UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172018.
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission File Number 001-05224
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| STANLEY BLACK & DECKER, INC. |
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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| CONNECTICUT | | 06-0548860 |
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) | | (I.R.S. EMPLOYER IDENTIFICATION NUMBER) |
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1000 STANLEY DRIVE NEW BRITAIN, CONNECTICUT | | 06053 |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) | | (ZIP CODE) |
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | | þ | | | Accelerated filer | | ¨ |
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| Non-accelerated filer | | ¨ | (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
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| | | | | | Emerging growth company | | ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
153,351,694153,009,803 shares of the registrant’s common stock were outstanding as of October 19, 2017.July 17, 2018.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172018 AND OCTOBERJULY 1, 20162017
(Unaudited, Millions of Dollars, Except Per Share Amounts)
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net Sales | $ | 3,298.6 |
| | $ | 2,882.0 |
| | $ | 9,333.7 |
| | $ | 8,486.5 |
| $ | 3,643.6 |
| | $ | 3,286.7 |
| | $ | 6,852.9 |
| | $ | 6,143.0 |
|
| Costs and Expenses | | | | | | | | | | | | | | |
| Cost of sales | $ | 2,046.5 |
| | $ | 1,797.9 |
| | $ | 5,804.1 |
| | $ | 5,295.9 |
| $ | 2,356.5 |
| | $ | 2,073.4 |
| | $ | 4,400.1 |
| | $ | 3,863.7 |
|
| Selling, general and administrative | 758.4 |
| | 643.8 |
| | 2,168.8 |
| | 1,923.9 |
| 801.8 |
| | 738.6 |
| | 1,580.6 |
| | 1,420.6 |
|
| Provision for doubtful accounts | 5.0 |
| | 1.6 |
| | 18.0 |
| | 16.2 |
| 4.0 |
| | 5.6 |
| | 10.8 |
| | 13.9 |
|
| Other, net | 65.5 |
| | 56.8 |
| | 232.0 |
| | 150.6 |
| 119.3 |
| | 55.3 |
| | 177.3 |
| | 155.8 |
|
| Loss (gain) on sales of businesses | 3.2 |
| | — |
| | (265.1 | ) | | — |
| 0.8 |
| | 0.9 |
| | 0.8 |
| | (268.3 | ) |
| Pension settlement | — |
| | — |
| | 12.8 |
| | — |
| — |
| | 0.3 |
| | — |
| | 12.8 |
|
| Restructuring charges | 19.1 |
| | 9.1 |
| | 42.9 |
| | 27.3 |
| 13.4 |
| | 8.0 |
| | 36.3 |
| | 23.8 |
|
| Interest expense | 57.2 |
| | 50.2 |
| | 164.5 |
| | 145.2 |
| 69.0 |
| | 56.0 |
| | 132.2 |
| | 107.3 |
|
| Interest income | (10.3 | ) | | (5.1 | ) | | (28.6 | ) | | (16.4 | ) | (15.6 | ) | | (9.7 | ) | | (31.4 | ) | | (18.3 | ) |
| | $ | 2,944.6 |
| | $ | 2,554.3 |
| | $ | 8,149.4 |
| | $ | 7,542.7 |
| $ | 3,349.2 |
| | $ | 2,928.4 |
| | $ | 6,306.7 |
| | $ | 5,311.3 |
|
| Earnings before income taxes | 354.0 |
| | 327.7 |
| | 1,184.3 |
| | 943.8 |
| 294.4 |
| | 358.3 |
| | 546.2 |
| | 831.7 |
|
| Income taxes | 79.8 |
| | 78.7 |
| | 239.8 |
| | 234.7 |
| 1.0 |
| | 80.7 |
| | 82.7 |
| | 160.4 |
|
| Net earnings | $ | 274.2 |
| | $ | 249.0 |
| | $ | 944.5 |
| | $ | 709.1 |
| $ | 293.4 |
| | $ | 277.6 |
| | $ | 463.5 |
| | $ | 671.3 |
|
| Less: Net earnings (loss) attributable to non-controlling interests | — |
| | 0.1 |
| | — |
| | (0.7 | ) | |
| Less: Net loss attributable to non-controlling interests | | (0.2 | ) | | — |
| | (0.7 | ) | | — |
|
| Net Earnings Attributable to Common Shareowners | $ | 274.2 |
| | $ | 248.9 |
| | $ | 944.5 |
| | $ | 709.8 |
| $ | 293.6 |
| | $ | 277.6 |
| | $ | 464.2 |
| | $ | 671.3 |
|
| Total Comprehensive Income Attributable to Common Shareowners | $ | 377.8 |
| | $ | 278.3 |
| | $ | 1,246.9 |
| | $ | 722.2 |
| $ | 14.5 |
| | $ | 360.1 |
| | $ | 280.9 |
| | $ | 867.3 |
|
| Earnings per share of common stock: | | | | | | | | | | | | | | |
| Basic | $ | 1.83 |
| | $ | 1.71 |
| | $ | 6.32 |
| | $ | 4.88 |
| $ | 1.96 |
| | $ | 1.86 |
| | $ | 3.09 |
| | $ | 4.49 |
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| Diluted | $ | 1.80 |
| | $ | 1.68 |
| | $ | 6.21 |
| | $ | 4.81 |
| $ | 1.93 |
| | $ | 1.82 |
| | $ | 3.03 |
| | $ | 4.42 |
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| Dividends per share of common stock | $ | 0.63 |
| | $ | 0.58 |
| | $ | 1.79 |
| | $ | 1.68 |
| $ | 0.63 |
| | $ | 0.58 |
| | $ | 1.26 |
| | $ | 1.16 |
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| Weighted-average shares outstanding (in thousands): | | | | | | | | | | | | | | |
| Basic | 149,689 |
| | 145,410 |
| | 149,464 |
| | 145,547 |
| 149,748 |
| | 149,514 |
| | 150,101 |
| | 149,353 |
|
| Diluted | 152,622 |
| | 147,975 |
| | 152,106 |
| | 147,717 |
| 152,494 |
| | 152,226 |
| | 153,124 |
| | 151,862 |
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See Notes to (Unaudited) Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBERJUNE 30, 20172018 AND DECEMBER 31, 201630, 2017
(Unaudited, Millions of Dollars, Except Per Share Amounts)
| | | | September 30,
2017 | | December 31,
2016 | June 30,
2018 | | December 30,
2017 |
| ASSETS | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | $ | 483.3 |
| | $ | 1,131.8 |
| $ | 385.8 |
| | $ | 637.5 |
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| Accounts and notes receivable, net | 2,009.8 |
| | 1,302.8 |
| 2,151.4 |
| | 1,628.7 |
|
| Inventories, net | 2,247.4 |
| | 1,478.0 |
| 2,444.2 |
| | 2,018.4 |
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| Assets held for sale | — |
| | 523.4 |
| |
| Other current assets | 288.2 |
| | 352.5 |
| 341.2 |
| | 274.4 |
|
| Total Current Assets | 5,028.7 |
| | 4,788.5 |
| 5,322.6 |
| | 4,559.0 |
|
| Property, Plant and Equipment, net | 1,677.3 |
| | 1,451.2 |
| |
| Property, plant and equipment, net | | 1,817.1 |
| | 1,742.5 |
|
| Goodwill | 8,679.7 |
| | 6,694.0 |
| 8,947.7 |
| | 8,776.1 |
|
| Intangibles, net | 3,561.1 |
| | 2,299.5 |
| 3,596.7 |
| | 3,507.4 |
|
| Other Assets | 826.4 |
| | 401.7 |
| |
| Other assets | | 495.5 |
| | 512.7 |
|
| Total Assets | $ | 19,773.2 |
| | $ | 15,634.9 |
| $ | 20,179.6 |
| | $ | 19,097.7 |
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| LIABILITIES AND SHAREOWNERS' EQUITY | | | | | | |
| Current Liabilities | | | | | | |
| Short-term borrowings | $ | 577.0 |
| | $ | 4.3 |
| $ | 1,101.5 |
| | $ | 5.3 |
|
| Current maturities of long-term debt | 8.7 |
| | 7.8 |
| 978.9 |
| | 977.5 |
|
| Accounts payable | 2,091.6 |
| | 1,640.4 |
| 2,288.5 |
| | 2,021.0 |
|
| Accrued expenses | 1,324.9 |
| | 1,101.5 |
| 1,270.0 |
| | 1,387.7 |
|
| Liabilities held for sale | — |
| | 53.5 |
| |
| Total Current Liabilities | 4,002.2 |
| | 2,807.5 |
| 5,638.9 |
| | 4,391.5 |
|
| Long-Term Debt | 3,818.0 |
| | 3,815.3 |
| |
| Deferred Taxes | 1,182.3 |
| | 735.4 |
| |
| Post-Retirement Benefits | 635.7 |
| | 644.3 |
| |
| Other Liabilities | 2,116.2 |
| | 1,258.8 |
| |
| Long-term debt | | 2,831.2 |
| | 2,828.2 |
|
| Deferred taxes | | 467.0 |
| | 436.1 |
|
| Post-retirement benefits | | 603.7 |
| | 629.9 |
|
| Other liabilities | | 2,451.0 |
| | 2,507.0 |
|
Commitments and Contingencies (Note R) |
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| Shareowners’ Equity | | | | | | |
| Stanley Black & Decker, Inc. Shareowners’ Equity | | | | | | |
Preferred stock, without par value:
Authorized 10,000,000 shares in 2017 and 2016
Issued and outstanding 750,000 shares in 2017 | 750.0 |
| | — |
| |
Common stock, par value $2.50 per share:
Authorized 300,000,000 shares in 2017 and 2016
Issued 176,902,738 shares in 2017 and 2016 | 442.3 |
| | 442.3 |
| |
Preferred stock, without par value:
Authorized 10,000,000 shares in 2018 and 2017
Issued and outstanding 750,000 shares in 2018 and 2017 | | 750.0 |
| | 750.0 |
|
Common stock, par value $2.50 per share:
Authorized 300,000,000 shares in 2018 and 2017
Issued 176,902,738 shares in 2018 and 2017 | | 442.3 |
| | 442.3 |
|
| Retained earnings | 5,803.9 |
| | 5,127.3 |
| 6,273.9 |
| | 5,998.7 |
|
| Additional paid in capital | 4,631.8 |
| | 4,774.4 |
| 4,606.4 |
| | 4,643.2 |
|
| Accumulated other comprehensive loss | (1,618.8 | ) | | (1,921.2 | ) | (1,772.4 | ) | | (1,589.1 | ) |
| ESOP | (20.0 | ) | | (25.9 | ) | (14.4 | ) | | (18.8 | ) |
| | 9,989.2 |
| | 8,396.9 |
| 10,285.8 |
| | 10,226.3 |
|
| Less: cost of common stock in treasury | (1,973.5 | ) | | (2,029.9 | ) | (2,100.4 | ) | | (1,924.1 | ) |
| Stanley Black & Decker, Inc. Shareowners’ Equity | 8,015.7 |
| | 6,367.0 |
| 8,185.4 |
| | 8,302.2 |
|
| Non-controlling interests | 3.1 |
| | 6.6 |
| 2.4 |
| | 2.8 |
|
| Total Shareowners’ Equity | 8,018.8 |
| | 6,373.6 |
| 8,187.8 |
| | 8,305.0 |
|
| Total Liabilities and Shareowners’ Equity | $ | 19,773.2 |
| | $ | 15,634.9 |
| $ | 20,179.6 |
| | $ | 19,097.7 |
|
See Notes to (Unaudited) Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20172018 AND OCTOBERJULY 1, 20162017
(Unaudited, Millions of Dollars)
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| OPERATING ACTIVITIES | | | | | | | | | | | | | | |
| Net Earnings Attributable to Common Shareowners | $ | 274.2 |
| | $ | 248.9 |
| | $ | 944.5 |
| | $ | 709.8 |
| |
| Adjustments to reconcile net earnings to cash provided by operating activities: | | | | | | | | |
| Net earnings | | $ | 293.4 |
| | $ | 277.6 |
| | $ | 463.5 |
| | $ | 671.3 |
|
| Adjustments to reconcile net earnings to cash provided by (used in) operating activities: | |
| |
| | | | |
| Depreciation and amortization of property, plant and equipment | 76.6 |
| | 66.6 |
| | 218.1 |
| | 196.4 |
| 83.2 |
| | 73.7 |
| | 164.5 |
| | 141.5 |
|
| Amortization of intangibles | 44.1 |
| | 36.5 |
| | 119.9 |
| | 108.8 |
| 44.5 |
| | 42.1 |
| | 86.8 |
| | 75.8 |
|
| Pre-tax loss (gain) on sales of businesses | 3.2 |
| | — |
| | (265.1 | ) | | — |
| |
| Loss (gain) on sales of businesses | | 0.8 |
| | 0.9 |
| | 0.8 |
| | (268.3 | ) |
| Changes in working capital | (214.9 | ) | | (182.9 | ) | | (784.2 | ) | | (393.3 | ) | (185.0 | ) | | (263.7 | ) | | (729.3 | ) | | (797.0 | ) |
| Changes in other assets and liabilities | 173.7 |
| | 77.6 |
| | 234.6 |
| | 28.3 |
| (38.9 | ) | | 21.2 |
| | (137.7 | ) | | 14.4 |
|
| Cash provided by operating activities | 356.9 |
| | 246.7 |
| | 467.8 |
| | 650.0 |
| |
| Cash provided by (used in) operating activities | | 198.0 |
| | 151.8 |
| | (151.4 | ) | | (162.3 | ) |
| INVESTING ACTIVITIES | | | | | | | | | | | | | | |
| Capital and software expenditures | (91.0 | ) | | (78.1 | ) | | (277.9 | ) | | (221.7 | ) | (111.7 | ) | | (122.2 | ) | | (218.0 | ) | | (186.9 | ) |
| Business acquisitions, net of cash acquired | (152.0 | ) | | (38.3 | ) | | (2,582.1 | ) | | (59.3 | ) | (505.6 | ) | | 5.3 |
| | (506.8 | ) | | (2,430.1 | ) |
| Proceeds from sales of assets | 5.5 |
| | 1.3 |
| | 28.0 |
| | 8.9 |
| 6.6 |
| | 3.2 |
| | 7.9 |
| | 22.5 |
|
| Proceeds from sales of businesses, net of cash sold | — |
| | — |
| | 745.3 |
| | — |
| |
| (Payments) proceeds from net investment hedge settlements | (27.9 | ) | | 57.8 |
| | (31.6 | ) | | 63.3 |
| |
| (Payments) proceeds from sales of businesses, net of cash sold | | (1.7 | ) | | 0.5 |
| | (1.9 | ) | | 745.3 |
|
| Proceeds (payments) from net investment hedge settlements | | 37.8 |
| | (24.4 | ) | | 20.3 |
| | (3.7 | ) |
| Proceeds from deferred purchase price receivable | | — |
| | 104.7 |
| | — |
| | 227.8 |
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| Other | (8.1 | ) | | (4.0 | ) | | (25.4 | ) | | (16.2 | ) | (12.9 | ) | | (13.5 | ) | | (15.3 | ) | | (17.3 | ) |
| Cash used in investing activities | (273.5 | ) | | (61.3 | ) | | (2,143.7 | ) | | (225.0 | ) | (587.5 | ) | | (46.4 | ) | | (713.8 | ) | | (1,642.4 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | | | |
| Stock purchase contract fees | (9.9 | ) | | (3.5 | ) | | (9.9 | ) | | (10.4 | ) | (10.1 | ) | | — |
| | (20.2 | ) | | — |
|
| Net short-term (repayments) borrowings | (64.4 | ) | | (255.9 | ) | | 499.2 |
| | 92.4 |
| |
| Net short-term borrowings (repayments) | | 753.6 |
| | (593.1 | ) | | 1,135.6 |
| | 563.6 |
|
| Cash dividends on common stock | (94.7 | ) | | (84.5 | ) | | (267.9 | ) | | (243.9 | ) | (94.2 | ) | | (86.5 | ) | | (189.1 | ) | | (173.2 | ) |
| Termination of interest rate swaps | — |
| | — |
| | — |
| | 27.0 |
| |
| Proceeds from issuances of common stock | 14.6 |
| | 19.1 |
| | 47.5 |
| | 51.3 |
| 9.5 |
| | 15.6 |
| | 22.6 |
| | 32.9 |
|
| Proceeds from issuance of preferred stock | — |
| | — |
| | 727.5 |
| | — |
| — |
| | 727.5 |
| | — |
| | 727.5 |
|
| Premium paid on equity option | — |
| | — |
| | (25.1 | ) | | — |
| — |
| | (25.1 | ) | | (57.3 | ) | | (25.1 | ) |
| Purchases of common stock for treasury | (0.6 | ) | | (0.6 | ) | | (16.2 | ) | | (362.7 | ) | (201.3 | ) | | (2.1 | ) | | (212.7 | ) | | (15.6 | ) |
| Other | (6.9 | ) | | — |
| | (9.2 | ) | | (0.5 | ) | — |
| | (1.3 | ) | | (5.5 | ) | | (2.3 | ) |
| Cash (used in) provided by financing activities | (161.9 | ) | | (325.4 | ) | | 945.9 |
| | (446.8 | ) | |
| Effect of exchange rate changes on cash and cash equivalents | 22.3 |
| | (7.4 | ) | | 81.5 |
| | (22.8 | ) | |
| Change in cash and cash equivalents | (56.2 | ) | | (147.4 | ) | | (648.5 | ) | | (44.6 | ) | |
| Cash and cash equivalents, beginning of period | 539.5 |
| | 568.2 |
| | 1,131.8 |
| | 465.4 |
| |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 483.3 |
| | $ | 420.8 |
| | $ | 483.3 |
| | $ | 420.8 |
| |
| Cash provided by financing activities | | 457.5 |
| | 35.0 |
| | 673.4 |
| | 1,107.8 |
|
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (87.8 | ) | | 21.1 |
| | (59.9 | ) | | 59.2 |
|
| Change in cash, cash equivalents and restricted cash | | (19.8 | ) | | 161.5 |
| | (251.7 | ) | | (637.7 | ) |
| Cash, cash equivalents and restricted cash, beginning of period | | 423.2 |
| | 378.0 |
| | 655.1 |
| | 1,177.2 |
|
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | | $ | 403.4 |
| | $ | 539.5 |
| | $ | 403.4 |
| | $ | 539.5 |
|
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of June 30, 2018 and December 30, 2017, as shown above: |
| | | | | | | |
| | June 30, 2018 | | December 30, 2017 |
| Cash and cash equivalents | $ | 385.8 |
| | $ | 637.5 |
|
| Restricted cash included in Other current assets | 17.6 |
| | 17.6 |
|
| Cash, cash equivalents and restricted cash | $ | 403.4 |
| | $ | 655.1 |
|
See Notes to (Unaudited) Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBERJUNE 30, 20172018
| |
| A. | Basis of PresentationSIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Operating results for the three and ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in Stanley Black & Decker, Inc.’s (the “Company”) Form 10-K for the year ended December 31, 201630, 2017, and subsequent related filings with the Securities and Exchange Commission.
In April 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson") from the Doncasters Group, which is being accounted for as a business combination. The results of this acquisition are being consolidated into the Company's Industrial segment. In March 2017, the Company acquired the Tools business of Newell Brands ("Newell Tools") and the Craftsman® brand, which were both accounted for as business combinations. The results of these acquisitions have been consolidated into the Company's Tools & Storage segment. Refer to Note F, Acquisitions, for further discussion on these acquisitions.
In February 2017, the Company sold the majority of its mechanical security businesses within the Security segment, which included the commercial hardware brands of Best Access, phi Precision and GMT. In addition, theThe Company also sold atwo small businessbusinesses within the Tools & Storage segment on January 3,in the first and fourth quarters of 2017, and aone small business withinin the Industrial segment on September 2,in the third quarter of 2017. The operating results of these businesses have been reported within continuing operations in the Condensed Consolidated Financial Statements through their respective dates of sale in 2017 and for the three and nine months ended October 1, 2016. In addition, the assets and liabilities related to the businesses sold in the first quarter of 2017 were classified as held for sale on the Company's Condensed Consolidated Balance Sheets as of December 31, 2016.2017. Refer to Note T, Divestitures, for further discussion.
In March 2017, the Company acquired the Tools business of Newell Brands ("Newell Tools") and the Craftsman brand, which are both being accounted for as business combinations. The results of these acquisitions are being consolidated into the Company's Tools & Storage segment. Refer to Note F, Acquisitions, for further discussion.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. Certain amounts reported in the previous year have been recast as a result of the retrospective adoption of new accounting standards in the first quarter of 2018. Refer to Note B, New Accounting Standards, for further discussion.
Financial Instruments
Derivative financial instruments are employed to manage risks, including foreign currency, interest rate exposures and commodity prices and are not used for trading or speculative purposes. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure. The Company recognizes all derivative instruments in the balance sheet at fair value.
Changes in the fair value of derivatives are recognized periodically either in earnings or in shareowners’ equity as a component of other comprehensive income (loss) ("OCI") , depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Changes in the fair value of derivatives accounted for as fair value hedges are recorded in earnings in the same caption as the changes in the fair value of the hedged items. Gains and losses on derivatives designated as cash flow hedges, to the extent they are included in the assessment of effectiveness, are recorded in other comprehensive income (loss) and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in other comprehensive income (loss) would be recognized in earnings. Changes in the fair value of derivatives that are designated and qualify as a hedge of the net investment in foreign operations, to the extent they are included in the assessment of effectiveness, are reported in other comprehensive income (loss) and are deferred until disposal of the underlying assets. Gains and losses representing components excluded from the assessment of effectiveness for cash flow and fair value hedges are recognized in earnings on a
straight-line basis in the same caption as the hedged item over the term of the hedge. Gains and losses representing components excluded from the assessment of effectiveness for net investment hedges are recognized in earnings on a straight-line basis in Other, net over the term of the hedge.
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to interest expense over the remaining period of the debt originally covered by the terminated swap.
Changes in the fair value of derivatives not designated as hedges are reported in Other, net in the Consolidated Statements of Operations and Comprehensive Income. Refer to Note I, Financial Instruments, for further discussion.
Revenue Recognition
The Company’s revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For its customer contracts, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. The majority of the Company’s revenues are recorded at a point in time from the sale of tangible products.
Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service and evidence of the fair value of the advertising, in which case the expense is classified as selling, general, and administrative expense.
The Company’s revenues can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration the Company expects to be entitled to in exchange for transferring the promised good or service to the customer.
Sales of security monitoring systems may have multiple performance obligations, including equipment, installation and monitoring or maintenance services. In most instances, the Company allocates the appropriate amount of consideration to each performance obligation based on the standalone selling price ("SSP") of the distinct goods or services performance obligation. In circumstances where SSP is not observable, the Company allocates the consideration for the performance obligations by utilizing one of the following methods: expected cost plus margin, the residual approach, or a mix of these estimation methods.
For performance obligations that the Company satisfies over time, revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company utilizes the method that most accurately depicts the progress toward completion of the performance obligation.
The Company’s contract sales for the installation of security intruder systems and other construction-related projects are generally recorded under the input method. The input method recognizes revenue on the basis of the Company’s efforts or inputs to the satisfaction of a performance obligation relative to the total inputs expected to satisfy that performance obligation. Revenue recognized on security contracts in process are based upon the allocated contract price and related total inputs of the project at completion. The extent of progress toward completion is generally measured using input methods based on labor metrics. Revisions to these estimates as contracts progress have the effect of increasing or decreasing profits each period. Provisions for anticipated losses are made in the period in which they become determinable. The revenues for monitoring and monitoring-related services are recognized as services are rendered over the contractual period.
The Company utilizes the output method for contract sales in the Oil & Gas business. The output method recognizes revenue based on direct measurements of the customer value of the goods or services transferred to date relative to the remaining goods or services promised under the contract. The output method includes methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered.
Contract assets or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations the Company records a contract asset. Conversely, if the
measure of the remaining performance obligations exceeds the measure of the remaining rights, the Company records a contract liability.
Incremental costs of obtaining or fulfilling a contract with a customer that are expected to be recovered are recognized and classified in Other current assets or Other assets in the Condensed Consolidated Balance Sheets and are typically amortized over the contract period. The Company recognizes the incremental costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less.
Customer billings for services not yet rendered are deferred and recognized as revenue as the services are rendered. The associated deferred revenue is included in Accrued expenses or Other liabilities, as appropriate, in the Condensed Consolidated Balance Sheets.
Refer to Note D, Accounts and Notes Receivable, for further discussion.
| |
B. | New Accounting Standards |
B. NEW ACCOUNTING STANDARDS
Adoption of New Accounting Standards
In AugustMarch 2017, the Financial Accounting Standards BoardsBoard ("FASB") issued Accounting Standards Update ("ASU") 2017-07, Compensation-Retirement Benefits (Topic 715) (“new pension standard”). The new pension standard improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The Company adopted this standard in the first quarter of 2018 utilizing the full retrospective method. As a result of the adoption, all components other than service cost were reclassified from Cost of sales and Selling, general and administrative to Other, net in the Consolidated Statements of Operations and Comprehensive Income.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to provide additional guidance and reduce diversity in practice when classifying certain transactions within the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted these standards in the first quarter of 2018 utilizing the retrospective transition method. The impacts of the new standards relate to the presentation of restricted cash as well as certain cash flows related to the Company's accounts receivable sale program. Refer to Note D, Accounts and Notes Receivable, for further discussion.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“new revenue standard”). The new revenue standard outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new model provides a five-step analysis in determining when and how revenue is recognized. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard allows for initial application to be performed retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. During 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations, licensing, collectability and made technical corrections on various topics.
The Company adopted the new revenue recognition standard in the first quarter of 2018 using the full retrospective method. Accordingly, certain prior period amounts have been recast to reflect the financial results of the Company in accordance with the new standard. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings for the earliest balance sheet period presented.
As a result of the adoption of the new revenue standard, outbound freight is recorded as a component of cost of sales as opposed to a reduction of net sales. The new revenue standard also requires companies to record an asset for anticipated customer return of inventory and a sales return reserve at the gross amount of the initial sale, rather than at the net margin amount. Additionally, certain sales to distributors subject to a guarantee with a third-party financier that were previously deferred are now recognized upon shipment in accordance with the new revenue standard and the associated short-term and long-term accounts receivable and short-term and long-term debt balances have been recast. Lastly, for certain product warranties provided to customers that meet the criteria of a service-type warranty, a portion of consideration paid by customers must now be deferred and recognized as revenue over the anticipated service warranty period.
As a result of the adoption of the new revenue and pension standards, certain amounts in the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended July 1, 2017 have been recast, as follows:
|
| | | | | | | | | | | | | | | |
| (Millions of Dollars, except per share amounts) | Three months ended July 1, 20171 | | Adoption of ASU 2014-09 | | Adoption of ASU 2017-07 | | Three months ended July 1, 2017 |
| Net Sales | $ | 3,229.5 |
| | $ | 57.2 |
| | $ | — |
| | $ | 3,286.7 |
|
| Cost of sales | $ | 2,017.3 |
| | $ | 55.8 |
| | $ | 0.3 |
| | $ | 2,073.4 |
|
| Selling, general and administrative | $ | 733.9 |
| | $ | — |
| | $ | 4.7 |
| | $ | 738.6 |
|
| Provision for doubtful accounts | $ | 4.8 |
| | $ | 0.8 |
| | $ | — |
| | $ | 5.6 |
|
| Other, net | $ | 60.3 |
| | $ | — |
| | $ | (5.0 | ) | | $ | 55.3 |
|
| Earnings before income taxes | $ | 357.7 |
| | $ | 0.6 |
| | $ | — |
| | $ | 358.3 |
|
| Income taxes | $ | 80.5 |
| | $ | 0.2 |
| | $ | — |
| | $ | 80.7 |
|
| Net earnings attributable to common shareowners | $ | 277.2 |
| | $ | 0.4 |
| | $ | — |
| | $ | 277.6 |
|
| Diluted earnings per share of common stock | $ | 1.82 |
| | $ | — |
| | $ | — |
| | $ | 1.82 |
|
1As previously reported in the Company's Form 10-Q for the quarterly period ended July 1, 2017.
|
| | | | | | | | | | | | | | | |
| (Millions of Dollars, except per share amounts) | Six months ended July 1, 20171 | | Adoption of ASU 2014-09 | | Adoption of ASU 2017-07 | | Six months ended July 1, 2017 |
| Net Sales | $ | 6,035.1 |
| | $ | 107.9 |
| | $ | — |
| | $ | 6,143.0 |
|
| Cost of sales | $ | 3,757.6 |
| | $ | 105.6 |
| | $ | 0.5 |
| | $ | 3,863.7 |
|
| Selling, general and administrative | $ | 1,410.4 |
| | $ | — |
| | $ | 10.2 |
| | $ | 1,420.6 |
|
| Provision for doubtful accounts | $ | 13.0 |
| | $ | 0.9 |
| | $ | — |
| | $ | 13.9 |
|
| Other, net | $ | 166.5 |
| | $ | — |
| | $ | (10.7 | ) | | $ | 155.8 |
|
| Earnings before income taxes | $ | 830.3 |
| | $ | 1.4 |
| | $ | — |
| | $ | 831.7 |
|
| Income taxes | $ | 160.0 |
| | $ | 0.4 |
| | $ | — |
| | $ | 160.4 |
|
| Net earnings attributable to common shareowners | $ | 670.3 |
| | $ | 1.0 |
| | $ | — |
| | $ | 671.3 |
|
| Diluted earnings per share of common stock | $ | 4.41 |
| | $ | 0.01 |
| | $ | — |
| | $ | 4.42 |
|
1As previously reported in the Company's Form 10-Q for the year-to-date period ended July 1, 2017.
As a result of the adoption of the new revenue standard, certain balances as of December 30, 2017 in the Condensed Consolidated Balance Sheets have been recast, as follows:
|
| | | | | | | | | | | |
| (Millions of Dollars) | Balance at December 30, 20171 | | Adoption of ASU 2014-09 | | Balance at December 30, 2017 |
| ASSETS | | | | | |
| Accounts and notes receivable, net | $ | 1,635.9 |
| | $ | (7.2 | ) | | $ | 1,628.7 |
|
| Other assets | $ | 487.8 |
| | $ | 24.9 |
| | $ | 512.7 |
|
| | | | | | |
| LIABILITIES AND SHAREOWNERS' EQUITY | | | | | |
| Current maturities of long-term debt | $ | 983.4 |
| | $ | (5.9 | ) | | $ | 977.5 |
|
| Accrued expenses | $ | 1,352.1 |
| | $ | 35.6 |
| | $ | 1,387.7 |
|
| Long-term debt | $ | 2,843.0 |
| | $ | (14.8 | ) | | $ | 2,828.2 |
|
| Deferred taxes | $ | 434.2 |
| | $ | 1.9 |
| | $ | 436.1 |
|
| Other liabilities | $ | 2,511.1 |
| | $ | (4.1 | ) | | $ | 2,507.0 |
|
Retained earnings2 | $ | 5,990.4 |
| | $ | 8.3 |
| | $ | 5,998.7 |
|
| Accumulated other comprehensive loss | $ | (1,585.9 | ) | | $ | (3.2 | ) | | $ | (1,589.1 | ) |
1As previously reported in the Company's Form 10-K for the year ended December 30, 2017.
2Adjustment includes the cumulative effect of the adoption of $4.3 million for periods prior to fiscal year 2016.
As a result of the adoption of the new revenue and cash flows standards, certain amounts for the three and six months ended July 1, 2017 in the Condensed Consolidated Statements of Cash Flows have been recast, as follows:
|
| | | | | | | | | | | | | | | |
| (Millions of Dollars) | Three months ended July 1, 20171 | | Adoption of ASU 2014-09 | | Adoption of ASU 2016-15 & 2016-18 | | Three months ended July 1, 2017 |
| OPERATING ACTIVITIES | | | | | | | |
| Net earnings | $ | 277.2 |
| | $ | 0.4 |
| | $ | — |
| | $ | 277.6 |
|
| Changes in working capital | $ | (159.1 | ) | | $ | 0.1 |
| | $ | (104.7 | ) | | $ | (263.7 | ) |
| Changes in other assets and liabilities | $ | 21.7 |
| | $ | (0.5 | ) | | $ | — |
| | $ | 21.2 |
|
| Cash provided by (used in) operating activities | $ | 256.5 |
| | $ | — |
| | $ | (104.7 | ) | | $ | 151.8 |
|
| INVESTING ACTIVITIES | | | | | | | |
| Proceeds from deferred purchase price receivable | $ | — |
| | $ | — |
| | $ | 104.7 |
| | $ | 104.7 |
|
| Cash used in investing activities | $ | (151.1 | ) | | $ | — |
| | $ | 104.7 |
| | $ | (46.4 | ) |
| | | | | | | | |
| Change in cash, cash equivalents and restricted cash | $ | 161.5 |
| | $ | — |
| | $ | — |
| | $ | 161.5 |
|
| Cash, cash equivalents and restricted cash, beginning of period | $ | 378.0 |
| | $ | — |
| | $ | — |
| | $ | 378.0 |
|
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 539.5 |
| | $ | — |
| | $ | — |
| | $ | 539.5 |
|
1As previously reported in the Company's Form 10-Q for the quarterly period ended July 1, 2017.
|
| | | | | | | | | | | | | | | |
| (Millions of Dollars) | Six months ended July 1, 20171 | | Adoption of ASU 2014-09 | | Adoption of ASU 2016-15 & 2016-18 | | Six months ended July 1, 2017 |
| OPERATING ACTIVITIES | | | | | | | |
| Net earnings | $ | 670.3 |
| | $ | 1.0 |
| | $ | — |
| | $ | 671.3 |
|
| Changes in working capital | $ | (569.3 | ) | | $ | 0.1 |
| | $ | (227.8 | ) | | $ | (797.0 | ) |
| Changes in other assets and liabilities | $ | 60.9 |
| | $ | (1.1 | ) | | $ | (45.4 | ) | | $ | 14.4 |
|
| Cash provided by (used in) operating activities | $ | 110.9 |
| | $ | — |
| | $ | (273.2 | ) | | $ | (162.3 | ) |
| INVESTING ACTIVITIES | | | | | | | |
| Proceeds from deferred purchase price receivable | $ | — |
| | $ | — |
| | $ | 227.8 |
| | $ | 227.8 |
|
| Cash used in investing activities | $ | (1,870.2 | ) | | $ | — |
| | $ | 227.8 |
| | $ | (1,642.4 | ) |
| | | | | | | | |
| Change in cash, cash equivalents and restricted cash | $ | (592.3 | ) | | $ | — |
| | $ | (45.4 | ) | | $ | (637.7 | ) |
| Cash, cash equivalents and restricted cash, beginning of period | 1,131.8 |
| | $ | — |
| | $ | 45.4 |
| | $ | 1,177.2 |
|
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 539.5 |
| | $ | — |
| | $ | — |
| | $ | 539.5 |
|
1As previously reported in the Company's Form 10-Q for the year-to-date period ended July 1, 2017.
In December 2017, the U.S. Securities and Exchange Commission ("SEC") staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740, Income Taxes, (the "measurement period"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it can determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately before the enactment of the Act. The measurement period for accounting for the Act begins in the period of enactment and ends when an entity has obtained, prepared and analyzed the information necessary to complete the accounting requirements under ASC 740, but in no event can the measurement period extend beyond one year. Any provisional amount or adjustment to a provisional amount included in a company’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined. Refer to Note P, Income Taxes, for further discussion.
In August 2017, the FASB issued ASU 2017-12, Derivatives andAnd Hedging (Topic 815):Targeted Improvements to Accounting for Hedge Activities. The new standard amends the hedge accounting recognition and presentation requirements in ASC 815. ThisAs permitted by ASU is effective2017-12, the Company early adopted this standard in the first quarter of 2018 on a prospective basis. Refer to Note A, Significant Accounting Policies, for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on its consolidatedupdated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715). The new standard improves the presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied retrospectively. Based on the Company's preliminary assessment, the anticipated impactsinstruments policy related to the consolidated financial statements relate to classificationadoption of the components of net pension and postretirement benefit costs on the income statement.this standard.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610). The new standard provides guidance for recognizing gains and losses of nonfinancial assets in contracts with non-customers. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will adoptadopted this guidancestandard in the first quarter of 2018 and doesit did not expect it to have a materialan impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill
impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard narrows the definition of a business and provides a framework for evaluation. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.The Company adopted this standard prospectively in the first quarter of 2018.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new standard eliminates the exception to the principle in ASC 740, for all intra-entity sales of assets other than inventory, to be deferred, until the transferred asset is sold to a third party or otherwise recovered through use. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will adoptadopted this guidancestandard in the first quarter of 2018 and does not expect it to have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to provide additional guidance and reduce diversity in practice when classifying certain transactions within the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. These standards are effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of this update is to simplify several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU was effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard prospectively in the first quarter of 2017 and it did not have a material impact on its consolidated financial statements. Prior periods were not adjusted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of this update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods and is to be applied utilizing a modified retrospective approach. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company adopted this standard in the first quarter 2018 and it did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance permits, but does not require, companies to reclassify the stranded tax effects of the Act on items within accumulated other comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the timing of its adoption of this standard.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has evaluatedis currently evaluating this guidance to determine the new guidance and expectsimpact it will notmay have a material impact on its consolidated financial statements.
In July 2015,February 2016, the FASB issued ASU 2015-11,2016-02, InventoryLeases (Topic 330): Simplifying842) ("new lease standard"). The objective of the Measurementnew lease standard is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of Inventory. This ASU changes the measurement principle for certain inventory methods from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU does not apply to inventory that is measured using the Last-in First-out ("LIFO") or the retail inventory method. The provisions of ASU 2015-11 werenew lease standard. Both standards are effective for fiscal years beginning after December 15, 2016,2018, including interim
periods within those fiscal years.annual periods and are to be applied utilizing a modified retrospective approach. The Company adopted this standard inis currently evaluating these standards to determine the first quarter of 2017 and it did notimpact they may have an impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new model provides a five-step analysis in determining when and how revenue is recognized. The core principle of the new guidance is that a company should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB affirmed its proposal to defer the effective date of the standard to annual reporting periods (and interim reporting periods within those years) beginning after December 15, 2017. Entities are permitted to apply the new revenue standard early, but not before the original effective date of annual periods beginning after December 15, 2016. The standard shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In March, April, May and December 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations, licensing, collectability and made technical corrections on various topics. The Company expects to apply the full retrospective method of adoption starting with the first interim period after December 15, 2017. Based on the Company’s assessment, the anticipated impacts to the financial statements are primarily related to classification of outbound freight on the income statement and presentation of sales returns reserve.
| |
| C. | Earnings Per ShareEARNINGS PER SHARE |
The following table reconciles net earnings attributable to common shareowners and the weighted-average shares outstanding used to calculate basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 2016:2017:
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Numerator (in millions): | | | | | | | | | | | | | | |
| Net Earnings Attributable to Common Shareowners | $ | 274.2 |
| | $ | 248.9 |
| | $ | 944.5 |
| | $ | 709.8 |
| |
Net earnings attributable to common shareowners1 | | $ | 293.6 |
| | $ | 277.6 |
| | $ | 464.2 |
| | $ | 671.3 |
|
| | | | | | | | | | | | | | | |
| Denominator (in thousands): | | | | | | | | | | | | | | |
| Basic earnings per share — weighted-average shares | 149,689 |
| | 145,410 |
| | 149,464 |
| | 145,547 |
| |
| Basic weighted-average shares | | 149,748 |
| | 149,514 |
| | 150,101 |
| | 149,353 |
|
| Dilutive effect of stock contracts and awards | 2,933 |
| | 2,565 |
| | 2,642 |
| | 2,170 |
| 2,746 |
| | 2,712 |
| | 3,023 |
| | 2,509 |
|
| Diluted earnings per share — weighted-average shares | 152,622 |
| | 147,975 |
| | 152,106 |
| | 147,717 |
| |
| Earnings per share of common stock: | | | | | | | | |
| Diluted weighted-average shares | | 152,494 |
| | 152,226 |
| | 153,124 |
| | 151,862 |
|
Earnings per share of common stock1: | | | | | | | | |
| Basic | $ | 1.83 |
| | $ | 1.71 |
| | $ | 6.32 |
| | $ | 4.88 |
| $ | 1.96 |
| | $ | 1.86 |
| | $ | 3.09 |
| | $ | 4.49 |
|
| Diluted | $ | 1.80 |
| | $ | 1.68 |
| | $ | 6.21 |
| | $ | 4.81 |
| $ | 1.93 |
| | $ | 1.82 |
| | $ | 3.03 |
| | $ | 4.42 |
|
1Prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
The following weighted-average stock options were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive (in thousands):
|
| | | | | | | | | | | |
| | Third Quarter | | Year-to-Date |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Number of stock options | 2 |
| | — |
| | 388 |
| | 854 |
|
|
| | | | | | | | | | | |
| | Second Quarter | | Year-to-Date |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Number of stock options | 1,161 |
| | — |
| | 1,162 |
| | 1,163 |
|
As described in detail in Note J, Equity Arrangements, the Company issued $750 million Equity Units in May 2017 comprised of $750.0 million of convertible preferred stock and forward stock purchase contracts. On and after May 15, 2020, the convertible 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. The conversion rate was initially 6.1627 shares of common stock per one share of convertible preferred stock, which is equivalent to an initial conversion price of approximately $162.27 per share of common stock. As of SeptemberJune 30, 2017,2018, due to the customary anti-dilution provisions, the conversion rate was 6.1649,6.1709, equivalent to a conversion price of approximately $162.21$162.05 per share of common stock. The convertible preferred stock is excluded from the denominator of the diluted earnings per share calculation on the basis that the convertible preferred stock will be settled in cash except to the extent that the conversion value of the convertible preferred stock exceeds its liquidation preference. Therefore, before any redemption or conversion, the common shares that would be required to settle the applicable conversion value in excess of the liquidation preference, if the Company elects to settle such excess in common shares, would beare included in the denominator of diluted earnings per share.
As describedshare in detailperiods in Note J, Equity Arrangements, the Company issued Equity Units in December 2013 comprised of $345.0 million of Notes and Equity Purchase Contracts, which obligated the holders to purchase on November 17, 2016, for $100, between 1.0122 and 1.2399 shares of the Company’s common stock.they are dilutive. The shares related to the Equity Purchase Contracts wereconvertible preferred stock have been anti-dilutive during January and February 2016. Upon the November 17, 2016 settlement date, the Company issued 3,504,165 sharesmost of common stock and received cash proceeds of $345.0 million.2018.
D. Financing ReceivablesACCOUNTS AND NOTES RECEIVABLE
|
| | | | | | | |
| (Millions of Dollars) | June 30, 2018 | | December 30, 20171 |
| Trade accounts receivable | $ | 1,952.6 |
| | $ | 1,388.1 |
|
| Trade notes receivable | 145.4 |
| | 158.7 |
|
| Other accounts receivable | 143.7 |
| | 162.3 |
|
| Gross accounts and notes receivable | $ | 2,241.7 |
| | $ | 1,709.1 |
|
| Allowance for doubtful accounts | (90.3 | ) | | (80.4 | ) |
| Accounts and notes receivable, net | $ | 2,151.4 |
| | $ | 1,628.7 |
|
| Long-term receivables, net | $ | 168.5 |
| | $ | 176.9 |
|
1Certain prior year amounts have been recast as a result of the adoption of new accounting standards. Refer to Note B, New Accounting Standards, for further discussion.
Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses. Long-term trade financing receivables, net, of $191.1$168.5 million and $180.9$176.9 million at SeptemberJune 30, 20172018 and December 31, 2016,30, 2017, respectively, are reported within Other Assetsassets in the Condensed Consolidated Balance Sheets. Financing receivables and long-termThe Company's financing receivables are predominantly related to certain security equipment leases with commercial businesses. Generally, the Company retains legal title to any equipment under lease and bears the right to repossess such equipment in an event of default. All financing receivables are interest bearing and the Company has not classified any financing receivables as held-for-sale. Interest income earned from financing receivables that are not delinquent is recorded on the effective interest method.
The Company considers any financing receivable that has not been collected within 90 days of original billing date as past-due or delinquent. The Company’s payment terms are generally consistent with the industries in which their businesses operate and typically range from 30-90 days globally. Additionally, the Company considers the credit quality of all past-due or delinquent financing receivables as non-performing.nonperforming. The Company does not adjust the promised amount of consideration for the effects of a significant financing component when the period between transfer of the product and receipt of payment is less than one year. Any significant financing components for contracts greater than one year are included in revenue over time.
ThePrior to January 2018, the Company hashad an accounts receivable sale program that expires on January 5, 2018.program. According to the terms of that program, the Company iswas required to sell certain of its trade accounts receivables at fair value to a wholly-owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS”). The BRS, in turn, mustwas required to sell such receivables to a third-party financial institution (“Purchaser”) for cash and a deferred purchase price receivable. The Purchaser’s maximum cash investment in the receivables at any time iswas $100.0 million. The purpose of the program iswas to provide liquidity to the Company. The Company accountsaccounted for these transfers as sales under ASC 860, "TransfersTransfers and Servicing."Servicing. Receivables arewere derecognized from the Company’s consolidated balance sheet when the BRS sellssold those receivables to the Purchaser. The Company hashad no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred purchase price receivable. At September 30, 2017,In January 2018, the Company did not record a servicing asset or liability related to its retained responsibility based on its assessmentsigned an amendment that changed the structure of this program which eliminated the deferred purchase price receivable from the Purchaser and resulted in the BRS retaining ownership of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.trade accounts receivables. This program was then terminated on February 1, 2018.
At SeptemberDecember 30, 2017, and December 31, 2016, $61.0$100.8 million and $100.5 million, respectively, of net receivables were derecognized. Gross receivables sold amounted to $546.1$549.3 million ($460.0464.0 million, net) and $1,549.3$1,003.1 million ($1,312.9852.9 million, net) for the three and ninesix months ended September 30,July 1, 2017, respectively. These sales resulted in a pre-tax loss of $2.0$1.9 million and $5.3$3.3 million, respectively, and included servicing fees of $0.4 million and $1.0$0.6 million, respectively, for the three and ninesix months ended September 30,July 1, 2017. Proceeds from transfers of receivables to the Purchaser totaled $432.1$444.1 million and $1,213.0$781.1 million for the three and ninesix months ended September 30,July 1, 2017, respectively. Collections of previously sold receivables, including deferred purchase price receivables, and all fees, which are settled one month in arrears, resulted in payments to the Purchaser of $471.9$408.7 million and $1,252.9$781.1 million for the three and ninesix months ended September 30,July 1, 2017, respectively.
Gross receivables sold amounted to $433.6 million ($364.8 million, net) and $1,307.1 million ($1,111.0 million, net) for the three and nine months ended October 1, 2016, respectively. These sales resulted in a pre-tax loss of $1.1 million and $3.5 million, respectively, and included servicing fees of $0.2 million and $0.6 million, respectively, for the three and nine months ended October 1, 2016. Proceeds from transfers of receivables to the Purchaser totaled $354.0 million and $1,031.6 million, respectively, for the three and nine months ended October 1, 2016. Collections of previously sold receivables, including deferred purchase price receivables, and all fees, which are settled one month in arrears, resulted in payments to the Purchaser of $375.5 million and $1,053.1 million, respectively, for the three and nine months ended October 1, 2016.
The Company’s risk of loss following the sale of the receivables is limited to the deferred purchase price receivable, which was $202.0 million at September 30, 2017 and $83.2$106.9 million at December 31, 2016.30, 2017. The deferred purchase price receivable will besettled in full in January 2018, and historically was repaid in cash as receivables arewere collected, generally within 30 days, and asdays. As such the carrying value of the receivable recorded approximatesat December 30, 2017 approximated fair value. There were $0.1 million ofno delinquencies or credit losses for the three and ninesix months ended September 30, 2017 and OctoberJuly 1, 2016.2017. Cash inflows related to the deferred purchase price receivable totaled $216.4$104.7 million and $504.8$227.8 million for the three and ninesix months ended SeptemberJuly 1, 2017, respectively. In accordance with the adoption of the new cash flows
standards described in Note B, New Accounting Standards, the proceeds related to the deferred purchase price receivable are classified as investing activities.
As of June 30, 2018 and December 30, 2017, respectively, and $135.2the Company's deferred revenue totaled $188.2 million and $354.7$117.0 million respectively, of which $93.3 million and $95.6 million, respectively, was classified as current.
Revenue recognized for the three and nine months ended OctoberJune 30, 2018 and July 1, 2017 that was previously deferred as of December 30, 2017 and December 31, 2016 totaled $18.9 million and $15.2 million, respectively. All cash flows underRevenue recognized for the program are reportedsix months ended June 30, 2018 and July 1, 2017 that was previously deferred as a component of changes in working capital within operating activities in the Condensed Consolidated Statements of Cash Flows since all the cash from the Purchaser is either: 1) received upon the initial sale of the receivable or 2) from the ultimate collection of the underlying receivablesDecember 30, 2017 and the underlying receivables are not subject to significant risks, other than credit risk, given their short-term nature.December 31, 2016 totaled $93.5 million and $81.4 million, respectively.
As of June 30, 2018, approximately $1.155 billion of revenue from long-term contracts primarily in the Security segment was unearned related to customer contracts which were not completely fulfilled and will be recognized on a decelerating basis over the next 5 years. This amount excludes any of the Company's contracts with an original expected duration of one year or less.
The components of Inventories, net at SeptemberJune 30, 20172018 and December 31, 201630, 2017 are as follows: |
| | | | | | | |
| (Millions of Dollars) | September 30, 2017 | | December 31, 2016 |
| Finished products | $ | 1,648.1 |
| | $ | 1,044.2 |
|
| Work in process | 166.0 |
| | 133.3 |
|
| Raw materials | 433.3 |
| | 300.5 |
|
| Total | $ | 2,247.4 |
| | $ | 1,478.0 |
|
In the first quarter of 2017, the Company acquired inventory with estimated fair values of approximately $198.2 million and $15.7 million related to the Newell Tools and Craftsman brand acquisitions, respectively. Refer to Note F, Acquisitions, for further discussion of these acquisitions. |
| | | | | | | |
| (Millions of Dollars) | June 30, 2018 | | December 30, 2017 |
| Finished products | $ | 1,734.8 |
| | $ | 1,461.4 |
|
| Work in process | 197.3 |
| | 155.5 |
|
| Raw materials | 512.1 |
| | 401.5 |
|
| Total | $ | 2,444.2 |
| | $ | 2,018.4 |
|
2017F. ACQUISITIONS
Newell Tools2018 ACQUISITIONS
Nelson Fasteners Systems
On March 9, 2017,April 2, 2018, the Company acquired the Toolsindustrial business of Newell BrandsNelson Fastener Systems ("Newell Tools"Nelson"), which includes from the industrial cutting, hand tool and power tool accessory brands Irwin® and Lenox®,Doncasters Group, for approximately $1.84 billion,$430.4 million, net of cash acquired and an estimated working capital adjustment. This acquisition enhancesNelson is complementary to the Company’s position within the global tools & storage industry and broadens the Company’sCompany's product offerings, enhances its presence in the general industrial end markets, expands its portfolio of highly-engineered fastening solutions, and solutions to customers and end users, particularly within power tool accessories.will deliver cost synergies. The results of Newell ToolsNelson are being consolidated into the Company's Tools & StorageIndustrial segment.
The Newell ToolsNelson acquisition is being accounted for as a business combination, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The following table summarizes the estimated fair valuesvalue of majoridentifiable net assets acquired, which includes $67.5 million of working capital and liabilities assumed:
|
| | | |
| (Millions of Dollars) | |
| Cash and cash equivalents | $ | 20.0 |
|
| Accounts and notes receivable, net | 26.9 |
|
| Inventories, net | 198.2 |
|
| Prepaid expenses and other current assets | 22.1 |
|
| Property, plant and equipment, net | 118.7 |
|
| Trade names | 283.0 |
|
| Customer relationships | 548.0 |
|
| Other assets | 8.2 |
|
| Accounts payable | (70.2 | ) |
| Accrued expenses | (37.5 | ) |
| Deferred taxes | (307.9 | ) |
| Other liabilities | (3.1 | ) |
| Total identifiable net assets | $ | 806.4 |
|
| Goodwill | 1,051.0 |
|
| Total consideration paid | $ | 1,857.4 |
|
$174.0 million of intangible assets, is $227.0 million. The trade names were determinedrelated goodwill is $203.4 million. The amount allocated to have indefinite lives.intangible assets includes $150.0 million for customer relationships. The weighted-average useful lifelives assigned to the customer relationships isintangible assets range from 12 to 15 years.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business, assembled workforce, and the going concern nature of Newell Tools. ItNelson. Goodwill is estimated that $14.9 million of goodwill, relatingnot expected to the pre-acquisition historical tax basis of goodwill, will be deductible for tax purposes.
The purchase price allocation for Newell ToolsNelson is preliminary in certainall respects. During the measurement period, the Company expects to record adjustments relating to the finalization of intangible assets, inventory and property, plant and equipment valuations, working capital accounts, leases, pension liabilities, various opening balance sheet contingencies, including environmental remediation, and risk insurance reserves, and various income tax matters, amongst others.
A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results from operations. The Company will complete its purchase price allocation as soon as reasonably possible within the measurement period.
Other 2018 Acquisitions
During the second quarter of 2018, the Company completed four smaller acquisitions for a total purchase price of $84.3 million, net of cash acquired. The estimated fair value of the identifiable net assets acquired, which includes $13.9 million of working capital and $36.8 million of intangible assets, is $30.6 million. The related goodwill is $53.7 million. The amount allocated to intangible assets includes $24.4 million for customer relationships. The useful lives assigned to intangible assets ranges from 10 and 12 years.
The purchase price allocation for these acquisitions is preliminary in all respects. During the measurement period, the Company expects to record adjustments relating to the finalization of valuations for intangible assets, working capital accounts, and various opening balance sheet contingencies and various income tax matters, amongst others. These adjustments are not expected to have a material impact on the Company’s condensed consolidated financial statements.
2017 ACQUISITIONS
Newell Tools
On March 9, 2017, the Company acquired Newell Tools for approximately $1.86 billion, net of cash acquired. The Newell Tools results have been consolidated into the Company's Tools & Storage segment.
The Newell Tools acquisition was accounted for as a business combination. The purchase price allocation for Newell Tools was completed during the first quarter of 2018. The measurement period adjustments recorded in the first quarter of 2018 did not have a material impact to the Company's condensed consolidated financial statements. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed:
|
| | | |
| (Millions of Dollars) | |
| Cash and cash equivalents | $ | 20.0 |
|
| Accounts and notes receivable, net | 19.7 |
|
| Inventories, net | 195.5 |
|
| Prepaid expenses and other current assets | 27.1 |
|
| Property, plant and equipment, net | 112.4 |
|
| Trade names | 283.0 |
|
| Customer relationships | 548.0 |
|
| Other assets | 8.8 |
|
| Accounts payable | (70.3 | ) |
| Accrued expenses | (40.7 | ) |
| Deferred taxes | (269.4 | ) |
| Other liabilities | (7.9 | ) |
| Total identifiable net assets | $ | 826.2 |
|
| Goodwill | 1,031.8 |
|
| Total consideration paid | $ | 1,858.0 |
|
The trade names were determined to have indefinite lives. The weighted-average useful life assigned to the customer relationships is 15 years.
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business, assembled workforce, and the going concern nature of Newell Tools. It is estimated that $15.7 million of goodwill, relating to the pre-acquisition historical tax basis of goodwill, will be deductible for tax purposes.
Refer to Note E, Acquisitions, of the Company's Form 10-K for the year ended December 30, 2017 for further discussion.
Craftsman Brand
On March 8, 2017, the Company purchased the CraftsmanCraftsman® brand from Sears Holdings which provides the Company with the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels. TheCorporation ("Sears Holdings") for a total estimated cash purchase price is $887.4of $916.2 million consistingon a discounted basis, which consists of an initial cash payment of $569.4$568.2 million, which reflects the impact of working capital adjustments, a cash payment at the end of year threedue in March 2020 with an estimated present value at acquisition date of $234.0 million, and future payments to Sears Holdings of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032, which was initially valued at $84.0$114.0 million at the acquisition date based on estimated future sales projections which are subject to change.projections. Refer to Note M, Fair Value Measurements, for additional details. In addition, as part of the acquisition the Company also granted a perpetual license to Sears Holdings to continue selling Craftsman®-branded products in Sears-relatedSears Holdings-related channels. The perpetual license will be royalty-free until March 2032, which represents an estimated value of approximately $293.0 million, and 3% thereafter. The Craftsman results are beinghave been consolidated into the Company's Tools & Storage segment.
The CraftsmanCraftsman® brand acquisition is beingwas accounted for as a business combination which requires, among other things,combination. The purchase price allocation for Craftsman was completed during the assets acquired and liabilities assumed to be recognized at their fair values asfirst quarter of 2018. The measurement period adjustments recorded in the acquisition date.first quarter of 2018 did not have a material impact on the Company's condensed consolidated financial statements. The estimated fair value of identifiable net assets acquired, which includes $45.2$40.2 million of working capital and $433.0$418.0 million of intangible assets, is $589.8$482.6 million. The related goodwill is $590.6$726.6 million. The amount allocated to intangible assets includes $406.0$396.0 million of an indefinite-lived trade name. The useful life assigned to the customer relationships is 1517 years.
Goodwill iswas calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business and the going concern nature of the CraftsmanCraftsman® brand. A portionIt is estimated that $442.7 million of the goodwill is expected towill be deductible for tax purposes.
The purchase price allocationRefer to Note E, Acquisitions, of the Company's Form 10-K for Craftsman is preliminary in certain respects. During the measurement period, the Company expects to record adjustments relating to the finalization of valuations for intangible assets, the contingent consideration liability relating to future payments to Sears Holdings, and various opening balance sheet contingencies, including warranty exposures, amongst others.
A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results from operations. The Company will complete its purchase price allocation as soon as reasonably possible within the measurement period.
OTHER ACQUISITIONS
The Company completed an acquisition during the first quarter ofyear ended December 30, 2017 for a total purchase price of $26.1 million, net of cash acquired, which is being consolidated into the Company's Security segment.further discussion.
Other 2017 Acquisitions
During the third quarter of 2017, the Company completed threefour smaller acquisitions for a total purchase price of $152.0$182.9 million, net of cash acquired, which are being consolidated into the Company's Tools & Storage and Security segments.
During The estimated fair value of the measurement period, the Company expectsidentifiable net assets acquired, which includes $38.2 million of working capital and $54.4 million of intangible assets, is $89.4 million. The related goodwill is $93.5 million. The amount allocated to record adjustments relatingintangible assets includes $51.4 million for customer relationships. The useful lives assigned to the finalization of valuations for intangible assets, working capital accounts,customer relationships range between 10 and various opening balance sheet contingencies.15 years.
2016 ACQUISITIONS
During 2016, the Company completed five acquisitions for a totalThe purchase price of $59.3 million, net of cash acquired, which have been consolidated into the Company’s Tools & Storage and Security segments. The total purchase price for the acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The purchase accountingallocation for these acquisitions is substantially complete.
The Company will complete its purchase price allocation in the third quarter of 2018. Any measurement period adjustments resulting from the finalization of the Company's purchase accounting assessment are not expected to be material.
ACTUAL AND PRO-FORMA IMPACT OF THE ACQUISTIONS
Actual Impact from Acquisitions
The net sales and net earnings (loss)losses from 20172018 acquisitions included in the Company's Consolidated Statements of Operations and Comprehensive Income are $66.1 million and $11.3 million, respectively, for both the three and ninesix months ended SeptemberJune 30, 2017 are shown in the table below.2018. These amounts include amortization relating to inventory step-up and intangible assets recorded upon acquisition, transaction costs, and other integration-related costs.
|
| | | | | | | |
| (Millions of Dollars) | Third Quarter 2017 | | Year-to-Date 2017 |
| Net sales | $ | 252.5 |
| | $ | 532.9 |
|
| Net earnings (loss) attributable to common shareowners | $ | 3.6 |
| | $ | (39.3 | ) |
Pro-forma Impact from Acquisitions
The following table presents supplemental pro-forma information as if the 2017 and 2018 acquisitions had occurred on January 3, 2016.1, 2017. The pro-forma consolidated results are not necessarily indicative of what the Company’s consolidated net sales and net earnings would have been had the Company completed the acquisitions on January 3, 2016.1, 2017. In addition, the pro-forma consolidated results do not purport to project the future results of the Company.
| | | | Third Quarter | | Year-to-Date | | Second Quarter | | Year-to-Date |
| (Millions of Dollars, except per share amounts) | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| Net sales | $ | 3,309.3 |
| | $ | 3,119.2 |
| | $ | 9,570.1 |
| | $ | 9,198.3 |
| | $ | 3,651.4 |
| | $ | 3,394.1 |
| | $ | 6,930.2 |
| | $ | 6,505.4 |
|
| Net earnings attributable to common shareowners | 292.2 |
| | 251.8 |
| | 1,044.8 |
| | 667.5 |
| | $ | 306.6 |
| | $ | 276.9 |
| | $ | 480.4 |
| | $ | 667.7 |
|
| Diluted earnings per share | $ | 1.91 |
| | $ | 1.70 |
| | $ | 6.87 |
| | $ | 4.52 |
| | $ | 2.01 |
| | $ | 1.82 |
| | $ | 3.14 |
| | $ | 4.40 |
|
2018 Pro-forma Results
The 2018 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2018 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made:
Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the purchase price allocation that would have been incurred from December 31, 2017 to the acquisition dates.
Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from December 31, 2017 to the acquisition date of Nelson.
Because the 2018 acquisitions were assumed to occur on January 1, 2017, there were no deal costs or inventory step-up amortization factored into the 2018 pro-forma year, as such expenses would have occurred in the first year following the acquisition.
2017 Pro-forma Results
The 2017 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2017 and 2018 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made:
Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the purchase price allocation that would have been incurred from January 1, 2017 to the acquisition dates.dates of Newell Tools and Craftsman and from January 1, 2017 to July 1, 2017 for the remaining 2017 and 2018 acquisitions.
Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from January 1, 2017 to the acquisition date of Newell Tools.Tools and from January 1, 2017 to July 1, 2017 for Nelson.
Because the 2017 acquisitions were assumed to occur on January 3, 2016, there were no deal costs or inventory step-up amortization factored into the 2017 pro-forma year, as such expenses would have occurred in the first year following the acquisition.
2016 Pro-forma Results
The 2016 pro-forma results were calculated by taking the historical financial results of Stanley Black & Decker and adding the historical results of the 2017 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made assuming the acquisitions commenced on January 3, 2016:
Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the purchase price allocation that would have been incurred for the three and nine months ended October 1, 2016.
Additional expense for deal costs and inventory step-up, which would have been amortized as the corresponding inventory was sold.
Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred for the three and nine months ended October 1, 2016 for Newell Tools.
G. GoodwillGOODWILL
Changes in the carrying amount of goodwill by segment are as follows: |
| | | | | | | | | | | | | | | |
| (Millions of Dollars) | Tools & Storage | | Security | | Industrial | | Total |
| Balance December 31, 2016 | $ | 3,247.8 |
| | $ | 2,007.0 |
| | $ | 1,439.2 |
| | $ | 6,694.0 |
|
| Acquisition adjustments | 1,665.7 |
| | 58.0 |
| | — |
| | 1,723.7 |
|
| Foreign currency translation and other | 155.3 |
| | 90.2 |
| | 16.5 |
| | 262.0 |
|
| Balance September 30, 2017 | $ | 5,068.8 |
| | $ | 2,155.2 |
| | $ | 1,455.7 |
| | $ | 8,679.7 |
|
In the first nine months of 2017, goodwill increased by approximately $2.0 billion, which primarily related to the Newell Tools and Craftsman brand acquisitions. The goodwill amounts for these and other 2017 acquisitions are subject to change based upon the allocation of the consideration transferred to the assets acquired and liabilities assumed. Refer to Note F, Acquisitions, for further discussion. |
| | | | | | | | | | | | | | | |
| (Millions of Dollars) | Tools & Storage | | Industrial | | Security | | Total |
| Balance December 30, 2017 | $ | 5,189.7 |
| | $ | 1,454.4 |
| | $ | 2,132.0 |
| | $ | 8,776.1 |
|
| Acquisition adjustments | 40.8 |
| | 203.9 |
| | 44.0 |
| | 288.7 |
|
| Foreign currency translation | (61.4 | ) | | (3.8 | ) | | (51.9 | ) | | (117.1 | ) |
| Balance June 30, 2018 | $ | 5,169.1 |
| | $ | 1,654.5 |
| | $ | 2,124.1 |
| | $ | 8,947.7 |
|
H. Long-Term Debt and Financing ArrangementsLONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt and financing arrangements at SeptemberJune 30, 20172018 and December 31, 201630, 2017 are as follows:
| | | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 30, 2017 |
| (Millions of Dollars) | Interest Rate | Original Notional | Unamortized Discount | Unamortized Gain/(Loss) Terminated Swaps (1) | Purchase Accounting FV Adjustment | Deferred Financing Fees | Carrying Value | | Carrying Value | Interest Rate | Original Notional | Unamortized Discount | Unamortized Gain/(Loss) Terminated Swaps 1 | Purchase Accounting FV Adjustment | Deferred Financing Fees | Carrying Value | | Carrying Value 2 |
| Notes payable due 2018 | 2.45% | $ | 632.5 |
| $ | — |
| $ | — |
| $ | — |
| $ | (2.0 | ) | $ | 630.5 |
| | $ | 629.2 |
| 2.45% | $ | 632.5 |
| $ | — |
| $ | — |
| $ | — |
| $ | (0.7 | ) | $ | 631.8 |
| | $ | 630.9 |
|
| Notes payable due 2018 | 1.62% | 345.0 |
| — |
| — |
| — |
| (1.1 | ) | 343.9 |
| | 343.1 |
| 1.62% | 345.0 |
| — |
| — |
| — |
| (0.4 | ) | 344.6 |
| | 344.1 |
|
| Notes payable due 2021 | 3.40% | 400.0 |
| (0.2 | ) | 14.5 |
| — |
| (1.4 | ) | 412.9 |
| | 415.2 |
| 3.40% | 400.0 |
| (0.1 | ) | 11.8 |
| — |
| (1.1 | ) | 410.6 |
| | 412.1 |
|
| Notes payable due 2022 | 2.90% | 754.3 |
| (0.3 | ) | — |
| — |
| (3.2 | ) | 750.8 |
| | 750.3 |
| 2.90% | 754.3 |
| (0.3 | ) | — |
| — |
| (2.7 | ) | 751.3 |
| | 750.9 |
|
| Notes payable due 2028 | 7.05% | 150.0 |
| — |
| 11.7 |
| 11.4 |
| — |
| 173.1 |
| | 174.7 |
| 7.05% | 150.0 |
| — |
| 10.9 |
| 10.6 |
| — |
| 171.5 |
| | 172.6 |
|
| Notes payable due 2040 | 5.20% | 400.0 |
| (0.2 | ) | (33.8 | ) | — |
| (3.1 | ) | 362.9 |
| | 361.7 |
| 5.20% | 400.0 |
| (0.2 | ) | (32.7 | ) | — |
| (3.0 | ) | 364.1 |
| | 363.3 |
|
| Notes payable due 2052 (junior subordinated) | 5.75% | 750.0 |
| — |
| — |
| — |
| (19.1 | ) | 730.9 |
| | 730.4 |
| 5.75% | 750.0 |
| — |
| — |
| — |
| (18.7 | ) | 731.3 |
| | 731.0 |
|
| Notes payable due 2053 (junior subordinated) | 5.75% | 400.0 |
| — |
| 4.7 |
| — |
| (8.1 | ) | 396.6 |
| | 396.5 |
| 5.75% | 400.0 |
| — |
| 4.7 |
| — |
| (8.0 | ) | 396.7 |
| | 396.6 |
|
| Other, payable in varying amounts through 2022 | 0.00% - 2.73% | 25.1 |
| — |
| — |
| — |
| — |
| 25.1 |
| | 22.0 |
| 0.00% - 4.50% | 8.2 |
| — |
| — |
| — |
| — |
| 8.2 |
| | 4.2 |
|
| Total long-term debt, including current maturities | | $ | 3,856.9 |
| $ | (0.7 | ) | $ | (2.9 | ) | $ | 11.4 |
| $ | (38.0 | ) | $ | 3,826.7 |
| | $ | 3,823.1 |
| | $ | 3,840.0 |
| $ | (0.6 | ) | $ | (5.3 | ) | $ | 10.6 |
| $ | (34.6 | ) | $ | 3,810.1 |
| | $ | 3,805.7 |
|
| Less: Current maturities of long-term debt | | | (8.7 | ) | | (7.8 | ) | | | (978.9 | ) | | (977.5 | ) |
| Long-term debt | | | $ | 3,818.0 |
| | $ | 3,815.3 |
| | | $ | 2,831.2 |
| | $ | 2,828.2 |
|
(1)1Unamortized gain/(loss) associated with interest rate swaps are more fully discussed in Note I, Financial Instruments.
2Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
In January 2017, the Company amended its existing $2.0 billion commercial paper program to increase the maximum amount of notes authorized to be issued to $3.0 billion and to include Euro denominated borrowings in addition to U.S. Dollars. As of SeptemberJune 30, 2017,2018, the Company had $573.1 million$1.1 billion of borrowings outstanding against the Company’s $3.0 billion commercial paper program, of which approximately $471.3$924.5 million in Euro denominated commercial paper was designated as a Net Investment Hedge as described in more detail in Note I, Financial Instruments. AtAs of December 31, 2016,30, 2017, the Company had no commercial paper borrowings outstanding.
In January
The Company has a five-year $1.75 billion committed credit facility (the “Credit Agreement”). Borrowings under the Credit Agreement may include U.S. Dollars up to the $1.75 billion commitment or in Euro or Pounds Sterling subject to a foreign currency sub-limit of $400.0 million and bear interest at a floating rate dependent upon the denomination of the borrowing. Repayments must be made on December 18, 2020 or upon an earlier termination date of the Credit Agreement, at the election of the Company. The 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 of June 30, 2018 and December 30, 2017, the Company had not drawn on its existing five-year $1.75 billion committed credit facility.
The Company also executedhas a 364-day $1.3$1.25 billion committed credit facility (the "2017 Credit Agreement"). executed in December 2017. The 2017 Credit Agreement consists of a $1.3$1.25 billion revolving credit loan and a sub-limit of an amount equal to the Euro equivalent of $400 million for swing line advances. Borrowings under the 2017 Credit Agreement may be made in U.S. Dollars or Euros, pursuant to the terms of the agreement, and bear interest at a floating rate dependent on the denomination of the borrowing. Repayments must be made by January 17,December 19, 2018 or upon an earlier termination of the 2017 Credit Agreement at the election of the Company. The Company also has the option at the termination date to convert all advances into a term loan provided certain requirements are met. The 2017 Credit Agreement serves as a liquidity back-stop for the Company’s $3.0 billion U.S. Dollar and Euro commercial paper program, also authorized and amended in January 2017, as discussed above.program. As of SeptemberJune 30, 2018 and December 30, 2017, the Company had not drawn on this commitment.
As of September 30,
In January 2017, and December 31, 2016, the Company had not drawn on its existing five-year $1.75executed a 364-day $1.25 billion committed credit facility.facility which consisted of a $1.25 billion revolving credit loan and a sub-limit of an amount equal to the Euro equivalent of $400 million for swing line advances. Borrowings under this credit agreement were made in U.S. Dollars or Euros, pursuant to the terms of the agreement, and bore interest at a floating rate dependent on the denomination of the borrowing. This credit agreement was terminated in December 2017 at the election of the Company.
I. FINANCIAL INSTRUMENTS
I. Financial InstrumentsIn the first quarter of 2018, the Company elected to early adopt ASU 2017-12, Derivatives And Hedging (Topic 815):Targeted Improvements to Accounting for Hedge Activities, which amends the hedge accounting recognition and presentation requirements of ASC 815. ASU 2017-12 requires the presentation and disclosure requirements to be applied prospectively and as a result, certain disclosures for the three and six month periods ending July 1, 2017 conform to the presentation and disclosure requirements prior to the adoption.
The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure.
If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, "DerivativesDerivatives and Hedging", management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. Financial instruments are not utilized for speculative purposes.
A summary of the fair values of the Company’s financial instrumentsderivatives recorded in the Condensed Consolidated Balance Sheets at SeptemberJune 30, 2018 and December 30, 2017 and December 31, 2016is as follows:
| | | (Millions of Dollars) | Balance Sheet Classification | | September 30, 2017 | | December 31, 2016 | | Balance Sheet Classification | | September 30, 2017 | | December 31, 2016 | Balance Sheet
Classification | | June 30, 2018 | | December 30, 2017 | | Balance Sheet
Classification | | June 30, 2018 | | December 30, 2017 |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | |
| Interest Rate Contracts Cash Flow | LT other assets | | $ | — |
| | $ | — |
| | LT other liabilities | | $ | 56.0 |
| | $ | 47.3 |
| Other current assets | | $ | — |
| | $ | — |
| | Accrued expenses | | $ | 33.9 |
| | $ | 55.7 |
|
| Foreign Exchange Contracts Cash Flow | Other current assets | | 3.5 |
| | 37.6 |
| | Accrued expenses | | 26.6 |
| | 1.6 |
| Other current assets | | 7.3 |
| | 4.1 |
| | Accrued expenses | | 5.4 |
| | 33.4 |
|
| | LT other assets | | 0.9 |
| | — |
| | LT other liabilities | | 11.7 |
| | — |
| LT other assets | | 1.8 |
| | — |
| | LT other liabilities | | 1.0 |
| | 5.2 |
|
| Net Investment Hedge | Other current assets | | 9.9 |
| | 44.1 |
| | Accrued expenses | | 6.7 |
| | 1.8 |
| Other current assets | | 10.2 |
| | 6.6 |
| | Accrued expenses | | 1.5 |
| | 7.0 |
|
| | LT other assets | | — |
| | — |
| | LT other liabilities | | 5.7 |
| | 0.5 |
| LT other assets | | — |
| | — |
| | LT other liabilities | | 15.8 |
| | 5.8 |
|
| Non-derivative designated as hedging instrument: | | | | | | | | | | | | | | | | |
| Net Investment Hedge | | — |
| | — |
| | Short-term borrowings | | 471.3 |
| | — |
| | — |
| | — |
| | Short-term borrowings | | 924.5 |
| | — |
|
| Total Designated | | $ | 14.3 |
| | $ | 81.7 |
| | $ | 578.0 |
| | $ | 51.2 |
| |
| Total designated as hedging | | | $ | 19.3 |
| | $ | 10.7 |
| | $ | 982.1 |
| | $ | 107.1 |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
| Foreign Exchange Contracts | Other current assets | | $ | 5.0 |
| | $ | 28.5 |
| | Accrued expenses | | $ | 16.9 |
| | $ | 46.4 |
| Other current assets | | $ | 17.6 |
| | $ | 7.3 |
| | Accrued expenses | | $ | 21.3 |
| | $ | 6.9 |
|
| Total Undesignated | | $ | 5.0 |
| | $ | 28.5 |
| | $ | 16.9 |
| | $ | 46.4 |
| |
| Total | | | $ | 36.9 |
| | $ | 18.0 |
| | $ | 1,003.4 |
| | $ | 114.0 |
|
The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.
During the ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 2016,2017, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash paidreceived of $4.2$23.5 million and net cash received of $67.9$22.8 million, respectively.
CASH FLOW HEDGES
AsThere were after-tax mark-to-market losses of September$57.3 million and $112.6 million as of June 30, 20172018 and December 31, 2016, there was an after-tax mark-to-market loss of $117.1 million and $46.3 million,30, 2017, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax gainloss of $12.6$29.8 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates.
The tables below detail pre-tax amounts reclassified fromof derivatives designated as cash flow hedges in Accumulated other comprehensive loss into earnings for active derivative financial instrumentsderivatives during the periods in which the underlying hedged transactions affected earnings for the three and ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 2016 (in millions):2017:
| | | Third Quarter 2017 | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion) | | Gain (Loss)
Recognized in
Income
(Ineffective Portion*) | |
| | | | Second Quarter 2018 |
| (Millions of dollars) | | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Recognized in
Income on Amounts Excluded from Effectiveness Testing |
| Interest Rate Contracts | | $ | (1.6 | ) | | Interest expense | | $ | — |
| | $ | — |
| | $ | 3.8 |
| | Interest expense | | $ | — |
| | $ | — |
|
| Foreign Exchange Contracts | | $ | (26.5 | ) | | Cost of sales | | $ | 3.6 |
| | $ | — |
| | $ | 29.7 |
| | Cost of sales | | $ | (9.2 | ) | | $ | — |
|
| | | Year-to-Date 2017 | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion) | | Gain (Loss)
Recognized in
Income
(Ineffective Portion*) | |
| | | | Year-to-Date 2018 |
| (Millions of dollars) | | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Recognized in
Income on Amounts Excluded from Effectiveness Testing |
| Interest Rate Contracts | | $ | (8.8 | ) | | Interest expense | | $ | — |
| | $ | — |
| | $ | 21.8 |
| | Interest expense | | $ | — |
| | $ | — |
|
| Foreign Exchange Contracts | | $ | (65.1 | ) | | Cost of sales | | $ | 13.3 |
| | $ | — |
| | $ | 23.0 |
| | Cost of sales | | $ | (12.0 | ) | | $ | — |
|
| | | Third Quarter 2016 | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion) | | Gain (Loss) Recognized in Income (Ineffective Portion*) | |
| | | | Second Quarter 2017 |
| (Millions of dollars) | | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion) | | Gain (Loss)
Recognized in
Income
(Ineffective Portion*) |
| Interest Rate Contracts | | $ | (7.0 | ) | | Interest expense | | $ | — |
| | $ | — |
| | $ | (11.0 | ) | | Interest expense | | $ | — |
| | $ | — |
|
| Foreign Exchange Contracts | | $ | (0.9 | ) | | Cost of sales | | $ | (2.3 | ) | | $ | — |
| | $ | (29.9 | ) | | Cost of sales | | $ | 5.2 |
| | $ | — |
|
| | | Year-to-Date 2016 | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion) | | Gain (Loss) Recognized in Income (Ineffective Portion*) | |
| | | | Year-to-Date 2017 |
| (Millions of dollars) | | | Gain (Loss)
Recorded in OCI | | Classification of
Gain (Loss)
Reclassified from
OCI to Income | | Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion) | | Gain (Loss) Recognized in Income (Ineffective Portion*) |
| Interest Rate Contracts | | $ | (61.1 | ) | | Interest expense | | $ | — |
| | $ | — |
| | $ | (7.2 | ) | | Interest expense | | $ | — |
| | $ | — |
|
| Foreign Exchange Contracts | | $ | (5.3 | ) | | Cost of sales | | $ | 21.3 |
| | $ | — |
| | $ | (38.6 | ) | | Cost of sales | | $ | 9.7 |
| | $ | — |
|
* Includes ineffective portion and amount excluded from effectiveness testing on derivatives.
For
A summary of the three and nine months ended September 30, 2017, the hedged items' impact topre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations and Comprehensive Income was a for the three and six months ended June 30, 2018 is as follows: |
| | | | | | | | | | | | | | | | |
| | | Second Quarter 2018 | | Year-to-Date 2018 |
| (Millions of dollars) | | Cost of Sales | | Interest Expense | | Cost of Sales | | Interest Expense |
| Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded | | $ | 2,356.5 |
| | $ | 69.0 |
| | $ | 4,400.1 |
| | $ | 132.2 |
|
| Gain (loss) on cash flow hedging relationships: | |
| | | |
| |
|
| Foreign Exchange Contracts: | |
| | | |
| |
|
| Hedged Items | | $ | 9.2 |
| | $ | — |
| | $ | 12.0 |
| | $ | — |
|
| Gain (loss) reclassified from OCI into Income | | $ | (9.2 | ) | | $ | — |
| | $ | (12.0 | ) | | $ | — |
|
| Interest Rate Swap Agreements: | | | | | | | | |
Gain (loss) reclassified from OCI into Income 1 | | $ | — |
| | $ | (3.8 | ) | | $ | — |
| | $ | (7.6 | ) |
1 Inclusive of the gain/loss of $3.6 million and $13.3 million, respectively, in Cost of sales, which is offsetting the amounts shown above. amortization on terminated derivative financial instruments.
For the three and ninesix months ended OctoberJuly 1, 2016,2017, the hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a gainloss of $2.3$5.2 million and a loss$9.7 million, respectively in Cost of $21.3 million, respectively.sales. There was no impact related to the interest rate contracts' hedged items for all periods presented.
For
An after-tax loss of $7.1 million and an after-tax gain of $1.0 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the three months ended SeptemberJune 30, 2018 and July 1, 2017, there was no net impact to earnings for hedged items. For the nine months ended September 30, 2017,respectively. An after-tax loss of $11.7 million and an after-tax gain of $1.4 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) duringfor the periods in which the underlying hedged transactions affected earnings. For the three and ninesix months ended OctoberJune 30, 2018 and July 1, 2016, an after-tax loss of $3.6 million and an after-tax gain of $6.2 million,2017, respectively, was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) during the periods in which the underlying hedged transactions affected earnings.
Interest Rate Contracts
: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-debt proportions. At SeptemberJune 30, 20172018 and December 31, 2016,30, 2017, the Company had forward starting interest rate swaps on $400 million of forward starting swaps outstandingfuture debt issuances which were executed in 2014. The objective of the hedges is to offset the expected variability on future payments associated with the interest rate on debt instruments expected to be issued in 2018. Gains or losses on the swaps are recorded in Accumulated other comprehensive loss and will be subsequently reclassified into earnings as interest expense as the future interest expense on debt is recognized in earnings or as ineffectiveness occurs.earnings.
Foreign Currency Contracts
Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with functional currencies different than their own, which creates currency-related volatility in the
Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases and sales of inventory. Gains and losses reclassified from Accumulated other comprehensive loss for the effective portion of the hedge are recorded in Cost of sales. The ineffective portion, if any,sales as well as gainsthe hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At June 30, 2018 and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive loss, but are recorded directly to the Consolidated Statements of Operations and Comprehensive Income in Other, net. At SeptemberDecember 30, 2017, the notional value of forward currency contracts outstanding was $626.3$264.1 million and $559.9 million, respectively, maturing on various dates through 2018. At December 31, 2016, the notional value of forward currency contracts outstanding was $503.8 million, maturing on various dates through 2017.
Purchased Option Contracts: The Company and its subsidiaries have entered into various intercompany transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its intercompany obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from Accumulated other comprehensive loss for the effective portions of the hedge are recorded in Cost of sales. The ineffective portion, if any,sales as well as gainsthe hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. As of June 30, 2018 and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive loss, but are recorded directly to the Consolidated Statements of Operations and Comprehensive Income in Other, net. At SeptemberDecember 30, 2017, the notional value of purchased option contracts was $455.0$375.5 million and $400.0 million, respectively, maturing on various dates through 2019. As of December 31, 2016, the notional value of purchased option contracts was $252.0 million, maturing on various dates through 2017.
FAIR VALUE HEDGES
Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In previousprior years, the Company entered into interest rate swaps on the first five yearsrelated to certain of its notes payable which were subsequently terminated. Amortization of the Company's $400 million 5.75% notes due 2053 andgain/loss on previously terminated swaps is reported as a reduction of interest rate swaps with notional values which equaled the Company's $400 million 3.40% notes due 2021 and the Company's $150 million 7.05% notes due 2028. These interest rate swaps effectively converted the Company's fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest rates. In the second quarter of 2016, the Company terminated all of the above interest rate swaps and there were no open contracts as of September 30, 2017 and December 31, 2016. The terminations resulted in cash receipts of $27.0 million. This gain was deferred and is being amortized to earnings over the remaining life of the notes.
expense. Prior to termination, of the Company’s interest rate swaps discussed above, the changes in the fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. As of June 30, 2018 and December 30, 2017, the Company did not have any active fair value interest rate swaps.
A summary of the pre-tax effect of fair value adjustments relating to these swapshedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2018 is as follows (in millions):follows:
|
| | | | | | | | | | | | | | | |
| | Third Quarter 2016 | | Year-to-Date 2016 |
| Income Statement Classification | Gain/(Loss) on
Swaps* | | Gain/(Loss) on
Borrowings | | Gain/(Loss) on
Swaps* | | Gain/(Loss) on
Borrowings |
| Interest Expense | $ | — |
| | $ | — |
| | $ | (3.3 | ) | | $ | 3.8 |
|
*Includes ineffective portion and amount excluded from effectiveness testing. |
| | | | | | | |
(Millions of dollars) | Second Quarter 2018 Interest Expense | | Year-to-Date 2018
Interest Expense |
| Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the fair value hedges are recorded | $ | 69.0 |
| | $ | 132.2 |
|
| Amortization of gain/loss on terminated swaps | $ | 0.8 |
| | $ | 1.6 |
|
Amortization of the gain/loss on terminated swaps of $0.8 million and $2.4$1.6 million areis reported as a reduction of interest expense for the three and ninesix months ended September 30,July 1, 2017, respectively. In addition
A summary of the amounts recorded on the balance sheet related to thecumulative basis adjustments for fair value adjustments in the table above, net swap accruals and amortization of the gain/loss on terminated swaps of $0.8 million and $6.1 million are reported as a reduction of interest expensehedges for the three and ninesix months ended October 1, 2016, respectively. Interest expense on the underlying debt when the hedge was active was $19.9 million for the nine months ended October 1, 2016.June 30, 2018 is as follows:
|
| | | | | | | | | | |
| | | Year-to-Date 2018 |
(Millions of dollars) | | Carrying Amount of Hedged Liability | | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability |
| Current Maturities of Long-Term Debt | | $ | — |
| | Terminated Swaps | | $ | 3.2 |
|
| Long-Term Debt | | $ | — |
| | Terminated Swaps | | $ | (8.4 | ) |
NET INVESTMENT HEDGES
Foreign Exchange Contracts:
The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive loss were gainsa gain of $3.3$46.8 million and $88.6$3.4 million at SeptemberJune 30, 2018 and December 30, 2017, and December 31, 2016, respectively.
As of SeptemberJune 30, 2017,2018, the Company had foreign exchange forward contracts maturing on various dates in 20172018 with notional values totaling $749.6$701.4 million outstanding hedging a portion of its British pound sterling, Mexican peso, Swedish krona, Euro and Canadian dollar denominated net investments; a cross currency swap with a notional value totaling $250.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investment; an option contract with a notional value totaling $36.2 million maturing in 2018 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of $471.3$924.5 million maturing in 20172018 hedging a portion of its Euro denominated net investments. As of
December 31, 2016,30, 2017, the Company had foreign exchange contracts maturing on various dates in 2017through 2018 with notional values totaling $1.0 billion$751.2 million outstanding hedging a portion of its British pound sterling, Mexican peso, Swedish krona, Euro and Canadian dollar denominated net investments, and a cross currency swap with a notional value totaling $250.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investment. For the nine months ended September 30, 2017 and October 1, 2016, maturing
Maturing foreign exchange contracts resulted in net cash paidreceived of $31.6$20.3 million and net cash receivedpaid of $63.3$3.7 million for the six months ended June 30, 2018 and July 1, 2017, respectively.
Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets. GainsUpon adoption of ASU 2017-12, gains and losses afterrepresenting components excluded from the assessment of effectiveness are recognized in earnings in Other, net on a hedge has been de-designated are recorded directlystraight-line basis over the term of the hedge. Prior to the Consolidated Statementsadoption of Operations and Comprehensive Income in Other, net.ASU 2017-12, no components were excluded from the assessment of effectiveness. Refer to Note B, New Accounting Standards, for further discussion.
The pre-tax gain or loss from fair value changes for the three and six ended June 30, 2018 and July 1, 2017 was as follows (in millions):follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2017 | | Year-to-Date 2017 |
| Income Statement Classification | Amount
Recorded in OCI
(Loss) Gain | | Effective Portion
Recorded in
Income
Statement | | Ineffective
Portion*
Recorded in
Income
Statement | | Amount
Recorded in OCI
(Loss) Gain | | Effective Portion
Recorded in
Income
Statement | | Ineffective
Portion*
Recorded in
Income
Statement |
| Other, net | $ | (42.3 | ) | | $ | — |
| | $ | — |
| | $ | (131.3 | ) | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | | Second Quarter 2018 |
| (Millions of Dollars) | | Total Gain (Loss) Recorded in OCI | | Excluded Component Recorded in OCI | | Income Statement Classification | | Total Gain (Loss) Reclassified from OCI to Income | | Excluded Component Amortized from OCI to Income |
| Forward Contracts | | $ | 48.7 |
| | $ | 2.3 |
| | Other, net | | $ | 2.3 |
| | $ | 2.3 |
|
| Cross Currency Swap | | $ | 1.4 |
| | $ | 1.4 |
| | Other, net | | $ | 1.7 |
| | $ | 1.7 |
|
| Option Contracts | | $ | 2.6 |
| | $ | — |
| | Other, net | | $ | — |
| | $ | — |
|
| Non-derivative designated as Net Investment Hedge | | $ | 51.5 |
| | $ | — |
| | Other, net | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter 2016 | | Year-to-Date 2016 |
| Income Statement Classification | Amount
Recorded in OCI
Gain (Loss) | | Effective Portion
Recorded in
Income
Statement | | Ineffective
Portion*
Recorded in
Income
Statement | | Amount
Recorded in OCI
Gain (Loss) | | Effective Portion
Recorded in
Income
Statement | | Ineffective
Portion*
Recorded in
Income
Statement |
| Other, net | $ | 16.0 |
| | $ | — |
| | $ | — |
| | $ | 53.8 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | | Year-to-Date 2018 |
| (Millions of Dollars) | | Total Gain (Loss) Recorded in OCI | | Excluded Component Recorded in OCI | | Income Statement Classification | | Total Gain (Loss) Reclassified from OCI to Income | | Excluded Component Amortized from OCI to Income |
| Forward Contracts | | $ | 22.2 |
| | $ | 6.2 |
| | Other, net | | $ | 4.1 |
| | $ | 4.1 |
|
| Cross Currency Swap | | $ | 2.9 |
| | $ | 8.3 |
| | Other, net | | $ | 3.4 |
| | $ | 3.4 |
|
| Option Contracts | | $ | (0.9 | ) | | $ | — |
| | Other, net | | $ | — |
| | $ | — |
|
| Non-derivative designated as Net Investment Hedge | | $ | 38.9 |
| | $ | — |
| | Other, net | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Second Quarter 2017 | | Year-to-Date 2017 |
| (Millions of Dollars) | | Amount
Recorded in OCI
Gain (Loss) | | Effective Portion
Recorded in
Income
Statement | | Ineffective
Portion*
Recorded in Income
Statement | | Amount
Recorded in OCI
Gain (Loss) | | Effective Portion
Recorded in
Income
Statement | | Ineffective
Portion*
Recorded in Income
Statement |
| Other, net | | $ | (73.3 | ) | | $ | — |
| | $ | — |
| | $ | (89.0 | ) | | $ | — |
| | $ | — |
|
*Includes ineffective portion and amount excluded from effectiveness testing.
UNDESIGNATED HEDGES
Foreign Exchange Contracts: Currency swaps and foreignForeign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding at SeptemberJune 30, 20172018 was $1.3$1.4 billion, maturing on various dates through 2018. The total notional amount of the forward contracts outstanding at December 31, 201630, 2017 was $1.5$1.0 billion, maturing on various dates through 2018. The impacts of changes in 2017. The income statement impactsthe fair value related to derivatives not designated as hedging instruments under ASC 815 for the three and ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 20162017 are as follows (in millions):follows:
| | | Derivatives Not Designated as Hedging Instruments under ASC 815 | Income Statement
Classification | | Third Quarter 2017
Amount of Gain (Loss)
Recorded in Income on
Derivative | | Year-to-Date 2017
Amount of Gain (Loss)
Recorded in Income on
Derivative | |
| (Millions of Dollars) | | Income Statement
Classification | | Second Quarter 2018
Amount of Gain (Loss)
Recorded in Income on
Derivative | | Year-to-Date 2018
Amount of Gain (Loss)
Recorded in Income on
Derivative |
| Foreign Exchange Contracts | Other, net | | $ | 13.9 |
| | $ | 43.6 |
| Other, net | | $ | (2.2 | ) | | $ | 14.9 |
|
| | | Derivatives Not Designated as Hedging Instruments under ASC 815 | Income Statement
Classification | | Third Quarter 2016
Amount of Gain (Loss)
Recorded in Income on
Derivative | | Year-to-Date 2016
Amount of Gain (Loss)
Recorded in Income on
Derivative | |
| (Millions of Dollars) | | Income Statement
Classification | | Second Quarter 2017
Amount of Gain (Loss)
Recorded in Income on
Derivative | | Year-to-Date 2017
Amount of Gain (Loss)
Recorded in Income on
Derivative |
| Foreign Exchange Contracts | Other, net | | $ | 12.5 |
| | $ | (24.5 | ) | Other, net | | $ | 1.1 |
| | $ | 29.7 |
|
J. Equity ArrangementsEQUITY ARRANGEMENTS
In 2016,April 2018, the Company repurchased 3,940,0871,399,732 shares of common stock for approximately $374.1$200.0 million. Additionally,
In March 2018, the Company net-share settledpurchased 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 $57.3 million, or an average of $17.96 per share. The premium paid was recorded as a reduction of Shareowners’ equity. The purpose of the capped call options is to hedge the risk of stock price appreciation between the lower and received 711,376 shares during 2016. Refer to Note J, Capital Stock,upper strike prices of the capped call options for a future share repurchase.
The capped call has an initial lower strike price of $156.86 and an upper strike price of $203.92, which is approximately 30% higher than the closing price of the Company's Form 10-Kcommon stock on March 13, 2018. As of June 30, 2018, there has been no change to the upper and lower strike prices. The aggregate fair value of the options at June 30, 2018 was $34.8 million.
The capped call transactions may be settled by net share settlement (the default settlement method) or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement. The number of shares the Company will receive will be determined by the terms of the contracts using a volume-weighted-average price calculation for the year ended December 31, 2016.
In November 2016,market value of the Company issued 3,504,165 shares ofCompany's common stock, to settleover an averaging period. The market value determined will then be measured against the purchase contractsapplicable strike price of the 2013 Equity Units. See further discussion below.capped call transactions.
In March 2015, the Company entered into a forward share purchase contract with a financial 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. In November 2016,June 2018, the Company amended the settlement date to April 2019,2021, or earlier at the Company's option. The reduction of common shares outstanding was recorded at the inception of the forward share purchase contract in March 2015 and factored into the calculation of weighted-average shares outstanding at that time.
In October 2014, the Company entered into a forward share purchase contract on its common stock. The contract obligated the Company to pay $150.0 million, plus an additional amount related to the forward component of the contract, to the financial institution counterparty not later than October 2016, or earlier at the Company’s option, for the 1,603,822 shares purchased. The reduction of common shares outstanding was recorded at the inception of the forward share purchase contract in October 2014 and factored into the calculation of weighted-average shares outstanding at that time. In October 2016, the Company physically settled the contract, receiving 1,603,822 shares for a settlement amount of $147.4 million. Refer to Note J, Capital Stock, of the Company's Form 10-K for the year ended December 31, 2016, for additional disclosure related to the shares physically received.
As described more fully in Note H, Long-Term Debt and Financing Arrangements, of the Company’s Form 10-K for the year ended December 31, 2016, in November 2013, the Company purchased from certain financial institutions “out-of-the-money” capped call options on 12.2 million shares of its common stock (subject to customary anti-dilution adjustments). In February 2015, the Company net-share settled 9.1 million of the 12.2 million capped call options on its common stock and received 911,077 shares using an average reference price of $96.46 per common share. In February 2016, the Company net-share settled the remaining 3.1 million capped call options on its common stock and received 293,142 shares using an average reference price of $94.34 per common share.
Equity Units and Capped Call Transactions
As described more fully in Note H, Long-Term Debt and Financing Arrangements, of the Company’s Form 10-K for the year ended December 31, 2016, in December 2013, the Company issued Equity Units comprised of $345.0 million of Notes and Equity Purchase Contracts. The Equity Purchase Contracts obligated the holders to purchase on November 17, 2016, for $100, between 1.0122 and 1.2399 shares of the Company’s common stock, which were equivalent to an initial settlement price of $98.80 and $80.65, respectively, per share of common stock.
In accordance with the Equity Purchase Contracts, on November 17, 2016, the Company issued 3,504,165 common shares and received additional cash proceeds of $345.0 million. The conversion rate used in calculating the average of the daily volume-weighted-average price of common stock during the market value averaging period, was 1.0157 (equivalent to the minimum settlement rate and a conversion price of $98.45 per common share) on November 17, 2016.
Contemporaneously with the issuance of the Equity Units described above, the Company paid $9.7 million, or an average of $2.77 per option, to enter into capped call transactions on 3.5 million shares of common stock with a major financial institution. The purpose of the capped call transactions was to offset the potential economic dilution associated with the common shares issuable upon the settlement of the Equity Purchase Contracts. Refer to Note H, Long-Term Debt and Financing Arrangements, of the Company’s Form 10-K for the year ended December 31, 2016 for further discussion. The $9.7 million premium paid was recorded as a reduction to equity.
The capped call transactions covered, subject to customary anti-dilution adjustments, the number of shares equal to the number of shares issuable upon settlement of the Equity Purchase Contracts at the 1.0122 minimum settlement rate. In October and November 2016, the Company's capped call options on its common stock expired and were net-share settled resulting in the Company physically receiving 418,234 shares using an average reference price of $117.84 per common share.
$750 Million Equity Units and Capped Call Transactions
In May 2017, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million (“$750 million Equity Units”). Each unit has a stated amount of $100 and initially consists of a three-year forward stock purchase contract (“2020 Purchase Contracts”) for the purchase of a variable number of shares of common stock, on May 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 $727.5 million in cash proceeds from the $750 million Equity Units, net of underwriting costs and commissions, before offering expenses, and issued 750,000 shares of Series C Preferred Stock, recording $750.0 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used $25.1 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution as described in more detail below.
Convertible Preferred Stock
In May 2017, the Company issued 750,000 shares of Series C Preferred Stock, without par, with a liquidation preference of $1,000 per share. The convertible preferred stock will initially not bear any dividends and the liquidation preference of the convertible preferred stock will not accrete. The convertible preferred stock has no maturity date, and will remain outstanding unless converted by holders or redeemed by the Company. Holders of shares of the convertible preferred stock will generally have no voting rights.
The Series C Preferred Stock is pledged as collateral to support holders’ purchase obligations under the 2020 Purchase Contracts and can be remarketed. In connection with any successful remarketing, the Company may (but is not required to) modify certain terms of the convertible preferred stock, including the dividend rate, the conversion rate, and the earliest redemption date. After any successful remarketing in connection with which the dividend rate on the convertible preferred stock is increased, the Company will pay cumulative dividends on the convertible preferred stock, if declared by the board of directors, quarterly in arrears from the applicable remarketing settlement date.
On and after May 15, 2020, the Series C Preferred Stock may be converted into common stock at the option of the holder. The initial conversion rate was 6.1627 shares of common stock per one share of Series C Preferred Stock, which is equivalent to an initial conversion price of approximately $162.27 per share of common stock. As of SeptemberJune 30, 2017,2018, due to the customary anti-dilution provisions, the conversion rate was 6.1649,6.1709, equivalent to a conversion price of approximately $162.21$162.05 per share of common stock. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof.
The Company may not redeem the Series C Preferred Stock prior to June 22, 2020. At the election of the Company, on or after June 22, 2020, the Company may redeem for cash, all or any portion of the outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series C Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date.
2020 Purchase Contracts
The 2020 Purchase Contracts obligate the holders to purchase, on May 15, 2020, for a price of $100 in cash, a maximum number of 5.4 million shares of the Company’s common stock (subject to customary anti-dilution adjustments). The 2020 Purchase Contract holders may elect to settle their obligation early, in cash. The Series C Preferred Stock is pledged as collateral to guarantee the holders’ obligations to purchase common stock under the terms of the 2020 Purchase Contracts. The initial settlement rate determining the number of shares that each holder must purchase will not exceed the maximum settlement rate, and is determined over a market value averaging period immediately preceding May 15, 2020.
The initial maximum settlement rate of 0.7241 was calculated using an initial reference price of $138.10, equal to the last reported sale price of the Company's common stock on May 11, 2017. As of SeptemberJune 30, 2017,2018, due to the customary anti-dilution provisions, the maximum settlement rate was 0.7244,0.7251, equivalent to a reference price of $138.05.$137.92. If the applicable market value of the Company's common stock is less than or equal to the reference price, the settlement rate will be the maximum settlement rate; and if the applicable market value of common stock is greater than the reference price, the settlement rate will be a number of shares of the Company's common stock equal to $100 divided by the applicable market value. Upon settlement of the 2020 Purchase Contracts, the Company will receive additional cash proceeds of $750 million.
The Company will paymake quarterly payments ("Contracts Adjustment Payments") to the holders of the 2020 Purchase Contracts quarterly payments (“Contract Adjustment Payments”) at a rate of 5.375% per annum, payable quarterly in arrears on February 15, May 15, August 15 and November 15, commencing August 15, 2017. The $116.9$117.1 million present value of the Contract Adjustment Payments reduced Shareowners’ Equity at inception. As each quarterly Contract Adjustment Payment is made, the related liability is reduced and the difference between the cash paymentpayments and the present value will accrete to interest expense, approximately $1.3 million per year over the three-year term. As of SeptemberJune 30, 2017,2018, the present value of the Contract Adjustment Payments was $107.5$78.3 million.
The holders can settle the purchase contracts early, for cash, subject to certain exceptions and conditions in the prospectus supplement. Upon early settlement of any purchase contracts, the Company will deliver the number of shares of its common stock equal to 85% of the number of shares of common stock that would have otherwise been deliverable.
2017 Capped Call Transactions
In order to offset the potential economic dilution associated with the common shares issuable upon conversion of the Series C Preferred Stock, to the extent that the conversion value of the convertible preferred stock exceeds its liquidation preference, the Company entered into capped call transactions with three major financial institutions (the “counterparties”).institutions.
The capped call transactions have a term of approximately three years and are intended to cover the number of shares issuable upon conversion of the Series C Preferred Stock. Subject to customary anti-dilution adjustments, the capped call hashad an initial lower strike price of $162.27, which corresponds to the minimum 6.1627 settlement rate of the Series C Preferred Stock, and an upper strike price of $179.53, which is approximately 30% higher than the closing price of the Company's common stock on May 11, 2017. As of SeptemberJune 30, 2017,2018, due to the customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of $162.21$162.05 and an adjusted upper strike price of $179.47.$179.29.
The capped call transactions may be settled by net share settlement (the default settlement method) or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement. The number of shares the Company will receive will be determined by the terms of the contracts using a volume-weighted averagevolume-weighted-average price calculation for the market value of the Company's common stock, over an averaging period. The market value determined will then be measured against the applicable strike price of the capped call transactions. The Company expects the capped call transactions to offset the potential dilution upon conversion of the Series C Preferred Stock if the calculated market value is greater than the lower strike price but less than or equal to the upper strike price of the capped call transactions. Should the calculated market value exceed the upper strike price of the capped call transactions, the dilution mitigation will be limited based on such capped value as determined under the terms of the contracts.
With respect to the impact on the Company, the 2017 capped call transactions and $750 million Equity Units, when taken together, result in the economic equivalent of having the conversion price on $750 million Equity Units at $179.47,$179.29, the upper strike of the capped call as of SeptemberJune 30, 2017.2018.
The
In May 2017, the Company paid $25.1 million, or an average of $5.43 per option, to enter into capped call transactions on 4.6 million shares of common stock. The $25.1 million premium paid was a reduction of Shareowners’ Equity. The aggregate fair value of the options at SeptemberJune 30, 20172018 was $28.2$16.2 million.
K. Accumulated Other Comprehensive LossACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in the balances for each component of accumulatedAccumulated other comprehensive loss: |
| | | | | | | | | | | | | | | | | | | | |
| (Millions of Dollars) | | Currency translation adjustment and other | | Unrealized losses on cash flow hedges, net of tax | | Unrealized gains (losses) on net investment hedges, net of tax | | Pension (losses) gains, net of tax | | Total |
| Balance - December 31, 2016 | | $ | (1,586.3 | ) | | $ | (46.3 | ) | | $ | 88.6 |
| | $ | (377.2 | ) | | $ | (1,921.2 | ) |
| Other comprehensive income (loss) before reclassifications | | 452.5 |
| | (69.4 | ) | | (85.3 | ) | | (19.0 | ) | | 278.8 |
|
| Adjustments related to sales of businesses | | 4.7 |
| | — |
| | — |
| | 2.6 |
| | 7.3 |
|
| Reclassification adjustments to earnings | | — |
| | (1.4 | ) | | — |
| | 17.7 |
| | 16.3 |
|
| Net other comprehensive income (loss) | | 457.2 |
| | (70.8 | ) | | (85.3 | ) | | 1.3 |
| | 302.4 |
|
| Balance - September 30, 2017 | | $ | (1,129.1 | ) | | $ | (117.1 | ) | | $ | 3.3 |
| | $ | (375.9 | ) | | $ | (1,618.8 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| (Millions of Dollars) | | Currency translation adjustment and other1 | | Unrealized gains (losses) on cash flow hedges, net of tax | | Unrealized gains (losses) on net investment hedges, net of tax | | Pension gains (losses), net of tax | | Total |
| Balance - December 30, 2017 | | $ | (1,108.2 | ) | | $ | (112.6 | ) | | $ | 3.4 |
| | $ | (371.7 | ) | | $ | (1,589.1 | ) |
| Other comprehensive (loss) income before reclassifications | | (294.9 | ) | | 43.6 |
| | 49.3 |
| | 7.1 |
| | (194.9 | ) |
| Reclassification adjustments to earnings | | — |
| | 11.7 |
| | (5.9 | ) | | 5.8 |
| | 11.6 |
|
| Net other comprehensive (loss) income | | (294.9 | ) | | 55.3 |
| | 43.4 |
| | 12.9 |
| | (183.3 | ) |
| Balance - June 30, 2018 | | $ | (1,403.1 | ) | | $ | (57.3 | ) | | $ | 46.8 |
| | $ | (358.8 | ) | | $ | (1,772.4 | ) |
1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
| | | (Millions of Dollars) | | Currency translation adjustment and other | | Unrealized losses on cash flow hedges, net of tax | | Unrealized gains on net investment hedges, net of tax | | Pension (losses) gains, net of tax | | Total | | Currency translation adjustment and other1 | | Unrealized gains (losses) on cash flow hedges, net of tax | | Unrealized gains (losses) on net investment hedges, net of tax | | Pension gains (losses), net of tax | | Total |
| Balance - January 2, 2016 | | $ | (1,300.9 | ) | | $ | (52.1 | ) | | $ | 11.8 |
| | $ | (353.0 | ) | | $ | (1,694.2 | ) | |
| Balance - December 31, 2016 | | | $ | (1,586.7 | ) | | $ | (46.3 | ) | | $ | 88.6 |
| | $ | (377.2 | ) | | $ | (1,921.6 | ) |
| Other comprehensive income (loss) before reclassifications | | 9.9 |
| | (48.9 | ) | | 35.2 |
| | 13.9 |
| | 10.1 |
| | 298.0 |
| | (44.7 | ) | | (57.8 | ) | | (20.3 | ) | | 175.2 |
|
| Adjustments related to sales of businesses | | | 4.7 |
| | — |
| | — |
| | 2.6 |
| | 7.3 |
|
| Reclassification adjustments to earnings | | — |
| | (6.2 | ) | | — |
| | 8.5 |
| | 2.3 |
| | — |
| | (1.4 | ) | | — |
| | 14.9 |
| | 13.5 |
|
| Net other comprehensive income (loss) | | 9.9 |
| | (55.1 | ) | | 35.2 |
| | 22.4 |
| | 12.4 |
| | 302.7 |
| | (46.1 | ) | | (57.8 | ) | | (2.8 | ) | | 196.0 |
|
| Balance - October 1, 2016 | | $ | (1,291.0 | ) | | $ | (107.2 | ) | | $ | 47.0 |
| | $ | (330.6 | ) | | $ | (1,681.8 | ) | |
| Balance - July 1, 2017 | | | $ | (1,284.0 | ) | | $ | (92.4 | ) | | $ | 30.8 |
| | $ | (380.0 | ) | | $ | (1,725.6 | ) |
1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
The reclassifications out of accumulatedAccumulated other comprehensive loss for the ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 20162017 were as follows (in millions):
| | | Reclassifications from Accumulated other comprehensive loss to earnings | | 2017 | | 2016 | | Affected line item in Consolidated Statements of Operations And Comprehensive Income | |
| Realized gains on cash flow hedges | | $ | 13.3 |
| | $ | 21.3 |
| | Cost of sales | |
| Realized losses on cash flow hedges | | (11.3 | ) | | (11.2 | ) | | Interest expense | |
| (Millions of Dollars) | | | 2018 | | 2017 | | Affected line item in Consolidated Statements of Operations And Comprehensive Income |
| Realized gains (losses) on cash flow hedges | | | $ | (12.0 | ) | | $ | 9.7 |
| | Cost of sales |
| Realized gains (losses) on cash flow hedges | | | (7.6 | ) | | (7.6 | ) | | Interest expense |
| Total before taxes | | $ | 2.0 |
| | $ | 10.1 |
| | | $ | (19.6 | ) | | $ | 2.1 |
| |
| Tax effect | | (0.6 | ) | | (3.9 | ) | | Income taxes | | 7.9 |
| | (0.7 | ) | | Income taxes |
| Realized gains on cash flow hedges, net of tax | | $ | 1.4 |
| | $ | 6.2 |
| | |
| Realized gains (losses) on cash flow hedges, net of tax | | | $ | (11.7 | ) | | $ | 1.4 |
| |
| | | | | | | |
| Realized gains (losses) on net investment hedges | | | $ | 7.5 |
| | $ | — |
| | Other, net |
| Tax effect | | | (1.6 | ) | | — |
| | Income taxes |
| Realized gains (losses) on net investment hedges, net of tax | | | $ | 5.9 |
| | $ | — |
| |
| | | | | | | |
| Amortization of defined benefit pension items: | | | | | | | | | | |
| Actuarial losses and prior service costs / credits | | $ | (7.3 | ) | | $ | (7.8 | ) | | Cost of sales | |
| Actuarial losses and prior service costs / credits | | (4.8 | ) | | (5.2 | ) | | Selling, general and administrative | | $ | (7.8 | ) | | $ | (8.0 | ) | | Other, net |
| Settlement loss | | (12.8 | ) | | — |
| | Other, net | | — |
| | (12.8 | ) | | Other, net |
| Total before taxes | | $ | (24.9 | ) | | $ | (13.0 | ) | | | $ | (7.8 | ) | | $ | (20.8 | ) | |
| Tax effect | | 7.2 |
| | 4.5 |
| | Income taxes | | 2.0 |
| | 5.9 |
| | Income taxes |
| Amortization of defined benefit pension items, net of tax | | $ | (17.7 | ) | | $ | (8.5 | ) | | | $ | (5.8 | ) | | $ | (14.9 | ) | |
L. Net Periodic Benefit CostNET PERIODIC BENEFIT COST — Defined Benefit PlansDEFINED BENEFIT PLANS
Following are the components of net periodic pension (benefit) expense for the three and ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 20162017:
| | | | Third Quarter | Second Quarter |
| | Pension Benefits | | Other Benefits | Pension Benefits | | Other Benefits |
| | U.S. Plans | | Non-U.S. Plans | | All Plans | U.S. Plans | | Non-U.S. Plans | | All Plans |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Service cost | $ | 2.1 |
| | $ | 2.3 |
| | $ | 3.6 |
| | $ | 3.1 |
| | $ | 0.1 |
| | $ | 0.2 |
| $ | 2.0 |
| | $ | 2.1 |
| | $ | 3.8 |
| | $ | 3.3 |
| | $ | 0.2 |
| | $ | 0.2 |
|
| Interest cost | 10.8 |
| | 11.3 |
| | 7.5 |
| | 9.0 |
| | 0.5 |
| | 0.4 |
| 11.0 |
| | 10.9 |
| | 7.2 |
| | 7.1 |
| | 0.4 |
| | 0.3 |
|
| Expected return on plan assets | (16.1 | ) | | (17.0 | ) | | (11.6 | ) | | (10.8 | ) | | — |
| | — |
| (17.5 | ) | | (16.1 | ) | | (11.8 | ) | | (11.2 | ) | | — |
| | — |
|
| Amortization of prior service cost (credit) | 0.4 |
| | 1.3 |
| | (0.3 | ) | | 0.1 |
| | (0.3 | ) | | (0.3 | ) | 0.3 |
| | 0.2 |
| | (0.2 | ) | | (0.3 | ) | | (0.4 | ) | | (0.4 | ) |
| Amortization of net loss | 2.0 |
| | 1.8 |
| | 2.3 |
| | 1.4 |
| | — |
| | — |
| 2.0 |
| | 2.3 |
| | 2.3 |
| | 2.3 |
| | — |
| | — |
|
| Settlement / curtailment loss | — |
| | — |
| | — |
| | 0.3 |
| | — |
| | — |
| — |
| | — |
| | 0.1 |
| | 0.3 |
| | — |
| | — |
|
| Net periodic pension (benefit) expense | $ | (0.8 | ) | | $ | (0.3 | ) | | $ | 1.5 |
| | $ | 3.1 |
| | $ | 0.3 |
| | $ | 0.3 |
| $ | (2.2 | ) | | $ | (0.6 | ) | | $ | 1.4 |
| | $ | 1.5 |
| | $ | 0.2 |
| | $ | 0.1 |
|
| | | | Year-to-Date | Year-to-Date |
| | Pension Benefits | | Other Benefits | Pension Benefits | | Other Benefits |
| | U.S. Plans | | Non-U.S. Plans | | All Plans | U.S. Plans | | Non-U.S. Plans | | All Plans |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Service cost | $ | 6.5 |
| | $ | 7.0 |
| | $ | 10.2 |
| | $ | 9.5 |
| | $ | 0.4 |
| | $ | 0.5 |
| $ | 3.8 |
| | $ | 4.4 |
| | $ | 7.7 |
| | $ | 6.6 |
| | $ | 0.3 |
| | $ | 0.3 |
|
| Interest cost | 32.4 |
| | 34.0 |
| | 21.6 |
| | 28.4 |
| | 1.2 |
| | 1.2 |
| 21.4 |
| | 21.6 |
| | 14.7 |
| | 14.1 |
| | 0.8 |
| | 0.7 |
|
| Expected return on plan assets | (48.3 | ) | | (50.9 | ) | | (33.8 | ) | | (34.3 | ) | | — |
| | — |
| (34.3 | ) | | (32.2 | ) | | (24.0 | ) | | (22.2 | ) | | — |
| | — |
|
| Amortization of prior service cost (credit) | 0.9 |
| | 3.9 |
| | (0.9 | ) | | 0.2 |
| | (1.0 | ) | | (0.9 | ) | 0.5 |
| | 0.5 |
| | (0.6 | ) | | (0.6 | ) | | (0.7 | ) | | (0.7 | ) |
| Amortization of net loss | 6.2 |
| | 5.3 |
| | 6.9 |
| | 4.5 |
| | — |
| | — |
| 3.9 |
| | 4.2 |
| | 4.7 |
| | 4.6 |
| | — |
| | — |
|
| Settlement / curtailment loss | — |
| | — |
| | 12.8 |
| | 0.4 |
| | — |
| | — |
| — |
| | — |
| | 0.2 |
| | 12.8 |
| | — |
| | — |
|
| Net periodic pension (benefit) expense | $ | (2.3 | ) | | $ | (0.7 | ) | | $ | 16.8 |
| | $ | 8.7 |
| | $ | 0.6 |
| | $ | 0.8 |
| $ | (4.7 | ) | | $ | (1.5 | ) | | $ | 2.7 |
| | $ | 15.3 |
| | $ | 0.4 |
| | $ | 0.3 |
|
In accordance with the adoption of ASU 2017-07, the components of net periodic benefit cost other than the service cost component are included in Other, net in the Consolidated Statements of Operations and Comprehensive Income.
For the ninethree and six months ended September 30,July 1, 2017, the Company recorded pre-tax charges of approximately $0.3 million and $12.8 million, respectively, reflecting losses previously reported in accumulatedAccumulated other comprehensive loss related to a non-U.S. pension plan for which the Company settled its obligation by purchasing an annuity and making lump sum payments to participants.
M. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements
MeasurementFASB ASC 820, "Fair Value Measurement,", defines, establishes a consistent framework for measuring, and expands disclosure requirements about fair value. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs and significant value drivers are observable.
Level 3 — Instruments that are valued using unobservable inputs.
The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. The Company holds various financial instruments that are employed to manage risks, including foreign currency and interest rate exposures.these risks. These financial instruments are carried at fair value and are included within the scope of ASC 820. The Company determines the fair valuesvalue of these financial
instruments through the use of matrix or model pricing, which utilizes observable inputs such as market interest and currency rates. When determining the fair values of these financial instrumentsvalue for which Level 1 evidence does not exist, the Company considers various factors including the following: exchange or market price quotations of similar instruments, time value and volatility factors, the Company’s own credit rating and the credit rating of the counter-party.
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis for each of the hierarchy levels:
| | | (Millions of Dollars) | Total | | Level 1 | | Level 2 | | Level 3 | Total Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| September 30, 2017 | | | | | | | | |
| Money market fund | $ | 3.2 |
| | $ | 3.2 |
| | $ | — |
| | $ | — |
| |
| Derivative assets | $ | 19.3 |
| | $ | — |
| | $ | 19.3 |
| | $ | — |
| |
| Derivative and non-derivative liabilities | $ | 594.9 |
| | $ | — |
| | $ | 594.9 |
| | $ | — |
| |
| Contingent consideration liability | $ | 84.0 |
| | $ | — |
| | $ | — |
| | $ | 84.0 |
| |
| December 31, 2016 | | | | | | | | |
| June 30, 2018 | | | | | | | | |
| Money market fund | $ | 4.3 |
| | $ | 4.3 |
| | $ | — |
| | $ | — |
| $ | 10.8 |
| | $ | 10.8 |
| | $ | — |
| | $ | — |
|
| Derivative assets | $ | 110.2 |
| | $ | — |
| | $ | 110.2 |
| | $ | — |
| $ | 36.9 |
| | $ | — |
| | $ | 36.9 |
| | $ | — |
|
| Derivative liabilities | $ | 97.6 |
| | $ | — |
| | $ | 97.6 |
| | $ | — |
| $ | 78.9 |
| | $ | — |
| | $ | 78.9 |
| | $ | — |
|
| Non-derivative hedging instrument | | $ | — |
| | $ | — |
| | $ | 924.5 |
| | $ | — |
|
| Contingent consideration liability | | $ | 115.0 |
| | $ | — |
| | $ | — |
| | $ | 115.0 |
|
| December 30, 2017 | | | | | | | | |
| Money market fund | | $ | 11.6 |
| | $ | 11.6 |
| | $ | — |
| | $ | — |
|
| Derivative assets | | $ | 18.0 |
| | $ | — |
| | $ | 18.0 |
| | $ | — |
|
| Derivative liabilities | | $ | 114.0 |
| | $ | — |
| | $ | 114.0 |
| | $ | — |
|
| Contingent consideration liability | | $ | 114.0 |
| | $ | — |
| | $ | — |
| | $ | 114.0 |
|
The following table presents the carrying values and fair values ofprovides information about the Company's financial assets and liabilities as well as the Company's debt, as of September 30, 2017 and December 31, 2016:not carried at fair value.
|
| | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 30, 20171 |
| (Millions of Dollars) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Other investments | $ | 7.6 |
| | $ | 7.8 |
| | $ | 7.6 |
| | $ | 7.9 |
|
| Long-term debt, including current portion | $ | 3,810.1 |
| | $ | 3,925.6 |
| | $ | 3,805.7 |
| | $ | 3,991.0 |
|
|
| | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| (Millions of Dollars) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Other investments | $ | 8.9 |
| | $ | 9.3 |
| | $ | 8.9 |
| | $ | 9.2 |
|
| Derivative assets | $ | 19.3 |
| | $ | 19.3 |
| | $ | 110.2 |
| | $ | 110.2 |
|
| Derivative and non-derivative liabilities | $ | 594.9 |
| | $ | 594.9 |
| | $ | 97.6 |
| | $ | 97.6 |
|
| Long-term debt, including current portion | $ | 3,826.7 |
| | $ | 4,022.4 |
| | $ | 3,823.1 |
| | $ | 3,967.4 |
|
As discussed in1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note F, Acquisitions,B, New Accounting Standards the Company recorded a contingent consideration liability in the first quarter of 2017 relating to the Craftsman brand acquisition representing the Company's obligation to make future payments to Sears Holdings of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032, which was initially valued at $84.0 million at the acquisition date. The first payment is due the first quarter of 2020 relating to royalties owed, for the previous eleven quarters, and future payments will be due quarterly through the first quarter of 2032. The fair value was estimated using Level 3 inputs including future sales projections, which are subject to change, and the contractual royalty rates. There was no change in the fair value of the contingent consideration as of September 30, 2017.further discussion.
The Company had no other significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during the nine months of 2017 or 2016.
The money market fund and other investments outlined in the tables above relaterelated to the West Coast Loading Corporation ("WCLC") trust and are considered Level 1 instruments within the fair value hierarchy. The long-term debt instruments are considered Level 2 instruments and are measured using the stateda discounted cash flows in each obligation discounted atflow analysis based on the Company’s marginal borrowing rates. The differences between the carrying values and fair values of long-term debt are attributable to the stated interest rates differing from the Company's marginal borrowing rates. The fair values of the Company's variable rate short-term borrowings approximate their carrying values at SeptemberJune 30, 20172018 and December 31, 2016.30, 2017. The fair values of foreign currency and interest rate swap agreements, comprising the derivative assets and liabilitiesfinancial instruments in the table above are based on current settlement values.
As discussed in Note F, Acquisitions, the Company recorded a contingent consideration liability relating to the Craftsman® brand acquisition representing the Company's obligation to make future payments to Sears Holdings of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032, which was valued at $114.0 million as of the acquisition date. The first payment is due the first quarter of 2020 relating to royalties owed for the previous eleven quarters, and future payments will be due quarterly through the first quarter of 2032. The estimated fair value was determined using a discounted cash flow analysis based on future sales projections and contractual royalty rates. A 100 basis point reduction in the discount rate would have resulted in an increase to the liability of approximately $8 million as of the acquisition date. The liability may fluctuate in the future if there are changes to sales projections or the discount rate as a result of actual sales levels or changes in market conditions. There was no significant change in the fair value of the contingent consideration as of June 30, 2018.
The Company had no significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during the first six months of 2018 or 2017.
As discussed in Note D, Financing ReceivablesAccounts And Notes Receivable, the Company hashad a deferred purchase price receivable related to sales of trade receivables. The deferred purchase price receivable will bewas settled in full in January 2018, and historically was repaid in cash as receivables arewere collected, generally within 30 days, and as such thedays. The carrying value of the receivable approximatesas of December 30, 2017 approximated fair value.
Refer to Note I, Financial Instruments, for more details regarding derivative financial instruments, Note R, Commitments and Contingencies, for more details regarding the other investments related to the WCLC trust, and Note H, Long-Term Debt and Financing Arrangements, for more information regarding the carrying values of the long-term debt.
N. Other Costs and ExpensesOTHER COSTS AND EXPENSES
Other, net is primarily comprised of intangible asset amortization expense, currency-related gains or losses, environmental remediation expense, and acquisition-related transaction and consulting costs. Acquisition-relatedcosts, and certain pension gains or losses. During the three and six months ended June 30, 2018, Other, net included $9.4 million and $15.3 million in acquisition-related transaction and consulting costs, respectively, and a $77.7 million environmental remediation charge related to a recently announced settlement with the Environmental Protection Agency ("EPA"). Refer to Note R, Commitments and Contingencies, for further discussion of $5.4 million and $51.0 million were included in Other, net forthe EPA settlement. During the three and ninesix months ended September 30,July 1, 2017, Other, net included $5.6 million and $45.6 million of acquisition-related transaction and consulting costs, respectively.
O. Restructuring ChargesRESTRUCTURING CHARGES
A summary of the restructuring reserve activity from December 31, 201630, 2017 to SeptemberJune 30, 20172018 is as follows:
| | | (Millions of Dollars) | December 31,
2016 | | Net Additions | | Usage | | Currency | | September 30,
2017 | December 30,
2017 | | Net Additions | | Usage | | Currency | | June 30,
2018 |
| Severance and related costs | $ | 21.4 |
| | $ | 34.4 |
| | $ | (32.8 | ) | | $ | 2.1 |
| | $ | 25.1 |
| $ | 20.0 |
| | $ | 32.8 |
| | $ | (22.9 | ) | | $ | (0.9 | ) | | $ | 29.0 |
|
| Facility closures and asset impairments | 14.2 |
| | 8.5 |
| | (16.1 | ) | | 0.3 |
| | 6.9 |
| 3.2 |
| | 3.5 |
| | (5.0 | ) | | — |
| | 1.7 |
|
| Total | $ | 35.6 |
| | $ | 42.9 |
| | $ | (48.9 | ) | | $ | 2.4 |
| | $ | 32.0 |
| $ | 23.2 |
| | $ | 36.3 |
|
| $ | (27.9 | ) | | $ | (0.9 | ) | | $ | 30.7 |
|
For the ninesix months ended SeptemberJune 30, 2017,2018, the Company recognized net restructuring charges of $42.9$36.3 million. This amount reflects $34.4$32.8 million of net severance charges associated with the reduction of approximately 1,4631,000 employees and $8.5$3.5 million of facility closure and other restructuring costs.
For the three months ended SeptemberJune 30, 2017,2018, the Company recognized net restructuring charges of $19.1$13.4 million. This amount reflects $16.3$10.5 million of net severance charges associated with the reduction of approximately 1,138 employees and $2.8594 employees. The Company also had $2.9 million of facility closure and other restructuring costs.
The majority of the $32.0$30.7 million of reserves remaining as of SeptemberJune 30, 20172018 is expected to be utilized within the next 12 months.
Segments: The $43$36 million of net restructuring charges for the ninesix months ended SeptemberJune 30, 20172018 includes: $18$15 million pertaining to the Tools & Storage segment; $17$5 million pertaining to the Industrial segment; $12 million pertaining to the Security segment; $7 million pertaining to the Industrial segment and $1$4 million pertaining to Corporate.
The $19$13 million of net restructuring charges for the three months ended SeptemberJune 30, 20172018 includes: $9$7 million pertaining to the Tools & Storage segment; $8$2 million pertaining to the Industrial segment; $3 million pertaining to the Security segment and $2$1 million pertaining to the Industrial segment.Corporate.
| |
| P. | Income TaxesINCOME TAXES |
The Company recognized income tax expense of $79.8$1.0 million and $239.8$82.7 million for the three and ninesix months ended SeptemberJune 30, 2018, resulting in effective tax rates of 0.3% and 15.1%, respectively. Excluding the impacts of the aforementioned EPA settlement in the second quarter of 2018, the tax charge recorded in the first quarter of 2018 related to the recently enacted U.S. tax legislation, and the acquisition-related charges, the effective tax rates were 7.0% and 13.4% for the three and six months ended June 30, 2018, respectively. These effective tax rates differ from the U.S. statutory tax rate during these periods primarily due to tax on foreign earnings and the effective settlements of income tax audits.
The Company recognized income tax expense of $80.7 million and $160.4 million for the three and six months ended July 1, 2017, respectively, resulting in effective tax rates of 22.5% and 20.2%19.3%, respectively. The effective tax rates differdiffered from the U.S. statutory tax rate during these periods primarily due to a portion of the Company’s earnings being realized in lower-taxed foreign jurisdictions, the utilization of U.S. tax attributes during the first quarter of 2017 due to the divestiture of the mechanical security businesses and the favorable settlement of certain income tax audits during the second quarter of 2017, and the acceleration of certain tax credits resulting in a tax benefit during the third quarter of 2017. Non-deductible transaction costs and other acquisition-related restructuring items partially offset the net tax benefits mentioned above for the three and
nine six months ended September 30,July 1, 2017. Excluding the tax impact of the divestitures and acquisition-related charges for the three and ninesix months ended September 30,July 1, 2017, the effective tax rates were 23.0%23.5% and 23.7%24.1%, respectively.
The Company recognized income tax expense of $78.7 million and $234.7 million for the three and nine months ended October 1, 2016, respectively, resulting in effective tax rates of 24.0% and 24.9%, respectively. The effective tax rates differed from the U.S. statutory tax rate during these periods primarily due to a portion of the Company’s earnings being realized in lower-taxed foreign jurisdictions, the finalization of audit settlements during the first quarter of 2016, adjustments to tax positions relating to undistributed foreign earnings during the second quarter of 2016, and adjustments relating to the filing of certain U.S. and foreign corporate income tax returns during the third quarter of 2016.
The Company is subject to examinations by taxing authorities in U.S. federal, state, and foreign jurisdictions. The Company considers many factors when evaluating and estimating its tax positions and the examination of itsimpact on income tax returns by the Internal Revenue Serviceexpense, which may require periodic adjustments and other taxing authorities both domestically and internationally. The final outcome of the future tax consequences of these examinations and legal proceedings, as well as the outcome of competent authority proceedings, changes and interpretation in regulatory tax laws, or expiration of statute of limitations could impact the Company’s financial statements. Accordingly, the Company has tax reserves recorded for which itmay 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 benefitpositions will significantly increase or decrease which could have a material effect onwithin the financial results for any particular fiscal quarter or year.next 12 months. However, based on the uncertainties associated with litigation and the status of examinations, including the protocols of finalizing audits by the relevant tax authorities which could include formal legal proceedings, it is not possible to reasonably estimate the impact of any such change.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. As of June 30, 2018, the Company has not completed its accounting for the tax effects of the enactment of the Act; however, in certain cases (as described below), the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company has not been able to make a reasonable estimate and continues to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment.
During the first quarter of 2018, the Company recorded a provisional charge of $23.1 million as an adjustment to the provisional amounts recorded at December 30, 2017 related to the re-measurement of deferred tax assets and liabilities, and liabilities for unrecognized tax benefits. The provisional charges were included as a component of income taxes on the Consolidated Statements of Operations and Comprehensive Income.
The Company operates in many countries throughout the world through numerous subsidiaries. In order to complete the accounting associated with the Act, the Company will continue to accumulate the relevant data, refine computational elements, monitor and analyze U.S. federal and state guidance if and when issued, and adjust its provisional estimates accordingly within the measurement period prescribed by SAB 118. Any adjustments could be material to income tax expense.
Provisional amounts
Deferred tax assets and liabilities: The Company remeasured certain deferred tax assets and liabilities based on the U.S. tax rates at which they are expected to become realized in the future. The provisional amount recorded in 2017 related to the re-measurement of its deferred tax balance resulted in a decrease to tax expense of approximately $252.5 million as of December 30, 2017. Upon further analysis of certain aspects of the Act and refinement of the calculations during the first quarter of 2018, the Company adjusted the provisional amount by $17.4 million as an increase to tax expense, which is included as a component of income taxes on the Consolidated Statements of Operations and Comprehensive Income. The Company is still analyzing certain aspects of the Act and refining its estimate, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
International provision tax effects: As of December 30, 2017, the Company recorded a provisional amount for the one-time transition tax on undistributed foreign earnings, resulting in an increase to income tax expense of $276.1 million comprised of an accrued provisional income tax payable of approximately $460.7 million, partially offset by the reversal of the deferred tax liability of approximately $184.6 million associated with certain legacy Black & Decker unremitted foreign earnings and profits which were previously designated as not being indefinitely reinvested. The remaining deferred tax liability on unremitted foreign earnings of $4.9 million represents withholding taxes which will become payable upon distribution. The Company is still analyzing certain aspects of the Act and refining its estimate, which may be adjusted, possibly materially, due to changes in interpretations and assumptions the Company has made, guidance that may be issued and actions the Company may take as a result of the Act.
Q. Business SegmentsBUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, SecurityIndustrial and Industrial.Security.
The Tools & Storage segment is comprised of the Power Tools & Equipment ("PTE") and Hand Tools, Accessories & Storage ("HTAS") businesses. The PTE business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors. Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKER brand, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories, and home products such as hand-held vacuums, paint tools and cleaning appliances. The HTAS business
sells hand tools, power tool accessories and storage products. Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and saw blades.threading products. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products.
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. The Engineered Fastening business primarily sells engineered fastening products and systems designed for specific applications. The product lines include blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners. The Infrastructure business consists of the Oil & Gas and Hydraulics businesses. The Oil & Gas business 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. The Hydraulics business sells hydraulic tools and accessories.
The Security segment is comprised of the Convergent Security Solutions ("CSS") and Mechanical Access Solutions ("MAS") businesses. The CSS business designs, supplies and installs commercial electronic security systems and provides electronic security services, including alarm monitoring, video surveillance, fire alarm monitoring, systems integration and system maintenance. Purchasers of these systems typically contract for ongoing security systems monitoring and maintenance at the time of initial equipment installation. The business also sells healthcare solutions, which include asset tracking, infant protection, pediatric protection, patient protection, wander management, fall management, and emergency call products. The MAS business primarily sells automatic doors.
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. The Engineered Fastening business primarily sells engineered fastening products and systems designed for specific applications. The product lines include stud welding systems, blind rivets and tools, blind inserts and tools, drawn arc weld studs, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners. The Infrastructure business consists of the Oil & Gas and Hydraulics businesses. The Oil & Gas business 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. The Hydraulics business sells hydraulic tools and accessories.
The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A inclusive of the provision for doubtful accounts (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, interest income, interest expense, other, net (inclusive of intangible asset amortization expense), restructuring charges, gainsgain or lossesloss on sales of businesses, pension settlement, restructuring charges, interest expense, interest income, and income taxes. Refer to Note O, Restructuring Charges, for the amount of net restructuring charges by segment. Corporate overhead is comprised of world headquarters facility expense, cost for the executive
management team and cost for certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Transactions between segments are not material. Segment assets primarily include cash, accounts receivable, inventory, other current assets, property, plant and equipment, intangible assets and other miscellaneous assets. Net sales and long-lived assets are attributed to the geographic regions based on the geographic locations of the end customer and the Company subsidiary, respectively.
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 20171 | | 2018 | | 20171 |
| NET SALES | | | | | | | |
| |
| | | | |
| Tools & Storage | $ | 2,318.2 |
| | $ | 1,896.9 |
| | $ | 6,432.2 |
| | $ | 5,535.4 |
| $ | 2,567.8 |
| | $ | 2,307.4 |
| | $ | 4,783.6 |
| | $ | 4,202.3 |
|
| Industrial | | 573.1 |
| | 503.4 |
| | 1,077.3 |
| | 983.1 |
|
| Security | 476.8 |
| | 522.7 |
| | 1,429.0 |
| | 1,564.6 |
| 502.7 |
| | 475.9 |
| | 992.0 |
| | 957.6 |
|
| Industrial | 503.6 |
| | 462.4 |
| | 1,472.5 |
| | 1,386.5 |
| |
| Total | $ | 3,298.6 |
| | $ | 2,882.0 |
| | $ | 9,333.7 |
| | $ | 8,486.5 |
| $ | 3,643.6 |
| | $ | 3,286.7 |
| | $ | 6,852.9 |
| | $ | 6,143.0 |
|
| SEGMENT PROFIT | | | | | | | |
| |
| | | | |
| Tools & Storage | $ | 396.6 |
| | $ | 330.0 |
| | $ | 1,058.2 |
| | $ | 954.5 |
| $ | 398.6 |
| | $ | 371.9 |
| | $ | 700.0 |
| | $ | 656.4 |
|
| Industrial | | 85.5 |
| | 94.7 |
| | 166.0 |
| | 179.8 |
|
| Security | 54.0 |
| | 71.4 |
| | 156.8 |
| | 199.3 |
| 48.1 |
| | 51.8 |
| | 93.6 |
| | 102.5 |
|
| Industrial | 93.8 |
| | 80.4 |
| | 276.5 |
| | 235.2 |
| |
| Segment profit | 544.4 |
| | 481.8 |
| | 1,491.5 |
| | 1,389.0 |
| 532.2 |
| | 518.4 |
| | 959.6 |
| | 938.7 |
|
| Corporate overhead | (55.7 | ) | | (43.1 | ) | | (148.7 | ) | | (138.5 | ) | (50.9 | ) | | (49.3 | ) | | (98.2 | ) | | (93.9 | ) |
| Other, net | (65.5 | ) | | (56.8 | ) | | (232.0 | ) | | (150.6 | ) | 119.3 |
| | 55.3 |
| | 177.3 |
| | 155.8 |
|
| (Loss) gain on sales of businesses | (3.2 | ) | | — |
| | 265.1 |
| | — |
| |
| Loss (gain) on sales of businesses | | 0.8 |
| | 0.9 |
| | 0.8 |
| | (268.3 | ) |
| Pension settlement | — |
| | — |
| | (12.8 | ) | | — |
| — |
| | 0.3 |
| | — |
| | 12.8 |
|
| Restructuring charges | (19.1 | ) | | (9.1 | ) | | (42.9 | ) | | (27.3 | ) | 13.4 |
| | 8.0 |
| | 36.3 |
| | 23.8 |
|
| Interest expense | (57.2 | ) | | (50.2 | ) | | (164.5 | ) | | (145.2 | ) | 69.0 |
| | 56.0 |
| | 132.2 |
| | 107.3 |
|
| Interest income | 10.3 |
| | 5.1 |
| | 28.6 |
| | 16.4 |
| (15.6 | ) | | (9.7 | ) | | (31.4 | ) | | (18.3 | ) |
| Earnings before income taxes | $ | 354.0 |
| | $ | 327.7 |
| | $ | 1,184.3 |
| | $ | 943.8 |
| $ | 294.4 |
| | $ | 358.3 |
| | $ | 546.2 |
| | $ | 831.7 |
|
1Certain prior year amounts have been recast as a result of the adoption of the new revenue and pension standards. Refer to Note B, New Accounting Standards, for further discussion.
As described in Note A, Significant Accounting Policies, the Company recognizes revenue at a point in time from the sale of tangible products or over time depending on when the performance obligation is satisfied. For the three and six months ended June 30, 2018 and July 1, 2017, the majority of the Company’s revenue was recognized at the time of sale. The following table provides the percent of total segment revenue recognized over time for the Industrial and Security segments for the three and six months ended June 30, 2018 and July 1, 2017:
|
| | | | | | | | | | | |
| | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2018 | | 2017 | | 2018 | | 2017 |
| Industrial | 10.3 | % | | 14.5 | % | | 10.6 | % | | 12.9 | % |
| Security | 43.9 | % | | 49.6 | % | | 46.1 | % | | 47.8 | % |
The following table is a further disaggregation of the Industrial segment revenue for the three and six months ended June 30, 2018 and July 1, 2017:
|
| | | | | | | | | | | | | | | |
| | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2018 | | 2017 | | 2018 | | 2017 |
| Engineered Fastening | $ | 468.2 |
| | $ | 388.8 |
| | $ | 880.0 |
| | $ | 778.8 |
|
| Infrastructure | 104.9 |
| | 114.6 |
| | 197.3 |
| | 204.3 |
|
| Industrial | $ | 573.1 |
| | $ | 503.4 |
| | $ | 1,077.3 |
| | $ | 983.1 |
|
The following table is a summary of total assets by segment as of SeptemberJune 30, 20172018 and December 31, 201630, 2017:
| | | (Millions of Dollars) | September 30,
2017 | | December 31,
2016 | June 30,
2018 | | December 30, 20171 |
| Tools & Storage | $ | 13,095.4 |
| | $ | 8,512.4 |
| $ | 13,367.5 |
| | $ | 12,817.5 |
|
| Industrial | | 3,896.7 |
| | 3,413.3 |
|
| Security | 3,429.0 |
| | 3,139.0 |
| 3,453.0 |
| | 3,406.9 |
|
| Industrial | 3,532.6 |
| | 3,359.0 |
| |
| | 20,057.0 |
| | 15,010.4 |
| 20,717.2 |
| | 19,637.7 |
|
| Assets held for sale | — |
| | 523.4 |
| |
| Corporate assets | (283.8 | ) | | 101.1 |
| (537.6 | ) | | (540.0 | ) |
| Consolidated | $ | 19,773.2 |
| | $ | 15,634.9 |
| $ | 20,179.6 |
| | $ | 19,097.7 |
|
1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
Corporate assets primarily consist of cash, deferred taxes and property, plant and equipment. Based on the nature of the Company's cash pooling arrangements, at timesthe corporate-related cash accounts will be in a net liability position.position at times.
The following table is a summary of net sales by geographic area for the three and six months ended June 30, 2018 and July 1, 2017:
|
| | | | | | | | | | | | | | | |
| | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2018 | | 20171 | | 2018 | | 20171 |
| United States | $ | 2,004.9 |
| | $ | 1,807.5 |
| | $ | 3,673.8 |
| | $ | 3,347.4 |
|
| Canada | 165.5 |
| | 143.1 |
| | 309.7 |
| | 275.9 |
|
| Other Americas | 206.9 |
| | 199.0 |
| | 392.2 |
| | 357.0 |
|
| France | 160.4 |
| | 153.0 |
| | 323.2 |
| | 302.1 |
|
| Other Europe | 785.4 |
| | 701.6 |
| | 1,540.7 |
| | 1,321.5 |
|
| Asia | 320.5 |
| | 282.5 |
| | 613.3 |
| | 539.1 |
|
| Consolidated | $ | 3,643.6 |
| | $ | 3,286.7 |
| | $ | 6,852.9 |
| | $ | 6,143.0 |
|
1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
| |
| R. | Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES |
The Company is involved in various legal proceedings relating to environmental issues, employment, product liability, workers’ compensation claims and other matters. The Company periodically reviews the status of these proceedings with both inside and outside counsel, as well as an actuary for risk insurance. Management believes that the ultimate disposition of these matters will not have a material adverse effect on operations or financial condition taken as a whole.
In the normal course of business, the Company is a party to administrative proceedings and litigation, before federal and state regulatory agencies, relating to environmental remediation with respect to claims involving the discharge of hazardous substances into the environment, generally at current and former manufacturing facilities. In addition, some of these claims assert that the Company is responsible for damages and liability, for remedial investigation and clean-up costs, with respect to sites that have never been owned or operated by the Company but the Company has been identified as a potentially responsible party ("PRP").
In connection with the 2010 merger with Black & Decker, the Company assumed certain commitments and contingent liabilities. Black & Decker is a party to litigation and administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment. Some of these assert claims for damages and liability for remedial investigations and clean-up costs with respect to sites that have never been owned or operated by Black & Decker butenvironment at which Black & Decker has been identified as a potentially responsible party ("PRP"). Other matters involve current and former manufacturing facilities.
facilities and has also been named as a PRP in certain administrative proceedings.
The Company, along with many other companies, has been named as a PRP in a number of administrative proceedings for the remediation of various waste sites, including 26 active Superfund sites. Current laws potentially impose joint and several liabilities upon each PRP. In assessing its potential liability at these sites, the Company has considered the following: whether responsibility is being disputed, the terms of existing agreements, experience at similar sites, and the Company’s volumetric contribution at these 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. In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. 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 June 30, 2018 and December 30, 2017, the Company had reserves of $250.7 million and $176.1 million, respectively, for remediation activities associated with Company-owned properties, as well as for Superfund sites, for losses that are probable and estimable. Of the 2018 amount, $28.7 million is classified as current and $222.0 million as long-term which is expected to be paid over the estimated remediation period. The range of environmental remediation costs that is reasonably possible is $218.1 million to $351.6 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 policy.
As of June 30, 2018, the Company has recorded $12.2 million in other assets related to funding received by the Environmental Protection Agency (“EPA”) and placed in a trust in accordance with the final settlement with the EPA, embodied in a Consent Decree approved by the United States District Court for the Central District of California on July 3, 2013. Per the Consent Decree, Emhart Industries, Inc. (a dissolved, former indirectly wholly-owned subsidiary of The Black & Decker Corporation) (“Emhart”) has agreed to be responsible for an interim remedy at a site located in Rialto, California and formerly operated by West Coast Loading Corporation (“WCLC”), a defunct company for which Emhart was alleged to be liable as a successor. The remedy will be funded by (i) the amounts received from the EPA as gathered from multiple parties, and, to the extent necessary, (ii) Emhart's affiliate. The interim remedy requires the construction of a water treatment facility and the filtering of ground water at or around the site for a period of approximately 30 years or more. As of June 30, 2018, the Company's net cash obligation associated with remediation activities including WCLC assets is $238.5 million.
The EPA has also asserted claims in federal court in Rhode Island against certain current and former affiliates of Black & Decker related to environmental contamination found at the Centredale Manor Restoration Project Superfund ("Centredale") site, located in North Providence, Rhode Island. The EPA has discovered a variety of contaminants at the site, including but not limited to, dioxins, polychlorinated biphenyls, and pesticides. The EPA alleges that Black & Decker and certain of its current and former affiliates are liable for site clean-up costs under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") as successors to the liability of Metro-Atlantic, Inc., a former operator at the site, and demanded reimbursement of the EPA’s costs related to this site. Black & Decker and certain of its current and former affiliates contest the EPA's allegation that they are responsible for the contamination, and have asserted contribution claims, counterclaims and cross-claims against a number of other PRPs, including the federal government as well as insurance carriers. The EPA released its Record of Decision ("ROD") in September 2012, which identified and described the EPA's selected remedial alternative for the site. Black & Decker and certain of its current and former affiliates are contestingcontested the EPA's selection of the remedial alternative
set forth in the ROD, on the grounds that the EPA's actions were arbitrary and capricious and otherwise not in accordance with law, and have proposed other equally-protective, more cost-effective alternatives. On June 10, 2014, the EPA issued an Administrative Order under Sec. 106 of CERCLA, instructing Emhart Industries, Inc. and Black & Decker to perform the remediation of Centredale pursuant to the ROD. Black & Decker and Emhart Industries, Inc. disputedisputed the factual, legal and scientific bases cited by the EPA for such an Orderadministrative order and have provided the EPA with numerous good-faith bases for Black & Decker’s and Emhart Industries, Inc.’s declination to comply with the Orderadministrative order at this time. Black & Decker and Emhart Industries, Inc. continue to vigorously litigate the issue of their liability for environmental conditions at the Centredale site, including the completion of the Phase 1 trial in late July, 2015 and the completion of the Phase 2 trial in April, 2017. The Court in Phase 1 of the trial found that dioxin contamination at the Centredale site was not “divisible,”"divisible," and that Emhart was jointly and severally liable for dioxin contamination at the Site.site. In its Phase 2 Findings of Fact and Conclusions of Law, entered on August 17, 2017, the Court found that certain components of EPA’sthe EPA's selected remedy were arbitrary and capricious, however, and remanded the matter to the EPA while retaining jurisdiction over the ongoing remedy selection and implementation process. The Court also held in Phase 2 that Black &and Decker had sufficient cause for its declination to comply with EPA’sthe EPA's June 10, 2014 Orderadministrative order and that no associated civil penalties or fines were warranted. The United States has filed a Motion for Reconsideration concerning the Court’sCourt's Phase 2 rulings and appealed the ruling to the United States Court of Appeals for the First Circuit. Emhart's Motion to Dismiss the Appeal was denied without prejudice for consideration with the merits. On July 9, 2018, a ruling on that motion is not expected untilConsent Decree was lodged with the United States District Court documenting the terms of a settlement between the Company and the United States for reimbursement of EPA's past costs and remediation of environmental contamination found at least early 2018.the Centredale site. The terms of the Consent Decree are subject to public comment and Court approval. Once approved and entered, the settlement will resolve outstanding issues relating to Phase 1 and 2 of the litigation with the United States. The 3rd Phase of the litigation /and trial, which is in its veryrelatively early stages, will address the potential allocation of liability to other partiesPRPs who may have contributed to contamination of the SiteCentredale site with dioxins, PCB’spolychlorinated biphenyls and other contaminants of concern. TheBased on the Company's estimated remediation costs related toand response cost obligations arising out of the Centredale siteSettlement reached with the United States (including the EPA’s past costs as well as costs of additional investigation, remediation, and related costs such as EPA’s oversight costs, less escrowed funds contributed by primary PRPs who have reached settlement agreements with the EPA)costs), which the Company considers to be probable and reasonably estimable, range from approximately $68.1 million to $139.7 million, with no amount within that range representing a more likely outcome until such time as the litigation is resolved through judgment or compromise. The Company’shas increased its reserve for this environmental remediation matter of $68.1site by $77.7 million reflectsto $145.8 million. Accordingly, in June 2018, the fact that the EPA considers Metro-Atlantic, Inc. to be a primary source of contamination at the site. As the specific nature of the environmental remediation activities that may be mandated by the EPA at this site have not yet been finally determined through the on-going litigation, the ultimate remedial costs associated with the site may vary from the amount accrued by the Company at September 30, 2017.
In the normal course of business, the Company is involved$77.7 million increase was recorded in various lawsuits and claims. In addition, the Company is a party to a number of proceedings before federal and state regulatory agencies relating to environmental remediation. Also, the Company, along with many other companies, has been named as a PRP in a number of administrative proceedings for the remediation of various waste sites, including 29 active Superfund sites. Current laws potentially impose joint and several liabilities upon each PRP. In assessing its potential liability at these sites, the Company has considered the following: whether responsibility is being disputed, the terms of existing agreements, experience at similar sites, and the Company’s volumetric contribution at these 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. In the event that no amountOther, net in the rangeConsolidated Statements of probable loss is considered most likely, the minimum loss in the range is accrued. The amount of liability recorded is based on an evaluation of currently available facts with respect to each individual siteOperations 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 September 30, 2017 and December 31, 2016 the Company had reserves of $175.0 million and $160.9 million, respectively, for remediation activities associated with Company-owned properties, as well as for Superfund sites, for losses that are probable and estimable. Of the 2017 amount, $21.7 million is classified as current and $153.3 million as long-term which is expected to be paid over the estimated remediation period. As of September 30, 2017, the Company has recorded $12.1 million in other assets related to funding received by the EPA and placed in a trust in accordance
with the final settlement with the EPA, embodied in a Consent Decree approved by the United States District Court for the Central District of California on July 3, 2013. Per the Consent Decree, Emhart Industries, Inc. (a dissolved, former indirectly wholly-owned subsidiary of The Black & Decker Corporation) (“Emhart”) has agreed to be responsible for an interim remedy at a site located in Rialto, California and formerly operated by West Coast Loading Corporation (“WCLC”), a defunct company for which Emhart was alleged to be liable as a successor. The remedy will be funded by (i) the amounts received from the EPA as gathered from multiple parties, and, to the extent necessary, (ii) Emhart's affiliate. The interim remedy requires the construction of a water treatment facility and the filtering of ground water at or around the site for a period of approximately 30 years or more. Accordingly, as of September 30, 2017, the Company's cash obligation associated with the aforementioned remediation activities including WCLC is $162.9 million. The range of environmental remediation costs that is reasonably possible is $142.4 million to $276.2 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 policy.Comprehensive Income.
The Company and approximately 6047 other companies comprise the Lower Passaic Cooperating Parties Group (the “CPG”). The CPG members and other companies are parties to a May 2007 Administrative Settlement Agreement and Order on Consent (“AOC”) with the EPA to perform a remedial investigation/feasibility study (“RI/FS”) of the lower seventeen miles of the Lower Passaic River in New Jersey (the “River”). The Company’s potential liability stems from former operations in Newark, New Jersey. As an interim step related to the 2007 AOC, on June 18, 2012, the CPG members voluntarily entered into an AOC with the EPA for remediation actions focused solely at mile 10.9 of the River. The Company’s estimated costs related to the RI/FS and focused remediation action at mile 10.9, based on an interim allocation, are included in its environmental reserves. On April 11, 2014, the EPA issued a Focused Feasibility Study (“FFS”) and proposed plan which addressed various early action remediation alternatives for the lower 8.3 miles of the River. The EPA received public comment on the FFS and proposed plan (including comments from the CPG and other entities asserting that the FFS and proposed plan do not comply with CERCLA) which public comment period ended on August 20, 2014. The CPG submitted to the EPA a draft RI report in February 2015 and draft FS report in April 2015 for the entire lower seventeen miles of the River. On March 4, 2016, the EPA issued a RODRecord of Decision selecting the remedy for the lower 8.3 miles of the River. The cleanup plan adopted by the EPA is now considered a final action for the lower 8.3 miles of the River and will include the removal of 3.5 million cubic yards of sediment, placement of a cap over the entire lower 8.3 miles of the River, and, according to the EPA, will cost approximately $1.4 billion and take 6 years to implement after the remedial design is completed. The(The EPA estimates that the remedial design will take four years to complete.) The Company and 105 other parties received a letter dated March 31, 2016 from the EPA notifying such parties of potential liability for the costs of the cleanup of the lower 8.3 miles of the River and a letter dated March 30, 2017 stating that the EPA had offered 20 of the parties (not including the Company) an early cash out settlement. In a letter dated May 17, 2017, the EPA stated that these 20 parties did not discharge any of the eight hazardous substances identified as the contaminants of concern in the lower 8.3 mile ROD as the contaminants of concern.ROD. In the March 30, 2017 letter, the EPA stated that other parties who did not discharge dioxins, furans or polychlorinated biphenyls (which are considered the contaminants of concern posing the greatest risk to human health or the environment) may also be eligible for cash out settlement, but expects those parties’parties' allocation to be determined through a complex settlement analysis using a third partythird-party allocator. The Company asserts that it did not discharge dioxins, furans or polychlorinated biphenyls and should be eligible for a cash out settlement.Theresettlement. On September 30, 2016, Occidental Chemical Corporation ("OCC") entered into an agreement with the EPA to perform the remedial design for the cleanup plan for the lower 8.3 miles of the River. On June 30, 2018, OCC filed a complaint in the United States District Court for the District of New Jersey against over 100 companies, including the Company, seeking CERCLA cost recovery or contribution for past costs relating to various investigations and cleanups OCC has conducted or is conducting in connection with the River. According to the complaint, OCC has incurred or is incurring costs which includes the estimated cost to complete the remedial design for the cleanup plan for the lower 8.3 miles of the River. OCC also seeks a declaratory judgment
to hold the defendants liable for their proper shares of future response costs, including the remedial action for the lower 8.3 miles of the River. There has been no determination as to how the RI/FS will be modified in light of the EPA’sEPA's decision to implement a final action for the lower 8.3 miles of the River. At this time, the Company cannot reasonably estimate its liability related to the remediation efforts, excluding the RI/FS and remediation actions at mile 10.9, as the RI/FS is ongoing, the ultimate remedial approach and associated cost for the upper portion of the River has not yet been determined, and the parties that will participate in funding the remediation and their respective allocations are not yet known. On September 30, 2016, Occidental Chemical Corporation entered into an agreement with EPA to perform the remedial design for the cleanup plan for the lower 8.3 miles of the river.
Per the terms of a Final Order and Judgment approved by the United States District Court for the Middle District of Florida on January 22, 1991, Emhart is responsible for a percentage of remedial costs arising out of the Kerr McGee Chemical Corporation Superfund Site located in Jacksonville, Florida. On March 15, 2017, the Company received formal notification from the EPA that the EPA had issued a ROD selecting the preferred alternative identified in the Proposed Cleanup Plan. The cleanup adopted by the EPA is currently estimated to cost approximately $68.7 million. Accordingly, in the first quarter of 2017, the Company increased its reserve by $17.1 million which was recorded in Other, net in the Consolidated Statements of Operations and Comprehensive Income.
The amount recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. Actual costs to be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs, the Company does not expect that any sum it may have to pay in connection with these matters in excess of the amounts recorded will have a materially adverse effect on its financial position, results of operations or liquidity.
S. GuaranteesGUARANTEES
The Company’s financial guarantees at SeptemberJune 30, 20172018 are as follows:
| | | (Millions of Dollars) | Term | | Maximum Potential Payment | | Carrying Amount of Liability | Term | | Maximum
Potential
Payment | | Carrying
Amount of
Liability |
| Guarantees on the residual values of leased assets | One to five years | | $ | 103.4 |
| | $ | — |
| One to four years | | $ | 100.4 |
| | $ | — |
|
| Standby letters of credit | Up to three years | | 71.7 |
| | — |
| Up to three years | | 74.3 |
| | — |
|
| Commercial customer financing arrangements | Up to six years | | 73.8 |
| | 25.5 |
| Up to six years | | 71.0 |
| | 7.3 |
|
| Total | | $ | 248.9 |
| | $ | 25.5 |
| | $ | 245.7 |
| | $ | 7.3 |
|
The Company has guaranteed a portion of the residual values of leased assets arising from its synthetic lease program. The lease guarantees are for an amount up to $103.4$100.4 million while the fair value of the underlying assets is estimated at $118.9 million. The related assets would be available to satisfy the guarantee obligations and therefore it is unlikely the Company will incur any future loss associated with these guarantees.
The Company has issued $71.7$74.3 million in standby letters of credit that guarantee future payments which may be required under certain insurance programs.
The Company provides various limited and full recourse guarantees to financial institutions that provide financing to U.S. and Canadian Mac Tool distributors and franchisees for their initial purchase of the inventory and trucks necessary to function as a distributor and franchisee. In addition, the Company provides limited and full recourse guarantees to financial institutions that extend credit to certain end retail customers of its U.S. Mac Tool distributors and franchisees. The gross amount guaranteed in these arrangements is $73.8$71.0 million and the $25.5$7.3 million carrying value of the guarantees issued is recorded in debt and other liabilities as appropriate in the Condensed Consolidated Balance Sheets.
The Company provides product and service warranties which varyon certain products across its businesses. The types of product warranties offered generally range from one year to limited lifetime, and certain branded products recently acquired carry a lifetime warranty. There are also certain products with no warranty.lifetime. Further, the Company sometimes incurs discretionary costs to service its products in connection with product performance issues. Historical warranty and service claim experience forms the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability as new information becomes available.
The changes in the carrying amount of product and service warranties for the ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 20162017 are as follows:
| | | (Millions of Dollars) | 2017 | | 2016 | 2018 | | 2017 |
| Balance beginning of period | $ | 103.4 |
| | $ | 105.4 |
| |
Balance beginning of period1 | | $ | 108.5 |
| | $ | 103.4 |
|
| Warranties and guarantees issued | 76.9 |
| | 71.4 |
| 53.9 |
| | 50.4 |
|
| Warranty payments and currency | (71.8 | ) | | (69.6 | ) | (58.3 | ) | | (47.1 | ) |
| Balance end of period | $ | 108.5 |
| | $ | 107.2 |
| $ | 104.1 |
| | $ | 106.7 |
|
1 2018 beginning of period balance has been recast as a result of the adoption of new accounting standards. Refer to Note B, New Accounting Standards, for further discussion.
T. DivestituresDIVESTITURES
On January 3, 2017, the Company sold a business within the Tools & Storage segment for $25.6approximately $26 million. During the second quarter of 2017, the Company received additional proceeds of $0.5 million as a result of the finalization of the purchase price. On February 22, 2017, the Company sold the majority of its mechanical security businesses within the Security segment, which includes the commercial hardware brands of Best Access, phi Precision and GMT, for net proceeds of $719.2 million. The Company also sold a business in the Industrial segment during the third quarter of 2017, resulting in a loss of $3.2approximately $717 million. As a result of these sales, the Company recognized an after-taxa pre-tax gain of $234.3$268.3 million in the first nine monthshalf of 2017, primarily related to the sale of the mechanical security businesses. ThesePre-tax income for these businesses totaled $0.6 million during the first quarter of 2017.
The Company also sold a small business in the Industrial segment during the third quarter of 2017 and a small business in the Tools & Storage segment during the fourth quarter of 2017 for total proceeds of approximately $14 million. During the second quarter of 2018, the Company recognized a $0.8 million charge as a result of the finalization of the purchase price for the Tools & Storage business sold during the fourth quarter of 2017.
The above disposals dodid not qualify as discontinued operations in accordance with ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entityand therefore, the operating results of these businesses are included in the Company's continuing operations for all periods presented through their respective dates of sale in 2017.
The following table summarizes the pre-tax income for these businesses for the three and nine months ended September 30, 2017 and October 1, 2016: |
| | | | | | | | | | | | | | | |
| | Third Quarter | | Year-to-Date |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 |
| Pre-tax income | $ | 0.7 |
| | $ | 12.0 |
| | $ | 1.7 |
| | $ | 34.0 |
|
The carrying amounts of the assets and liabilities that were expected to be included in the sales of the mechanical security businesses and the business within the Tools & Storage segment were classified as held for sale as of December 31, 2016, as follows:
|
| | | |
| (Millions of Dollars) | December 31, 2016 |
| Accounts and notes receivable, net | $ | 35.3 |
|
| Inventories, net | 33.2 |
|
| Property, plant and equipment, net | 52.3 |
|
| Goodwill and other intangibles, net | 399.8 |
|
| Other assets | 2.8 |
|
| Total assets | $ | 523.4 |
|
| | |
| Accounts payable and accrued expenses | $ | 38.0 |
|
| Other liabilities | 15.5 |
|
| Total liabilities | $ | 53.5 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 provider of hand tools, power tools and related accessories, mechanical access solutions (primarily automatic doors),engineered fastening systems and products, services and equipment for oil & gas and infrastructure applications, commercial electronic security and monitoring systems, healthcare solutions, engineered fastening systems and products and services for various industrial applications.mechanical access solutions (primarily automatic doors). The Company continues to pursue a growth and acquisition strategy that involves industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth. The Company also remains focused on organic growth with margin expansion, including increasing its presence in emerging markets, with a goal of generating greater than 20% of annual revenues from those markets over time, and leveraging the Stanley Fulfillment System a now expanded program ("SFS 2.0") focused, which focuses on upgradingdigital excellence, commercial excellence, breakthrough innovation, core SFS operating principles and digital capabilities while maintaining commercial and supply chain excellence, and funding required investments, in part, through functional transformation. Strategic acquisitions, combined with strong innovation-driven organic growth performance, will help enableIn addition, the Company continues to reachmake strides towards achieving its vision22/22 Vision of doubling its size toreaching $22 billion in revenue by 2022 while expanding the margin rate.rate, by becoming known as one of the world’s leading innovators, delivering top-quartile financial performance and elevating its commitment to social responsibility.
In April 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson"), which enhances its presence in the general industrial end markets and expands its portfolio of highly-engineered fastening solutions.
In March 2017, the Company acquired the Tools business of Newell Brands ("Newell Tools"), which is another important step in the Company's quest to strengthenhas strengthened its presence in the global tools industry, and the CraftsmanCraftsman® brand, which grantsgranted the Company the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels. Furthermore, in February 2017, the Company completed the sale ofsold the majority of its mechanical security businesses, which allowed the Company to deploy capital in a more accretive and growth-oriented manner.
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.
Refer to the “Strategic Objectives” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Form 10-K for the year ended December 31, 201630, 2017 for additional strategic discussions.
Segments
The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, SecurityIndustrial and Industrial.Security.
Tools & Storage
The Tools & Storage segment is comprised of the Power Tools & Equipment ("PTE") and Hand Tools, Accessories & Storage ("HTAS") businesses. Annual revenues in the Tools & Storage segment were $7.5$9.0 billion in 2016,2017, representing 66%70% of the Company’s total revenues.
The PTE business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors. Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKERDECKER® brand, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories, and home products such as hand-held vacuums, paint tools and cleaning appliances.
The HTAS business sells hand tools, power tool accessories and storage products. Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and saw blades.threading products. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products.
SecurityIndustrial
The Security segment is comprised of the Convergent Security Solutions ("CSS") and Mechanical Access Solutions ("MAS") businesses. Annual revenues in the Security segment were $2.1 billion in 2016, representing 18% 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 solutions, infant protection, pediatric protection, patient protection, wander management, fall management, and emergency call products. The MAS business primarily sells automatic doors.
Industrial
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. Annual revenues in the Industrial segment revenues totaled $1.8were $2.0 billion in 2016,2017, representing 16%15% of the Company’s total revenues.
The Engineered Fastening business primarily sells engineered fastening products and systems designed for specific applications. The product lines include stud welding systems, blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, and high-strength structural fasteners.
The Infrastructure business consists of the Oil & Gas and Hydraulics businesses. The Oil & Gas business 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. The Hydraulics business sells hydraulic tools and accessories.
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 2017, representing 15% 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.
Acquisitions
On April 2, 2018, the Company acquired Nelson from the Doncasters Group, which is being integrated into the Engineered Fastening business. This acquisition is complementary to the Company's product offerings, enhances its presence in the general industrial end markets, expands its portfolio of highly-engineered fastening solutions, and will deliver cost synergies.
On March 9, 2017, the Company acquired Newell Tools, which included the highly attractive industrial cutting, hand tool and power tool accessory brands Irwin® and Lenox®. The acquisition enhanced the Company’s position within the global tools & storage industry and broadened the Company’s product offerings and solutions to customers and end-users, particularly within power tool accessories.
On March 8, 2017, the Company completedpurchased the purchase of the CraftsmanCraftsman® brand from Sears Holdings, which providesprovided the Company with the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels. The Company plans to significantly increase the availability of Craftsman®-branded products to consumers in previously underpenetrated channels, enhance innovation, and add manufacturing jobs in the U.S. to support growth.
On March 9, 2017, the Company acquired Newell Tools, which includes the highly attractive industrial cutting, hand tool and power tool accessory brands Irwin® and Lenox®. The acquisition enhances the Company’s position within the global tools & storage industry and broadens the Company’s product offerings and solutionsRefer to customers and end-users, particularly within power tool accessories.Note F, Acquisitions, for further discussion.
Divestitures
On February 22, 2017, the Company completed the sale ofsold the majority of its mechanical security businesses, which included the commercial hardware brands of Best Access, phi Precision and GMT. The sale allowed the Company to deploy capital in a more accretive and growth-oriented manner.
Refer to Note T, Divestitures, for further discussion.
Certain Items Impacting Earnings
Throughout MD&A, the Company has provided a discussion of the outlook and results both inclusive and exclusive of acquisition-related charges, and gainsgain or lossesloss on sales of businesses. The acquisition-related charges relate primarilybusinesses, environmental settlement charge, and tax charge related to the Newell Tools and Craftsman brand acquisitions.recently enacted U.S. tax legislation. The amountsresults and measures, including gross profit and segment profit, on a basis excluding such chargesthese amounts are considered relevant to aid analysis and understanding of the Company’s results and business trends aside from the material impact of these charges. In addition, these measures are utilized internally by management to understand business trends, as once the anticipated cost synergies from these acquisitions, as applicable, are realized, such charges are not expected to recur.items. These amounts for the three and nine months ended September 30, 2017 are as follows:
Acquisition-Related ChargesSecond Quarter and Year-To-Date 2018
During the three months ended September 30, 2017, theThe Company reported $30$127 million and $152 million in pre-tax acquisition-related charges during the second quarter and year-to-date 2018 periods, respectively, which were comprised of the following:
$109 million and $11 million for the second quarter and year-to-date 2018 periods, respectively, reducing Gross Profit primarily pertaining to amortization of the inventory step-up adjustment for the Newell Tools acquisition;Nelson acquisition in the second quarter of 2018 and facility-related charges;
$726 million and $42 million for the second quarter and year-to-date 2018 periods, respectively, in SG&A primarily for integration-related costs and consulting fees;
$587 million and $93 million for the second quarter and year-to-date 2018 periods, respectively, in Other, net primarily forrelated to the recently announced settlement with the Environmental Protection Agency ("EPA") and deal transaction costs;
$1 million for the second quarter and year-to-date 2018 periods related to a previously divested business; and
$84 million and $5 million for the second quarter and year-to-date 2018 periods, respectively, in Restructuring charges pertaining to facility closures and employee severance.
The tax effect on the above charges during the thirdsecond quarter of 20172018 was $9$29 million, resulting in after-tax charges of $21$98 million, or approximately $0.13$0.64 per diluted share.
DuringOn a year-to-date basis, the nine months ended September 30,tax effect on the above charges was $34 million. The Company also recorded a $23 million tax charge in the first quarter of 2018 related to the recently enacted U.S. tax legislation. The above charges, as well as the tax charge relating to the recently enacted U.S. tax legislation, resulted in net after-tax charges of $141 million, or $0.92 per diluted share, in the first half of 2018.
Second Quarter and Year-To-Date 2017 the
The Company reported $130$42 million in pre-tax acquisition-related charges during the second quarter of 2017 and a $168 million pre-tax gain during the first half of 2017, respectively, which were comprised of the following:
$4326 million and $33 million for the second quarter and year-to-date 2017 periods, respectively, reducing Gross Profit primarily pertaining to amortization of the inventory step-up adjustmentadjustments for the Newell Tools acquisition;and Craftsman® brand acquisitions;
$268 million and $19 million for the second quarter and year-to-date 2017 periods, respectively, in SG&A primarily for integration-related costs and consulting fees;
$516 million and $46 million for the second quarter and year-to-date 2017 periods, respectively, in Other, net primarily for deal transaction costs;
$268 million gain relating to the sales of the majority of the mechanical security businesses and a small business in the Tools & Storage segment in the first quarter of 2017; and
$102 million for the second quarter and year-to-date 2017 periods in Restructuring charges pertaining to facility closures and employee severance.
The tax effect on the above charges during the first nine monthssecond quarter of 2017 was $39$13 million, resulting in after-tax charges of approximately $91$29 million, or $0.59$0.19 per diluted share. On a year-to-date basis, the above amounts resulted in a net after-tax gain of $168 million, or $1.10 per diluted share.
Sales of Businesses
During the three months ended September 30, 2017, the Company reported a $3 million loss, or $0.02 per diluted share, relating to the sale of a business in the Industrial segment. During the nine months ended September 30, 2017, the Company reported a $265 million pre-tax gain primarily relating to the previously discussed sale of the majority of the mechanical security businesses. The tax effect of the gain was $31 million, resulting in an after-tax gain of $234 million, or $1.54 per diluted share.
20172018 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 the mid-point of and tighteningrevising its 2017 EPS2018 diluted earnings per share outlook to $8.20 - $8.30 ($7.33 - $7.43$7.00 to $7.20, from $7.40 to $7.60, reflecting the recently announced settlement with the EPA regarding the remediation of the Centredale Superfund site. The Company is reiterating its diluted earnings per share range, excluding acquisition-related charges, the aforementioned
environmental settlement, and net gain on salestax charges related to the recently enacted U.S. tax legislation, of businesses) from $8.05 - $8.25 ($7.18 - $7.38 excluding acquisition-related charges$8.30 to $8.50, and net gain on sales of businesses) as it expects stronger full year results attributable primarily to higher organic growth expectations. The Company is also reiterating its free cash flow conversion estimate, defined as free cash flow divided by net income, excluding the net gain on sales of businesses, of approximately 100%. The Company has changed the following assumptions for 2018 from its prior outlook: incremental price, cost and productivity actions will approximate $0.48 of accretion per diluted share, higher organic volume expectations will approximate $0.12 of incremental accretion per diluted share, benefits from the $200 million share repurchase executed in the second quarter of 2018 will approximate $0.10 of accretion per diluted share, foreign currency impacts from the strengthening of the U.S. dollar during the second quarter of 2018 will result in approximately $0.40 of incremental dilution to earnings per share, and higher commodity inflation expectations, including the impact from the initial $34 billion of section 301 tariffs, will result in approximately $0.30 of incremental dilution to earnings per share.
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. Certain amounts reported in the previous year have been recast as a result of the retrospective adoption of new accounting standards in the first quarter of 2018. Refer to Note B, New Accounting Standards, for further discussion.
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 $3.299$3.644 billion in the thirdsecond quarter of 20172018 compared to $2.882$3.287 billion in the thirdsecond quarter of 2016,2017, representing an increase of 14%11% fueled by strong organic growth of 7%., which includes a one point contribution from price. Acquisitions, primarily Newell Tools, volumeNelson, and foreign currency increased sales by 3% and 1%, respectively. Tools & Storage net sales increased 11% compared to the second quarter of 2017 due to strong volume growth of 9%, 7%price of 1% from initial actions in response to commodity inflation and currency pressure, and favorable foreign currency of 1%. Industrial net sales increased 14% compared to the second quarter of 2017 primarily due to acquisition growth of 11% and favorable foreign currency of 3%. Net sales in the Security segment increased 6% compared to the second quarter of 2017 driven by bolt-on commercial electronic security acquisitions of 4%, favorable foreign currency of 3% and price of 1%, partially offset by lower volume of 2%.
Net sales were $6.853 billion in the first half of 2018 compared to $6.143 billion in the first half of 2017, representing an increase of 12% with strong organic growth of 6%. Acquisitions, primarily Newell Tools and Nelson, and foreign currency increased sales by 4% and 3%, respectively, while the impact of businesses sold decreased sales by 3%1%. Tools & Storage net sales increased 22% compared to the third quarter of 2016 due to strong organic growth of 9%, with solid growth across all regions, acquisition growth of 13% and favorable foreign currency of 1%, partially offset by a 1% decline from the sale of a business in the first quarter of 2017. The impact of price was relatively neutral compared to the third quarter of 2016. Net sales in the Security segment decreased 9% compared to the third quarter of 2016 as increases from small bolt-on commercial electronic security acquisitions of 3% and foreign currency of 2% were more than offset by a decline of 14% from the sale of the majority of the mechanical security businesses. Industrial net sales increased 9% compared to the third quarter of 2016 primarily due to an 8% increase in volume, fueled by organic sales growth of 6% in Engineered Fastening and 15% in Infrastructure, and a 1% increase from foreign currency.
Net sales were $9.334 billion in the first nine months of 2017 compared to $8.487 billion in the first nine months of 2016, representing an increase of 10% fueled by strong organic growth of 6%. Acquisitions, primarily Newell Tools, and volume each increased sales by 6% while the impact of businesses sold decreased sales by 2%. Tools & Storage net sales increased 16% compared to the first nine monthshalf of 20162017 due to strong organic growth of 8%, fueled by solid growth across all regions, and acquisition growth of 9%4% and favorable foreign currency of 2%. Industrial net sales increased 10% compared to the first half of 2017 primarily due to acquisition growth of 6% and favorable foreign currency of 5%, partially offset by a 1% decline from the sale ofdecrease due to a business sold in the firstthird quarter of 2017. Net sales in the Security segment declined 9%increased 4% compared to the first nine monthshalf of 2016 as organic growth of2017 due to a 1% increase in price and a 4% increase in both foreign currency and small bolt-on commercial electronic security acquisitions, of 2% werewhich more than offset by declines of 11%3% from the sale of the majority of the
mechanical security businesses and 1%2% from foreign currency. Industrial net sales increased 6% compared to the first nine months of 2016 primarily due to a 7% increase in volume, driven by organic growth of 6% in Engineered Fastening and 12% in Infrastructure, partially offset by a 1% decrease in foreign currency.lower volumes.
Gross Profit: Gross profit was $1.252$1.287 billion, or 38.0%35.3% of net sales, in the thirdsecond quarter of 20172018 compared to $1.084$1.213 billion, or 37.6%36.9% of net sales, in the thirdsecond quarter of 2016.2017. Acquisition-related charges, which reduced gross profit, were $9.6$8.8 million for the three months ended SeptemberJune 30, 2017, primarily relating to the amortization of the inventory step-up adjustment2018 and $26.1 million for the Newell Tools acquisition.three months ended July 1, 2017. Excluding acquisition-relatedthese charges, gross profit was 38.2%35.6% of net sales for the three months ended SeptemberJune 30, 2018, compared to 37.7% of net sales for the three months ended July 1, 2017, as volume leverage, productivity and price were more than offset by an anticipated $50 million of commodity inflation and $20 million of foreign currency pressure, which emerged during the last 8 weeks of the second quarter of 2018.
Gross profit was $2.453 billion, or 35.8% of net sales, in the first half of 2018 compared to $2.279 billion, or 37.1% of net sales, in the first half of 2017. Acquisition-related charges, which reduced gross profit, were $10.5 million for the six months ended June 30, 2018 and $32.9 million for the six months ended July 1, 2017. Excluding these charges, gross profit was 35.9% of net sales for the six months ended June 30, 2018, compared to 37.6% of net sales for the threesix months ended OctoberJuly 1, 2016, as volume leverage and productivity more than offset increasing commodity inflation.
Gross profit was $3.530 billion, or 37.8% of net sales, in the first nine months of 2017 compared to $3.191 billion, or 37.6% of net sales, in the first nine months of 2016. Acquisition-related charges, which reduced gross profit, were $42.5 million for the nine months ended September 30, 2017, primarily relating to the amortization of the inventory step-up adjustment for the Newell Tools acquisition. Excluding acquisition-related charges, gross profit was 38.3% of net sales for the nine months ended September 30, 2017, compared to 37.6% of net sales for the nine months ended October 1, 2016.2017. The year-over-year increasedecrease in the profit rate was attributable to commodity inflation of approximately $100 million and foreign currency pressure, which more than offset volume leverage, productivity and cost control, which more than offset currency and increasing commodity inflation.price.
SG&A Expenses: SG&A, inclusive of the provision for doubtful accounts, was $763.4$805.8 million, or 23.1%22.1% of net sales, in the thirdsecond quarter of 20172018, compared to $645.4$744.2 million, or 22.4%22.6% of net sales, in the thirdsecond quarter of 2016.2017. Within SG&A,
acquisition-related integration and consulting costscharges totaled $7.4$25.5 million for the three months ended SeptemberJune 30, 2018 and $8.7 million for the three months ended July 1, 2017. Excluding these charges, SG&A was 22.9%21.4% of net sales for the three months ended SeptemberJune 30, 20172018, compared to 22.4% for the three months ended OctoberJuly 1, 2016,2017, as investments in growth initiatives weretight cost management and volume leverage was partially offset by continued cost management.SFS 2.0 growth investments.
On a year-to-date basis, SG&A, inclusive of the provision for doubtful accounts, was $2.187 billion,$1,591.4 million, or 23.2% of net sales, in 2018, compared to $1,434.5 million, or 23.4% of net sales, in 2017 compared to $1.940 billion, or 22.9% of net sales, in 2016.2017. Within SG&A, acquisition-related integration and consulting costscharges totaled $26.8$41.9 million for the ninesix months ended SeptemberJune 30, 2018 and $19.4 million for the six months ended July 1, 2017. Excluding these charges, SG&A was 23.1%22.6% of net sales for the ninesix months ended SeptemberJune 30, 20172018, compared to 22.9%23.0% for the ninesix months ended OctoberJuly 1, 2016,2017, as investments in growth initiatives weretight cost management was partially offset by continued cost management.SFS 2.0 growth investments.
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.
Corporate Overhead: The corporate overhead element of SG&A, which is not allocated to the business segments, amounted to $55.7
$50.9 million, or 1.7%1.4% of net sales, in the thirdsecond quarter of 20172018 compared to $43.1$49.3 million, or 1.5% of net sales, in the corresponding period of 2016.2017. On a year-to-date basis, the corporate overhead element of SG&A, amounted to $148.7$98.2 million, or 1.6%1.4% of net sales, in 20172018 compared to $138.5$93.9 million, or 1.6%1.5% of net sales, in 2016.2017.
Other, net: Other, net amounted to $65.5$119.3 million and $232.0$55.3 million forin the threesecond quarter of 2018 and nine months ended September 30, 2017, respectively. The year-over-year increase was primarily driven by a $77.7 million environmental remediation charge related to the recently announced EPA settlement regarding the cleanup of the Centredale Superfund site. Excluding this charge and acquisition-related transaction costscharges of $5.4$9.4 million and $51.0$5.6 million forin the threesecond quarter of 2018 and nine months ended September 30, 2017, respectively, Other, net totaled $60.1$32.2 million and $181.0$49.7 million forin the threesecond quarter of 2018 and nine months ended September 30, 2017, respectively. The year-over-year decrease reflects a favorable resolution of a prior claim, among other items.
Other, net amounted to $56.8$177.3 million and $150.6$155.8 million forin the threefirst half of 2018 and nine months ended October 1, 2016,2017, respectively. Excluding the aforementioned EPA settlement charge and acquisition-related charges of $93.0 million in the first half of 2018 and acquisition-related charges of $45.6 million in the first half of 2017, Other, net totaled $84.3 million and $110.2 million, respectively, during these periods. The year-over-year increase in both periodsdecrease was primarily driven by higher amortization expense, negative impacts of foreign currency and a one-timean environmental remediation charge of $17 million recorded in the first quarter of 2017 relating to a legacy Black & Decker site.site and a favorable resolution of a prior claim, partially offset by higher intangible amortization expense.
Refer to Note R, Commitments and Contingencies, for additional information regarding the EPA settlement discussed above.
Loss (Gain) on Sales of Businesses: DuringFor the three and six months ended SeptemberJune 30, 2018, the Company reported a $0.8 million loss relating to a previously divested business. In the first half of 2017, the Company reported a $3.2$268.3 million loss relating to the sale of a business in the Industrial segment. During the nine months ended September 30, 2017, the Company reported a $265.1 millionpre-tax gain primarily relating to the sale of the majority of the Company's mechanical security businesses, as previously discussed.
Pension settlement: Pension settlement of $12.8 million forin the nine months ended September 30,first half of 2017 reflects losses previously reported in Accumulated other comprehensive loss related to a non-U.S. pension plan for which the Company settled its obligation by purchasing an annuity and making lump sum payments to participants.
Interest, net: Net interest expense was $46.9$53.4 million in the thirdsecond quarter of 20172018 compared to $45.1$46.3 million in the thirdsecond quarter of 2016.2017. On a year-to-date basis, net interest expense was $135.9$100.8 million in 20172018 compared to $128.8$89.0 million in 2016.2017. The year-over-year increase induring both periods iswas primarily due to the termination ofhigher interest rate swaps in June 2016 hedgingrates on the Company's fixed rate debt.U.S. commercial paper borrowings partially offset by higher interest income.
Income Taxes: The Company recognized income tax expense of $79.8$1.0 million and $239.8$82.7 million for the three and ninesix months ended SeptemberJune 30, 2018, resulting in effective tax rates of 0.3% and 15.1%, respectively. Excluding the impacts of the aforementioned EPA settlement in the second quarter of 2018, the tax charge recorded in the first quarter of 2018 related to the recently enacted U.S. tax legislation, and the acquisition-related charges, the effective tax rates were 7.0% and 13.4% for the three and six months ended June 30, 2018, respectively. These effective tax rates differ from the U.S. statutory tax rate during these periods primarily due to tax on foreign earnings and the effective settlements of income tax audits.
The Company recognized income tax expense of $80.7 million and $160.4 million for the three and six months ended July 1, 2017, respectively, resulting in effective tax rates of 22.5% and 20.2%19.3%, respectively. The effective tax rates differdiffered from the
U.S. statutory tax rate during these periods primarily due to a portion of the Company’s earnings being realized in lower-taxed foreign jurisdictions, the utilization of U.S. tax attributes during the first quarter of 2017 due to the divestiture of the mechanical security businesses and the favorable settlement of certain income tax audits during the second quarter of 2017, and the acceleration of certain tax credits resulting in a tax benefit during the third quarter of 2017. Non-deductible transaction costs and other acquisition-related restructuring items partially offset the net tax benefits mentioned above for the three and ninesix months ended September 30,July 1, 2017. Excluding the tax impact of the divestitures and acquisition-related charges, the effective tax rates were 23.0%23.5% and 23.7%24.1% for the three and ninesix months ended September 30,July 1, 2017, respectively.
The Company recognized income tax expense of $78.7 million and $234.7 million for the three and nine months ended October 1, 2016, respectively, resulting in effective tax rates of 24.0% and 24.9%, respectively. The effective tax rates differ from the U.S. statutory tax rate during these periods primarily due to a portion of the Company’s earnings being realized in lower-taxed foreign jurisdictions, the finalization of audit settlements during the first quarter of 2016, adjustments to tax positions relating to undistributed foreign earnings during the second and third quarters of 2016, and adjustments relating to the filing of certain U.S. and foreign corporate income tax returns during the third quarter of 2016.
Business Segment Results
The Company’s reportable segments are aggregations of businesses that have similar products, services and end markets, among other factors. The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A inclusive of the provision for doubtful accounts (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), restructuring charges, gains or lossesloss (gain) on sales of businesses, pension settlement, restructuring charges, interest expense, interest income, and income taxes. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and the expense 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 net 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, SecurityIndustrial and Industrial.Security.
Tools & Storage:
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net sales | $ | 2,318.2 |
| | $ | 1,896.9 |
| | $ | 6,432.2 |
| | $ | 5,535.4 |
| $ | 2,567.8 |
| | $ | 2,307.4 |
| | $ | 4,783.6 |
| | $ | 4,202.3 |
|
| Segment profit | $ | 396.6 |
| | $ | 330.0 |
| | $ | 1,058.2 |
| | $ | 954.5 |
| $ | 398.6 |
| | $ | 371.9 |
| | $ | 700.0 |
| | $ | 656.4 |
|
| % of Net sales | 17.1 | % | | 17.4 | % | | 16.5 | % | | 17.2 | % | 15.5 | % | | 16.1 | % | | 14.6 | % | | 15.6 | % |
Tools & Storage net sales increased $421.3$260.4 million, or 22%11%, in the thirdsecond quarter of 20172018 compared to the thirdsecond quarter of 2016. Organic sales were strong across2017. Sales volume increased 9% with all regions primarily due to organic growth of 16% in emerging markets, 9% in North America, and 5% in Europe. Within emerging markets, all regions generated mid-teen organic growth from the continued success of mid-price-point product releases, higher e-commerce volumes, and two country specific distribution model changes. North America share gains were fueled by strong commercial execution along with market-leading innovation, including expanded adoption and new product launches within the DEWALT FlexVolt system. Europe delivered another quarter of above-market organic growth enabled by new product innovation and successful commercial actions. Acquisition sales, primarily from Newell Tools,contributing, price contributed 13% to overall sales growth in the third quarter of 20171% and foreign currency increased sales by 1%. Organic growth in emerging markets was 17%, whileNorth America was 10%, and Europe was 5%. Emerging markets growth was largely due to mid-price-point product releases, higher e-commerce volumes, continued benefits from the saleRussia & Turkey go-to-market model changes, and positive price. North America organic growth accelerated as new product innovation, including the FLEXVOLT® system, the initial rollout of Craftsman brand, a recovery in outdoor products and pricing actions all delivered growth on top of a business in the first quarter of 2017 resulted in a 1% decrease. The impact of price was relatively neutral compared to the third quarter of 2016.continued healthy U.S. tool market. Share gains continued within Europe with growth supported by new products and successful commercial actions.
On a year-to-date basis, net sales increased $896.8$581.3 million, or 16%14%, in the first nine monthshalf of 20172018 compared to the first nine monthshalf of 2016.2017. Organic sales increased 8% primarily due todriven by organic growth of 9%16% in emerging markets, 7% in North America, and 6% in Europe, and 7%
in emerging markets.Europe. Acquisition sales, primarily from Newell Tools, contributed 9%4% to overall sales growth in the first nine monthshalf of 2017, while the sale of a business in the first quarter of 2017 resulted in a 1% decrease.2018 and favorable foreign currency increased sales by 2%.
Segment profit for the thirdsecond quarter of 20172018 was $396.6$398.6 million, or 17.1%15.5% of net sales, compared to $330.0$371.9 million, or 17.4%16.1% of net sales, in the corresponding 20162017 period. Excluding acquisition-related charges of $16.8$17.8 million and $34.1 million for the three months ended June 30, 2018 and July 1, 2017, respectively, segment profit amounted to 17.8% of net sales16.2% in the thirdsecond quarter of 2018, compared to 17.6% in the second quarter of 2017, compared to 17.4% of net sales in the third quarter of 2016, as benefits offrom volume leverage, pricing, productivity and productivitycost control were more than offset growth investmentsby the impact from commodity inflation and commodity inflation.currency.
Year-to-date segment profit for the Tools & Storage segmentsecond quarter of 2018 was $1.058 billion,$700.0 million, or 16.5%14.6% of net sales, in 2017 compared to $954.5$656.4 million, or 17.2%15.6% of net sales, in the corresponding 20162017 period. Excluding acquisition-related charges of $68.2$32.5 million and $51.4 million for the six months ended June 30, 2018 and July 1, 2017, respectively, segment profit amounted to 17.5% of net sales15.3% in the first nine monthshalf of 20172018 compared to 17.2% of net sales16.8% in the first nine monthshalf of 2016, as volume leverage and productivity more than offset growth investments, currency and commodity inflation.
Security:
|
| | | | | | | | | | | | | | | |
| | Third Quarter | | Year-to-Date |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 |
| Net sales | $ | 476.8 |
| | $ | 522.7 |
| | $ | 1,429.0 |
| | $ | 1,564.6 |
|
| Segment profit | $ | 54.0 |
| | $ | 71.4 |
| | $ | 156.8 |
| | $ | 199.3 |
|
| % of Net sales | 11.3 | % | | 13.7 | % | | 11.0 | % | | 12.7 | % |
Security net sales decreased $45.9 million, or 9%, in the third quarter of 2017 compared to the third quarter of 2016 as small bolt-on commercial electronic security acquisitions of 3% and a 2% increase from foreign currency were more than offset by a 14% reduction resulting from the sale of the majority of the mechanical security businesses. Europe delivered organic growth of 1% as strength within the U.K. and the Nordics was partially offset by anticipated ongoing weakness in France. North America organic sales declined by 1% as growth within healthcare was more than offset by lower commercial electronic security installations due to customer-directed project delays and a modest impact from the recent hurricanes in Texas and the Southeastern U.S.
On a year-to-date basis, net sales decreased $135.6 million, or 9%, in the first nine months of 2017 compared to the first nine months of 2016, as 1% organic growth and small bolt-on commercial electronic security acquisitions of 2% were more than offset by an 11% reduction resulting from the sale of the majority of the mechanical security businesses and a 1% decrease from foreign currency.
Security segment profit for the third quarter of 2017 was $54.0 million, or 11.3% of net sales, compared to $71.4 million, or 13.7% of net sales, in the corresponding 2016 period.2017. The year-over-year change inwas primarily driven by the segment profit rate reflects an approximate 100 basis point decline related to the sale of the majority of the Company's mechanical security businesses, as well as impacts from the aforementioned project delays and funding modest growth investments.
Year-to-date segment profit for the first nine months of 2017 was $156.8 million, or 11.0% of net sales, compared to $199.3 million, or 12.7% of net sales, in the corresponding 2016 period. The year-over-year change in the segment profit rate reflects an approximate 135 basis point decline related to the sale of the majority of the Company's mechanical security businesses, as well as the othersame factors that impacted the thirdsecond quarter of 20172018, as discussed above.
Industrial:
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net sales | $ | 503.6 |
| | $ | 462.4 |
| | $ | 1,472.5 |
| | $ | 1,386.5 |
| $ | 573.1 |
| | $ | 503.4 |
| | $ | 1,077.3 |
| | $ | 983.1 |
|
| Segment profit | $ | 93.8 |
| | $ | 80.4 |
| | $ | 276.5 |
| | $ | 235.2 |
| $ | 85.5 |
| | $ | 94.7 |
| | $ | 166.0 |
| | $ | 179.8 |
|
| % of Net sales | 18.6 | % | | 17.4 | % | | 18.8 | % | | 17.0 | % | 14.9 | % | | 18.8 | % | | 15.4 | % | | 18.3 | % |
Industrial net sales increased $41.2$69.7 million, or 9%14%, in the thirdsecond quarter of 2018 compared to the second quarter of 2017, compared to the third quarter of 2016, due to an 8% increase in volumeacquisition growth of 11% and a 1% increase fromfavorable foreign currency.currency of 3%. Engineered Fastening organic revenues increased 6% due to strong3% as significant automotive and industrial fastener penetration gains were partially offset by the anticipated impact from lower automotive system shipments and volume growth within general industrial markets.shipments. Infrastructure organic revenues were up 15% on increased Hydraulic Toolsdown 10% as higher volumes from successful commercial actions and improved market conditions, as well as higherin the Hydraulics business were offset by expected lower pipeline project activity in the Oil & Gas volumes from North American onshore pipeline project extensions and increased global inspection activity.
business.
On a year-to-date basis, net sales increased $86.0$94.2 million, or 6%10%, in the first nine monthshalf of 20172018 compared to the first nine monthshalf of 2016,2017, due to a 7% increase in volumes,acquisition growth of 6% and favorable foreign currency of 5%, partially offset by a 1% decrease from foreign currency.decline due to a sale of a business in the third quarter of 2017. Engineered Fastening organic revenues increased 6%1% and Infrastructure organic revenues were up 12%down 6% primarily due to the same factors that impacted the thirdsecond quarter of 20172018, as discussed above.
Industrial segment profit for the thirdsecond quarter of 20172018 was $93.8$85.5 million or 18.6%14.9% of net sales, compared to $80.4$94.7 million, or 17.4%18.8% of net sales, in the corresponding 2016 period, primarily due2017 period. Excluding acquisition-related charges of $10.9 million for the three months ended June 30, 2018, segment profit amounted to volume leverage,16.8% in the second quarter of 2018 compared to 18.8% in the second quarter of 2017, as productivity gains and cost control.control were offset by the impact of commodity inflation, growth investments and the modestly dilutive impact from the Nelson acquisition.
Year-to-date segment profit for the Industrial segment was $276.5$166.0 million, or 18.8%15.4% of net sales, in 2018 compared to $235.2$179.8 million, or 17.0%18.3% of net sales, in the corresponding 20162017 period. Excluding acquisition-related charges of $12.9 million for the six months ended June 30, 2018, segment profit amounted to 16.6% in the first half of 2018 compared to 18.3% in the first half of 2017. The increaseyear-over-year change in the segment profit rate was primarily due to the same factors that impacted the thirdsecond quarter of 2018, as discussed above.
Security:
|
| | | | | | | | | | | | | | | |
| | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2018 | | 2017 | | 2018 | | 2017 |
| Net sales | $ | 502.7 |
| | $ | 475.9 |
| | $ | 992.0 |
| | $ | 957.6 |
|
| Segment profit | $ | 48.1 |
| | $ | 51.8 |
| | $ | 93.6 |
| | $ | 102.5 |
|
| % of Net sales | 9.6 | % | | 10.9 | % | | 9.4 | % | | 10.7 | % |
Security net sales increased $26.8 million, or 6%, in the second quarter of 2018 compared to the second quarter of 2017, primarily due to small bolt-on commercial electronic security acquisitions of 4%, favorable foreign currency of 3%, and price of 1%, partially offset by lower volumes of 2%. North America declined 2% organically as higher volumes within automatic doors and Healthcare were offset by lower volume and a difficult comparable in commercial electronic security. Europe was flat organically as strength within the Nordics was offset by anticipated weakness in France.
On a year-to-date basis, net sales increased $34.4 million, or 4%, in the first half of 2018 compared to the first half of 2017, primarily due to a 1% increase in price and a 4% increase in both foreign currency and small bolt-on commercial electronic security acquisitions, which more than offset declines of 3% from the sale of the majority of the mechanical security businesses and 2% from lower volumes. Organic sales for both North America and Europe decreased 1% primarily due to the same factors that impacted the second quarter, as discussed above.
Security segment profit for the second quarter of 2018 was $48.1 million, or 9.6% of net sales, compared to $51.8 million, or 10.9% of net sales, in the corresponding 2017 period. Excluding acquisition-related charges of $2.0 million and $0.7 million for the three months ended June 30, 2018 and July 1, 2017, respectively, segment profit amounted to 10.0% in the second quarter of 2018 compared to 11.0% in the second quarter of 2017, reflecting investments to support the business transformation in commercial electronic security partially offset by a continued focus on cost containment.
Year-to-date segment profit was $93.6 million, or 9.4% of net sales, in 2018 compared to $102.5 million, or 10.7% of net sales, in the corresponding 2017 period. Excluding acquisition-related charges of $3.3 million and $0.9 million for the six months ended June 30, 2018 and July 1, 2017, respectively, segment profit amounted to 9.8% in the first half of 2018 compared to
10.8% in the first half of 2017. The year-over-year change in the segment profit rate reflects investments to support business transformation in commercial electronic security and the impact from the sale of the majority of the mechanical security business, partially offset by a continued focus on cost containment.
RESTRUCTURING ACTIVITIES
A summary of the restructuring reserve activity from December 31, 201630, 2017 to SeptemberJune 30, 20172018 is as follows:
| | | (Millions of Dollars) | December 31,
2016 | | Net Additions | | Usage | | Currency | | September 30,
2017 | December 30,
2017 | | Net Additions | | Usage | | Currency | | June 30,
2018 |
| Severance and related costs | $ | 21.4 |
| | $ | 34.4 |
| | $ | (32.8 | ) | | $ | 2.1 |
| | $ | 25.1 |
| $ | 20.0 |
| | $ | 32.8 |
| | $ | (22.9 | ) | | $ | (0.9 | ) | | $ | 29.0 |
|
| Facility closures and asset impairments | 14.2 |
| | 8.5 |
| | (16.1 | ) | | 0.3 |
| | 6.9 |
| 3.2 |
| | 3.5 |
| | (5.0 | ) | | — |
| | 1.7 |
|
| Total | $ | 35.6 |
| | $ | 42.9 |
| | $ | (48.9 | ) | | $ | 2.4 |
| | $ | 32.0 |
| $ | 23.2 |
| | $ | 36.3 |
| | $ | (27.9 | ) | | $ | (0.9 | ) | | $ | 30.7 |
|
For the ninesix months ended SeptemberJune 30, 2017,2018, the Company recognized net restructuring charges of $42.9$36.3 million. This amount reflects $34.4$32.8 million of net severance charges associated with the reduction of approximately 1,4631,000 employees and $8.5$3.5 million of facility closure and other restructuring costs.
For the three months ended SeptemberJune 30, 2017,2018, the Company recognized net restructuring charges of $19.1$13.4 million. This amount reflects $16.3$10.5 million of net severance charges associated with the reduction of approximately 1,138594 employees and $2.8$2.9 million of facility closure and other restructuring costs.
The Company expects these restructuring actions to result in annual net cost savings of approximately $34$40 million by the end of 2018.2019.
The majority of the $32.0$30.7 million of reserves remaining as of SeptemberJune 30, 20172018 is expected to be utilized within the next 12 months.
Segments: The $43$36 million of net restructuring charges for the ninesix months ended SeptemberJune 30, 20172018 includes: $18$15 million pertaining to the Tools & Storage segment; $17$5 million pertaining to the Industrial segment; $12 million pertaining to the Security segment; $7 million pertaining to the Industrial segment and $1$4 million pertaining to Corporate.
The $19$13 million of net restructuring charges for the three months ended SeptemberJune 30, 20172018 includes: $9$7 million pertaining to the Tools & Storage segment; $8$2 million pertaining to the Industrial segment; $3 million pertaining to the Security segment and $2$1 million pertaining to the Industrial segment.Corporate.
The anticipated annual net cost savings of approximately $34$40 million by the end of 20182019 includes: $12$13 million in the Tools and Storage segment; $14$3 million in the Industrial segment; $19 million in the Security segment; $7 million in the Industrial segment and $1$5 million in Corporate.
FINANCIAL CONDITION
Liquidity, Sources and Uses of Capital: The Company’s primary sources of liquidity are cash flows generated from operations and available lines of credit under various credit facilities.
Operating Activities:Cash flows provided by operations were $356.9$198.0 million in the thirdsecond quarter of 20172018 compared to $246.7$151.8 million in the corresponding period of 2016. The year-over-year change was primarily driven by higher earnings, as the Company's strong operational performance more than offset higher growth investments and divestiture and acquisition-related payments in the third quarter of 2017.
Year-to-date cash flows provided by operations were $467.8 million in the first nine months of 2017 compared to $650.0 million in the corresponding period of 2016. The year-over-year change was primarily driven by higher cash Cash outflows from working capital (accounts receivable, inventory, accounts payable and deferred revenue) to support outsized organic growthin both periods were primarily driven by higher accounts receivables and inventory purchases in the Tools & Storage segment partially offsetas a result of strong organic growth and to support anticipated demand from new product launches, including Craftsman.
Year-to-date cash flows used in operations were $151.4 million in the first half of 2018 compared to $162.3 million in the corresponding period of 2017. Cash outflows from working capital were primarily driven by higher earnings excluding acquisition-related costs.the same factors that impacted the second quarter, as discussed above.
Free Cash Flow:Free cash flow, as defined in the table below, was $265.9$86.3 million in the thirdsecond quarter of 20172018, compared to $168.6$29.6 million in the thirdsecond quarter of 2016.2017. Free cash flow on a year-to-date basis was $189.9an outflow of $369.4 million in 2017,2018 compared to $428.3$349.2 million in 2016.2017. The changedecrease in the year-to-date free cash flow in 2018 was primarily due to increased workinghigher planned capital expenditures to support growth in the Tools & Storage segmentCompany's supply chain and higher planned capital expenditures.investments related to SFS 2.0 initiatives. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and
provide a dividenddividends to shareowners. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company’s common stock and business acquisitions, among other items.
| | | | Third Quarter | | Year-to-Date | Second Quarter | | Year-to-Date |
| (Millions of Dollars) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net cash provided by operating activities | $ | 356.9 |
| | $ | 246.7 |
| | $ | 467.8 |
| | $ | 650.0 |
| |
Net cash used in operating activities1 | | $ | 198.0 |
| | $ | 151.8 |
| | $ | (151.4 | ) | | $ | (162.3 | ) |
| Less: capital and software expenditures | (91.0 | ) | | (78.1 | ) | | (277.9 | ) | | (221.7 | ) | (111.7 | ) | | (122.2 | ) | | (218.0 | ) | | (186.9 | ) |
| Free cash flow | $ | 265.9 |
| | $ | 168.6 |
| | $ | 189.9 |
| | $ | 428.3 |
| $ | 86.3 |
| | $ | 29.6 |
| | $ | (369.4 | ) | | $ | (349.2 | ) |
1 Certain prior year amounts within operating activities have been recast as a result of the adoption of new accounting standards. Refer to Note B, New Accounting Standards, for further discussion.
Based on its potential to generate cash flow from operations on an annual basis and its credit position at SeptemberJune 30, 20172018, the Company continues to believe over the long-term it has the financial flexibility to deploy capital to its shareowners’ advantage through a combination of acquisitions, dividends and potential future share repurchases.
Investing Activities:Cash flows used in investing activities totaled $273.5$587.5 million in the thirdsecond quarter of 2017 primarily due to2018 driven by business acquisitions of $152.0$505.6 million, primarily related to Nelson, and capital and software expenditures of $91.0$111.7 million, and $27.9 million of cash payments frompartially offset by net investment hedge settlements.settlements of $37.8 million. Cash flows used in investing activities totaled $61.3$46.4 million in the thirdsecond quarter of 2016,2017, which mainly consisted of capital and software expenditures of $78.1$122.2 million, and business acquisitions of $38.3 million, which were partially offset by cash proceeds of $104.7 million from net investment hedge settlements of $57.8 million.the deferred purchase price receivable related to the Company's accounts receivable sales program, which was terminated in February 2018.
Year-to-date cash flows used in investing activities totaled $2.144 billion$713.8 million in 20172018 primarily due to business acquisitions of $2.582 billion, mainly related to the Newell Tools and Craftsman brand acquisitions,$506.8 million and capital and software expenditures of $277.9$218.0 million. Cash flows used in investing activities totaled $1.642 billion in the first half of 2017, which mainly consisted of business acquisitions of $2.430 billion and capital and software expenditures of $186.9 million, partially offset by net cash proceeds from sales of businesses of $745.3 million. Cash flows used in investing activities totaled $225.0 million in the first nine months of 2016, which mainly consisted of capital and software expenditures of $221.7 million and business acquisitions$227.8 million of $59.3 million, which were partially offset by cash proceeds from net investment hedge settlements of $63.3 million.the deferred purchase price receivable related to the Company's accounts receivable sales program, which was terminated in February 2018.
Financing Activities:Cash flows used inprovided by financing activities totaled $161.9$457.5 million in the thirdsecond quarter of 2017 mainly due to $94.7 million of cash dividend payments. Cash flows used in financing activities in the third quarter of 2016 were $325.4 million2018 primarily due to $255.9$753.6 million of net repayments ofproceeds from short-term borrowings under the Company's commercial paper program, partially offset by the repurchase of common shares for $201.3 million and $84.5cash dividend payments of $94.2 million. Cash flows provided by financing activities in the second quarter of 2017 were $35.0 million mainly due to $727.5 million in proceeds from the issuance of equity units, partially offset by $593.1 million of net repayments of short-term borrowings and $86.5 million of cash dividend payments.
Year-to-date cash flows provided by financing activities totaled $945.9$673.4 million in 2018 primarily due to $1.136 billion of net proceeds from short-term borrowings under the Company's commercial paper program, partially offset by the repurchase of common shares for $212.7 million and cash dividend payments of $189.1 million. Cash flows provided by financing activities in 2017 were $1.108 billion mainly due to proceeds of $727.5 million in proceeds from the issuance of equity units and $499.2$563.6 million offrom net short-term borrowings under the Company's commercial paper program primarily to fund acquisitions, partially offset by $267.9$173.2 million of cash dividend payments. Cash flows used in financing activities in 2016 were $446.8 million primarily due to repurchases of approximately 3.8 million common shares for $362.7 million and $243.9 million of cash dividends payments, partially offset by $92.4 million of net proceeds from short-term borrowings under the Company's commercial paper program, $51.3 million from issuances of common stock, and $27.0 million relating to the termination of interest rate swaps.
Credit Ratings & Liquidity:
The Company maintains strong investment grade credit ratings from the major U.S. rating agencies on its senior unsecured debt (S&P A, Fitch A-, Moody's Baa1), as well asand its commercial paper program (S&P A-1, Fitch F2, Moody's P-2). There have been no changes to any of the ratings during the thirdsecond quarter of 2017.2018. 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 $483$386 million as of SeptemberJune 30, 2017,2018, comprised of $70$37 million in the U.S. and $413$349 million in foreign jurisdictions. As of December 31, 2016,30, 2017, cash and cash equivalents totaled $1.132 billion, which was predominantly held$638 million, comprised of $54 million in the U.S. and $584 million in foreign jurisdictions. Concurrent with the Black & Decker merger, the Company made a determination to repatriate certain legacy Black & Decker foreign earnings, on which U.S. income taxes had not previously been provided. As
As a result of this repatriation decision,the Tax Cuts and Jobs Act signed into law on December 22, 2017 (the "Act"), the Company recorded a provisional tax liability of $466 million as of December 30, 2017 for the one-time transition tax associated with unremitted foreign earnings and profits, which included $5 million of foreign withholding taxes that will become payable upon
distribution. The Company is still analyzing certain aspects of the Act and refining its estimate, which may change materially due to changes in interpretations and assumptions the Company has recorded approximately $269made, new guidance that may be issued in the future, and actions the Company may take as a result of the new legislation. 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. The Company has considered the implications of paying the required one-time transition tax, and believes it will not have a material impact on its liquidity. Refer to Note P, Income Taxes, for further discussion of the impacts of the Act.
In January 2017, the Company amended its existing $2.0 billion commercial paper program to increase the maximum amount of notes authorized to be issued to $3.0 billion and to include Euro denominated borrowings in addition to U.S. Dollars. As of June 30, 2018, the Company had $1.1 billion of borrowings outstanding against the Company’s $3.0 billion commercial paper program, of which $925 million in Euro denominated commercial paper was designated as a Net Investment Hedge as described in more detail in Note I, Financial Instruments. At December 30, 2017, the Company had no commercial paper borrowings outstanding.
The Company has a five-year $1.75 billion committed credit facility (the “Credit Agreement”). Borrowings under the Credit Agreement may include U.S. Dollars up to the $1.75 billion commitment or in Euro or Pounds Sterling subject to a foreign currency sub-limit of $400.0 million and $261 millionbear interest at a floating rate dependent upon the denomination of associated deferred tax liabilitiesthe borrowing. Repayments must be made on December 18, 2020 or upon an earlier termination date of the Credit Agreement, at Septemberthe election of the Company. The 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 of June 30, 2018 and December 30, 2017, the Company had not drawn on this commitment.
The Company also has a 364-day $1.25 billion committed credit facility (the "2017 Credit Agreement") executed in December 2017. The 2017 Credit Agreement consists of a $1.25 billion revolving credit loan and a sub-limit of an amount equal to the Euro equivalent of $400 million for swing line advances. Borrowings under the 2017 Credit Agreement may be made in U.S. Dollars or Euros, pursuant to the terms of the agreement, and bear interest at a floating rate dependent on the denomination of the borrowing. Repayments must be made by December 19, 2018 or upon an earlier termination of the 2017 Credit Agreement at the election of the Company. The Company also has the option at the termination date to convert all advances into a term loan provided certain requirements are met. The 2017 Credit Agreement serves as a liquidity back-stop for the Company’s $3.0 billion U.S. Dollar and Euro commercial paper program. As of June 30, 2018 and December 31, 2016, respectively. Current plans30, 2017, the Company had not drawn on this commitment.
In January 2017, the Company executed a 364-day $1.25 billion committed credit facility which consisted of a $1.25 billion revolving credit loan and liquidity requirements do not demonstrate a needsub-limit of an amount equal to repatriate other foreign earnings. Accordingly, all other undistributed foreign earningsthe Euro equivalent of $400 million for swing line advances. Borrowings under this credit agreement could be made in U.S. Dollars or Euros, pursuant to the terms of the Company are considered to be permanently reinvested, or will be remitted substantially free of additional tax, consistent with the Company’s overall growth strategy internationally, including acquisitionsagreement, and long-term financial objectives. No provision has been made for taxes that might be payable upon remittance of these undistributed foreign earnings. However, should management determinebore interest at a later point to repatriate additional foreign earnings,floating rate dependent on the denomination of the borrowing. This credit agreement was terminated in December 2017 at the election of the Company.
In March 2018, the Company would be requiredpurchased 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 accruecustomary anti-dilution adjustments) for an aggregate premium of $57.3 million. The capped call has a lower strike price of $156.86 and pay taxes at that time.an upper strike price of $203.92. The purpose of the capped call options is to hedge the risk of stock price appreciation between the lower and upper strike prices of the capped call options for a future share repurchase. Refer to Note J, Equity Arrangements, for further discussion.
In May 2017, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million ("$750 million Equity Units"). Each unit has a stated amount of $100 and initially consists of a three-year forward stock purchase contract for the purchase of a variable number of shares of common stock, on May 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 $727.5 million in cash proceeds from the $750 million Equity Units, net of underwriting costs and commissions, before offering expenses, and issued 750,000 shares of Series C Preferred Stock, recording $750.0 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used $25.1 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution.
In January 2017, the Company amended its existing $2.0 billion commercial paper program to increase the maximum amount of notes authorized to be issued to $3.0 billion and to include Euro denominated borrowings in addition to U.S. Dollars. As of September 30, 2017, the Company had $573 million of borrowings outstanding against the Company’s $3.0 billion commercial paper program, of which $471 million in Euro denominated commercial paper was designated as a Net Investment Hedge as described in more detail in Note I, Financial Instruments. At December 31, 2016, the Company had no commercial paper borrowings outstanding.
In January 2017, the Company executed a 364-day $1.3 billion committed credit facility (the "2017 Credit Agreement"). The 2017 Credit Agreement consists of a $1.3 billion revolving credit loan and a sub-limit of an amount equal to the Euro equivalent of $400 million for swing line advances. Borrowings under the 2017 Credit Agreement may be made in U.S. Dollars or Euros, pursuant to the terms of the agreement, and bear interest at a floating rate dependent on the denomination of the borrowing. Repayments must be made by January 17, 2018 or upon an earlier termination of the 2017 Credit Agreement at the election of the Company. The 2017 Credit Agreement serves as a liquidity back-stop for the Company’s $3.0 billion U.S. Dollar and Euro commercial paper program, also authorized and amended in January 2017, as discussed above. As of September 30, 2017, the Company had not drawn on this commitment.
The Company has a five-year $1.75 billion committed credit facility (the “Credit Agreement”). Borrowings under the Credit Agreement may include U.S. Dollars up to the $1.75 billion commitment or in Euro or Pounds Sterling subject to a foreign currency sub-limit of $400.0 million and bear interest at a floating rate dependent upon the denomination of the borrowing. Repayments must be made on December 18, 2020 or upon an earlier termination date of the Credit Agreement, at the election of the Company. The Credit Agreement is designated to be a liquidity back-stop for the Company's $3.0 billion commercial paper program. As of September 30, 2017 and December 31, 2016, the Company has not drawn on this commitment.
In March 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. In November 2016,June 2018, the Company amended the settlement date to April 2019,2021, 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.
OTHER MATTERS
Critical Accounting Estimates: There have been no significant changes in the Company’s critical accounting estimates during the thirdsecond quarter of 2017.
In the third quarter of 2017, the Company performed its annual goodwill impairment testing and determined that the fair values of each of its reporting units exceeded their respective carrying amounts. For the Infrastructure reporting unit, the Company determined that the fair value, which was estimated using a discounted cash flow valuation model, exceeded its carrying amount by 18%. The key assumptions applied to the cash flow projections included a 9% discount rate, near-term revenue
growth rates over the next five years, which represented a cumulative annual growth rate of approximately 7%, and a 3% perpetual growth rate. These assumptions contemplated business, market and overall economic conditions. Management continues to be confident in the long-term viability and success of the Infrastructure reporting unit and is encouraged by its strong organic growth and operational performance in the first nine months of 2017. The reporting unit continues to invest in organic growth initiatives, which includes solid progress being made with respect to Breakthrough Innovation projects under the SFS 2.0 operating system, and remains confident in the long-term growth prospects of the markets and geographies served.
2018. 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 ended December 31, 201630, 2017 for a discussion of the Company’s critical accounting estimates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in the Company’s exposure to market risk during the thirdsecond quarter of 2017.2018. Refer to the“Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the year ended December 31, 201630, 2017 for further discussion.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including the Company’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer, the Company has, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined under Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Company’s President and Chief Executive Officer and its Executive Vice President and Chief Financial Officer have concluded that, as of SeptemberJune 30, 2017,2018, the Company’s disclosure controls and procedures are effective. There has been no change in the Company’s internal control over financial reporting that occurred during the thirdsecond quarter of 20172018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. In March 2017, the Company acquired Newell Tools for approximately $1.84 billion. Management's assessment of, and conclusion on, the effectiveness of internal control over financial reporting excludes the internal controls of Newell Tools. As part of the ongoing integration activities, the Company will complete an assessment of existing controls and incorporate its controls and procedures into Newell Tools.
CAUTIONARY STATEMENT
Under the Private Securities Litigation Reform Act of 1995
Statements in this Quarterly Report on Form 10-Q that are not historical, including but not limited to those regarding the Company’s ability to: (i) generate greater than 20% of annual revenues from emerging markets over time; (ii) achieve its vision of doubling the size of the Company to $22 billion in revenue by 2022 while expanding its margin rate; (iii)rate, by becoming known as one of the world’s leading innovators, delivering top-quartile financial performance and elevating its commitment to social responsibility; (ii) achieve full year 20172018 diluted EPS of approximately $8.20 - $8.30 ( $7.33 - $7.43$7.00-$7.20 ($8.30-$8.50 excluding acquisition-related charges, the recently announced settlement with the EPA regarding the Centredale Superfund site, and net gain on sales of businesses)tax charges relating to the recently enacted U.S. tax legislation); (iv)(iii) achieve free cash flow conversion, defined as free cash flow divided by net income, (excluding the net gain on the sales of businesses), of approximately 100% for 2017;2018; and (v)(iv) over time, return approximately 50% of free cash flow to shareholders through a strong and growing dividend, as well as opportunistically repurchasing its shares, with the remaining free cash flow (approximately 50%) deployed toward acquisitions, (collectively, the “Results”) are “forward-looking statements” and subject to risk and uncertainty.
The Company’s ability to deliver the Results as described above is based on current expectations and involves inherent risks and uncertainties, including factors listed below and other factors that could delay, divert, or change any of them, and could cause actual outcomes and results to differ materially from current expectations. In addition to the risks, uncertainties and other factors discussed in this Quarterly Report, the risks, uncertainties and other factors that could cause or contribute to actual results differing materially from those expressed or implied in the forward-looking statements include, without limitation, those set forth under Item 1A Risk Factors of the Company’s Annual Report on Form 10-K and any material changes thereto set forth in any subsequent Quarterly Reports on Form 10-Q, or those contained in the Company’s other filings with the Securities and Exchange Commission, and those set forth below.
The Company’s ability to deliver the Results is dependent, or based, upon: (i) the Company’s ability to invest in product, brand and commercialization of the CraftsmanCraftsman® brand in previously underpenetrated channels, enhance innovation and add manufacturing jobs(including successful brand launch in the U.S. to support growth;second half of 2018); (ii) the Company’s ability to successfully integrate Newell Tools while remaining focused on its diversified industrial portfolio strategy;being one of the world’s leading innovators, continuing to deliver top-quartile financial performance and elevating our commitment to social responsibility; (iii) the Company’s ability to deliver overall organic growth approaching 6%of approximately 7% in 2017;2018; (iv) the Company’s ability to limit the impact from: commodity inflation of higher charges includedapproximately $205 million; foreign currency headwinds of approximately $80 million; and the first $34 billion of section 301 tariffs and section 232 steel and aluminum tariffs of approximately $35 million; (v)net impact from: closed acquisitions, cost and price actions and improved productivity being approximately +$1.53 to $1.63 EPS in “Other, net”2018; and share repurchase executed in 2017; (v)second quarter being approximately +$0.10; (vi) core (non-M(non M&A) restructuring charges being approximately $50 million in 2017 (inclusive of the 1Q 2017 pension settlement of approximately $13 million), and 20172018; (vii) 2018 core tax rate being relatively consistent with the 2016 levels; (vi)approximately 18%; (viii) the successful identification, completion and integration of, and realization of cost and revenue synergies associated with, acquisitions, as well as integration of existing businesses and formation of new business platforms; (vii)(ix) the continued acceptance of technologies used in the Company’s products and services (including DEWALT FlexVolt™DEWALT FLEXVOLT™ product); (viii)(x) the Company’s ability to manage existing Sonitrol franchisee and Mac Tools relationships; (ix)(xi) the Company’s ability to minimize costs associated with any sale or discontinuance of a business or product line, including any severance, restructuring, legal or other costs; (x)(xii) the proceeds realized with respect to any business or product line disposals; (xi)(xiii) the extent of any asset impairments with respect to any businesses or product lines that are sold or discontinued; (xii)(xiv) the success of the Company’s efforts to manage freight costs, steel and other commodity costs as well as capital expenditures; (xiii)(xv) the Company’s ability to sustain or increase prices in order to, among other things, offset or mitigate the impact of steel, aluminum, freight, energy, non-ferrous commodity and other commodity costs and any inflation increases and/or currency impacts; (xiv)(xvi) the Company’s ability to generate free cash flow and maintain a strong debt to capital ratio; (xv)(xvii) the Company’s ability to identify and effectively execute productivity improvements and cost reductions, while minimizing any associated restructuring charges; (xvi)(xviii) the Company’s ability to obtain favorable settlement of tax audits; (xvii)(xix) the ability of the Company to generate earnings sufficient to realize future income tax benefits during periods when temporary differences become deductible, including realizing tax credit carry forward amounts within the allowable carry forward periods; (xviii)(xx) the continued ability of the Company to access credit markets under satisfactory terms; (xix)(xxi) the Company’s ability to negotiate satisfactory price and payment terms under which the Company buys and sells goods, services, materials and products; (xx)(xxii) the Company’s ability to successfully develop, market and achieve sales from new products and services; and (xxi)(xxiii) the availability of cash to repurchase shares when conditions are right.right; (xxiv) adjustments to the provisional estimates recorded in 2017 for the enacted U.S. Tax Cuts and Jobs Act based on legislative developments and refined calculations; and (xxv) the ability of the Company to proactively manage the impact of the legislative changes brought about by the U.S. Tax Cuts and Jobs Act.
The Company’s ability to deliver the Results is also dependent upon: (i) the success of the Company’s marketing and sales efforts, including the ability to develop and market new and innovative products at the right price points in both existing and new markets; (ii) the ability of the Company to maintain or improve production rates in the Company’s manufacturing facilities, respond to significant changes in product demand and fulfill demand for new and existing products; (iii) the Company’s ability to continue improvements in working capital through effective management of accounts receivable and inventory levels; (iv) the ability to continue successfully managing and defending claims and litigation; (v) the success of the Company’s efforts to mitigate any adverse earnings impact resulting from for example, increases in the cost of energy or significant Chinese Renminbi, Canadian Dollar, Euro, British Pound, Brazilian Real, or other currency fluctuations; (vi) the geographic distribution of the Company’s earnings; (vii) the commitment to and success of the Stanley Fulfillment System; and (viii) successful implementation with expected results of cost reduction programs.
The Company’s ability to achieve the Results will also be affected by external factors. These external factors include: challenging global geopolitical and macroeconomic environment, possibly including impact from "Brexit" or other similar actions by other EU member states;states as well as the impact of any U.S. tariffs on imported goods; the economic environment of emerging markets, particularly Latin America, Russia, China and Turkey; pricing pressure and other changes within competitive markets; the continued consolidation of customers particularly in consumer channels; inventory management pressures on the Company’s customers; the impact the tightened credit markets may have on the Company or its customers or suppliers; 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; increasing competition; changes in laws, regulations and policies that affect the Company, including, but not limited to trade, monetary, tax and fiscal policies and laws; the timing and extent of any inflation or deflation; the impact of poor weather conditions on sales; currency exchange fluctuations; the impact of dollar/foreign currency exchange and interest rates on the competitiveness of products and the Company’s debt program; the strength of the U.S. and European economies;the impact from demand changes within world-wide markets associated with homebuilding and remodeling; the impact of events that cause or may cause disruption in the Company’s supply, manufacturing, distribution and sales networks such as war, terrorist activities, and political unrest including, hostilities on the Korean Peninsula; and recessionary or expansive trends in the economies of the world in which the Company operates. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date hereof.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
The Company has reached a settlement with the Environmental Protection Agency (“EPA”) for reimbursement of EPA’s past costs and remediation of environmental contamination found at the Centredale Manor Restoration Project Superfund (“Centredale”) site located in North Providence, Rhode Island. The EPA had alleged that Black & Decker and certain of its current and former affiliates are liable for site clean-up costs under the Comprehensive Environmental Response, Compensation, and Liability Act as successors to the liability of Metro-Atlantic, Inc., a former operator at the site, and demanded reimbursement of the EPA’s costs related to this site. Black & Decker and certain of its current and former affiliates contested the EPA’s allegation that they are responsible for the contamination, and have asserted contribution claims, counterclaims and cross-claims against a number of other potentially responsible parties ("PRPs"), including the federal government as well as insurance carriers. Although the settlement with the EPA resolves EPA's claims against the Company, the litigation against other PRPs to recover costs associated with this clean-up continues.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors as disclosed in the Company’s Form 10-K for the year ended December 31, 201630, 2017 filed with the Securities and Exchange Commission on February 15, 2017.27, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about the Company’s purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the three months ended SeptemberJune 30, 2017:2018:
|
| | | | | | | | | | | | |
| 2017 | (a) Total Number Of Shares Purchased | | Average Price Paid Per Share | | Total Number Of Shares Purchased As Part Of A Publicly Announced Program | | (b) Maximum Number Of Shares That May Yet Be Purchased Under The Program |
| July 2 - August 5 | 3,823 |
| | $ | 143.13 |
| | — |
| | 15,000,000 |
|
| August 6 - September 2 | — |
| | — |
| | — |
| | 15,000,000 |
|
| September 3 - September 30 | — |
| | — |
| | — |
| | 15,000,000 |
|
| Total | 3,823 |
| | $ | 143.13 |
| | — |
| | 15,000,000 |
|
|
| | | | | | | | | | | | |
| 2018 | (a) Total Number Of Shares Purchased | | Average Price Paid Per Share | | Total Number Of Shares Purchased As Part Of A Publicly Announced Plan Or Program | | (b) Maximum Number Of Shares That May Yet Be Purchased Under The Program |
| April 1 - May 5 | 8,671 |
| | $ | 142.91 |
| | 1,399,732 |
| | 13,600,000 |
|
| May 6 - June 2 | — |
| | — |
| | — |
| | 13,600,000 |
|
| June 3 - June 30 | — |
| | — |
| | — |
| | 13,600,000 |
|
| Total | 8,671 |
| | $ | 142.91 |
| | 1,399,732 |
| | 13,600,000 |
|
| |
| (a) | The shares of common stock in this column were deemed surrendered to the Company by participants in various benefit plans of the Company to satisfy the participants’ taxes related to vesting or delivery of time-vesting restricted share units under those plans. |
| |
| (b) | On July 20, 2017, the Board of Directors approved a new repurchase program for up to 15.0 million shares of the Company’s common stock and terminated its previously approved repurchase program. As of SeptemberJune 30, 2017,2018, the authorized shares available for repurchase under the new repurchase program totaled 15.013.6 million shares. The currently authorized shares available for repurchase do not include approximately 3.6 million shares reserved and authorized for purchase under the Company’s previously approved repurchase program relating to a forward share purchase contract entered into in March 2015. Refer to Note J, Equity Arrangements, of the Notes to (Unaudited) Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further discussion. |
ITEM 6. EXHIBITS
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| (3) | | Revised Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 on the Company’s Current Report on Form 8-K filed on October 24, 2017)July 18, 2018). |
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| (10.1) | |
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| (10.2) | |
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| (10.3) | |
| |
| (10.4) | |
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| (11) | Statement re-computation of per share earnings (the information required to be presented in this exhibit appears in Note C to the Company’s (Unaudited) Condensed Consolidated Financial Statements set forth in this Quarterly Report on Form 10-Q). |
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| (i)(b) | | Certification by Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a). |
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| (32)(i) | | Certification by President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| (ii) | | Certification by Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| (101) | The following materials from Stanley Black & Decker Inc.'s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations and Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 2016;2017; (ii) Condensed Consolidated Balance Sheets at SeptemberJune 30, 20172018 and December 31, 2016;30, 2017; (iii) Condensed Consolidated Statements of Cash Flows for the three and ninesix months ended SeptemberJune 30, 20172018 and OctoberJuly 1, 2016;2017; and (iv) Notes to (Unaudited) Condensed Consolidated Financial Statements**.
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| ** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | STANLEY BLACK & DECKER, INC. |
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| Date: | October 25, 2017July 20, 2018 | By: | | /s/ DONALD ALLAN, JR. |
| | | | | Donald Allan, Jr. |
| | | | | Executive Vice President and Chief Financial Officer |
