to severance and facility-related costs. The Company expects to achieve annual net cost savings of approximately$24 million by the end of 2022 related to the restructuring costs incurred during the six months endedJuly 3, 2021 . The majority of the$61.9 million of reserves remaining as ofJuly 3, 2021 is expected to be utilized within the next 12 months. Segments: The$16 million of net restructuring charges for the six months endedJuly 3, 2021 includes:$8 million pertaining to the Tools & Storage segment;$2 million pertaining to the Industrial segment;$4 million pertaining to the Security segment; and$2.0 million relating to Corporate. The$14 million of net restructuring charges for the three months endedJuly 3, 2021 includes:$6 million pertaining to the Tools & Storage segment;$3 million pertaining to the Industrial segment;$3 million pertaining to the Security segment; and$2.0 million relating to Corporate. The anticipated annual net cost savings of approximately$24 million related to the 2021 restructuring actions include:$7 million in the Tools & Storage segment;$10 million in the Industrial segment;$6 million in the Security segment; and$1 million in Corporate. 45 -------------------------------------------------------------------------------- Table of Contents 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$444.4 million in the second quarter of 2021 compared to$328.2 million in the corresponding period of 2020. Year-to-date cash flows provided by operations were$286.6 million compared to cash flows used in operations of$77.0 million in the corresponding period of 2020. The year-over-year change was mainly attributable to increased earnings, partially offset by higher inventory balances to support strong demand in the Tools and Storage segment. Free Cash Flow: Free cash flow, as defined in the table below, was$339.3 million in the second quarter of 2021 compared to$263.7 million in the corresponding period of 2020. On a year-to-date basis, free cash flow was an inflow of$93.2 million in 2021 compared to an outflow of$224.4 million in 2020, an improvement of$317.6 million . Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners, and is useful information for investors. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company's common and preferred stock and business acquisitions, among other items. Second Quarter Year-to-Date (Millions of Dollars) 2021 2020 2021 2020 Net cash provided by (used in) operating activities$ 444.4 $ 328.2 $ 286.6 $ (77.0) Less: capital and software expenditures (105.1) (64.5) (193.4) (147.4) Free cash flow$ 339.3 $ 263.7 $ 93.2 $ (224.4)
Investing Activities: Cash flows used in investing activities totaled
Year-to-date cash flows used in investing activities totaled$256.7 million in 2021 primarily due to capital and software expenditures of$193.4 million and net investment hedge settlements of$52.6 million . Cash flows used in investing activities totaled$1.421 billion in the first half of 2020, primarily due to the CAM acquisition of$1.302 billion , net of cash acquired, and capital and software expenditures of$147.4 million . Financing Activities: Cash flows used in financing activities totaled$853.3 million in the second quarter of 2021 primarily driven by the Series C Preferred Stock redemption and conversion for$750.0 million and cash dividend payments on common stock of$111.6 million . Cash flows used in financing activities totaled$391.5 million in the second quarter of 2020 primarily driven by net payments on short-term borrowings under the Company's commercial paper program of$980.8 million and cash dividend payments of$105.8 million , partially offset by proceeds from issuances of common stock of$756.7 million . Year-to-date cash flows used in financing activities totaled$948.3 million in the first half of 2021 primarily driven by the Series C Preferred Stock redemption and conversion for$750.0 million , cash dividend payments on common stock of$221.7 million , partially offset by proceeds from issuances of common stock of$100.4 million . Cash flows provided by financing activities totaled$2.084 billion in the first half of 2020 primarily driven by net proceeds from debt issuances of$1.483 billion , proceeds from issuances of common stock of$801.3 million and net short-term borrowings under the Company's commercial paper program of$371.1 million , partially offset by the Craftsman deferred purchase price payment of$250.0 million and cash dividend payments of$211.4 million . Credit Ratings & 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), and 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 the first half of 2021, however, S&P and Fitch have revised their outlook to 'stable' from 'negative' as a result of the Company's strong performance during the COVID-19 pandemic. Failure to maintain strong investment grade credit 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. 46 -------------------------------------------------------------------------------- Table of Contents Cash and cash equivalents totaled$440 million as ofJuly 3, 2021 , comprised of$206 million in theU.S. and$234 million in foreign jurisdictions. As ofJanuary 2, 2021 , cash and cash equivalents totaled$1.381 billion , comprised of$1.119 billion in theU.S. and$262 million in foreign jurisdictions. As a result of the Tax Cuts and Jobs Act (the "Act"), the Company's tax liability related to the one-time transition tax associated with unremitted foreign earnings and profits totaled$290 million atJuly 3, 2021 . The Act permits aU.S. company to elect to pay the net tax liability interest-free over a period of up to eight years. 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.
The Company has a
The Company has a five-year$2.0 billion committed credit facility (the "5-Year Credit Agreement"). Borrowings under the 5-Year Credit Agreement may be made inU.S. Dollars, Euros or Pounds Sterling. A sub-limit amount of$653.3 million is designated for swing line advances which may be drawn in Euros pursuant to the terms of the 5-Year Credit Agreement. Borrowings bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and specific terms of the 5-Year Credit Agreement. The Company must repay all advances under the 5-Year Credit Agreement by the earlier ofSeptember 12, 2023 or upon termination. The 5-Year Credit Agreement is designated to be a liquidity back-stop for the Company's$3.0 billion U.S. Dollar and Euro commercial paper program. As ofJuly 3, 2021 , andJanuary 2, 2021 , the Company had not drawn on its five-year committed credit facility. The Company has a 364-Day$1.0 billion committed credit facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit Agreement may be made inU.S. Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the 364-Day Credit Agreement. The Company must repay all advances under the 364-Day Credit Agreement by the earlier ofSeptember 8, 2021 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$3.0 billion U.S. Dollar and Euro commercial paper program previously discussed. As ofJuly 3, 2021 , andJanuary 2, 2021 , the Company had not drawn on its 364-Day committed credit facility. The Company has an interest coverage covenant that must be maintained to permit continued access to its committed credit facilities described above. The interest coverage ratio tested for covenant compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted Interest Expense ("adjusted EBITDA"/"adjusted Interest Expense"). InApril 2020 , the Company entered into an amendment to its 5-Year Credit Agreement to: (a) amend the definition of Adjusted EBITDA to allow for additional adjustment addbacks, which primarily relate to anticipated incremental charges related to the COVID-19 pandemic, for amounts incurred beginning in the second quarter of 2020 through the second quarter of 2021, and (b) lower the minimum interest coverage ratio from 3.5 to 2.5 times for the period from and including the second quarter of 2020 through the end of fiscal year 2021. InNovember 2019 , the Company issued 7,500,000 Equity Units with a total notional value of$750 million ("2019 Equity Units"). Each unit has a stated amount of$100 and initially consisted of a three-year forward stock purchase contract ("2022 Purchase Contracts") for the purchase of a variable number of shares of common stock, onNovember 15, 2022 , for a price of$100 , and a 10% beneficial ownership interest in one share of 0% Series D Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of$1,000 per share ("Series D Preferred Stock"). The Company received approximately$735 million in cash proceeds from the 2019 Equity Units, net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series D Preferred Stock, recording$750 million in preferred stock. The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures inDecember 2019 . The Company also used$19 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. On and afterNovember 15, 2022 , the Series D Preferred Stock may be converted into common stock at the option of the holder. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. On or afterDecember 22, 2022 , the Company may elect to redeem for cash, all or any portion of the outstanding shares of the Series D Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series D Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date. Upon settlement of the 2022 Purchase Contracts, the Company will receive additional cash proceeds of$750 million . The Company pays the holders of the 2022 Purchase Contracts quarterly contract adjustment payments, which commencedFebruary 15, 2020 . As ofJuly 3, 2021 , the present value of the contract adjustment payments was approximately$57 million . 47 -------------------------------------------------------------------------------- Table of Contents 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 call 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 , 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$726 million in cash proceeds from the 2017 Equity Units, net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series C Preferred Stock, recording$750 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used$25 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. InMay 2020 , the Company successfully remarketed the Series C Preferred Stock. The remarketing generated cash proceeds of$750 million which were applied to settle the holders' stock purchase contract obligations, resulting in the Company issuing 5,463,750 common shares. 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. On and afterMay 15, 2020 , the Series C Preferred Stock may be converted into common stock at the option of the holder. The Company did not have the right to redeem the Series C Preferred Stock prior toMay 15, 2021 . OnApril 28, 2021 , the Company informed holders that it would redeem all outstanding shares of the Series C Preferred Stock onJune 3, 2021 (the "Redemption Date") at$1,002.50 per share in cash (the "Redemption Price"), which was equal to 100% of the liquidation preference of a share of Series C Preferred Stock, plus accumulated and unpaid dividends to, but excluding, the Redemption Date. If a holder elected to convert its shares of 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 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$350.0 million , plus an additional amount related to the forward component of the contract, byApril 2022 , or earlier at the Company's option.
Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Equity Arrangements, for further discussion of the Company's financing arrangements.
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Table of Contents OTHER MATTERS Critical Accounting Estimates: There have been no significant changes in the Company's critical accounting estimates during the second quarter of 2021. Refer to the "Other Matters" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the year endedJanuary 2, 2021 for a discussion of the Company's critical accounting estimates.
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