PART I
ITEM 1. BUSINESS
Stanley Black & Decker, Inc. ("the Company") was founded over 175 years ago, in 1843, by Frederick T. Stanley and incorporated in Connecticut in 1852. In March 2010, the Company completed a merger ("the Merger") with The Black & Decker Corporation (“Black & Decker”), a company founded by S. Duncan Black and Alonzo G. Decker and incorporated in Maryland in 1910. At that time, the Company changed its name from The Stanley Works ("Stanley") to Stanley Black & Decker, Inc.
The Company is a diversified global provider of hand tools, power tools and related accessories, engineered fastening systems and products, services and equipment for oil & gas and infrastructure applications, commercial electronic security and monitoring systems, healthcare solutions, and mechanical access solutions (primarily automatic doors), with
2018
consolidated annual revenues of
$14.0 billion
. Approximately
55
% of the Company’s
2018
revenues were generated in the United States, with the remainder largely from Europe (
22%
), emerging markets (
14%
) and Canada (4
%
).
The Company continues to execute a growth and acquisition strategy that involves industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth. The Company remains focused on organic growth, including increasing its presence in emerging markets, and leveraging the Stanley Fulfillment System ("SFS 2.0"), which focuses on digital excellence, commercial excellence, breakthrough innovation, core SFS operating principles, and functional transformation. In addition, the Company continues to make strides towards achieving its 22/22 Vision of reaching $22 billion in revenue by 2022 while expanding the margin rate, by becoming known as one of the world’s leading innovators, delivering top-quartile financial performance and elevating its commitment to social responsibility.
Execution of the above strategy has resulted in approximately
$9.4 billion
of acquisitions since 2002 (excluding the Black & Decker merger and pending acquisition of the International Equipment Solutions Attachments Group, as discussed below), which was enabled by strong cash flow generation and increased debt capacity. In recent years, the Company completed the acquisitions of Nelson Fastener Systems ("Nelson") for approximately
$430 million
, the Tools business of Newell Brands ("Newell Tools") for approximately
$1.84 billion
, and the Craftsman® brand from Sears Holdings Corporation ("Sears Holdings") for an estimated cash purchase price of approximately
$937 million
on a discounted basis. The Nelson acquisition is complementary to the Company's product offerings, enhances its presence in the general industrial end markets, and expands its portfolio of highly-engineered fastening solutions. The Newell Tools acquisition, which included the industrial cutting, hand tool and power tool accessory brands IRWIN® and LENOX®, enhances the Company’s position within the global tools & storage industry and broadens the Company’s product offerings and solutions to customers and end users, particularly within power tool accessories. The Craftsman acquisition provides the Company with the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels. Furthermore, the Company reached an agreement to acquire International Equipment Solutions Attachments Group ("IES Attachments"), a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition will further diversify the Company's presence in the industrial markets, expand its portfolio of attachment solutions and provide a meaningful platform for continued growth. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close in the first half of 2019.
On January 2, 2019, the Company acquired a
20 percent
interest in MTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment, for
$234 million
in cash. Under the terms of the agreement, the Company has the option to acquire the remaining
80 percent
of MTD beginning on July 1, 2021. The investment in MTD increases the Company's presence in the
$20 billion
global lawn and garden market and will allow the two companies to work together to pursue revenue and cost opportunities, improve operational efficiency, and introduce new and innovative products for professional and residential outdoor equipment customers, utilizing each company's respective portfolios of strong brands.
In February 2017, the Company completed the sale of the majority of its mechanical security businesses, which included the commercial hardware brands of Best Access, phi Precision and GMT, for net proceeds of approximately
$717 million
. This sale allowed the Company to deploy capital in a more accretive and growth-oriented manner. The Company has also divested several smaller businesses in recent years that did not fit into its long-term strategic objectives.
Refer to
Note E, Acquisitions,
and
Note T, Divestitures
, of the
Notes to Consolidated Financial Statements
in
Item 8
for further discussion.
At
December 29, 2018
, the Company employed
60,767
people worldwide. The Company’s principal executive office is located at 1000 Stanley Drive, New Britain, Connecticut 06053 and its telephone number is (860) 225-5111.
Description of the Business
The Company’s operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, Industrial and Security. All segments have significant international operations and are exposed to translational and transactional impacts from fluctuations in foreign currency exchange rates.
Additional information regarding the Company’s business segments and geographic areas is incorporated herein by reference to the material captioned “
Business Segment Results
” in
Item 7
and
Note P, Business Segments and Geographic Areas
, of the
Notes to Consolidated Financial Statements
in
Item 8
.
Tools & Storage
The Tools & Storage segment is comprised of the Power Tools and Equipment ("PTE") and Hand Tools, Accessories & Storage ("HTAS") businesses. Annual revenues in the Tools & Storage segment were
$9.8 billion
in
2018
, representing
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+DECKER® brand, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories, and home products such as hand-held vacuums, paint tools and cleaning appliances.
The HTAS business sells hand tools, power tool accessories and storage products. Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and threading products. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products.
The segment sells its products to professional end users, distributors, retail consumers and industrial customers in a wide variety of industries and geographies. The majority of sales are distributed through retailers, including home centers, mass merchants, hardware stores, and retail lumber yards, as well as third-party distributors and a direct sales force.
Industrial
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. Annual revenues in the Industrial segment were
$2.2 billion
in
2018
, representing
16%
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 blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems and precision nut running systems, micro fasteners, and high-strength structural fasteners. The business sells to customers in the automotive, manufacturing, electronics, construction, and aerospace industries, amongst others, and its products are distributed through direct sales forces and, to a lesser extent, third-party distributors.
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 Infrastructure businesses sell to the oil and natural gas pipeline industry and other industrial customers. The products and services are primarily distributed through a direct sales force and, to a lesser extent, third-party distributors.
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
$2.0 billion
in
2018
, representing
14%
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 CSS business sells to consumers, retailers, educational, financial and healthcare institutions, as well as commercial, governmental and industrial
customers. The MAS business primarily sells automatic doors to commercial customers. Products for both businesses are sold predominantly on a direct sales basis.
Other Information
Competition
The Company competes on the basis of its reputation for product quality, its well-known brands, its commitment to customer service, its strong customer relationships, the breadth of its product lines, its innovative products and customer value propositions.
The Company encounters active competition in the Tools & Storage and Industrial segments from both larger and smaller companies that offer the same or similar products and services. Certain large customers offer private label brands (“house brands”) that compete across a wider spectrum of the Company’s Tools & Storage segment product offerings. Competition in the Security segment is generally fragmented via both large international players and regional companies. Competition tends to be based primarily on price and the quality and comprehensiveness of services offered to customers.
Major Customers
A significant portion of the Company’s Tools & Storage products are sold to home centers and mass merchants in the U.S. and Europe. A consolidation of retailers both in North America and abroad has occurred over time. While this consolidation and the domestic and international expansion of these large retailers have provided the Company with opportunities for growth, the increasing size and importance of individual customers creates a certain degree of exposure to potential sales volume loss. One customer, Lowe's, accounted for approximately
12%
and 11% of the Company's consolidated net sales in
2018
and 2017, respectively. No other customer exceeded
10%
of consolidated sales in
2018
,
2017
or
2016
.
Working Capital
The Company continues to practice the five operating principles encompassed by Core SFS, one component of the SFS 2.0 operating system, which work in concert: sales and operations planning ("S&OP"), operational lean, complexity reduction, global supply management, and order-to-cash excellence. The Company develops standardized business processes and system platforms to reduce costs and provide scalability. Core SFS / Industry 4.0 has been instrumental in reducing working capital and creating significant opportunities to generate incremental free cash flow (defined as cash flow from operations less capital and software expenditures). Working capital turns were
8.8
at the end of
2018
, a slight decrease from 2017, reflecting higher levels of inventory associated with the Craftsman rollout as well as impacts from integrating recent acquisitions. The Company plans to continue leveraging Core SFS / Industry 4.0 to generate ongoing improvements, both in the existing business and future acquisitions, in working capital turns, cycle times, complexity reduction and customer service levels, with a long-term goal of sustaining 10+ working capital turns.
Raw Materials
The Company’s products are manufactured using resins, ferrous and non-ferrous metals including, but not limited to, steel, zinc, copper, brass, aluminum and nickel. The Company also purchases components such as batteries, motors, and electronic components to use in manufacturing and assembly operations along with resin-based molded parts. The raw materials required are procured globally and generally available from multiple sources at competitive prices. As part of the Company's Enterprise Risk Management, the Company has implemented a supplier risk mitigation strategy in order to identify and address any potential supply disruption associated with commodities, components, finished goods and critical services. The Company does not anticipate difficulties in obtaining supplies for any raw materials or energy used in its production processes.
Backlog
Due to short order cycles and rapid inventory turnover primarily in the Company's Tools & Storage segment, backlog is generally not considered a significant indicator of future performance. At February 2, 2019, the Company had approximately
$1,001 million
in unfilled orders, which mainly related to the Engineered Fastening and Security businesses. Substantially all of these orders are reasonably expected to be filled within the current fiscal year. As of
February 3, 2018
and
February 4, 2017
, unfilled orders amounted to
$929 million
and
$838 million
, respectively.
Patents and Trademarks
No business segment is solely dependent, to any significant degree, on patents, licenses, franchises or concessions, and the loss of one or several of these patents, licenses, franchises or concessions would not have a material adverse effect on any of the Company's businesses. The Company owns numerous patents, none of which individually is material to the Company's
operations as a whole. These patents expire at various times over the next 20 years. The Company holds licenses, franchises and concessions, none of which individually or in the aggregate are material to the Company's operations as a whole. These licenses, franchises and concessions vary in duration, but generally run from one to 40 years.
The Company has numerous trademarks that are used in its businesses worldwide. In the Tools & Storage segment, significant trademarks include STANLEY®, BLACK+DECKER®, D
E
WALT®, FLEXVOLT®, IRWIN®, LENOX®, CRAFTSMAN®, PORTER-CABLE®, BOSTITCH®, FATMAX®, Powers®, Guaranteed Tough®, MAC TOOLS®, PROTO®, Vidmar®, FACOM®, USAG™, LISTA® and the yellow & black color scheme for power tools and accessories. Significant trademarks in the Industrial segment include STANLEY®, CRC®, NELSON®, LaBounty®, Dubuis®, CribMaster®, Expert®, SIDCHROME™, POP®, Avdel®, HeliCoil®, Tucker®, NPR®, Spiralock® and STANLEY® Assembly Technologies. The Security segment includes significant trademarks such as STANLEY®, Blick™, HSM®, SONITROL®, Stanley Access Technologies™, AeroScout®, Hugs®, WanderGuard®, Roam Alert®, MyCall®, Arial® and Bed-Check®. The terms of these trademarks typically vary from 10 to 20 years, with most trademarks being renewable indefinitely for like terms.
Environmental Regulations
The Company is subject to various environmental laws and regulations in the U.S. and foreign countries where it has operations. In the normal course of business, the Company is involved in various legal proceedings relating to environmental issues. 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
December 29, 2018
and
December 30, 2017
, the Company had reserves of
$246.6 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,
$58.1 million
is classified as current and
$188.5 million
as long-term, which is expected to be paid over the estimated remediation period. As of
December 29, 2018
, the Company has recorded
$12.4 million
in other assets related to funding by the Environmental Protection Agency ("EPA") and monies received have been placed in trust in accordance with the Consent Decree associated with the West Coast Loading Corporation ("WCLC") proceedings, as further discussed in
Note S, Contingencies
, of the
Notes to Consolidated Financial Statements
in
Item 8
. Accordingly, the Company's cash obligation as of
December 29, 2018
associated with the aforementioned remediation activities is
$234.2 million
. The range of environmental remediation costs that is reasonably possible is
$214.0 million
to
$344.3 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.
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. Additional information regarding environmental matters is available in
Note S, Contingencies
, of the
Notes to Consolidated Financial Statements
in
Item 8
.
Employees
At
December 29, 2018
, the Company had
60,767
employees,
16,801
of whom were employed in the U.S. Employees in the U.S. totaling
1,433
are covered by collective bargaining agreements negotiated with
27
different local labor unions who are, in turn, affiliated with approximately
7
different international labor unions. The majority of the Company’s hourly-paid and weekly-paid employees outside the U.S. are not covered by collective bargaining agreements. The Company’s labor agreements in the U.S. expire between 2019 and 2021. There have been no significant interruptions of the Company’s operations in recent years due to labor disputes. The Company believes it has a good relationship with its employees.
Research and Development Costs
Research and development costs, which are classified in Selling, general and administrative ("SG&A"), were
$275.8 million
,
$252.3 million
and
$204.4 million
for fiscal years
2018
,
2017
and
2016
, respectively. The increases in
2018
and 2017 reflect the Company's continued focus on becoming known as one of the world's greatest innovators and its commitment to continue generating new core and breakthrough innovations.
Available Information
The Company’s website is located at http://www.stanleyblackanddecker.com. This URL is intended to be an inactive textual reference only. It is not intended to be an active hyperlink to the Company's website. The information on the Company's website is not, and is not intended to be, part of this Form 10-K and is not incorporated into this report by reference. The Company makes its Forms 10-K, 10-Q, 8-K and amendments to each available free of charge on its website as soon as reasonably practicable after filing them with, or furnishing them to, the U.S. Securities and Exchange Commission ("SEC"). Also available on the Company's website is the Company's Code of Ethics for its CEO and senior financial officers.
ITEM 1A. RISK FACTORS
The Company’s business, operations and financial condition are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including those risks set forth under the heading entitled "Cautionary Statements Under the Private Securities Litigation Reform Act of 1995" in Item 7, and in other documents that the Company files with the SEC, before making any investment decision with respect to its securities. If any of the risks or uncertainties actually occur or develop, the Company’s business, financial condition, results of operations and future growth prospects could change. Under these circumstances, the trading prices of the Company’s securities could decline, and you could lose all or part of your investment in the Company’s securities.
Changes in customer preferences, the inability to maintain mutually beneficial relationships with large customers, inventory reductions by customers, and the inability to penetrate new channels of distribution could adversely affect the Company’s business.
The Company has certain significant customers, particularly home centers and major retailers. The two largest customers comprised approximately 22% of net sales, with U.S. and international mass merchants and home centers collectively comprising approximately 37% of net sales. The loss or material reduction of business, the lack of success of sales initiatives, or changes in customer preferences or loyalties for the Company’s products, related to any such significant customer could have a material adverse impact on the Company’s results of operations and cash flows. In addition, the Company’s major customers are volume purchasers, a few of which are much larger than the Company and have strong bargaining power with suppliers. This limits the ability to recover cost increases through higher selling prices. Furthermore, unanticipated inventory adjustments by these customers can have a negative impact on net sales.
If customers in the Convergent Security Solutions ("CSS") business are dissatisfied with services and switch to competitive services, or disconnect for other reasons such as preference for digital technology products or other technology enhancements not then offered by CSS, the Company's attrition rates may increase. In periods of increasing attrition rates, recurring revenue and results of operations may be materially adversely affected. The risk is more pronounced in times of economic uncertainty, as customers may reduce amounts spent on the products and services the Company provides.
In times of tough economic conditions, the Company has experienced significant distributor inventory corrections reflecting de-stocking of the supply chain associated with difficult credit markets. Such distributor de-stocking exacerbated sales volume declines pertaining to weak end user demand and the broader economic recession. The Company’s results may be adversely impacted in future periods by such customer inventory adjustments. Further, the inability to continue to penetrate new channels of distribution may have a negative impact on the Company’s future results.
The Company faces active global competition and if it does not compete effectively, its business may suffer.
The Company faces active competition and resulting pricing pressures. The Company’s products compete on the basis of, among other things, its reputation for product quality, its well-known brands, price, innovation and customer service capabilities. The Company competes with both larger and smaller companies that offer the same or similar products and services or that produce different products appropriate for the same uses. These companies are often located in countries such as China, Taiwan and India where labor and other production costs are substantially lower than in the U.S., Canada and Western Europe. Also, certain large customers offer house brands that compete with some of the Company’s product offerings as a lower-cost alternative. To remain profitable and defend market share, the Company must maintain a competitive cost structure, develop new products and services, lead product innovation, respond to competitor innovations and enhance its existing products in a timely manner. The Company may not be able to compete effectively on all of these fronts and with all of its competitors, and the failure to do so could have a material adverse effect on its sales and profit margins.
Core SFS / Industry 4.0 is a continuous operational improvement process applied to many aspects of the Company’s business such as procurement, quality in manufacturing, maximizing customer fill rates, integrating acquisitions and other key business processes. In the event the Company is not successful in effectively applying the Core SFS principles to its key business processes, including those of acquired businesses, its ability to compete and future earnings could be adversely affected.
In addition, the Company may have to reduce prices on its products and services, or make other concessions, to stay competitive and retain market share. Price reductions taken by the Company in response to customer and competitive pressures, as well as price reductions and promotional actions taken to drive demand that may not result in anticipated sales levels, could also negatively impact its business. The Company engages in restructuring actions, sometimes entailing shifts of production to low-cost countries, as part of its efforts to maintain a competitive cost structure. If the Company does not execute restructuring actions well, its ability to meet customer demand may decline, or earnings may otherwise be adversely impacted. Similarly, if
such efforts to reform the cost structure are delayed relative to competitors or other market factors, the Company may lose market share and profits.
Customer consolidation could have a material adverse effect on the Company’s business.
A significant portion of the Company’s products are sold through home centers and mass merchant distribution channels in the U.S. and Europe. A consolidation of retailers in both North America and abroad has occurred over time and the increasing size and importance of individual customers creates risk of exposure to potential volume loss. The loss of certain larger home centers as customers would have a material adverse effect on the Company’s business until either such customers were replaced or the Company made the necessary adjustments to compensate for the loss of business.
Low demand for new products and the inability to develop and introduce new products at favorable margins could adversely impact the Company’s performance and prospects for future growth.
The Company’s competitive advantage is due in part to its ability to develop and introduce new products in a timely manner at favorable margins. The uncertainties associated with developing and introducing new products, such as market demand and costs of development and production, may impede the successful development and introduction of new products on a consistent basis. Introduction of new technology may result in higher costs to the Company than that of the technology replaced. That increase in costs, which may continue indefinitely or until increased demand and greater availability in the sources of the new technology drive down its cost, could adversely affect the Company’s results of operations. Market acceptance of the new products introduced in recent years and scheduled for introduction in future years may not meet sales expectations due to various factors, such as the failure to accurately predict market demand, end-user preferences, evolving industry standards, or the emergence of new or disruptive technologies. Moreover, the ultimate success and profitability of the new products may depend on the Company’s ability to resolve technical and technological challenges in a timely and cost-effective manner, and to achieve manufacturing efficiencies. The Company’s investments in productive capacity and commitments to fund advertising and product promotions in connection with these new products could erode profits if those expectations are not met.
The Company’s brands are important assets of its businesses and violation of its trademark rights by imitators, or the failure of its licensees or vendors to comply with the Company’s product quality, manufacturing requirements, marketing standards, and other requirements could negatively impact revenues and brand reputation.
The Company’s trademarks have a reputation for quality and value and are important to the Company's success and competitive position. Unauthorized use of the Company’s trademark rights may not only erode sales of the Company’s products, but may also cause significant damage to its brand name and reputation, interfere with its ability to effectively represent the Company to its customers, contractors, suppliers, and/or licensees, and increase litigation costs. Similarly, failure by licensees or vendors to adhere to the Company’s standards of quality and other contractual requirements could result in loss of revenue, increased litigation, and/or damage to the Company’s reputation and business. There can be no assurance that the Company’s ongoing efforts to protect its brand and trademark rights and ensure compliance with its licensing and vendor agreements will prevent all violations.
Successful sales and marketing efforts depend on the Company’s ability to recruit and retain qualified employees.
The success of the Company’s efforts to grow its business depends on the contributions and abilities of key executives, its sales force and other personnel, including the ability of its sales force to adapt to any changes made in the sales organization and achieve adequate customer coverage. The Company must therefore continue to recruit, retain and motivate management, sales and other personnel sufficiently to maintain its current business and support its projected growth. A shortage of these key employees might jeopardize the Company’s ability to implement its growth strategy.
The Company has significant operations outside of the United States, which are subject to political, legal, economic and other risks arising from operating outside of the United States.
The Company generates a significant portion of its total revenue outside of the United States. Business operations outside of the United States are subject to political, economic and other risks inherent in operating in certain countries, such as:
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the difficulty of enforcing agreements and protecting assets through legal systems outside the U.S.;
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managing widespread operations and enforcing internal policies and procedures such as compliance with U.S. and foreign anti-bribery and anti-corruption regulations;
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trade protection measures and import or export licensing requirements including those related to the U.S.'s relationship with China;
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the application of certain labor regulations outside of the United States, including data privacy;
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compliance with a wide variety of non-U.S. laws and regulations;
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changes in the general political and economic conditions in the countries where the Company operates, particularly in emerging markets;
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the threat of nationalization and expropriation;
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increased costs and risks of doing business in a wide variety of jurisdictions;
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government controls limiting importation of goods;
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government controls limiting payments to suppliers for imported goods;
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limitations on, or impacts from, the repatriation of foreign earnings; and
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exposure to wage, price and capital controls.
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Changes in the political or economic environments in the countries in which the Company operates could have a material adverse effect on its financial condition, results of operations or cash flows. Additionally, the Company is subject to complex U.S., foreign and other local laws and regulations that are applicable to its operations abroad, such as the Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act of 2010 and other anti-bribery and anti-corruption laws. Although the Company has implemented internal controls, policies and procedures and employee training and compliance programs to deter prohibited practices, such measures may not be effective in preventing employees, contractors or agents from violating or circumventing such internal policies and violating applicable laws and regulations. Any determination that the Company has violated anti-bribery or anti-corruption laws could have a material adverse effect on the Company’s business, operating results and financial condition. Compliance with international and U.S. laws and regulations that apply to the Company’s international operations increases the cost of doing business in foreign jurisdictions. Violations of such laws and regulations may result in severe fines and penalties, criminal sanctions, administrative remedies or restrictions on business conduct, and could have a material adverse effect on the Company’s reputation, its ability to attract and retain employees, its business, operating results and financial condition.
The Company’s business is subject to risks associated with sourcing and manufacturing overseas.
The Company imports large quantities of finished goods, component parts and raw materials. Substantially all of its import operations are subject to customs requirements and to tariffs and quotas set by governments through mutual agreements, bilateral actions or, in some cases unilateral action. In addition, the countries in which the Company’s products and materials are manufactured or imported from (including importation into the U.S. of the Company's products manufactured overseas) may from time to time impose additional quotas, duties, tariffs or other restrictions on its imports (including restrictions on manufacturing operations) or adversely modify existing restrictions. For example, changes in U.S. policy regarding international trade, including import and export regulation and international trade agreements, could also negatively impact the Company’s business. In 2018, the U.S. imposed tariffs on steel and aluminum as well as on goods imported from China and certain other countries, which has resulted in retaliatory tariffs by China and other countries. Additional tariffs imposed by the U.S. on a broader range of imports, or further retaliatory trade measures taken by China or other countries in response, could result in an increase in supply chain costs that the Company may not be able to offset or otherwise adversely impact the Company’s results of operations. Furthermore, imported products and materials may be subject to future tariffs or other trade measures in the U.S. Imports are also subject to unpredictable foreign currency variation which may increase the Company’s cost of goods sold. Adverse changes in these import costs and restrictions, or the Company’s suppliers’ failure to comply with customs regulations or similar laws, could harm the Company’s business.
The Company’s operations are also subject to the effects of international trade agreements and regulations such as the United States-Mexico-Canada Agreement, and the activities and regulations of the World Trade Organization. Although these trade agreements generally have positive effects on trade liberalization, sourcing flexibility and cost of goods by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country, trade agreements can also impose requirements that adversely affect the Company’s business, such as setting quotas on products that may be imported from a particular country into key markets including the U.S. or the European Union ("EU"), or making it easier for other companies to compete, by eliminating restrictions on products from countries where the Company’s competitors source products.
The Company’s ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the U.S. and other countries. These issues could delay importation of products or require the Company to locate alternative ports or warehousing providers to avoid disruption to customers. These
alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on the Company’s business and financial condition.
In addition, the Company has a number of key suppliers in South Korea. Escalation of hostilities with North Korea and/or military action in the region could cause disruptions in the Company's supply chain which could, in turn, cause product shortages, delays in delivery and/or increases in the Company's cost incurred to produce and deliver products to its customers.
The Company’s success depends on its ability to improve productivity and streamline operations to control or reduce costs.
The Company is committed to continuous productivity improvement and evaluating opportunities to reduce fixed costs, simplify or improve processes, and eliminate excess capacity. The Company has undertaken restructuring actions, the savings of which may be mitigated by many factors, including economic weakness, competitive pressures, and decisions to increase costs in areas such as sales promotion or research and development above levels that were otherwise assumed. Failure to achieve, or delays in achieving, projected levels of efficiencies and cost savings from such measures, or unanticipated inefficiencies resulting from manufacturing and administrative reorganization actions in progress or contemplated, would adversely affect the Company’s results.
The Company is exposed to risks related to cybersecurity and data privacy compliance.
The Company’s operations rely on the secure processing, storage and transmission of confidential, sensitive, proprietary and other types of information relating to its business operations, as well as confidential and sensitive information about its customers and employees maintained in the Company’s computer systems and networks, certain products and services, and in the computer systems and networks of its third-party vendors. Cyber threats are rapidly evolving as data thieves and hackers have become increasingly sophisticated and carry out large-scale, complex automated attacks. The Company may not be able to anticipate or prevent all such attacks and could be held liable for any resulting security breach or data loss. In addition, it is not always possible to deter misconduct by employees or third-party vendors.
Breaches of the Company’s or the Company’s vendors’ technology and systems, whether from circumvention of security systems, denial-of-service attacks or other cyber-attacks, hacking, “phishing” attacks, computer viruses, ransomware or malware, employee or insider error, malfeasance, social engineering, physical breaches or other actions, may result in manipulation or corruption of sensitive data, material interruptions or malfunctions in the Company’s or such vendors’ websites, applications, data processing, and certain products and services, or disruption of other business operations. Furthermore, any such breaches could compromise the confidentiality and integrity of material information held by the Company (including information about the Company’s business, employees or customers), as well as sensitive personally identifiable information (“PII”), the disclosure of which could lead to identity theft. Measures that the Company takes to avoid, detect, mitigate or recover from material incidents, including implementing and conducting training on insider trading policies for the Company’s employees and maintaining contractual obligations for the Company’s third-party vendors, can be expensive, and may be insufficient, circumvented, or may become ineffective.
To conduct its operations, the Company regularly moves data across national borders, and consequently is subject to a variety of continuously evolving and developing laws and regulations in the United States and abroad regarding privacy, data protection and data security. The scope of the laws that may be applicable to the Company is often uncertain and may be conflicting, particularly with respect to foreign laws. For example, the European Union’s General Data Protection Regulation (“GDPR”), which became effective in May 2018, greatly increased the jurisdictional reach of European Union law and added a broad array of requirements for handling personal data, including the public disclosure of significant data breaches. Additionally, other countries have enacted or are enacting data localization laws that require data to stay within their borders. In many cases, these laws and regulations apply not only to transfers between unrelated third parties but also to transfers between the Company and its subsidiaries. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time. Implementation of the GDPR and data localization laws will continue to require changes to certain business practices, thereby increasing costs, or may result in negative publicity, require significant management time and attention, and may subject the Company to remedies that may harm its business, including fines or demands or orders that the Company modify or cease existing business practices.
The Company has invested and continues to invest in risk management and information security and data privacy measures in order to protect its systems and data, including employee training, organizational investments, incident response plans, table top exercises and technical defenses. The cost and operational consequences of implementing, maintaining and enhancing further data or system protection measures could increase significantly to overcome increasingly intense, complex, and sophisticated global cyber threats. Despite the Company’s best efforts, it is not fully insulated from data breaches and system disruptions. Recent well-publicized security breaches at other companies have led to enhanced government and regulatory scrutiny of the
measures taken by companies to protect against cyber-attacks, and may in the future result in heightened cybersecurity requirements, including additional regulatory expectations for oversight of vendors and service providers. Any material breaches of cybersecurity, including the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data, or media reports of perceived security vulnerabilities to the Company’s systems, products and services or those of the Company’s third parties, even if no breach has been attempted or occurred, could cause the Company to experience reputational harm, loss of customers and revenue, fines, regulatory actions and scrutiny, sanctions or other statutory penalties, litigation, liability for failure to safeguard the Company’s customers’ information, or financial losses that are either not insured against or not fully covered through any insurance maintained by the Company. Any of the foregoing may have a material adverse effect on the Company’s business, operating results and financial condition.
The performance of the Company may suffer from business disruptions or other costs associated with information technology, cyber attacks, system implementations, data privacy, or catastrophic losses affecting distribution centers and other infrastructure.
The Company relies heavily on computer systems, including those of third parties, to manage and operate its businesses, and record and process transactions. Computer systems are important to production planning, customer service and order fulfillment among other business-critical processes. Consistent and efficient operation of the computer hardware and software systems is imperative to the successful sales and earnings performance of the various businesses in many countries.
Despite efforts to prevent such situations and maintaining insurance policies and loss control and risk management practices that partially mitigate these risks, the Company’s systems may be affected by damage or interruption from, among other causes, power outages, system failures or computer viruses. Computer hardware and storage equipment that is integral to efficient operations, such as e-mail, telephone and other functionality, is concentrated in certain physical locations in the various continents in which the Company operates. Additionally, the Company relies on software applications and enterprise cloud storage systems and cloud computing services provided by third-party vendors, and the Company's business may be adversely affected by service disruptions or security breaches in such third-party systems.
In addition, the Company is in the process of system conversions to SAP as well as other applications to provide a common platform across most of its businesses. There can be no assurances that expected expense synergies will be achieved or that there will not be delays to the expected timing of such synergies. It is possible the costs to complete the system conversions may exceed current expectations, and that significant costs may be incurred that will require immediate expense recognition as opposed to capitalization. The risk of disruption to key operations is increased when complex system changes such as SAP conversions are undertaken. If systems fail to function effectively, or become damaged, operational delays may ensue and the Company may be forced to make significant expenditures to remedy such issues. Any significant disruption in the Company’s computer operations could have a material adverse impact on its business and results.
The Company’s operations are significantly dependent on infrastructure, notably certain distribution centers and security alarm monitoring facilities, which are concentrated in various geographic locations. Factors that are hard to predict or beyond the Company’s control, like weather (including any potential effects of climate change), natural disasters, supply and commodity shortages, fire, explosions, terrorism, political unrest, cybersecurity breaches, generalized labor unrest or health pandemics could damage or disrupt the Company’s infrastructure, or that of its suppliers or distributors. If the Company does not effectively plan for or respond to disruptions in its operations, or cannot quickly repair damage to its information, production or supply systems, the Company may be late in delivering or unable to deliver products and services to its customers, and the quality and safety of its products and services might be negatively affected. If a material or extended disruption occurs, the Company may lose its customers’ or business partners’ confidence or suffer damage to its reputation, and long-term consumer demand for its products and services could decline. Although the Company maintains business interruption insurance, it may not fully protect the Company against all adverse effects that could result from significant disruptions. These events could materially and adversely affect the Company’s product sales, financial condition and results of operations.
The Company’s results of operations could be negatively impacted by inflationary or deflationary economic conditions which could affect the ability to obtain raw materials, component parts, freight, energy, labor and sourced finished goods in a timely and cost-effective manner.
The Company’s products are manufactured using both ferrous and non-ferrous metals including, but not limited to, steel, zinc, copper, brass, aluminum, and nickel. Additionally, the Company uses other commodity-based materials for components and packaging including, but not limited to, plastics, resins, wood and corrugated products. The Company’s cost base also reflects significant elements for freight, energy and labor. The Company also sources certain finished goods directly from vendors. If the Company is unable to mitigate any inflationary increases through various customer pricing actions and cost reduction initiatives, its profitability may be adversely affected.
Conversely, in the event there is deflation, the Company may experience pressure from its customers to reduce prices, and there can be no assurance that the Company would be able to reduce its cost base (through negotiations with suppliers or other measures) to offset any such price concessions which could adversely impact results of operations and cash flows.
Further, as a result of inflationary or deflationary economic conditions, the Company believes it is possible that a limited number of suppliers may either cease operations or require additional financial assistance from the Company in order to fulfill their obligations. In a limited number of circumstances, the magnitude of the Company’s purchases of certain items is of such significance that a change in established supply relationships with suppliers or increase in the costs of purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or an inability to market products. Changes in value-added tax rebates, currently available to the Company or to its suppliers, could also increase the costs of the Company’s manufactured products, as well as purchased products and components, and could adversely affect the Company’s results.
In addition, many of the Company’s products incorporate battery technology. As other industries begin to adopt similar battery technology for use in their products, the increased demand could place capacity constraints on the Company’s supply chain. In addition, increased demand for battery technology may also increase the costs to the Company for both the battery cells as well as the underlying raw materials. If the Company is unable to mitigate any possible supply constraints or related increased costs, its profitably and financial results could be negatively impacted.
Uncertainty about the financial stability of economies outside the U.S. could have a significant adverse effect on the Company's business, results of operations and financial condition.
The Company generates approximately
45%
of its revenues from outside the U.S., including
22%
from Europe and
14%
from various emerging market countries. Each of the Company’s segments generates sales from these marketplaces. While the Company believes any downturn in the European or emerging marketplaces might be offset to some degree by the relative stability in North America, the Company’s future growth, profitability and financial liquidity could be affected, in several ways, including but not limited to the following:
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•
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depressed consumer and business confidence may decrease demand for products and services;
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•
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customers may implement cost-reduction initiatives or delay purchases to address inventory levels;
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•
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significant declines of foreign currency values in countries where the Company operates could impact both the revenue growth and overall profitability in those geographies;
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•
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a slowing or contracting Chinese economy could reduce China’s consumption and negatively impact the Company’s sales in that region, as well as globally;
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•
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a devaluation of foreign currencies could have an effect on the credit worthiness (as well as the availability of funds) of customers in those regions impacting the collectability of receivables;
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•
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a devaluation of foreign currencies could have an adverse effect on the value of financial assets of the Company in the effected countries;
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•
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the impact of an event (individual country default, Brexit, or break up of the Euro) could have an adverse impact on the global credit markets and global liquidity potentially impacting the Company’s ability to access these credit markets and to raise capital. With respect to Brexit, until the terms of the UK’s exit from the EU in March 2019 are determined, including any transition period, it is difficult to predict its impact. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which the Company’s businesses are subject, impact trade between the UK and the EU and other parties and create economic and political uncertainty in the region.
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The Company is exposed to market risk from changes in foreign currency exchange rates which could negatively impact profitability.
The Company manufactures and sells its products in many countries throughout the world. As a result, there is exposure to foreign currency risk as the Company enters into transactions and makes investments denominated in multiple currencies. The Company’s predominant currency exposures are related to the Euro, Canadian Dollar, British Pound, Australian Dollar, Brazilian Real, Argentine Peso, Chinese Renminbi (“RMB”) and the Taiwan Dollar. In preparing its financial statements, for foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates, while income and expenses are translated using average exchange rates. With respect to the effects on translated earnings, if the U.S. dollar strengthens relative to local currencies, the Company’s earnings could be negatively impacted. In
2018
, translational and transactional foreign currency fluctuations negatively impacted pre-tax earnings by approximately
$100.0 million
and diluted earnings per share by approximately
$0.55
. The translational and transactional impacts will vary over time and may be more material in the future. Although the Company utilizes risk management tools,
including hedging, as it deems appropriate, to mitigate a portion of potential market fluctuations in foreign currencies, there can be no assurance that such measures will result in all market fluctuation exposure being eliminated. The Company generally does not hedge the translation of its non-U.S. dollar earnings in foreign subsidiaries, but may choose to do so in certain instances.
The Company sources many products from China and other low-cost countries for resale in other regions. To the extent the RMB or other currencies appreciate, the Company may experience cost increases on such purchases. The Company may not be successful at implementing customer pricing or other actions in an effort to mitigate the related cost increases and thus its profitability may be adversely impacted.
The Company has incurred, and may incur in the future, significant indebtedness, or issue additional equity securities, in connection with mergers or acquisitions which may impact the manner in which it conducts business or the Company’s access to external sources of liquidity. The potential issuance of such securities may limit the Company’s ability to implement elements of its growth strategy and may have a dilutive effect on earnings.
As described in
Note H, Long-Term Debt and Financing Arrangements
, of the
Notes to Consolidated Financial Statements
in
Item 8
, the Company has a five-year
$2.0 billion
committed credit facility and a 364-day
$1.0 billion
committed credit facility. No amounts were outstanding against either of these facilities at
December 29, 2018
.
The instruments and agreements governing certain of the Company’s current indebtedness contain requirements or restrictive covenants that include, among other things:
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•
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a limitation on creating liens on certain property of the Company and its subsidiaries;
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•
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a restriction on entering into certain sale-leaseback transactions;
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•
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customary events of default. If an event of default occurs and is continuing, the Company might be required to repay all amounts outstanding under the respective instrument or agreement; and
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•
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maintenance of a specified financial ratio. The Company has an interest coverage covenant that must be maintained to permit continued access to its committed revolving credit facilities. The interest coverage ratio tested for covenant compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted Interest Expense ("adjusted EBITDA"/"adjusted Interest Expense"); such adjustments to interest or EBITDA include, but are not limited to, removal of non-cash interest expense and stock-based compensation expense. The interest coverage ratio must not be less than 3.5 times and is computed quarterly, on a rolling twelve months (last twelve months) basis. Under this covenant definition, the interest coverage ratio was 8.5 times EBITDA or higher in each of the
2018
quarterly measurement periods. Management does not believe it is reasonably likely the Company will breach this covenant. Failure to maintain this ratio could adversely affect further access to liquidity.
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Future instruments and agreements governing indebtedness may impose other restrictive conditions or covenants. Such covenants could restrict the Company in the manner in which it conducts business and operations as well as in the pursuit of its growth and repositioning strategies.
The Company is exposed to counterparty risk in its hedging arrangements.
From time to time, the Company enters into arrangements with financial institutions to hedge exposure to fluctuations in currency and interest rates, including forward contracts, options and swap agreements. The failure of one or more counterparties to the Company’s hedging arrangements to fulfill their obligations could adversely affect the Company’s results of operations.
Tight capital and credit markets or the failure to maintain credit ratings could adversely affect the Company by limiting the Company’s ability to borrow or otherwise access liquidity.
The Company’s long-term growth plans are dependent on, among other things, the availability of funding to support corporate initiatives and complete appropriate acquisitions and the ability to increase sales of existing product lines. While the Company has not encountered financing difficulties to date, the capital and credit markets have experienced extreme volatility and disruption in the past and may again in the future. Market conditions could make it more difficult for the Company to borrow or otherwise obtain the cash required for significant new corporate initiatives and acquisitions. In addition, changes in regulatory standards or industry practices, such as the transition away from LIBOR to the Secured Overnight Financing Rate ("SOFR") as a benchmark reference for short-term interests, could create incremental uncertainty in obtaining financing or increase the cost of borrowing.
Furthermore, there could be a number of follow-on effects from a credit crisis on the Company’s businesses, including insolvency of key suppliers resulting in product delays; inability of customers to obtain credit to finance purchases of the Company’s products and services and/or customer insolvencies.
In addition, the major rating agencies regularly evaluate the Company for purposes of assigning credit ratings. The Company’s ability to access the credit markets, and the cost of these borrowings, is affected by the strength of its credit ratings and current market conditions. Failure to maintain credit ratings that are acceptable to investors may adversely affect the cost and other terms upon which the Company is able to obtain financing, as well as its access to the capital markets.
The Company’s acquisitions, as well as general business reorganizations, may result in significant costs and certain risks for its business and operations.
In 2018, the Company completed the Nelson acquisition as well as a number of other smaller acquisitions. In addition, the Company reached an agreement to acquire International Equipment Solutions Attachments Group ("IES Attachments"), which is expected to close in the first half of 2019, and may make additional acquisitions in the future.
Acquisitions involve a number of risks, including:
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•
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the failure to identify the most suitable candidates for acquisitions;
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•
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the ability to identify and close on appropriate acquisition opportunities within desired time frames at reasonable cost;
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•
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the anticipated additional revenues from the acquired companies do not materialize, despite extensive due diligence;
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•
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the possibility that the acquired companies will not be successfully integrated or that anticipated cost savings, synergies, or other benefits will not be realized;
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•
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the acquired businesses will lose market acceptance or profitability;
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•
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the diversion of Company management’s attention and other resources;
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•
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the incurrence of unexpected costs and liabilities, including those associated with undisclosed pre-closing regulatory violations by the acquired business; and
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•
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the loss of key personnel, clients or customers of acquired companies.
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In addition, the success of the Company’s long-term growth and repositioning strategy will depend in part on successful general reorganization including its ability to:
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•
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combine businesses and operations;
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•
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integrate departments, systems and procedures; and
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•
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obtain cost savings and other efficiencies from such reorganizations, including the Company's functional transformation initiative.
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Failure to effectively consummate or manage the pending IES Attachments acquisition and any future acquisitions or general business reorganizations, and mitigate the related risks, may adversely affect the Company’s existing businesses and harm its operational results due to large write-offs, significant restructuring costs, contingent liabilities, substantial depreciation, and/or adverse tax or other consequences. The Company cannot ensure that such integrations and reorganizations will be successfully completed or that all of the planned synergies and other benefits will be realized.
Expansion of the Company's activity in emerging markets may result in risks due to differences in business practices and cultures.
The Company's growth plans include efforts to increase revenue from emerging markets through both organic growth and acquisitions. Local business practices in these regions may not comply with U.S. laws, local laws or other laws applicable to the Company. When investigating potential acquisitions, the Company seeks to identify historical practices of target companies that would create liability or other exposures for the Company were they to continue post-completion or as a successor to the target. Where such practices are discovered, the Company assesses the risk to determine whether it is prepared to proceed with the transaction. In assessing the risk, the Company looks at, among other factors, the nature of the violation, the potential liability, including any fines or penalties that might be incurred, the ability to avoid, minimize or obtain indemnity for the risks, and the likelihood that the Company would be able to ensure that any such practices are discontinued following completion of the acquisition through implementation of its own policies and procedures. Due diligence and risk assessment are, however, imperfect processes, and it is possible that the Company will not discover problematic practices until after completion, or that the Company will underestimate the risks associated with historical activities. Should that occur, the Company may incur fees,
fines, penalties, injury to its reputation or other damage that could negatively impact the Company's earnings.
Significant judgment and certain estimates are required in determining the Company’s worldwide provision for income taxes. Future tax law changes and audit results may materially increase the Company’s prospective income tax expense.
The Company is subject to income taxation in the U.S. as well as numerous foreign jurisdictions. Significant judgment is required in determining the Company’s worldwide income tax provision and accordingly there are many transactions and computations for which the final income tax determination is uncertain. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. The Company periodically assesses its liabilities and contingencies for all tax years still subject to audit based on the most currently available information, which involves inherent uncertainty. The Company is routinely audited by income tax authorities in many tax jurisdictions. Although management believes the recorded tax estimates are reasonable, the ultimate outcome of any audit (or related litigation) could differ materially from amounts reflected in the Company’s income tax accruals. Additionally, the global income tax provision can be materially impacted due to foreign currency fluctuations against the U.S. dollar since a significant amount of the Company’s earnings are generated outside the United States. Lastly, it is possible that future income tax legislation may be enacted that could have a material impact on the Company’s worldwide income tax provision beginning with the period that such legislation becomes enacted.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Act”). Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, changes to U.S. international taxation, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Following enactment of the Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the United States can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. While repatriation of some foreign earnings held outside the United States may be restricted by local laws, most of the Company’s foreign earnings as of December 31, 2017 could be repatriated to the United States. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017, issuers were permitted up to one year from the enactment of the Act to complete the accounting for the income tax effects of the Act (“the measurement period”). The Company completed its accounting for the tax effects of the Act within the measurement period and has included those effects in Income Taxes in the Consolidated Statements of Operations.
The Company’s failure to continue to successfully avoid, manage, defend, litigate and accrue for claims and litigation could negatively impact its results of operations or cash flows.
The Company is exposed to and becomes involved in various litigation matters arising out of the ordinary routine conduct of its business, including, from time to time, actual or threatened litigation relating to such items as commercial transactions, product liability, workers compensation, arrangements between the Company and its distributors, franchisees or vendors, intellectual property claims and regulatory actions.
In addition, the Company is subject to environmental laws in each jurisdiction in which business is conducted. Some of the Company’s products incorporate substances that are regulated in some jurisdictions in which it conducts manufacturing operations. The Company could be subject to liability if it does not comply with these regulations. In addition, the Company is currently, and may in the future be held responsible for remedial investigations and clean-up costs resulting from the discharge of hazardous substances into the environment, including sites that have never been owned or operated by the Company but at which it has been identified as a potentially responsible party under federal and state environmental laws and regulations. Changes in environmental and other laws and regulations in both domestic and foreign jurisdictions could adversely affect the Company’s operations due to increased costs of compliance and potential liability for non-compliance.
The Company manufactures products, configures and installs security systems and performs various services that create exposure to product and professional liability claims and litigation. If such products, systems and services are not properly manufactured, configured, installed, designed or delivered, personal injuries, property damage or business interruption could result, which could subject the Company to claims for damages. The costs associated with defending product liability claims and payment of damages could be substantial. The Company’s reputation could also be adversely affected by such claims, whether or not successful.
There can be no assurance that the Company will be able to continue to successfully avoid, manage and defend such matters. In addition, given the inherent uncertainties in evaluating certain exposures, actual costs to be incurred in future periods may vary from the Company’s estimates for such contingent liabilities.
The Company’s products could be recalled.
The Consumer Product Safety Commission or other applicable regulatory bodies may require the recall, repair or replacement of the Company’s products if those products are found not to be in compliance with applicable standards or regulations. A recall could increase costs and adversely impact the Company’s reputation.
The Company is exposed to credit risk on its accounts receivable.
The Company’s outstanding trade receivables are not generally covered by collateral or credit insurance. While the Company has procedures to monitor and limit exposure to credit risk on its trade and non-trade receivables, there can be no assurance such procedures will effectively limit its credit risk and avoid losses, which could have an adverse effect on the Company’s financial condition and operating results.
If the Company were required to write-down all or part of its goodwill, indefinite-lived trade names, or other definite-lived intangible assets, its net income and net worth could be materially adversely affected.
As a result of the Black and Decker merger and other acquisitions, the Company has approximately
$9.0 billion
of goodwill, approximately
$2.2 billion
of indefinite-lived trade names and approximately
$1.3 billion
of net definite-lived intangible assets at
December 29, 2018
. The Company is required to periodically, at least annually, determine if its goodwill or indefinite-lived trade names have become impaired, in which case it would write down the impaired portion of the asset. The definite-lived intangible assets, including customer relationships, are amortized over their estimated useful lives and are evaluated for impairment when appropriate. Impairment of intangible assets may be triggered by developments outside of the Company’s control, such as worsening economic conditions, technological change, intensified competition or other factors resulting in deleterious consequences.
If the investments in employee benefit plans do not perform as expected, the Company may have to contribute additional amounts to these plans, which would otherwise be available to cover operating expenses or other business purposes.
The Company sponsors pension and other post-retirement defined benefit plans. The Company’s defined benefit plan assets are currently invested in equity securities, government and corporate bonds and other fixed income securities, money market instruments and insurance contracts. The Company’s funding policy is generally to contribute amounts determined annually on an actuarial basis to provide for current and future benefits in accordance with applicable law which require, among other things, that the Company make cash contributions to under-funded pension plans. During
2018
, the Company made cash contributions to its defined benefit plans of approximately
$45 million
and it expects to contribute
$44 million
to its defined benefit plans in
2019
.
There can be no assurance that the value of the defined benefit plan assets, or the investment returns on those plan assets, will be sufficient in the future. It is therefore possible that the Company may be required to make higher cash contributions to the plans in future years which would reduce the cash available for other business purposes, and that the Company will have to recognize a significant pension liability adjustment which would decrease the net assets of the Company and result in higher expense in future years. The fair value of the defined benefit plan assets at
December 29, 2018
was approximately
$2.0 billion
.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of
December 29, 2018
, the Company and its subsidiaries owned or leased significant facilities used for manufacturing, distribution and sales offices in 20 states and 16 foreign countries. The Company leases its corporate headquarters in New Britain, Connecticut. The Company has
88
other facilities that are larger than 100,000 square feet, as follows:
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Owned
|
|
Leased
|
|
Total
|
Tools & Storage
|
45
|
|
20
|
|
65
|
Industrial
|
12
|
|
5
|
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17
|
Security
|
2
|
|
2
|
|
4
|
Corporate
|
1
|
|
1
|
|
2
|
Total
|
60
|
|
28
|
|
88
|
The combined size of these facilities is approximately 23 million square feet. The buildings are in good condition, suitable for their intended use, adequate to support the Company’s operations, and generally fully utilized.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company is involved in various lawsuits and claims, including product liability, environmental and distributor claims, and administrative proceedings. The Company does not expect that the resolution of these matters will have a materially adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Notes to Consolidated Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION —
The Consolidated Financial Statements include the accounts of Stanley Black & Decker, Inc. and its majority-owned subsidiaries (collectively the “Company”) which require consolidation, after the elimination of intercompany accounts and transactions. The Company’s fiscal year ends on the Saturday nearest to December 31. There were
52
weeks in each of the fiscal years
2018
,
2017
and
2016
.
In April 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson") from the Doncasters Group, which excluded Nelson's automotive stud welding business. The acquisition is being accounted for as a business combination and the results 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 E, Acquisitions
, for further discussion on these acquisitions.
In the first quarter of 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, and sold a small business within the Tools & Storage segment. The Company also sold a small business in the Industrial segment in the third quarter of 2017 and a small business in the Tools & Storage segment in the fourth quarter of 2017. The operating results of these businesses have been reported in the Consolidated Financial Statements through their respective dates of sale in 2017 and for the year ended December 31, 2016. Refer to
Note T, Divestitures
, for further discussion.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 previous years have been reclassified to conform to the 2018 presentation. Furthermore, as discussed in "New Accounting Standards" below, certain amounts reported in previous years have been recast as a result of the retrospective adoption of new accounting standards in the first quarter of 2018.
FOREIGN CURRENCY —
For foreign operations with functional currencies other than the U.S. dollar, asset and liability accounts are translated at current exchange rates, while income and expenses are translated using average exchange rates. Translation adjustments are reported in a separate component of shareowners’ equity and exchange gains and losses on transactions are included in earnings.
CASH EQUIVALENTS —
Highly liquid investments with original maturities of three months or less are considered cash equivalents.
ACCOUNTS AND FINANCING RECEIVABLE —
Trade receivables are stated at gross invoice amounts less discounts, other allowances and provisions for uncollectible accounts. Financing receivables are initially recorded at fair value, less impairments or provisions for credit losses. 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. Additionally, the Company considers the credit quality of all past-due or delinquent financing receivables as nonperforming.
ALLOWANCE FOR DOUBTFUL ACCOUNTS —
The Company estimates its allowance for doubtful accounts using two methods. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. Second, a reserve is determined for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. Actual write-offs are charged against the allowance when collection efforts have been unsuccessful.
INVENTORIES —
U.S. inventories are primarily valued at the lower of Last-In First-Out (“LIFO”) cost or market because the Company believes it results in better matching of costs and revenues. Other inventories are primarily valued at the lower of First-In, First-Out (“FIFO”) cost and net realizable value because LIFO is not permitted for statutory reporting outside the U.S. Refer to
Note C, Inventories
, for a quantification of the LIFO impact on inventory valuation.
PROPERTY, PLANT AND EQUIPMENT —
The Company generally values property, plant and equipment (“PP&E”), including capitalized software, at historical cost less accumulated depreciation and amortization. Costs related to maintenance and repairs which do not prolong the asset's useful life are expensed as incurred. Depreciation and amortization are provided using straight-line methods over the estimated useful lives of the assets as follows:
|
|
|
|
|
|
Useful Life
(Years)
|
Land improvements
|
|
10 — 20
|
Buildings
|
|
40
|
Machinery and equipment
|
|
3 — 15
|
Computer software
|
|
3 — 7
|
Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of the lease.
The Company reports depreciation and amortization of property, plant and equipment in cost of sales and selling, general and administrative expenses based on the nature of the underlying assets. Depreciation and amortization related to the production of inventory and delivery of services are recorded in cost of sales. Depreciation and amortization related to distribution center activities, selling and support functions are reported in selling, general and administrative expenses.
The Company assesses its long-lived assets for impairment when indicators that the carrying amounts may not be recoverable are present. In assessing long-lived assets for impairment, the Company groups its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are generated (“asset group”) and estimates the undiscounted future cash flows that are directly associated with, and expected to be generated from, the use of and eventual disposition of the asset group. If the carrying value is greater than the undiscounted cash flows, an impairment loss must be determined and the asset group is written down to fair value. The impairment loss is quantified by comparing the carrying amount of the asset group to the estimated fair value, which is generally determined using weighted-average discounted cash flows that consider various possible outcomes for the disposition of the asset group.
GOODWILL AND INTANGIBLE ASSETS —
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Intangible assets acquired are recorded at estimated fair value. Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are tested for impairment annually during the third quarter, and at any time when events suggest an impairment more likely than not has occurred.
To assess goodwill for impairment, the Company, depending on relevant facts and circumstances, performs either a qualitative assessment, as permitted by Accounting Standards Update ("ASU") 2011-08,
Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment
, or a quantitative analysis utilizing a discounted cash flow valuation model. In performing a qualitative assessment, the Company first assesses relevant factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company identifies and considers the significance of relevant key factors, events, and circumstances that could affect the fair value of each reporting unit. These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance. The Company also considers changes in each reporting unit's fair value and carrying amount since the most recent date a fair value measurement was performed. In performing a quantitative analysis, the Company determines the fair value of a reporting unit using management’s assumptions about future cash flows based on long-range strategic plans. This approach incorporates many assumptions including discount rates, future growth rates and expected profitability. In the event the carrying amount of a reporting unit exceeded its fair value, an impairment loss would be recognized to the extent the carrying amount of the reporting unit’s goodwill exceeded the implied fair value of the goodwill.
Indefinite-lived intangible assets are tested for impairment utilizing either a qualitative assessment or a quantitative analysis. For a qualitative assessment, the Company identifies and considers relevant key factors, events, and circumstances to determine whether it is necessary to perform a quantitative impairment test. The key factors considered include macroeconomic, industry, and market conditions, as well as the asset's actual and forecasted results. For the quantitative impairment tests, the Company compares the carrying amounts to the current fair market values, usually determined by the estimated cost to lease the assets from third parties. Intangible assets with definite lives are amortized over their estimated useful lives generally using an accelerated method. Under this accelerated method, intangible assets are amortized reflecting the pattern over which the economic benefits of the intangible assets are consumed. Definite-lived intangible assets are also evaluated for impairment when impairment indicators are present. If the carrying amount exceeds the total undiscounted future cash flows, a discounted cash flow analysis is performed to determine the fair value of the asset. If the carrying amount of the asset was to exceed the fair value, it would be written down to fair value. No significant goodwill or other intangible asset impairments were recorded during
2018
,
2017
or
2016
.
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 OCI 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 accumulated 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 OCI 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. 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 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 Consolidated Balance Sheets.
Refer to
Note B, Accounts and Notes Receivable,
for further discussion.
COST OF SALES AND SELLING, GENERAL & ADMINISTRATIVE —
Cost of sales includes the cost of products and services provided reflecting costs of manufacturing and preparing the product for sale. These costs include expenses to acquire and manufacture products to the point that they are allocable to be sold to customers and costs to perform services pertaining to service revenues (e.g. installation of security systems, automatic doors, and security monitoring costs). Cost of sales is primarily comprised of freight, direct materials, direct labor as well as overhead which includes indirect labor and facility and equipment costs. Cost of sales also includes quality control, procurement and material receiving costs as well as internal transfer costs. Selling, general & administrative costs ("SG&A") include the cost of selling products as well as administrative function costs. These expenses generally represent the cost of selling and distributing the products once they are available for sale and primarily include salaries and commissions of the Company’s sales force, distribution costs, notably salaries and facility costs, as well as administrative expenses for certain support functions and related overhead.
ADVERTISING COSTS —
Television advertising is expensed the first time the advertisement airs, whereas other advertising is expensed as incurred. Advertising costs are classified in SG&A and amounted to
$101.3 million
in
2018
,
$123.3 million
in
2017
and
$124.1 million
in
2016
. Expense pertaining to cooperative advertising with customers reported as a reduction of Net Sales was
$315.8 million
in
2018
,
$297.4 million
in
2017
and
$232.5 million
in
2016
. Cooperative advertising with customers classified as SG&A expense amounted to
$5.4 million
in
2018
,
$6.1 million
in
2017
and
$6.6 million
in
2016
.
SALES TAXES —
Sales and value added taxes collected from customers and remitted to governmental authorities are excluded from Net Sales reported in the Consolidated Statements of Operations.
SHIPPING AND HANDLING COSTS —
The Company generally does not bill customers for freight. Shipping and handling costs associated with inbound and outbound freight are reported in Cost of sales. Distribution costs are classified in SG&A and amounted to
$316.0 million
,
$279.8 million
and
$235.3 million
in
2018
,
2017
and
2016
, respectively.
STOCK-BASED COMPENSATION —
Compensation cost relating to stock-based compensation grants is recognized on a straight-line basis over the vesting period, which is generally
four
years. The expense for stock options and restricted stock units awarded to retirement-eligible employees (those aged
55
and over, and with
10
or more years of service) is recognized on the grant date, or (if later) by the date they become retirement-eligible.
POSTRETIREMENT DEFINED BENEFIT PLAN —
The Company uses the corridor approach to determine expense recognition for each defined benefit pension and other postretirement plan. The corridor approach defers actuarial gains and losses resulting from variances between actual and expected results (based on economic estimates or actuarial assumptions) and amortizes them over future periods. For pension plans, these unrecognized gains and losses are amortized when the net gains and losses exceed 10% of the greater of the market-related value of plan assets or the projected benefit obligation at the beginning of the year. For other postretirement benefits, amortization occurs when the net gains and losses exceed 10% of the accumulated postretirement benefit obligation at the beginning of the year. For ongoing, active plans, the amount in excess of the corridor is amortized on a straight-line basis over the average remaining service period for active plan participants. For plans with primarily inactive participants, the amount in excess of the corridor is amortized on a straight-line basis over the average remaining life expectancy of inactive plan participants.
INCOME TAXES —
The Company accounts for income taxes under the asset and liability method in accordance with ASC 740,
Income Taxes
, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. Any changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent that it is more likely than not that these assets will be realized. In making this determination, management considers all available positive and negative evidence, including future reversals of existing temporary differences, estimates of future taxable income, tax-planning strategies, and the realizability of net operating loss carryforwards. In the event that it is determined that an asset is not more likely that not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the unrealizable amount would be charged to earnings in the period in which that determination is made. Conversely, if the Company were to determine that it would be able to realize deferred tax assets in the future in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company records uncertain tax positions in accordance with ASC 740, which requires a two-step process. First, management determines whether it is more likely than not that a tax position will be sustained based on the technical merits of the position and second, for those tax positions that meet the more likely than not threshold, management recognizes the largest amount of the tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related taxing authority. The Company maintains an accounting policy of recording interest and penalties on uncertain tax positions as a component of Income taxes in the Consolidated Statements of Operations.
The Company is subject to income tax in a number of locations, including many state and foreign jurisdictions. Significant judgment is required when calculating the worldwide provision for income taxes. Many factors are considered when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next twelve months. These changes may be the result of settlements of ongoing audits or final decisions in transfer pricing matters. The Company periodically assesses its liabilities and contingencies for all tax years still subject to audit based on the most current available information, which involves inherent uncertainty.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Act”). Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, changes to U.S. international taxation, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017, issuers were permitted up to one year from the enactment of the Act to complete the accounting for the income tax effects of the Act (“the measurement period”). The Company completed its accounting for the tax effects of the Act within the measurement period and has included those effects within Income taxes in the Consolidated Statements of Operations.
The Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Financial Accounting Standards Board ("FASB") Staff Q&A, Topic 740, No. 5,
Accounting for Global Intangible Low-Taxed Income
, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.
Refer to
Note Q, Income Taxes,
for further discussion.
EARNINGS PER SHARE —
Basic earnings per share equals net earnings attributable to common shareowners divided by weighted-average shares outstanding during the year. Diluted earnings per share include the impact of common stock equivalents using the treasury stock method when the effect is dilutive.
NEW ACCOUNTING STANDARDS ADOPTED —
In March 2017, the FASB issued 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 SG&A to Other, net in the Consolidated Statements of Operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. 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 ("new cash flow 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 an accounts receivable sale program that was terminated in the first quarter of 2018. Refer to
Note B, 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.
The Company adopted the new revenue 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 revenue 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 for the years ended
December 30, 2017
and
December 31, 2016
have been recast, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars, except per share amounts)
|
2017
1
|
|
Adoption of ASU 2014-09
|
|
Adoption of ASU 2017-07
|
|
2017
|
Net Sales
|
$
|
12,747.2
|
|
|
$
|
219.4
|
|
|
$
|
—
|
|
|
$
|
12,966.6
|
|
Cost of sales
|
$
|
7,969.2
|
|
|
$
|
215.9
|
|
|
$
|
3.2
|
|
|
$
|
8,188.3
|
|
Selling, general and administrative
|
$
|
2,965.7
|
|
|
$
|
—
|
|
|
$
|
17.2
|
|
|
$
|
2,982.9
|
|
Provision for doubtful accounts
|
$
|
14.4
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
|
$
|
16.3
|
|
Other, net
|
$
|
289.7
|
|
|
$
|
—
|
|
|
$
|
(20.5
|
)
|
|
$
|
269.2
|
|
Earnings before income taxes
|
$
|
1,526.1
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
1,527.8
|
|
Income taxes
|
$
|
300.5
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
300.9
|
|
Net earnings
|
$
|
1,225.6
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
1,226.9
|
|
Diluted earnings per share of common stock
|
$
|
8.04
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
8.05
|
|
1
As previously reported in the Company's 2017 Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars, except per share amounts)
|
2016
1
|
|
Adoption of ASU 2014-09
|
|
Adoption of ASU 2017-07
|
|
2016
|
Net Sales
|
$
|
11,406.9
|
|
|
$
|
186.6
|
|
|
$
|
—
|
|
|
$
|
11,593.5
|
|
Cost of sales
|
$
|
7,139.7
|
|
|
$
|
182.0
|
|
|
$
|
3.8
|
|
|
$
|
7,325.5
|
|
Selling, general and administrative
|
$
|
2,602.0
|
|
|
$
|
—
|
|
|
$
|
7.3
|
|
|
$
|
2,609.3
|
|
Provision for doubtful accounts
|
$
|
21.9
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
23.2
|
|
Other, net
|
$
|
196.9
|
|
|
$
|
0.1
|
|
|
$
|
(11.1
|
)
|
|
$
|
185.9
|
|
Earnings before income taxes
|
$
|
1,226.1
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
1,229.3
|
|
Income taxes
|
$
|
261.2
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
261.7
|
|
Net earnings
|
$
|
964.9
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
967.6
|
|
Diluted earnings per share of common stock
|
$
|
6.51
|
|
|
$
|
0.02
|
|
|
$
|
—
|
|
|
$
|
6.53
|
|
1
As previously reported in the Company's 2017 Form 10-K.
As a result of the adoption of the new revenue standard, certain balances as of
December 30, 2017
in the Consolidated Balance Sheets have been recast, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2017
1
|
|
Adoption of ASU 2014-09
|
|
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 earnings
2
|
$
|
5,990.4
|
|
|
$
|
8.3
|
|
|
$
|
5,998.7
|
|
Accumulated other comprehensive loss
|
$
|
(1,585.9
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(1,589.1
|
)
|
1
As previously reported in the Company's 2017 Form 10-K.
2
Adjustment 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 years ended
December 30, 2017
and
December 31, 2016
in the Consolidated Statements of Cash Flows have been recast, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2017
1
|
|
Adoption of ASU 2014-09
|
|
Adoption of ASU 2016-15 & 2016-18
|
|
2017
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net earnings
|
$
|
1,225.6
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
1,226.9
|
|
Provision for doubtful accounts
|
$
|
14.4
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
|
$
|
16.3
|
|
Accounts receivable
|
$
|
(200.6
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(704.7
|
)
|
|
$
|
(905.6
|
)
|
Deferred revenue
|
$
|
2.1
|
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
1.6
|
|
Other current assets
|
$
|
42.8
|
|
|
$
|
(3.3
|
)
|
|
$
|
(45.4
|
)
|
|
$
|
(5.9
|
)
|
Other long-term assets
|
$
|
83.6
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
84.9
|
|
Accrued expenses
|
$
|
120.1
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
123.3
|
|
Other long-term liabilities
|
$
|
19.8
|
|
|
$
|
(3.6
|
)
|
|
$
|
—
|
|
|
$
|
16.2
|
|
Net cash provided by operating activities
|
$
|
1,418.6
|
|
|
$
|
—
|
|
|
$
|
(750.1
|
)
|
|
$
|
668.5
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
$
|
(2,601.1
|
)
|
|
$
|
—
|
|
|
$
|
17.6
|
|
|
$
|
(2,583.5
|
)
|
Proceeds related to deferred purchase price receivable
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
704.7
|
|
|
$
|
704.7
|
|
Net cash (used in) provided by investing activities
|
$
|
(2,289.1
|
)
|
|
$
|
—
|
|
|
$
|
722.3
|
|
|
$
|
(1,566.8
|
)
|
|
|
|
|
|
|
|
|
Change in cash, cash equivalents and restricted cash
|
$
|
(494.3
|
)
|
|
$
|
—
|
|
|
$
|
(27.8
|
)
|
|
$
|
(522.1
|
)
|
Cash, cash equivalents and restricted cash, beginning of year
|
$
|
1,131.8
|
|
|
$
|
—
|
|
|
$
|
45.4
|
|
|
$
|
1,177.2
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
|
$
|
637.5
|
|
|
$
|
—
|
|
|
$
|
17.6
|
|
|
$
|
655.1
|
|
1
As previously reported in the Company's 2017 Form 10-K with the exception of certain amounts that have been reclassified to conform to the 2018 presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2016
1
|
|
Adoption of ASU 2014-09
|
|
Adoption of ASU 2016-15 & 2016-18
|
|
2016
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net earnings
|
$
|
964.9
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
967.6
|
|
Provision for doubtful accounts
|
$
|
21.9
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
23.2
|
|
Accounts receivable
|
$
|
(69.4
|
)
|
|
$
|
4.2
|
|
|
$
|
(345.1
|
)
|
|
$
|
(410.3
|
)
|
Deferred revenue
|
$
|
(9.2
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
—
|
|
|
$
|
(12.0
|
)
|
Other current assets
|
$
|
26.0
|
|
|
$
|
(17.4
|
)
|
|
$
|
45.4
|
|
|
$
|
54.0
|
|
Other long-term assets
|
$
|
(45.9
|
)
|
|
$
|
(21.2
|
)
|
|
$
|
—
|
|
|
$
|
(67.1
|
)
|
Accrued expenses
|
$
|
(28.1
|
)
|
|
$
|
35.0
|
|
|
$
|
—
|
|
|
$
|
6.9
|
|
Other long-term liabilities
|
$
|
42.5
|
|
|
$
|
(1.8
|
)
|
|
$
|
—
|
|
|
$
|
40.7
|
|
Net cash provided by operating activities
|
$
|
1,485.2
|
|
|
$
|
—
|
|
|
$
|
(299.7
|
)
|
|
$
|
1,185.5
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds related to deferred purchase price receivable
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
345.1
|
|
|
$
|
345.1
|
|
Net cash (used in) provided by investing activities
|
$
|
(284.0
|
)
|
|
$
|
—
|
|
|
$
|
345.1
|
|
|
$
|
61.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash, cash equivalents and restricted cash
|
$
|
666.4
|
|
|
$
|
—
|
|
|
$
|
45.4
|
|
|
$
|
711.8
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
$
|
465.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
465.4
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF YEAR
|
$
|
1,131.8
|
|
|
$
|
—
|
|
|
$
|
45.4
|
|
|
$
|
1,177.2
|
|
1
As previously reported in the Company's 2017 Form 10-K with the exception of certain amounts that have been reclassified to conform to the 2018 presentation.
In August 2018, the SEC issued Disclosure Update and Simplification Release (“DUSTR”) modifying various disclosure requirements. The amendments are effective for all filings made on or after November 5, 2018. However, the SEC staff has provided an extended transition period for companies to comply with the new interim disclosure requirement to provide a reconciliation of changes in shareholders’ equity (either in a separate statement or note to the financial statements). The extended transition period allows companies to first present the reconciliation of changes in shareholders' equity in its Form 10-Q for the first quarter that begins after the effective date of November 5, 2018. There was no significant change to the Company's annual disclosures as a result of this guidance.
In December 2017, the SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Act. SAB 118 provided a measurement period not to extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740,
Income Taxes
, (the "measurement period"). The Company completed its accounting for the tax effects of the Act within the measurement period and has included those effects within Income Taxes in the Consolidated Statements of Operations. Refer to
Note Q, Income Taxes
, for further discussion.
In August 2017, the FASB issued ASU 2017-12,
Derivatives And Hedging (Topic 815):
Targeted Improvements to Accounting for Hedge Activities
. The new standard amends the hedge accounting recognition and presentation requirements in ASC 815. As permitted by ASU 2017-12, the Company early adopted this standard in the first quarter of 2018 on a prospective basis. See above for the updated financial instruments policy reflecting the adoption of 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. The Company adopted this standard in the first quarter of 2018 and it did not have an impact on its Consolidated Financial Statements.
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. 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. The Company adopted this standard in the first quarter of 2018 and it did not have a material impact 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 of 2018 and it did not have a material impact on its Consolidated Financial Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
—
In August 2018, the FASB issued ASU 2018-15,
Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, 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 Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)
. The standard modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820)
. The standard modifies disclosure requirements of fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019 and for 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 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 does not plan to reclassify these stranded tax effects and therefore, does not expect this standard to have an impact on its Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350).
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 is currently evaluating this guidance to determine the impact it may have on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
("new lease standard"). The objective of the new lease standard is to increase transparency and comparability among organizations by requiring recognition of all 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
, and ASU 2018-11,
Targeted Improvements, Leases (Topic 842),
which provide clarification on how to apply certain aspects of the new lease standard and allow entities to initially apply the standards from the adoption date. In December 2018, the FASB issued ASU 2018-20,
Leases (Topic 842): Narrow-Scope Improvements for Lessors,
which clarified how lessors should apply certain aspects of the new lease standard. These standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects to utilize the new transition method to apply the standards from the adoption date effective the first quarter of 2019. Upon adoption, the Company expects to record lease liabilities and right-of-use assets of approximately
$425 million
-
$475 million
on its consolidated balance sheets. The Company does not expect the standards to impact its consolidated statements of operations or retained earnings.
B. ACCOUNTS AND NOTES RECEIVABLE
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
Trade accounts receivable
|
$
|
1,437.1
|
|
|
$
|
1,388.1
|
|
Trade notes receivable
|
150.0
|
|
|
158.7
|
|
Other accounts receivable
|
122.7
|
|
|
162.3
|
|
Gross accounts and notes receivable
|
1,709.8
|
|
|
1,709.1
|
|
Allowance for doubtful accounts
|
(102.0
|
)
|
|
(80.4
|
)
|
Accounts and notes receivable, net
|
$
|
1,607.8
|
|
|
$
|
1,628.7
|
|
Long-term receivable, net
|
$
|
153.7
|
|
|
$
|
176.9
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, 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 receivable, net, of
$153.7 million
and
$176.9 million
at
December 29, 2018
and
December 30, 2017
, respectively, are reported within Other Assets in the Consolidated Balance Sheets. The Company's financing receivables are predominantly related to certain security equipment leases with commercial businesses. Generally, the Company retains legal title to any equipment leases 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. Additionally, the Company considers the credit quality of all past-due or delinquent financing receivables as 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.
In October 2018, the Company entered into a new accounts receivable sale program. According to the terms, the Company is 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, is required to sell such receivables to a third-party financial institution (“Purchaser”) for cash. The Purchaser’s maximum cash investment in the receivables at any time is
$110.0 million
. The purpose of the program is to provide liquidity to the Company. These transfers qualify as sales under ASC 860 and receivables are derecognized from the Company’s Consolidated Balance Sheets when the BRS sells those receivables to the Purchaser. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities. At
December 29, 2018
, the Company did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.
At
December 29, 2018
,
$100.1 million
of net receivables were derecognized. Gross receivables sold amounted to
$618.3 million
(
$481.8 million
, net) for the year ended
December 29, 2018
. These sales resulted in a pre-tax loss of
$0.7 million
for the year ended
December 29, 2018
, which included servicing fees of
$0.2 million
. Proceeds from transfers of receivables to the Purchaser totaled
$194.3 million
for the year ended
December 29, 2018
. Collections of previously sold receivables resulted in payments to the Purchaser of
$94.3 million
for the year ended
December 29, 2018
. All cash flows under the program are reported as a component of changes in accounts receivable within operating activities in the Consolidated Statements of Cash Flows since all the cash from the Purchaser is received upon the initial sale of the receivable.
Prior to January 2018, the Company had a separate accounts receivable sale program. According to the terms of that program, the Company was required to sell certain of its trade accounts receivables at fair value to the BRS. The BRS, in turn, was required to sell such receivables to a third-party financial institution (“Purchasing Institution”) for cash and a deferred purchase price receivable. The Purchasing Institution’s maximum cash investment in the receivables at any time was
$100.0 million
. The purpose of the program was to provide liquidity to the Company. The Company accounted for these transfers as sales under ASC 860,
Transfers and Servicing
. Receivables were derecognized from the Company’s Consolidated Balance Sheets when the BRS sold those receivables to the Purchasing Institution. The Company had no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred purchase price receivable. In January 2018, the Company signed an amendment that changed the structure of this program which eliminated the deferred purchase price receivable from the Purchasing Institution and resulted in the BRS retaining ownership of the trade accounts receivables. This program was then terminated on February 1, 2018.
At
December 30, 2017
,
$100.8 million
of net receivables were derecognized. Gross receivables sold amounted to
$2.181 billion
(
$1.830 billion
, net) and resulted in a pre-tax loss of
$7.5 million
for the year ended
December 30, 2017
, which included servicing fees of
$1.4 million
. Proceeds from transfers of receivables to the Purchasing Institution totaled
$1.023 billion
for the year ended
December 30, 2017
. Collections of previously sold receivables, including deferred purchase price receivables, and all fees, which were settled one month in arrears, resulted in payments to the Purchasing Institution of
$1.785 billion
for the year ended
December 30, 2017
.
The Company’s risk of loss following the sale of the receivables was limited to the deferred purchase price receivable, which was
$106.9 million
at
December 30, 2017
. The deferred purchase price receivable was settled in full in January 2018, and historically was repaid in cash as receivables were collected, generally within
30 days
. As such, the carrying value of the receivable recorded at December 30, 2017 approximated fair value. Delinquencies and credit losses on receivables sold were
$0.2 million
for the year ended
December 30, 2017
. Cash inflows related to the deferred purchase price receivable totaled
$704.7 million
for the year ended
December 30, 2017
. In accordance with the adoption of the new cash flows standards described in
Note A, Significant Accounting Policies
, the proceeds related to the deferred purchase price receivable are classified as investing activities.
As of
December 29, 2018
and
December 30, 2017
, the Company's deferred revenue totaled
$202.0 million
and
$117.0 million
, respectively, of which
$98.6 million
and
$95.6 million
, respectively, was classified as current.
Revenue recognized for the years ended
December 29, 2018
and
December 30, 2017
that was previously deferred as of
December 30, 2017
and
December 31, 2016
totaled
$89.3 million
and
$76.3 million
, respectively.
As of
December 29, 2018
, approximately
$1.160 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.
C. INVENTORIES
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
Finished products
|
$
|
1,707.4
|
|
|
$
|
1,461.4
|
|
Work in process
|
150.8
|
|
|
155.5
|
|
Raw materials
|
515.3
|
|
|
401.5
|
|
Total
|
$
|
2,373.5
|
|
|
$
|
2,018.4
|
|
Net inventories in the amount of
$1.2 billion
at
December 29, 2018
and
$896.9 million
at
December 30, 2017
were valued at the lower of LIFO cost or market. If the LIFO method had not been used, inventories would have been
$44.6 million
higher than reported at
December 29, 2018
and
$2.9 million
lower than reported at
December 30, 2017
.
As part of the Nelson acquisition in the second quarter of 2018, the Company acquired net inventory with an estimated fair value of
$48.6 million
. Refer to
Note E, Acquisitions,
for further discussion of the Nelson acquisition.
D. PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
Land
|
$
|
115.9
|
|
|
$
|
110.9
|
|
Land improvements
|
52.2
|
|
|
53.0
|
|
Buildings
|
625.6
|
|
|
611.8
|
|
Leasehold improvements
|
157.8
|
|
|
140.0
|
|
Machinery and equipment
|
2,566.1
|
|
|
2,343.7
|
|
Computer software
|
452.5
|
|
|
400.1
|
|
Property, plant & equipment, gross
|
$
|
3,970.1
|
|
|
$
|
3,659.5
|
|
Less: accumulated depreciation and amortization
|
(2,054.9
|
)
|
|
(1,917.0
|
)
|
Property, plant & equipment, net
|
$
|
1,915.2
|
|
|
$
|
1,742.5
|
|
Depreciation and amortization expense associated with property, plant and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Depreciation
|
$
|
288.4
|
|
|
$
|
253.6
|
|
|
$
|
221.8
|
|
Amortization
|
42.8
|
|
|
43.3
|
|
|
41.8
|
|
Depreciation and amortization expense
|
$
|
331.2
|
|
|
$
|
296.9
|
|
|
$
|
263.6
|
|
E. ACQUISITIONS
PENDING ACQUISITION
On August 6, 2018, the Company reached an agreement to acquire International Equipment Solutions Attachments Group ("IES Attachments"), a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. On January 29, 2019, the agreement was amended to exclude the mobile processors business. The Company expects the acquisition to further diversify the Company's presence in the industrial markets, expand its portfolio of attachment solutions and provide a meaningful platform for continued growth. The acquisition will be accounted for as a business combination and consolidated into the Company's Industrial segment. The transaction is expected to close in the first half of 2019 subject to customary closing conditions, including regulatory approvals.
2019 TRANSACTION
On January 2, 2019, the Company acquired a
20 percent
interest in MTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment, for
$234 million
in cash. With 2017 revenues of $2.4 billion, MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning on July 1, 2021 and ending on January 2, 2029. In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD’s 2018 EBITDA, with an equitable sharing arrangement for future EBITDA growth. The investment in MTD increases the Company's presence in the $20 billion global lawn and garden segment and will allow the two companies to work together to pursue revenue and cost opportunities, improve
operational efficiency, and introduce new and innovative products for professional and residential outdoor equipment customers, utilizing each company's respective portfolios of strong brands. The Company will apply the equity method of accounting to the MTD investment.
2018 ACQUISITIONS
Nelson Fasteners Systems
On April 2, 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson") from the Doncasters Group, which excluded Nelson's automotive stud welding business, for
$430.1 million
, net of cash acquired and an estimated working capital adjustment. Nelson 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. The results of Nelson are being consolidated into the Industrial segment.
The Nelson 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 estimated fair value of identifiable net assets acquired, which includes
$64.9 million
of working capital and
$167.0 million
of intangible assets, is
$210.6 million
. The related goodwill is
$219.5 million
. The amount allocated to intangible assets includes
$149.0 million
for customer relationships. The useful lives assigned to the intangible 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 cost synergies of the combined business, assembled workforce, and the going concern nature of Nelson. Goodwill is not expected to be deductible for tax purposes.
The purchase price allocation for Nelson is substantially complete with the exception of certain opening balance sheet contingencies, including environmental, and tax matters. The Company will complete its purchase price allocation within the measurement period. Any measurement period adjustments resulting from the finalization of the Company's purchase accounting assessment are not expected to be material.
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.
Other 2018 Acquisitions
During 2018, the Company completed
six
smaller acquisitions for a total purchase price of
$105.2 million
, net of cash acquired. The estimated fair value of the identifiable net assets acquired, which includes
$13.0 million
of working capital and
$35.5 million
of intangible assets, is
$37.8 million
. The related goodwill is
$67.4 million
. The amount allocated to intangible assets includes
$32.0 million
for customer relationships. The useful lives assigned to intangible assets ranges from
10
to
14
years.
The purchase price allocation for these acquisitions is substantially complete with the exception of certain working capital accounts, various opening balance sheet contingencies and tax matters. These adjustments are not expected to have a material impact on the Company’s 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 is complete. The measurement period adjustments recorded in 2018 did not have a material impact to the Company's Consolidated Financial Statements. The following table summarizes the estimated fair values of 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.
Craftsman Brand
On March 8, 2017, the Company purchased the Craftsman® brand from Sears Holdings Corporation ("Sears Holdings") for a total estimated cash purchase price of
$936.7 million
on a discounted basis, which consists of an initial cash payment of
$568.2 million
, a cash payment due 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 valued at
$134.5 million
at the acquisition date based on estimated future sales 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 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 have been consolidated into the Company's Tools & Storage segment.
The Craftsman® brand acquisition was accounted for as a business combination. The purchase price allocation for Craftsman is complete. The measurement period adjustments recorded in 2018 did not have a material impact on the Company's consolidated financial statements. The estimated fair value of identifiable net assets acquired, which includes
$40.2 million
of working capital and
$418.0 million
of intangible assets, is
$482.6 million
. The related goodwill is
$747.1 million
. The amount allocated to intangible assets includes
$396.0 million
of an indefinite-lived trade name. The useful life assigned to the customer relationships is
17 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 and the going concern nature of the Craftsman® brand. It is estimated that
$442.7 million
of goodwill will be deductible for tax purposes.
Other 2017 Acquisitions
During 2017, the Company completed
four
smaller acquisitions for a total purchase price of
$182.9 million
, net of cash acquired, which have been consolidated into the Company's Tools & Storage and Security segments. The purchase price allocation for these acquisitions is complete. The estimated fair value of the identifiable net assets acquired, which includes
$35.3 million
of working capital and
$54.4 million
of intangible assets, is
$88.1 million
. The related goodwill is
$94.8 million
.
The amount allocated to intangible assets includes
$51.4 million
for customer relationships. The useful lives assigned to the customer relationships range between
10
and
15
years.
2016 ACQUISITIONS
During 2016, the Company completed
five
acquisitions for a total 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 and liabilities assumed based on their estimated fair values. The purchase accounting for these acquisitions is complete.
ACTUAL AND PRO-FORMA IMPACT FROM ACQUISITIONS
Actual Impact from Acquisitions
The net sales and net loss from the 2018 acquisitions included in the Company's Consolidated Statements of Operations for the year ended
December 29, 2018
are shown in the table below. The net loss includes amortization relating to inventory step-up and intangible assets recorded upon acquisition, transaction costs, and other integration-related costs.
|
|
|
|
|
(Millions of Dollars)
|
2018
|
Net sales
|
$
|
216.5
|
|
Net loss attributable to common shareowners
|
$
|
(12.3
|
)
|
Pro-forma Impact from Acquisitions
The following table presents supplemental pro-forma information for the years ended December 29, 2018 and December 30, 2017, as if the 2017 and 2018 acquisitions had occurred on January 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 1, 2017. In addition, the pro-forma consolidated results do not purport to project the future results of the Company.
|
|
|
|
|
|
|
|
|
(Millions of Dollars, except per share amounts)
|
2018
|
|
2017
|
Net sales
|
$
|
14,065.3
|
|
|
$
|
13,486.2
|
|
Net earnings attributable to common shareowners
|
628.1
|
|
|
1,230.1
|
|
Diluted earnings per share
|
$
|
4.14
|
|
|
$
|
8.07
|
|
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.
|
|
|
•
|
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 of the 2017 acquisitions and for the year ended December 30, 2017 for the 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 and for the year ended December 30, 2017 for the Nelson acquisition.
|
|
|
•
|
Additional expense for deal costs and inventory step-up, which would have been amortized as the corresponding inventory was sold, relating to the 2018 acquisitions.
|
F. GOODWILL AND INTANGIBLE ASSETS
GOODWILL —
The changes in the carrying amount of goodwill by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Tools & Storage
|
|
Industrial
|
|
Security
|
|
Total
|
Balance December 30, 2017
|
$
|
5,189.7
|
|
|
$
|
1,454.4
|
|
|
$
|
2,132.0
|
|
|
$
|
8,776.1
|
|
Acquisitions
|
59.8
|
|
|
225.5
|
|
|
55.0
|
|
|
340.3
|
|
Foreign currency translation and other
|
(95.2
|
)
|
|
(0.2
|
)
|
|
(64.3
|
)
|
|
(159.7
|
)
|
Balance December 29, 2018
|
$
|
5,154.3
|
|
|
$
|
1,679.7
|
|
|
$
|
2,122.7
|
|
|
$
|
8,956.7
|
|
As required by the Company's policy, goodwill and indefinite-lived trade names were tested for impairment in the third quarter of
2018
. The Company assessed the fair values of three of its reporting units utilizing a discounted cash flow valuation model and determined that the fair values exceeded the respective carrying amounts. The key assumptions used were discount rates and perpetual growth rates applied to cash flow projections. Also inherent in the discounted cash flow valuations were near-term revenue growth rates over the next five years. These assumptions contemplated business, market and overall economic conditions. For the remaining two reporting units, the Company determined qualitatively that it was not more likely than not that goodwill was impaired, and thus, the quantitative goodwill impairment test was not required. In making this determination, the Company considered the significant excess of fair value over carrying amount as calculated in the most recent quantitative analysis, each reporting unit's 2018 performance compared to prior year and their respective industries, analyst multiples and other positive qualitative information. Based on the results of the annual impairment testing performed in the third quarter of 2018, the Company determined that the fair values of each of its reporting units exceeded their respective carrying amounts.
The fair values of the Company's indefinite-lived trade names were assessed using quantitative analyses, which utilized discounted cash flow valuation models taking into consideration appropriate discount rates, royalty rates and perpetual growth rates applied to projected sales. Based on the results of this testing, the Company determined that the fair values of each of its indefinite-lived trade names exceeded their respective carrying amounts.
INTANGIBLE ASSETS —
Intangible assets at
December 29, 2018
and
December 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(Millions of Dollars)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized Intangible Assets — Definite lives
|
|
|
|
|
|
|
|
Patents and copyrights
|
$
|
42.5
|
|
|
$
|
(40.6
|
)
|
|
$
|
44.1
|
|
|
$
|
(41.0
|
)
|
Trade names
|
170.8
|
|
|
(114.9
|
)
|
|
154.0
|
|
|
(111.0
|
)
|
Customer relationships
|
2,435.0
|
|
|
(1,269.8
|
)
|
|
2,326.1
|
|
|
(1,155.4
|
)
|
Other intangible assets
|
236.1
|
|
|
(173.6
|
)
|
|
260.3
|
|
|
(175.6
|
)
|
Total
|
$
|
2,884.4
|
|
|
$
|
(1,598.9
|
)
|
|
$
|
2,784.5
|
|
|
$
|
(1,483.0
|
)
|
Indefinite-lived trade names totaled
$2.199 billion
at
December 29, 2018
and
$2.206 billion
at
December 30, 2017
. The year-over-year change is due to currency fluctuations.
Intangible assets amortization expense by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Tools & Storage
|
$
|
75.5
|
|
|
$
|
68.0
|
|
|
$
|
36.8
|
|
Industrial
|
50.7
|
|
|
45.4
|
|
|
49.8
|
|
Security
|
49.1
|
|
|
50.4
|
|
|
57.8
|
|
Consolidated
|
$
|
175.3
|
|
|
$
|
163.8
|
|
|
$
|
144.4
|
|
Future amortization expense in each of the next five years amounts to
$168.6 million
for
2019
,
$150.5 million
for
2020
,
$141.9 million
for
2021
,
$132.7 million
for
2022
,
$123.7 million
for
2023
and
$568.1 million
thereafter.
G. ACCRUED EXPENSES
Accrued expenses at
December 29, 2018
and
December 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
Payroll and related taxes
|
$
|
297.0
|
|
|
$
|
339.5
|
|
Income and other taxes
|
67.5
|
|
|
142.0
|
|
Customer rebates and sales returns
|
116.6
|
|
|
134.0
|
|
Insurance and benefits
|
69.4
|
|
|
73.7
|
|
Restructuring costs
|
108.8
|
|
|
23.2
|
|
Derivative financial instruments
|
7.5
|
|
|
103.1
|
|
Warranty costs
|
65.5
|
|
|
71.3
|
|
Deferred revenue
|
98.6
|
|
|
95.6
|
|
Freight costs
|
87.3
|
|
|
30.5
|
|
Environmental costs
|
58.1
|
|
|
22.5
|
|
Other
|
413.5
|
|
|
352.3
|
|
Total
|
$
|
1,389.8
|
|
|
$
|
1,387.7
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
H. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt and financing arrangements at
December 29, 2018
and
December 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 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
2
|
Notes payable due 2018
|
2.45%
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
630.9
|
|
Notes payable due 2018
|
1.62%
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
344.1
|
|
Notes payable due 2021
|
3.40%
|
400.0
|
|
(0.1
|
)
|
10.2
|
|
—
|
|
(1.0
|
)
|
409.1
|
|
|
412.1
|
|
Notes payable due 2022
|
2.90%
|
754.3
|
|
(0.3
|
)
|
—
|
|
—
|
|
(2.4
|
)
|
751.6
|
|
|
750.9
|
|
Notes payable due 2028
|
7.05%
|
150.0
|
|
—
|
|
10.4
|
|
10.0
|
|
—
|
|
170.4
|
|
|
172.6
|
|
Notes payable due 2028
|
4.25%
|
500.0
|
|
(0.4
|
)
|
—
|
|
—
|
|
(3.9
|
)
|
495.7
|
|
|
—
|
|
Notes payable due 2040
|
5.20%
|
400.0
|
|
(0.2
|
)
|
(31.9
|
)
|
—
|
|
(3.0
|
)
|
364.9
|
|
|
363.3
|
|
Notes payable due 2048
|
4.85%
|
500.0
|
|
(0.6
|
)
|
—
|
|
—
|
|
(5.0
|
)
|
494.4
|
|
|
—
|
|
Notes payable due 2052 (junior subordinated)
|
5.75%
|
750.0
|
|
—
|
|
—
|
|
—
|
|
(18.4
|
)
|
731.6
|
|
|
731.0
|
|
Notes payable due 2053 (junior subordinated)
|
7.08%
|
400.0
|
|
—
|
|
4.6
|
|
—
|
|
(7.9
|
)
|
396.7
|
|
|
$
|
396.6
|
|
Other, payable in varying amounts through 2022
|
0.00% - 4.50%
|
7.9
|
|
—
|
|
—
|
|
—
|
|
—
|
|
7.9
|
|
|
4.2
|
|
Total long-term debt, including current maturities
|
|
$
|
3,862.2
|
|
$
|
(1.6
|
)
|
$
|
(6.7
|
)
|
$
|
10.0
|
|
$
|
(41.6
|
)
|
$
|
3,822.3
|
|
|
$
|
3,805.7
|
|
Less: Current maturities of long-term debt
|
|
|
|
|
|
|
(2.5
|
)
|
|
(977.5
|
)
|
Long-term debt
|
|
|
|
|
|
|
$
|
3,819.8
|
|
|
$
|
2,828.2
|
|
1
Unamortized gain (loss) associated with interest rate swaps are more fully discussed in
Note I, Financial Instruments.
2
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies,
for further discussion
.
As of December 29, 2018, the aggregate annual principal maturities of long-term debt for each of the years from 2019 to 2023 are
$2.9 million
for 2019,
$0.4 million
for 2020,
$400.4 million
for 2021,
$758.5 million
for 2022, no principal maturities for 2023, and
$2.700 billion
thereafter. These maturities represent the principal amounts to be paid and accordingly exclude the remaining
$10.0 million
of unamortized fair value adjustments made in purchase accounting, which increased the Black & Decker note payable due 2028, as well as a net loss of
$8.3 million
pertaining to unamortized termination gain/loss on interest rate swaps and unamortized discount on the notes as described in
Note I, Financial Instruments,
and
$41.6 million
of unamortized deferred financing fees. Interest paid during
2018
,
2017
and 2016 amounted to
$249.6 million
,
$198.3 million
and
$176.6 million
, respectively.
In November 2018, the Company issued
$500 million
of senior unsecured notes, maturing on November 15, 2028 ("2028 Term Notes") and
$500 million
of senior unsecured notes, maturing on November 15, 2048 ("2048 Term Notes"). The 2028 Term Notes and 2048 Term Notes will accrue interest at fixed rates of
4.25%
per annum and
4.85%
per annum, respectively, with interest payable semi-annually in arrears on both notes. The notes are unsecured and rank equally with all of the Company's existing and future unsecured and unsubordinated debt. The Company received net proceeds of
$990.0 million
which reflects a discount of
$0.9 million
and
$9.1 million
of underwriting expenses and other fees associated with the transaction. The Company used the net proceeds from the offering for general corporate purposes, including repayment of other borrowings.
Contemporaneously with the issuance of the 2028 Term Notes and 2048 Term Notes, the Company paid
$977.5 million
to settle its remaining obligations of two unsecured notes which matured in November 2018. These notes are described in more detail below.
In December 2013, the Company issued
$400.0 million
aggregate principal amount of
5.75%
fixed-to-floating rate junior subordinated debentures maturing December 15, 2053 (“2053 Junior Subordinated Debentures”). The 2053 Junior Subordinated Debentures bore interest at a fixed rate of
5.75%
per annum, payable semi-annually in arrears to, but excluding December 15, 2018. From and including December 15, 2018, the 2053 Junior Subordinated Debentures bear interest at an annual rate equal to three-month LIBOR plus
4.304%
, payable quarterly in arrears. The 2053 Junior Subordinated Debentures are unsecured and rank subordinate and junior in right of payment to all of the Company’s existing and future senior debt. The 2053 Junior Subordinated Debentures rank equally in right of payment with all of the Company’s other unsecured junior subordinated debt. The Company received proceeds from the offering of
$392.0 million
, net of
$8.0 million
of underwriting discounts and commissions, before offering expenses. The Company used the net proceeds primarily to repay commercial paper borrowings. The Company may, so long as there is no event of default with respect to the debentures, defer interest payments on the debentures, from time to time, for one or more Optional Deferral Periods (as defined in the indenture
governing the 2053 Junior Subordinated Debentures) of up to five consecutive years. Deferral of interest payments cannot extend beyond the maturity date of the debentures. The 2053 Junior Subordinated Debentures include an optional redemption provision whereby the Company may elect to redeem the debentures, in whole or in part, at a "make-whole" premium based on United States Treasury rates, plus accrued and unpaid interest if redeemed before December 15, 2018, or at
100%
of their principal amount plus accrued and unpaid interest if redeemed after December 15, 2018. In addition, the Company could have redeemed the debentures in whole, but not in part, before December 15, 2018, if certain changes in tax laws, regulations or interpretations occurred at
100%
of their principal amount plus accrued and unpaid interest. On February 25, 2019, the Company redeemed all of the outstanding 2053 Junior Subordinated Debentures for
$405.7 million
, which represented 100% of the principal amount plus accrued and unpaid interest to the redemption date.
In November 2012, the Company issued
$800.0 million
of senior unsecured term notes, maturing on November 1, 2022 (“2022 Term Notes”) with fixed interest payable semi-annually, in arrears, at a rate of
2.90%
per annum. The 2022 Term Notes are unsecured and rank equally with all of the Company's existing and future unsecured and unsubordinated debt. The Company received net proceeds of
$793.9 million
, which reflected a discount of
$0.7 million
and
$5.4 million
of underwriting expenses and other fees associated with the transaction. The Company used the net proceeds from the offering for general corporate purposes, including repayment of short-term borrowings. The 2022 Term Notes include a Change of Control provision that would apply should a Change of Control event (as defined in the Indenture governing the 2022 Term Notes) occur. The Change of Control provision states that the holders of the 2022 Term Notes may require the Company to repurchase, in cash, all of the outstanding 2022 Term Notes for a purchase price at
101.0%
of the original principal amount, plus any accrued and unpaid interest outstanding up to the repurchase date. In December 2014, the Company repurchased
$45.7 million
of the 2022 Term Notes and paid
$45.3 million
in cash and recognized a net pre-tax gain of less than
$0.1 million
after expensing
$0.3 million
of related loan discount costs and deferred financing fees. At
December 29, 2018
, the carrying value of the 2022 Term Notes includes
$0.3 million
of unamortized discount.
In July 2012, the Company issued
$750.0 million
of junior subordinated debentures, maturing on July 25, 2052 (“2052 Junior Subordinated Debentures”) with fixed interest payable quarterly, in arrears, at a rate of
5.75%
per annum. The 2052 Junior Subordinated Debentures are unsecured and rank subordinate and junior in right of payment to all of the Company's existing and future senior debt. The Company received net proceeds of
$729.4 million
and paid
$20.6 million
of fees associated with the transaction. The Company used the net proceeds from the offering for general corporate purposes, including repayment of debt and refinancing of near-term debt maturities. The Company may, so long as there is no event of default with respect to the debentures, defer interest payments on the debentures, from time to time, for one or more Optional Deferral Periods (as defined in the indenture governing the 2052 Junior Subordinated Debentures) of up to
five
consecutive years per period. Deferral of interest payments cannot extend beyond the maturity date of the debentures. Additionally, the 2052 Junior Subordinated Debentures include an optional redemption whereby the Company may elect to redeem the debentures at
100%
of their principal amount plus accrued and unpaid interest.
Commercial Paper and Credit Facilities
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 December 29, 2018, the Company had
$373.0 million
of borrowings outstanding against the Company's
$3.0 billion
commercial paper program, of which approximately
$228.9 million
in Euro denominated commercial paper was designated as Net Investment Hedge as described in more detailed in
Note I, Financial Instruments
. At December 30, 2017, the Company had
no
borrowings outstanding against the Company’s
$3.0 billion
commercial paper program.
In September 2018, the Company amended and restated its existing five-year
$1.75 billion
committed credit facility with the concurrent execution of a new five-year
$2.0 billion
committed credit facility (the "5 Year Credit Agreement"). Borrowings under the Credit Agreement may be made in U.S. Dollars, Euros or Pounds Sterling. A sub-limit of
$653.3 million
is designated for swing line advances which may be drawn in Euros pursuant to the terms of the 5 Year Credit Agreement. Borrowings bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and specific terms of the 5 Year Credit Agreement. The Company must repay all advances under the 5 Year Credit Agreement by the earlier of September 12, 2023 or upon termination. The 5 Year Credit Agreement is designated to be a liquidity back-stop for the Company's
$3.0 billion
U.S. Dollar and Euro commercial paper program. As of
December 29, 2018
and December 30, 2017, the Company had not drawn on its five-year committed credit facility.
In September 2018, the Company terminated its previous 364-day
$1.25 billion
committed credit facility and concurrently executed a new 364-Day
$1.0 billion
committed credit facility (the "364 Day Credit Agreement"). Borrowings under the 364 Day Credit Agreement may be made in U.S. Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the 364 Day Credit Agreement. The Company
must repay all advances under the 364 Day Credit Agreement by the earlier of September 11, 2019 or upon termination. The Company may, however, convert all advances outstanding upon termination, into a term loan that shall be repaid in full no later than the first anniversary of the termination date, provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. The 364 Day Credit Agreement serves as a liquidity back-stop for the Company's
$3.0 billion
U.S. Dollar and Euro commercial paper program. As of
December 29, 2018
, the Company had not drawn on its 364-Day committed credit facility.
In addition, the Company has other short-term lines of credit that are primarily uncommitted, with numerous banks, aggregating
$455.4 million
, of which
$357.8 million
was available at
December 29, 2018
. Short-term arrangements are reviewed annually for renewal.
At
December 29, 2018
, the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was
$3.5 billion
. At December 29, 2018,
$376.1 million
was recorded as short-term borrowings relating to commercial paper and amounts outstanding against uncommitted lines. In addition,
$97.6 million
of the short-term credit lines was utilized primarily pertaining to outstanding letters of credit for which there are no required or reported debt balances. The weighted-average interest rates on U.S. dollar denominated short-term borrowings for the years ended December 29, 2018 and December 30, 2017 were
2.3%
and
1.2%
, respectively. The weighted-average interest rate on Euro denominated short-term borrowings for the years ended December 29, 2018 and December 30, 2017 was negative
0.3%
.
Equity Units
In December 2013, the Company issued
3,450,000
Equity Units (the “Equity Units”), each with a stated value of
$100
. The Equity Units were initially comprised of a 1/10, or
10%
, undivided beneficial ownership in a
$1,000
principal amount
2.25%
junior subordinated note due 2018 (the “2018 Junior Subordinated Note”) and a forward common stock purchase contract (the “Equity Purchase Contract”). The Company received approximately
$334.7 million
in cash proceeds from the Equity Units, net of underwriting discounts and commissions, before offering expenses, and recorded
$345.0 million
in long-term debt. The proceeds from the issuance of the Equity Units were used primarily to repay commercial paper borrowings. The Company also used
$9.7 million
of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution as described in more detail below.
Equity Purchase Contracts:
On November 17, 2016, the Company settled all Equity Purchase Contracts by issuing
3,504,165
common shares and received
$345.0 million
in cash proceeds generated from the remarketing described in detail below. The number of shares of common stock issuable upon settlement of each purchase contract (the “settlement rate”) was rounded to the nearest ten-thousandth of a share and was determined by calculating the applicable market value, equal to the average of the daily volume-weighted average price of common stock for each of the 20 consecutive trading days during the market value averaging period, October 21, 2016 through November 17, 2016. 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 purchase contract settlement rate and a conversion price of
$98.45
per common share).
Holders of the Equity Purchase Contracts were paid contract adjustment payments (“contract adjustment payments”) at a rate of
4.00%
per annum, payable quarterly in arrears on February 17, May 17, August 17 and November 17 of each year, commencing February 17, 2014. The
$40.2 million
present value of the Contract Adjustment Payments reduced Shareowners’ Equity upon issuance of the Equity Units and a related liability for the present value of the cash payments of
$40.2 million
was recorded. As each quarterly contract adjustment payment was made, the related liability was relieved with the difference between the cash payment and the present value accreted to interest expense over the three-year term. On November 17, 2016, the Company made the final contract adjustment payment.
2018 Junior Subordinated Notes:
Prior to November 17, 2016, the 2018 Junior Subordinated Notes bore interest at a rate of
2.25%
per annum, payable quarterly in arrears. The Company successfully remarketed the 2018 Junior Subordinated Notes in November 2016 ("Subordinated Notes"). In connection with the remarketing, the interest rate on the notes was reset, effective on the settlement date to a rate of
1.622%
per annum, payable semi-annually in arrears through November 2018.
The remarketing resulted in proceeds of
$345.0 million
, which the Company did not directly receive, and were automatically applied to satisfy in full the related unit holders’ obligations to purchase common stock under their Equity Purchase Contracts.
In November 2018, the
$345.0 million
aggregate principal amount of the Subordinated Notes matured and was paid by the Company to settle its remaining obligation.
Interest expense of
$4.9 million
for 2018 and
$5.6 million
for 2017 was recorded related to the contractual interest coupon on the Subordinated Notes based on the annual rate of
1.622%
. Interest expense of
$6.8 million
in 2016 was recorded related to the
2.25%
contractual interest coupon on the 2018 Junior Subordinated Notes.
Capped Call Transactions
:
In order to offset the potential economic dilution associated with the common shares issuable upon settlement of the Equity Purchase Contracts, the Company entered into capped call transactions with a major financial institution (the “counterparty”). 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. The capped call transactions had a term of approximately three years and initially had a lower strike price of
$98.80
, which corresponded to the minimum settlement rate of the Equity Purchase Contracts, and an upper strike price of
$112.91
, which was approximately
40%
higher than the closing price of the Company's common stock on November 25, 2013, and were subject to customary anti-dilution adjustments. The Company paid
$9.7 million
of cash to fund the cost of the capped call transactions, which was recorded as a reduction of Shareowners’ Equity. 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 receiving
418,234
shares of common stock.
Convertible Preferred Units
In November 2010, the Company issued
6,325,000
Convertible Preferred Units (the “Convertible Preferred Units”), each with a stated amount of
$100
. The Convertible Preferred Units were comprised of a 1/10, or
10%
, undivided beneficial ownership in a
$1,000
principal amount junior subordinated note (the “Notes”) and a Purchase Contract (the “Purchase Contract”) obligating holders to purchase
one
share of the Company’s
4.75%
Series B Perpetual Cumulative Convertible Preferred Stock (the “Convertible Preferred Stock”). The Company received
$613.5 million
in cash proceeds from the Convertible Preferred Units offering, net of underwriting fees.
In November 2015, the Notes were successfully remarketed with the proceeds automatically applied to satisfy in full the related unit holders’ obligations to purchase Convertible Preferred Stock under their Purchase Contracts. Accordingly, the Company issued
6,325,000
shares of Convertible Preferred Stock resulting in cash proceeds to the Company of
$632.5 million
. In December 2015, the Company converted, redeemed, and settled all Convertible Preferred Stock by paying
$632.5 million
in cash and issuing
2.9 million
common shares for the excess value of the conversion feature above the face value.
In November 2018, the
$632.5 million
principal amount of the Notes matured and was paid by the Company to settle its remaining obligation.
Interest expense of
$13.6 million
in 2018 and
$15.5 million
in 2017 and 2016 was recorded related to the contractual interest coupon on the Notes based upon the
2.45%
annual rate.
I. FINANCIAL INSTRUMENTS
In 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 fiscal years 2017 and 2016 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, 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 derivatives recorded in the Consolidated Balance Sheets at
December 29, 2018
and
December 30, 2017
follows:
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(Millions of Dollars)
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|
Balance Sheet
Classification
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2018
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|
2017
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Balance Sheet
Classification
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|
2018
|
|
2017
|
Derivatives designated as hedging instruments:
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|
|
|
|
|
|
|
|
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Interest Rate Contracts Cash Flow
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Other current assets
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$
|
—
|
|
|
$
|
—
|
|
|
Accrued expenses
|
|
$
|
—
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|
$
|
55.7
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|
LT other assets
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|
—
|
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|
—
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LT other liabilities
|
|
—
|
|
|
—
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|
Foreign Exchange Contracts Cash Flow
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|
Other current assets
|
|
18.1
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|
|
4.1
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|
Accrued expenses
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0.6
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|
|
33.4
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LT other assets
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|
—
|
|
|
—
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|
LT other liabilities
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|
—
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5.2
|
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Net Investment Hedge
|
|
Other current assets
|
|
5.7
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|
|
6.6
|
|
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Accrued expenses
|
|
1.5
|
|
|
7.0
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LT other assets
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—
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—
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LT other liabilities
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13.8
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5.8
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Non-derivative designated as hedging instrument:
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Net Investment Hedge
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|
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—
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|
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—
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Short-term borrowings
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|
228.9
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|
|
—
|
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Total Designated as hedging instruments
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$
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23.8
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|
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$
|
10.7
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$
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244.8
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$
|
107.1
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Derivatives not designated as hedging instruments:
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Foreign Exchange Contracts
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Other current assets
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$
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9.1
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|
$
|
7.3
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Accrued expenses
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$
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5.4
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|
|
$
|
6.9
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Total
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|
$
|
32.9
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|
$
|
18.0
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$
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250.2
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$
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114.0
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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.
In
2018
,
2017
and
2016
, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of
$2.4 million
,
$2.6 million
and
$94.7 million
, respectively.
CASH FLOW HEDGES —
There were after-tax mark-to-market losses of
$26.8 million
and
$112.6 million
as of
December 29, 2018
and
December 30, 2017
, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of
$1.9 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 of derivatives designated as cash flow hedges in Accumulated other comprehensive loss for active derivatives during the periods in which the underlying hedged transactions affected earnings for
2018
,
2017
and
2016
:
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2018
(Millions of Dollars)
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(Loss) Gain
Recorded in OCI
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Classification of
Gain (Loss)
Reclassified from
OCI to Income
|
|
Gain (Loss)
Reclassified from
OCI to Income
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Gain (Loss)
Recognized in
Income on Amounts Excluded from Effectiveness Testing
|
Interest Rate Contracts
|
|
$
|
33.1
|
|
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Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
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Foreign Exchange Contracts
|
|
$
|
35.9
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Cost of sales
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|
$
|
(17.9
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)
|
|
$
|
—
|
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2017
(Millions of Dollars)
|
|
(Loss) Gain
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
|
|
$
|
(8.4
|
)
|
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Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign Exchange Contracts
|
|
$
|
(66.6
|
)
|
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Cost of sales
|
|
$
|
8.4
|
|
|
$
|
—
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
2016
(Millions of Dollars)
|
|
(Loss) Gain
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
|
|
$
|
(6.2
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)
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
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Foreign Exchange Contracts
|
|
$
|
19.3
|
|
|
Cost of sales
|
|
$
|
21.7
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|
$
|
—
|
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* Includes ineffective portion and amount excluded from effectiveness testing on derivatives.
A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations for 2018 is as follows:
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2018
|
(Millions of dollars)
|
Cost of Sales
|
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Interest Expense
|
Total amount in the Consolidated Statements of Operations in which the effects of the cash flow hedges are recorded
|
$
|
9,131.3
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$
|
277.9
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Gain (loss) on cash flow hedging relationships:
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Foreign Exchange Contracts:
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Hedged Items
|
$
|
17.9
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|
$
|
—
|
|
Gain (loss) reclassified from OCI into Income
|
$
|
(17.9
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)
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$
|
—
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Interest Rate Swap Agreements:
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Gain (loss) reclassified from OCI into Income
1
|
$
|
—
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|
$
|
(15.3
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)
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1
Inclusive of the gain/loss amortization on terminated derivative financial instruments.
For
2017
and
2016
, the hedged items’ impact to the Consolidated Statement of Operations were losses of
$8.4 million
and
$21.7 million
, respectively, in Cost of Sales which are offsetting the amounts shown above. There was no impact related to the interest rate contracts’ hedged items for any period presented.
For
2018
and
2017
, an after-tax loss of
$15.4 million
and
$4.7 million
, respectively, and for 2016 an after-tax gain of
$3.3 million
were reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative financial 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-rate debt proportions. As of
December 29, 2018
, all interest rate swaps designated as cash flow hedges matured as discussed below. As of December 30, 2017, the Company had
$400 million
of forward starting swaps which were executed in 2014.
In November 2018, forward starting interest rate swaps with an aggregate notional amount of
$400 million
fixing 10 years of interest payments ranging from
4.25%
-
4.85%
matured. The objective of the hedges was to offset the expected variability on future payments associated with the interest rate on debt instruments. This resulted in a loss of
$22.7 million
, which was recorded in Accumulated other comprehensive loss and is being amortized to earnings as interest expense over future periods. The cash flows stemming from the maturity of such interest rate swaps designated as cash flow hedges are presented within other financing activities in the Consolidated Statements of Cash Flows.
In January and February 2019, the Company entered into forward starting interest rate swaps totaling
$450 million
to offset the expected variability on future interest payments associated with debt instruments expected to be issued in the future.
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 are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At
December 29, 2018
, and
December 30, 2017
the notional values of the forward currency contracts outstanding was
$240.0 million
and
$559.9 million
, respectively, maturing on various dates through
2019
.
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 are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At
December 29, 2018
and
December 30, 2017
, the notional value of option contracts outstanding was
$370.0 million
and
$400.0 million
, respectively, maturing on various dates through 2019.
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 previous years, the Company entered into interest rate swaps on the first five years of the Company's
$400 million
5.75%
notes due 2053 and 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 2016, the Company terminated all of the above interest rate swaps and there were no open contracts as of December 29, 2018 and
December 30, 2017
. 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.
A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations for 2018 is as follows:
|
|
|
|
|
|
(Millions of dollars)
|
|
2018
Interest Expense
|
Total amount in the Consolidated Statements of Operations in which the effects of the fair value hedges are recorded
|
|
$
|
277.9
|
|
Amortization of gain on terminated swaps
|
|
$
|
(3.2
|
)
|
Prior to termination of the Company's interest rate swaps discussed above, the changes in fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. A summary of the fair value adjustments relating to these swaps is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Income Statement Classification
(Millions of Dollars)
|
|
(Loss)/Gain on
Swaps*
|
|
Gain /(Loss) on
Borrowings
|
|
Gain/(Loss) on
Swaps*
|
|
(Loss)/Gain on
Borrowings
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3.3
|
)
|
|
$
|
3.8
|
|
* Includes ineffective portion and amount excluded from effectiveness testing on derivatives.
Amortization of the gain on terminated swaps of
$3.2 million
was reported as a reduction of interest expense in
2017
. In addition to the fair value adjustments in the table above, net swap accruals and amortization of the gain/loss on terminated swaps of
$6.9 million
was reported as a reduction of interest expense in
2016
. Interest expense on the underlying debt was
$19.9 million
in
2016
when the hedges were active.
A summary of the amounts recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of
December 29, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
|
Carrying Amount of Hedged Liability
1
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
|
Current maturities of long-term debt
|
|
$
|
2.5
|
|
|
Terminated Swaps
|
|
$
|
2.1
|
|
Long-Term Debt
|
|
$
|
3,819.8
|
|
|
Terminated Swaps
|
|
$
|
(10.0
|
)
|
1
Represents hedged items no longer designated in qualifying fair value hedging relationships.
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 a gain of
$63.3 million
and
$3.4 million
at
December 29, 2018
and
December 30, 2017
, respectively.
As of
December 29, 2018
, the Company had foreign exchange contracts that mature on various dates through 2019 with notional values totaling
$262.4 million
outstanding hedging a portion of its British pound sterling, Swedish krona and Euro
denominated net investments; a cross currency swap with a notional value totaling
$250.0 million
maturing 2023 hedging a portion of its Japanese yen denominated net investment; an option contract with a notional value totaling
$35.1 million
maturing in 2019 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of
$228.9 million
maturing in 2019 hedging a portion of its Euro denominated net investments. As of
December 30, 2017
, the Company had foreign exchange contracts maturing on various dates through 2018 with notional values totaling
$751.2 million
outstanding hedging a portion of its British pound sterling, Mexican peso, Swedish krona, Euro and Canadian denominated net investment and a cross currency swap with a notional value totaling
$250.0 million
maturing 2023 hedging a portion of its Japanese yen denominated net investment.
In January 2019, the Company entered into cross currency swaps with notional values totaling
$1.25 billion
maturing 2020 hedging a portion of its Euro, Swedish krona and Swiss franc denominated net investments.
Maturing foreign exchange contracts resulted in net cash received of
$25.7 million
, cash paid of
$23.3 million
and cash received of
$104.7 million
during
2018
,
2017
and
2016
, respectively.
Gains and losses on net investment hedges remain in Accumulated other comprehensive loss until disposal of the underlying assets. Upon adoption of ASU 2017-12, gains and losses representing components excluded from the assessment of effectiveness are recognized in earnings in Other, net on a straight-line basis over the term of the hedge. Prior to the adoption of ASU 2017-12, no components were excluded from the assessment of effectiveness. Refer to
Note A, Significant Accounting Policies
, for further discussion. Gains and losses after a hedge has been de-designated are recorded directly to the Consolidated Statements of Operations in Other, net.
The pre-tax gain or loss from fair value changes for 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
37.1
|
|
|
$
|
8.6
|
|
|
Other, net
|
|
$
|
8.2
|
|
|
$
|
8.2
|
|
Cross Currency Swap
|
|
$
|
(2.3
|
)
|
|
$
|
5.8
|
|
|
Other, net
|
|
$
|
6.8
|
|
|
$
|
6.8
|
|
Option Contracts
|
|
$
|
(2.0
|
)
|
|
$
|
—
|
|
|
Other, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-derivative designated as Net Investment Hedge
|
|
$
|
61.8
|
|
|
$
|
—
|
|
|
Other, net
|
|
$
|
—
|
|
|
$
|
—
|
|
The pre-tax gain or loss from fair value changes for 2017 and 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Income Statement Classification
(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
|
|
$
|
(131.3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
117.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
*
Includes ineffective portion.
As discussed in
Note H, Long-Term Debt and Financing Arrangements
, the Company amended its existing
$2.0 billion
commercial paper program in 2017 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. Euro denominated borrowings against this commercial paper program during 2018 and 2017 were designated as a Net Investment Hedge against a portion of its Euro denominated net investment. As of
December 29, 2018
, the Company has
$228.9 million
in Euro denominated borrowings outstanding against this commercial paper program. As of
December 30, 2017
, the Company had
no
borrowings outstanding against this commercial paper program.
UNDESIGNATED HEDGES
Foreign Exchange Contracts:
Currency swaps and foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables 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
December 29, 2018
was
$1.0 billion
maturing on various dates through 2019. The total notional amount of the forward contracts outstanding at
December 30, 2017
was
$1.0 billion
maturing on various dates through 2018. The income statement impacts related to derivatives not designated as hedging instruments under ASC 815 for
2018
,
2017
and
2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Income Statement
Classification
|
|
2018
Amount of
Gain (Loss)
Recorded in
Income on
Derivative
|
|
2017
Amount of
Gain (Loss)
Recorded in
Income on
Derivative
|
|
2016
Amount of
(Loss) Gain
Recorded in
Income on
Derivative
|
Foreign Exchange Contracts
|
Other-net
|
|
$
|
17.0
|
|
|
$
|
51.5
|
|
|
$
|
(21.1
|
)
|
J. CAPITAL STOCK
EARNINGS 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 fiscal years ended
December 29, 2018
,
December 30, 2017
, and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Numerator (in millions):
|
|
|
|
|
|
Net Earnings Attributable to Common Shareowners
1
|
$
|
605.2
|
|
|
$
|
1,227.3
|
|
|
$
|
968.0
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
148,919
|
|
|
149,629
|
|
|
146,041
|
|
Dilutive effect of stock contracts and awards
|
2,724
|
|
|
2,820
|
|
|
2,166
|
|
Diluted weighted-average shares outstanding
|
151,643
|
|
|
152,449
|
|
|
148,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share of common stock
1
:
|
|
|
|
|
|
Basic
|
$
|
4.06
|
|
|
$
|
8.20
|
|
|
$
|
6.63
|
|
Diluted
|
$
|
3.99
|
|
|
$
|
8.05
|
|
|
$
|
6.53
|
|
1
Prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies,
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):
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Number of stock options
|
1,339
|
|
|
389
|
|
|
734
|
|
As described in detail below under "Other Equity Arrangements," the Company issued 7,500,000 Equity Units in May 2017 with a total notional value of
$750.0 million
. Each unit initially consists of
750,000 shares
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
December 29, 2018
, due to the customary anti-dilution provisions, the conversion rate was
6.1783
, equivalent to a conversion price of approximately
$161.86
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, are included in the denominator of diluted earnings per share in periods in which they are dilutive. The shares related to the convertible preferred stock were anti-dilutive during most of 2018.
As described in detail below under "Other 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. The shares related to the Equity Purchase Contracts were anti-dilutive during certain months in 2016. Upon the November 17, 2016 settlement date, the Company issued
3,504,165
shares of common stock and received cash proceeds of
$345.0 million
.
COMMON STOCK ACTIVITY —
Common stock activity for
2018
,
2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Outstanding, beginning of year
|
154,038,031
|
|
|
152,559,767
|
|
|
153,944,291
|
|
Issued from treasury
|
941,854
|
|
|
1,680,339
|
|
|
4,870,761
|
|
Returned to treasury
|
(3,677,435
|
)
|
|
(202,075
|
)
|
|
(6,255,285
|
)
|
Outstanding, end of year
|
151,302,450
|
|
|
154,038,031
|
|
|
152,559,767
|
|
Shares subject to the forward share purchase contract
|
(3,645,510
|
)
|
|
(3,645,510
|
)
|
|
(3,645,510
|
)
|
Outstanding, less shares subject to the forward share purchase contract
|
147,656,940
|
|
|
150,392,521
|
|
|
148,914,257
|
|
In April 2018, the Company repurchased
1,399,732
shares of common stock for approximately
$200.0 million
. In July 2018, the Company repurchased
2,086,792
shares of common stock for approximately
$300.0 million
.
In 2016, the Company repurchased
3,940,087
shares of common stock for approximately
$374.1 million
. Additionally, the Company net-share settled capped call options on its common stock and received
711,376
shares during 2016.
In November 2016, the Company issued
3,504,165
shares of common stock to settle the purchase contracts of the 2013 Equity Units.
See "Other Equity Arrangements" below for further details of the above transactions.
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 June 2018, the Company amended the settlement date to April 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
. These shares are reflected as "Returned to treasury" in the table above.
COMMON STOCK RESERVED —
Common stock shares reserved for issuance under various employee and director stock plans at
December 29, 2018
and
December 30, 2017
are as follows:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Employee stock purchase plan
|
1,606,224
|
|
|
1,745,939
|
|
Other stock-based compensation plans
|
14,277,893
|
|
|
2,526,337
|
|
Total shares reserved
|
15,884,117
|
|
|
4,272,276
|
|
On January 22, 2018, the Board of Directors adopted the 2018 Omnibus Award Plan (the "2018 Plan") and authorized the issuance of
16,750,000
shares of the Company's common stock in connection with the awards pursuant to the 2018 Plan. No further awards will be issued under the Company's 2013 Long-Term Incentive Plan.
PREFERRED STOCK PURCHASE RIGHTS —
Prior to March 10, 2016, each outstanding share of common stock had a
1
share purchase right. Each purchase right could be exercised to purchase one two-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of
$220.00
, subject to adjustment. The rights, which did not have voting
rights, expired on
March 10, 2016
. There were no outstanding rights or shares of Series A Junior Participating Preferred Stock as of
December 29, 2018
.
STOCK-BASED COMPENSATION PLANS —
The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock units and other stock-based awards.
The plans are generally administered by the Compensation and Talent Development Committee of the Board of Directors, consisting of non-employee directors.
Stock Option Valuation Assumptions:
Stock options are granted at the fair market value of the Company’s stock on the date of grant and have a
10
-year term. Generally, stock option grants vest ratably over
4 years
from the date of grant.
The following describes how certain assumptions affecting the estimated fair value of stock options are determined: the dividend yield is computed as the annualized dividend rate at the date of grant divided by the strike price of the stock option; expected volatility is based on an average of the market implied volatility and historical volatility for the
5.25
year expected life; the risk-free interest rate is based on U.S. Treasury securities with maturities equal to the expected life of the option; and a seven percent forfeiture rate is assumed. The Company uses historical data in order to estimate forfeitures and holding period behavior for valuation purposes.
The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used to value grants made in
2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Average expected volatility
|
23.0
|
%
|
|
20.0
|
%
|
|
24.1
|
%
|
Dividend yield
|
2.0
|
%
|
|
1.5
|
%
|
|
2.0
|
%
|
Risk-free interest rate
|
2.9
|
%
|
|
2.2
|
%
|
|
2.0
|
%
|
Expected term
|
5.3 years
|
|
|
5.2 years
|
|
|
5.3 years
|
|
Fair value per option
|
$
|
26.54
|
|
|
$
|
30.71
|
|
|
$
|
23.41
|
|
Weighted-average vesting period
|
2.9 years
|
|
|
2.9 years
|
|
|
2.4 years
|
|
Stock Options:
The number of stock options and weighted-average exercise prices as of
December 29, 2018
are as follows:
|
|
|
|
|
|
|
|
|
Options
|
|
Price
|
Outstanding, beginning of year
|
6,561,404
|
|
|
$
|
102.56
|
|
Granted
|
1,255,750
|
|
|
130.88
|
|
Exercised
|
(267,378
|
)
|
|
80.66
|
|
Forfeited
|
(197,513
|
)
|
|
133.60
|
|
Outstanding, end of year
|
7,352,263
|
|
|
$
|
107.36
|
|
Exercisable, end of year
|
4,601,357
|
|
|
$
|
88.87
|
|
At
December 29, 2018
, the range of exercise prices on outstanding stock options was
$30.03
to
$168.78
. Stock option expense was
$23.9 million
,
$21.3 million
and
$22.8 million
for the years ended
December 29, 2018
,
December 30, 2017
and
December 31, 2016
, respectively. At
December 29, 2018
, the Company had
$53.3 million
of unrecognized pre-tax compensation expense for stock options. This expense will be recognized over the remaining vesting periods which are
1.8 years
on a weighted-average basis.
During
2018
, the Company received
$21.6 million
in cash from the exercise of stock options. The related tax benefit from the exercise of these options was
$3.3 million
. During
2018
,
2017
and
2016
, the total intrinsic value of options exercised was
$18.3 million
,
$72.7 million
and
$35.9 million
, respectively. When options are exercised, the related shares are issued from treasury stock.
An excess tax benefit is generated on the extent to which the actual gain, or spread, an optionee receives upon exercise of an option exceeds the fair value determined at the grant date; that excess spread over the fair value of the option times the applicable tax rate represents the excess tax benefit. During 2018 and 2017, the excess tax benefit arising from tax deductions in excess of recognized compensation cost totaled
$2.3 million
and
$18.3 million
, respectively, and was recorded in income tax expense. Prior to the adoption of ASU 2016-09, the 2016 excess tax benefit of
$9.1 million
was recorded in additional paid-in capital.
Outstanding and exercisable stock option information at
December 29, 2018
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Stock Options
|
|
Exercisable Stock Options
|
Exercise Price Ranges
|
Options
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise Price
|
|
Options
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise Price
|
$75.00 and below
|
2,031,976
|
|
|
2.20
|
|
$
|
62.36
|
|
|
2,031,976
|
|
|
2.20
|
|
$
|
62.36
|
|
$75.01 — $125.00
|
2,960,794
|
|
|
6.73
|
|
105.54
|
|
|
2,267,023
|
|
|
6.45
|
|
102.14
|
|
$125.01 and higher
|
2,359,493
|
|
|
9.43
|
|
148.40
|
|
|
302,358
|
|
|
8.78
|
|
167.51
|
|
|
7,352,263
|
|
|
6.35
|
|
$
|
107.36
|
|
|
4,601,357
|
|
|
4.73
|
|
$
|
88.87
|
|
Compensation cost for new grants is recognized on a straight-line basis over the vesting period. The expense for retirement eligible employees (those aged
55
and over and with
10
or more years of service) is recognized by the date they become retirement eligible, as such employees may retain their options for the
10
year contractual term in the event they retire prior to the end of the vesting period stipulated in the grant.
As of
December 29, 2018
, the aggregate intrinsic value of stock options outstanding and stock options exercisable was
$154.5 million
and
$152.8 million
, respectively.
Employee Stock Purchase Plan:
The Employee Stock Purchase Plan (“ESPP”) enables eligible employees in the United States, Canada and Israel to purchase shares of common stock at the lower of
85.0%
of the fair market value of the shares on the grant date (
$135.30
per share for fiscal year
2018
purchases) or
85.0%
of the fair market value of the shares on the last business day of each month. A maximum of
6,000,000
shares are authorized for subscription. During
2018
,
2017
and
2016
,
139,715
shares,
190,154
shares and
168,233
shares, respectively, were issued under the plan at average prices of
$121.00
,
$103.35
, and
$84.46
per share, respectively, and the intrinsic value of the ESPP purchases was
$3.1 million
,
$8.7 million
and
$4.8 million
, respectively. For
2018
, the Company received
$16.9 million
in cash from ESPP purchases, and there was no related tax benefit. The fair value of ESPP shares was estimated using the Black-Scholes option pricing model. ESPP compensation cost is recognized ratably over the
one
-year term based on actual employee stock purchases under the plan. The fair value of the employees’ purchase rights under the ESPP was estimated using the following assumptions for
2018
,
2017
and
2016
, respectively: dividend yield of
1.6%
,
1.8%
and
2.1%
; expected volatility of
16.0%
,
21.0%
and
20.0%
; risk-free interest rates of
1.6%
,
0.9%
, and
0.5%
; and expected lives of
one
year. The weighted-average fair value of those purchase rights granted in
2018
,
2017
and
2016
was
$43.69
,
$35.70
and
$29.68
, respectively. Total compensation expense recognized for ESPP amounted to
$6.6 million
for
2018
,
$6.7 million
for
2017
, and
$4.7 million
for
2016
.
Restricted Share Units and Awards:
Compensation cost for restricted share units and awards, including restricted shares granted to French employees in lieu of RSUs, (collectively “RSUs”) granted to employees is recognized ratably over the vesting term, which varies but is generally
4
years. RSU grants totaled
413,838
shares,
304,976
shares and
445,155
shares in
2018
,
2017
and
2016
, respectively. The weighted-average grant date fair value of RSUs granted in
2018
,
2017
and
2016
was
$133.90
,
$160.04
and
$118.20
per share, respectively.
Total compensation expense recognized for RSUs amounted to
$40.1 million
,
$31.7 million
and
$32.6 million
in
2018
,
2017
and
2016
, respectively. The actual tax benefit received in the period the shares were delivered was
$10.1 million
. The excess tax benefit recognized was
$1.8 million
,
$4.9 million
, and
$2.4 million
in
2018
,
2017
and
2016
, respectively. As of
December 29, 2018
, unrecognized compensation expense for RSUs amounted to
$93.0 million
and will be recognized over a weighted-average period of
2 years
.
A summary of non-vested restricted stock unit and award activity as of
December 29, 2018
, and changes during the
twelve
month period then ended is as follows:
|
|
|
|
|
|
|
|
|
Restricted Share
Units & Awards
|
|
Weighted-Average
Grant
Date Fair Value
|
Non-vested at December 30, 2017
|
1,084,675
|
|
|
$
|
121.89
|
|
Granted
|
413,838
|
|
|
133.90
|
|
Vested
|
(352,625
|
)
|
|
111.79
|
|
Forfeited
|
(71,153
|
)
|
|
124.62
|
|
Non-vested at December 29, 2018
|
1,074,735
|
|
|
$
|
129.65
|
|
The total fair value of shares vested (market value on the date vested) during
2018
,
2017
and
2016
was
$46.8 million
,
$46.6 million
and
$37.0 million
, respectively.
Non-employee members of the Board of Directors received restricted share-based grants which must be cash settled and accordingly mark-to-market accounting is applied. The Company recognized
$3.4 million
of income for these awards in 2018 and expense of
$7.0 million
and
$2.2 million
for
2017
and
2016
, respectively. Additionally, the Board of Directors were granted restricted share units for which compensation expense of
$1.2 million
,
$1.0 million
, and
$1.1 million
was recognized for
2018
,
2017
and
2016
, respectively.
Long-Term Performance Awards:
The Company has granted Long-Term Performance Awards (“LTIP”) under its 2018 Omnibus Award Plan and 2013 Long Term Incentive Plan to senior management employees for achieving Company performance measures. Awards are payable in shares of common stock, which may be restricted if the employee has not achieved certain stock ownership levels, and generally no award is made if the employee terminates employment prior to the payout date. LTIP grants were made in
2016
,
2017
and
2018
. Each grant has separate annual performance goals for each year within the respective
three
-year performance period. Earnings per share and cash flow return on investment represent
75%
of the share payout of each grant. There is a third market-based element, representing
25%
of the total grant, which measures the Company’s common stock return relative to peers over the performance period. The ultimate delivery of shares will occur in
2019
,
2020
and
2021
for the
2016
,
2017
and
2018
grants, respectively. Total payouts are based on actual performance in relation to these goals.
Expense recognized for these performance awards amounted to
$4.7 million
in
2018
,
$18.0 million
in
2017
, and
$20.0 million
in
2016
. With the exception of the market-based award, in the event performance goals are not met, compensation cost is not recognized and any previously recognized compensation cost is reversed.
A summary of the activity pertaining to the maximum number of shares that may be issued is as follows:
|
|
|
|
|
|
|
|
|
Share Units
|
|
Weighted-Average
Grant
Date Fair Value
|
Non-vested at December 30, 2017
|
692,913
|
|
|
$
|
97.80
|
|
Granted
|
184,435
|
|
|
155.83
|
|
Vested
|
(178,738
|
)
|
|
91.90
|
|
Forfeited
|
(71,203
|
)
|
|
95.11
|
|
Non-vested at December 29, 2018
|
627,407
|
|
|
$
|
116.85
|
|
OTHER EQUITY ARRANGEMENTS
In March 2018, the Company purchased from a financial institution "at-the money" capped call options with an approximate term of three years, on
3.2 million
shares of its common stock (subject to customary anti-dilution adjustments) for an aggregate premium of
$57.3 million
, or an average of
$17.96
per share. The premium paid was recorded as reduction of Shareowners' equity. 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.
The capped call has an initial lower strike price of
$156.86
and upper strike price of
$203.92
, which is approximately 30% higher than the closing price of the Company's common stock on March 13, 2018. As of
December 29, 2018
, due to the
customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of
$156.79
and an adjusted upper strike price of
$203.83
. The aggregate fair value of the options at December 29, 2018 was
$21.5
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 market value of the Company's common stock, over an average period. The market value determined will then be measured against the applicable strike price of the capped call transactions.
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) for an aggregate premium of
$73.5 million
, or an average of
$6.03
per share. The purpose of the capped call options was to hedge the risk of stock price appreciation between the lower and upper strike prices of the capped call options for a future share repurchase. The premium paid was recorded as a reduction of Shareowners’ equity. The contracts for the options provided that they may, at the Company’s election, subject to certain conditions, be cash settled, physically settled, modified-physically settled, or net-share settled (the default settlement method). The capped call options had various expiration dates and initially had an average lower strike price of
$86.07
and an average upper strike price of
$106.56
, subject to customary market 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. Additionally, the Company purchased directly from the counterparties participating in the net-share settlement,
3,381,162
shares for
$326.1 million
, equating to an average price of
$96.46
per 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. Additionally, the Company purchased
1,316,858
shares directly from the counterparty participating in the net-share settlement for
$124.2 million
. The Company also repurchased
2,446,287
shares of common stock in February 2016 for
$230.9 million
, equating to an average price of
$94.34
.
Equity Units and Capped Call Transactions
As described more fully in
Note H, Long-Term Debt and Financing Arrangements
, 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
shares of common stock 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. 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 receiving
418,234
shares using an average reference price of
$117.84
per common share. Refer to
Note H, Long-Term Debt and Financing Arrangements,
for further discussion.
$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
$726.0 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 December 29, 2018, due to the customary anti-dilution provisions, the conversion rate was
6.1783
, equivalent to a conversion price of approximately
$161.86
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 December 29, 2018, due to the customary anti-dilution provisions, the maximum settlement rate was
0.7259
, equivalent to a reference price of
$137.76
. 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 pay 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, which commenced August 15, 2017. The
$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 payment and the present value accretes to interest expense, approximately
$1.3 million
per year over the three-year term. As of December 29, 2018, the present value of the Contract Adjustment Payments was
$58.8 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.
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”).
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 has 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 December 29, 2018, due to the customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of
$161.86
and an adjusted upper strike price of
$179.08
.
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 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 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
$179.08
, the upper strike of the capped call as of December 29, 2018.
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 December 29, 2018 was
$8.8 million
.
K. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the changes in the accumulated balances for each component of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Currency translation adjustment and other
1
|
|
Unrealized (losses) gains 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
|
$
|
(1,586.7
|
)
|
|
$
|
(46.3
|
)
|
|
$
|
88.6
|
|
|
$
|
(377.2
|
)
|
|
$
|
(1,921.6
|
)
|
Other comprehensive income (loss) before reclassifications
|
473.8
|
|
|
(71.0
|
)
|
|
(85.2
|
)
|
|
(19.1
|
)
|
|
298.5
|
|
Adjustments related to sales of businesses
|
4.7
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
7.3
|
|
Reclassification adjustments to earnings
|
—
|
|
|
4.7
|
|
|
—
|
|
|
22.0
|
|
|
26.7
|
|
Net other comprehensive income (loss)
|
478.5
|
|
|
(66.3
|
)
|
|
(85.2
|
)
|
|
5.5
|
|
|
332.5
|
|
Balance - December 30, 2017
|
$
|
(1,108.2
|
)
|
|
$
|
(112.6
|
)
|
|
$
|
3.4
|
|
|
$
|
(371.7
|
)
|
|
$
|
(1,589.1
|
)
|
Other comprehensive (loss) income before reclassifications
|
(373.0
|
)
|
|
70.4
|
|
|
71.2
|
|
|
(9.7
|
)
|
|
(241.1
|
)
|
Reclassification adjustments to earnings
|
—
|
|
|
15.4
|
|
|
(11.3
|
)
|
|
11.8
|
|
|
15.9
|
|
Net other comprehensive (loss) income
|
(373.0
|
)
|
|
85.8
|
|
|
59.9
|
|
|
2.1
|
|
|
(225.2
|
)
|
Balance - December 29, 2018
|
$
|
(1,481.2
|
)
|
|
$
|
(26.8
|
)
|
|
$
|
63.3
|
|
|
$
|
(369.6
|
)
|
|
$
|
(1,814.3
|
)
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
2018
|
|
2017
|
|
|
Components of accumulated other comprehensive loss
|
|
Reclassification adjustments
|
|
Reclassification adjustments
|
|
Affected line item in Consolidated Statements of Operations
|
Realized (losses) gains on cash flow hedges
|
|
$
|
(17.9
|
)
|
|
$
|
8.4
|
|
|
Cost of sales
|
Realized losses on cash flow hedges
|
|
(15.3
|
)
|
|
(15.1
|
)
|
|
Interest expense
|
Total before taxes
|
|
$
|
(33.2
|
)
|
|
$
|
(6.7
|
)
|
|
|
Tax effect
|
|
17.8
|
|
|
2.0
|
|
|
Income taxes
|
Realized losses on cash flow hedges, net of tax
|
|
$
|
(15.4
|
)
|
|
$
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
Realized gains on net investment hedges
|
|
$
|
15.0
|
|
|
$
|
—
|
|
|
Other, net
|
Tax effect
|
|
(3.7
|
)
|
|
—
|
|
|
Income taxes
|
Realized gains on net investment hedges, net of tax
|
|
11.3
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Actuarial losses and prior service costs / credits
2
|
|
(14.8
|
)
|
|
(16.2
|
)
|
|
Other, net
|
Settlement loss
1
|
|
—
|
|
|
(12.2
|
)
|
|
Pension settlement
|
Settlement losses
1
|
|
(0.7
|
)
|
|
(3.4
|
)
|
|
Other, net
|
Total before taxes
|
|
(15.5
|
)
|
|
(31.8
|
)
|
|
|
Tax effect
|
|
3.7
|
|
|
9.8
|
|
|
Income taxes
|
Amortization of defined benefit pension items, net of tax
|
|
$
|
(11.8
|
)
|
|
$
|
(22.0
|
)
|
|
|
1
Pension settlement losses are more fully discussed in
Note L, Employee Benefit Plans
.
2
Prior year Amortization of actuarial losses and prior service costs / credits of
$9.7 million
and
$6.5 million
have been reclassed out of Cost of sales and Selling, general and administrative, respectively, and into Other, net as a result of the adoption of the new pension standard. Refer to
Note A, Significant Accounting Policies,
for further discussion.
L. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN (“ESOP
”) — Most U.S. employees may make contributions that do not exceed
25%
of their eligible compensation to a tax-deferred 401(k) savings plan, subject to restrictions under tax laws. Employees generally direct the investment of their own contributions into various investment funds. An employer match benefit is provided under the plan equal to one-half of each employee’s tax-deferred contribution up to the first
7%
of their compensation. Participants direct the entire employer match benefit such that no participant is required to hold the Company’s common stock in their 401(k) account. The employer match benefit totaled
$28.0 million
,
$24.8 million
and
$21.9 million
in
2018
,
2017
and
2016
, respectively. In addition to the regular employer match,
$0.7 million
and
$4.3 million
was allocated to the employee's accounts for forfeitures and a surplus resulting from appreciation of the Company's share value in 2018 and 2016, respectively. There was no additional allocation in 2017.
In addition, approximately
9,700
U.S. salaried and non-union hourly employees are eligible to receive a non-contributory benefit under the Core benefit plan. Core benefit allocations range from
2%
to
6%
of eligible employee compensation based on age. Allocations for benefits earned under the Core plan were
$29.0 million
in
2018
,
$25.4 million
in
2017
and
$17.6 million
in
2016
. Assets held in participant Core accounts are invested in target date retirement funds which have an age-based allocation of investments.
Shares of the Company's common stock held by the ESOP were purchased with the proceeds of borrowings from the Company in 1991 ("1991 internal loan"). Shareowners' equity reflects a reduction equal to the cost basis of unearned (unallocated) shares purchased with the internal borrowings. In
2018
,
2017
and
2016
, the Company made additional contributions to the ESOP for
$7.0 million
,
$4.8 million
, and
$7.9 million
, respectively, which were used by the ESOP to make additional payments on the 1991 internal loan. These payments triggered the release of
207,049
,
133,694
and
219,492
shares of unallocated stock in 2018, 2017 and 2016, respectively.
Net ESOP activity recognized is comprised of the cost basis of shares released, the cost of the aforementioned Core and 401(k) match defined contribution benefits, less the fair value of shares released and dividends on unallocated ESOP shares. The Company’s net ESOP activity resulted in expense of
$0.4 million
in
2018
, expense of
$1.3 million
in
2017
and income of
$3.1 million
in
2016
. ESOP expense is affected by the market value of the Company’s common stock on the monthly dates when shares are released. The weighted-average market value of shares released was
$139.45
per share in
2018
,
$138.60
per share in
2017
and
$103.88
per share in
2016
.
Unallocated shares are released from the trust based on current period debt principal and interest payments as a percentage of total future debt principal and interest payments. Dividends on both allocated and unallocated shares may be used for debt service and to credit participant accounts for dividends earned on allocated shares. Dividends paid on the shares acquired with the
1991
internal loan were used solely to pay internal loan debt service in all periods. Dividends on ESOP shares, which are charged to shareowners’ equity as declared, were
$7.7 million
in
2018
,
$8.4 million
in
2017
and
$9.0 million
in
2016
, net of the tax benefit which is recorded in earnings in 2018 and 2017 and within equity for 2016. Dividends on ESOP shares were utilized entirely for debt service in all years. Interest costs incurred by the ESOP on the
1991
internal loan, which have no earnings impact, were
$1.6 million
,
$2.2 million
and
$3.1 million
for
2018
,
2017
and
2016
, respectively. Both allocated and unallocated ESOP shares are treated as outstanding for purposes of computing earnings per share. As of
December 29, 2018
, the cumulative number of ESOP shares allocated to participant accounts was
14,973,185
, of which participants held
2,186,499
shares, and the number of unallocated shares was
568,172
. At
December 29, 2018
, there were
110,670
released shares in the ESOP trust holding account pending allocation. The Company made cash contributions totaling
$2.3 million
in
2018
,
$1.8 million
in
2017
and
$4.2 million
in
2016
excluding additional contributions of
$7.0 million
,
$4.8 million
and
$7.9 million
in
2018
,
2017
and
2016
, respectively, as discussed previously.
PENSION AND OTHER BENEFIT PLANS
— The Company sponsors pension plans covering most domestic hourly and certain executive employees, and approximately
15,500
foreign employees. Benefits are generally based on salary and years of service, except for U.S. collective bargaining employees whose benefits are based on a stated amount for each year of service.
The Company contributes to a number of multi-employer plans for certain collective bargaining U.S. employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
a. Assets contributed to the multiemployer plan by one employer may be used to provide benefit to employees of other participating employers.
b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be inherited by the remaining participating employers.
c. If the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
In addition, the Company also contributes to a number of multiemployer plans outside of the U.S. The foreign plans are insured, therefore, the Company’s obligation is limited to the payment of insurance premiums.
The Company has assessed and determined that none of the multiemployer plans to which it contributes are individually significant to the Company’s financial statements. The Company does not expect to incur a withdrawal liability or expect to significantly increase its contributions over the remainder of the contract period.
In addition to the multiemployer plans, various other defined contribution plans are sponsored worldwide.
The expense for such defined contribution plans, aside from the earlier discussed ESOP plans, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Multi-employer plan expense
|
$
|
7.3
|
|
|
$
|
7.2
|
|
|
$
|
5.1
|
|
Other defined contribution plan expense
|
$
|
12.9
|
|
|
$
|
27.5
|
|
|
$
|
15.4
|
|
The components of net periodic pension (benefit) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
7.5
|
|
|
$
|
8.7
|
|
|
$
|
9.4
|
|
|
$
|
15.2
|
|
|
$
|
13.7
|
|
|
$
|
12.5
|
|
Interest cost
|
42.8
|
|
|
43.2
|
|
|
45.3
|
|
|
28.6
|
|
|
29.1
|
|
|
37.0
|
|
Expected return on plan assets
|
(68.7
|
)
|
|
(64.4
|
)
|
|
(67.9
|
)
|
|
(46.5
|
)
|
|
(45.5
|
)
|
|
(44.5
|
)
|
Amortization of prior service cost (credit)
|
1.1
|
|
|
1.1
|
|
|
5.2
|
|
|
(1.3
|
)
|
|
(1.2
|
)
|
|
0.3
|
|
Actuarial loss amortization
|
7.8
|
|
|
8.3
|
|
|
7.1
|
|
|
8.5
|
|
|
9.4
|
|
|
5.9
|
|
Settlement / curtailment loss
|
—
|
|
|
2.9
|
|
|
—
|
|
|
0.7
|
|
|
12.7
|
|
|
0.7
|
|
Net periodic pension (benefit) expense
|
$
|
(9.5
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
5.2
|
|
|
$
|
18.2
|
|
|
$
|
11.9
|
|
The Company provides medical and dental benefits for certain retired employees in the United States and Canada. Approximately
15,000
participants are covered under these plans. Net periodic post-retirement benefit expense was comprised of the following elements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefit Plans
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Interest cost
|
1.6
|
|
|
1.7
|
|
|
1.7
|
|
Amortization of prior service credit
|
(1.3
|
)
|
|
(1.4
|
)
|
|
(1.2
|
)
|
Net periodic post-retirement expense
|
$
|
0.8
|
|
|
$
|
0.9
|
|
|
$
|
1.1
|
|
In accordance with the adoption of ASU 2017-07, the components of net periodic pension (benefit) expense, other than the service cost component, are included in Other, net in the Consolidated Statements of Operations.
For the year ended December 30, 2017, the Company recorded pre-tax charges of approximately
$12.2 million
, reflecting 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. Also, in accordance with policy,
$2.9 million
and
$0.5 million
in pre-tax settlement and curtailment losses were recorded for other U.S. and non-U.S. plans, respectively, in December 2017 due to standard lump sum benefit payments elected exceeding the sum of service cost and interest cost.
Changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss in
2018
are as follows:
|
|
|
|
|
(Millions of Dollars)
|
2018
|
Current year actuarial loss
|
$
|
10.6
|
|
Amortization of actuarial loss
|
(14.8
|
)
|
Prior service cost from plan amendments
|
16.3
|
|
Settlement / curtailment loss
|
(0.7
|
)
|
Currency / other
|
(14.8
|
)
|
Total decrease recognized in accumulated other comprehensive loss (pre-tax)
|
$
|
(3.4
|
)
|
The amounts in Accumulated other comprehensive loss expected to be recognized as components of net periodic benefit costs during 2019 total
$15.3 million
, representing amortization of actuarial losses.
The changes in the pension and other post-retirement benefit obligations, fair value of plan assets, as well as amounts recognized in the Consolidated Balance Sheets, are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Other Benefits
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of prior year
|
$
|
1,365.3
|
|
|
$
|
1,359.0
|
|
|
$
|
1,446.1
|
|
|
$
|
1,359.8
|
|
|
$
|
52.3
|
|
|
$
|
54.2
|
|
Service cost
|
7.5
|
|
|
8.7
|
|
|
15.2
|
|
|
13.7
|
|
|
0.5
|
|
|
0.6
|
|
Interest cost
|
42.8
|
|
|
43.2
|
|
|
28.6
|
|
|
29.1
|
|
|
1.6
|
|
|
1.7
|
|
Settlements/curtailments
|
—
|
|
|
(16.7
|
)
|
|
(4.3
|
)
|
|
(35.9
|
)
|
|
—
|
|
|
—
|
|
Actuarial (gain) loss
|
(106.2
|
)
|
|
98.1
|
|
|
(64.1
|
)
|
|
11.4
|
|
|
(6.2
|
)
|
|
(2.1
|
)
|
Plan amendments
|
0.2
|
|
|
0.5
|
|
|
16.0
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Foreign currency exchange rates
|
—
|
|
|
—
|
|
|
(77.0
|
)
|
|
136.0
|
|
|
(1.0
|
)
|
|
0.7
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Acquisitions, divestitures, and other
|
34.0
|
|
|
(7.0
|
)
|
|
3.4
|
|
|
(11.6
|
)
|
|
1.9
|
|
|
2.1
|
|
Benefits paid
|
(82.7
|
)
|
|
(120.5
|
)
|
|
(58.9
|
)
|
|
(56.7
|
)
|
|
(4.4
|
)
|
|
(4.9
|
)
|
Benefit obligation at end of year
|
$
|
1,260.9
|
|
|
$
|
1,365.3
|
|
|
$
|
1,305.3
|
|
|
$
|
1,446.1
|
|
|
$
|
44.8
|
|
|
$
|
52.3
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of prior year
|
$
|
1,114.1
|
|
|
$
|
1,067.1
|
|
|
$
|
1,099.2
|
|
|
$
|
1,015.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
(52.9
|
)
|
|
153.5
|
|
|
(18.6
|
)
|
|
63.5
|
|
|
—
|
|
|
—
|
|
Participant contributions
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
19.4
|
|
|
37.6
|
|
|
20.9
|
|
|
24.0
|
|
|
4.4
|
|
|
4.9
|
|
Settlements
|
—
|
|
|
(16.7
|
)
|
|
(4.2
|
)
|
|
(35.9
|
)
|
|
—
|
|
|
—
|
|
Foreign currency exchange rate changes
|
—
|
|
|
—
|
|
|
(61.5
|
)
|
|
96.4
|
|
|
—
|
|
|
—
|
|
Acquisitions, divestitures, and other
|
22.8
|
|
|
(6.9
|
)
|
|
(2.9
|
)
|
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(82.7
|
)
|
|
(120.5
|
)
|
|
(58.9
|
)
|
|
(56.7
|
)
|
|
(4.4
|
)
|
|
(4.9
|
)
|
Fair value of plan assets at end of plan year
|
$
|
1,020.7
|
|
|
$
|
1,114.1
|
|
|
$
|
974.3
|
|
|
$
|
1,099.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Funded status — assets less than benefit obligation
|
$
|
(240.2
|
)
|
|
$
|
(251.2
|
)
|
|
$
|
(331.0
|
)
|
|
$
|
(346.9
|
)
|
|
$
|
(44.8
|
)
|
|
$
|
(52.3
|
)
|
Unrecognized prior service cost (credit)
|
4.3
|
|
|
5.2
|
|
|
(18.2
|
)
|
|
(37.0
|
)
|
|
(3.4
|
)
|
|
(4.8
|
)
|
Unrecognized net actuarial loss
|
272.0
|
|
|
264.9
|
|
|
270.8
|
|
|
294.7
|
|
|
(7.6
|
)
|
|
(1.7
|
)
|
Net amount recognized
|
$
|
36.1
|
|
|
$
|
18.9
|
|
|
$
|
(78.4
|
)
|
|
$
|
(89.2
|
)
|
|
$
|
(55.8
|
)
|
|
$
|
(58.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Other Benefits
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Amounts recognized in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost (non-current)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
1.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current benefit liability
|
(7.7
|
)
|
|
(8.2
|
)
|
|
(9.1
|
)
|
|
(8.9
|
)
|
|
(4.8
|
)
|
|
(5.2
|
)
|
Non-current benefit liability
|
(232.5
|
)
|
|
(243.0
|
)
|
|
(322.9
|
)
|
|
(339.8
|
)
|
|
(40.0
|
)
|
|
(47.1
|
)
|
Net liability recognized
|
$
|
(240.2
|
)
|
|
$
|
(251.2
|
)
|
|
$
|
(331.0
|
)
|
|
$
|
(346.9
|
)
|
|
$
|
(44.8
|
)
|
|
$
|
(52.3
|
)
|
Accumulated other comprehensive loss (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
$
|
4.3
|
|
|
$
|
5.2
|
|
|
$
|
(18.2
|
)
|
|
$
|
(37.0
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(4.8
|
)
|
Actuarial loss (gain)
|
272.0
|
|
|
264.9
|
|
|
270.8
|
|
|
294.7
|
|
|
(7.6
|
)
|
|
(1.7
|
)
|
|
$
|
276.3
|
|
|
$
|
270.1
|
|
|
$
|
252.6
|
|
|
$
|
257.7
|
|
|
$
|
(11.0
|
)
|
|
$
|
(6.5
|
)
|
Net amount recognized
|
$
|
36.1
|
|
|
$
|
18.9
|
|
|
$
|
(78.4
|
)
|
|
$
|
(89.2
|
)
|
|
$
|
(55.8
|
)
|
|
$
|
(58.8
|
)
|
The accumulated benefit obligation for all defined benefit pension plans was
$2.513 billion
at
December 29, 2018
and
$2.754 billion
at
December 30, 2017
. Information regarding pension plans in which accumulated benefit obligations exceed plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Projected benefit obligation
|
$
|
1,260.9
|
|
|
$
|
1,365.3
|
|
|
$
|
1,275.7
|
|
|
$
|
1,415.9
|
|
Accumulated benefit obligation
|
$
|
1,257.6
|
|
|
$
|
1,358.4
|
|
|
$
|
1,228.6
|
|
|
$
|
1,368.7
|
|
Fair value of plan assets
|
$
|
1,020.7
|
|
|
$
|
1,114.1
|
|
|
$
|
945.0
|
|
|
$
|
1,068.5
|
|
Information regarding pension plans in which projected benefit obligations (inclusive of anticipated future compensation increases) exceed plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Projected benefit obligation
|
$
|
1,260.9
|
|
|
$
|
1,365.3
|
|
|
$
|
1,301.7
|
|
|
$
|
1,445.1
|
|
Accumulated benefit obligation
|
$
|
1,257.6
|
|
|
$
|
1,358.4
|
|
|
$
|
1,252.7
|
|
|
$
|
1,395.1
|
|
Fair value of plan assets
|
$
|
1,020.7
|
|
|
$
|
1,114.1
|
|
|
$
|
969.7
|
|
|
$
|
1,096.5
|
|
The major assumptions used in valuing pension and post-retirement plan obligations and net costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Other Benefits
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average assumptions used to determine benefit obligations at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.20
|
%
|
|
3.53
|
%
|
|
3.95
|
%
|
|
2.62
|
%
|
|
2.24
|
%
|
|
2.38
|
%
|
|
4.03
|
%
|
|
3.53
|
%
|
|
3.51
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.44
|
%
|
|
3.45
|
%
|
|
3.63
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
Weighted-average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate - service cost
|
3.72
|
%
|
|
4.10
|
%
|
|
4.32
|
%
|
|
2.15
|
%
|
|
2.27
|
%
|
|
2.54
|
%
|
|
5.11
|
%
|
|
4.53
|
%
|
|
4.27
|
%
|
Discount rate - interest cost
|
3.16
|
%
|
|
3.30
|
%
|
|
3.39
|
%
|
|
2.20
|
%
|
|
2.31
|
%
|
|
2.94
|
%
|
|
3.77
|
%
|
|
2.93
|
%
|
|
2.94
|
%
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
6.00
|
%
|
|
3.45
|
%
|
|
3.63
|
%
|
|
3.24
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
|
3.50
|
%
|
Expected return on plan assets
|
6.25
|
%
|
|
6.25
|
%
|
|
6.50
|
%
|
|
4.37
|
%
|
|
4.41
|
%
|
|
4.68
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
The expected rate of return on plan assets is determined considering the returns projected for the various asset classes and the relative weighting for each asset class. The Company will use a
5.51%
weighted-average expected rate of return assumption to determine the 2019 net periodic benefit cost.
PENSION PLAN ASSETS
— Plan assets are invested in equity securities, government and corporate bonds and other fixed income securities, money market instruments and insurance contracts. The Company’s worldwide asset allocations at
December 29, 2018
and
December 30, 2017
by asset category and the level of the valuation inputs within the fair value hierarchy established by ASC 820 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
(Millions of Dollars)
|
2018
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents
|
$
|
139.5
|
|
|
$
|
113.6
|
|
|
$
|
25.9
|
|
Equity securities
|
|
|
|
|
|
U.S. equity securities
|
248.7
|
|
|
83.4
|
|
|
165.3
|
|
Foreign equity securities
|
220.0
|
|
|
85.2
|
|
|
134.8
|
|
Fixed income securities
|
|
|
|
|
|
Government securities
|
642.3
|
|
|
205.5
|
|
|
436.8
|
|
Corporate securities
|
656.6
|
|
|
—
|
|
|
656.6
|
|
Insurance contracts
|
37.1
|
|
|
—
|
|
|
37.1
|
|
Other
|
50.8
|
|
|
—
|
|
|
50.8
|
|
Total
|
$
|
1,995.0
|
|
|
$
|
487.7
|
|
|
$
|
1,507.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
(Millions of Dollars)
|
2017
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents
|
$
|
42.0
|
|
|
$
|
19.5
|
|
|
$
|
22.5
|
|
Equity securities
|
|
|
|
|
|
U.S. equity securities
|
342.8
|
|
|
103.5
|
|
|
239.3
|
|
Foreign equity securities
|
329.3
|
|
|
111.8
|
|
|
217.5
|
|
Fixed income securities
|
|
|
|
|
|
Government securities
|
707.8
|
|
|
213.3
|
|
|
494.5
|
|
Corporate securities
|
698.3
|
|
|
—
|
|
|
698.3
|
|
Insurance contracts
|
39.2
|
|
|
—
|
|
|
39.2
|
|
Other
|
53.9
|
|
|
—
|
|
|
53.9
|
|
Total
|
$
|
2,213.3
|
|
|
$
|
448.1
|
|
|
$
|
1,765.2
|
|
U.S. and foreign equity securities primarily consist of companies with large market capitalizations and to a lesser extent mid and small capitalization securities. Government securities primarily consist of U.S. Treasury securities and foreign government securities with de minimus default risk. Corporate fixed income securities include publicly traded U.S. and foreign investment grade and to a small extent high yield securities. Assets held in insurance contracts are invested in the general asset pools of the various insurers, mainly debt and equity securities with guaranteed returns. Other investments include diversified private equity holdings. The level 2 investments are primarily comprised of institutional mutual funds that are not publicly traded; the investments held in these mutual funds are generally level 1 publicly traded securities.
The Company's investment strategy for pension assets focuses on a liability-matching approach with gradual de-risking taking place over a period of many years. The Company utilizes the current funded status to transition the portfolio toward investments that better match the duration and cash flow attributes of the underlying liabilities. Assets approximating
50%
of the Company's current pension liabilities have been invested in fixed income securities, using a liability / asset matching duration strategy, with the primary goal of mitigating exposure to interest rate movements and preserving the overall funded status of the underlying plans. Plan assets are broadly diversified and are invested to ensure adequate liquidity for immediate and medium term benefit payments. The Company’s target asset allocations include approximately
20%
-
40%
in equity securities, approximately
50%
-
70%
in fixed income securities and approximately
10%
in other securities. In
2018
, the funded status percentage (total plan assets divided by total projected benefit obligation) of all global pension plans was
78%
, which is consistent with
79%
in 2017 and
77%
in 2016.
CONTRIBUTIONS
—
The Company’s funding policy for its defined benefit plans is to contribute amounts determined annually on an actuarial basis to provide for current and future benefits in accordance with federal law and other regulations. The Company expects to contribute approximately
$44 million
to its pension and other post-retirement benefit plans in 2019.
EXPECTED FUTURE BENEFIT PAYMENTS
—
Benefit payments, inclusive of amounts attributable to estimated future employee service, are expected to be paid as follows over the next
10 years
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
|
Total
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Years 6-10
|
Future payments
|
|
$
|
1,400.2
|
|
|
$
|
136.1
|
|
|
$
|
137.6
|
|
|
$
|
139.3
|
|
|
$
|
139.5
|
|
|
$
|
141.4
|
|
|
$
|
706.3
|
|
These benefit payments will be funded through a combination of existing plan assets, the returns on those assets, and amounts to be contributed in the future by the Company.
HEALTH CARE COST TRENDS
—
The weighted average annual assumed rate of increase in the per-capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be
6.7%
for 2019, reducing gradually to
4.6%
by
2028
and remaining at that level thereafter. A one percentage point change in the assumed health care cost trend rate would affect the post-retirement benefit obligation as of
December 29, 2018
by approximately
$1.4 million
to
$1.6 million
, and would have an immaterial effect on the net periodic post-retirement benefit cost.
M. FAIR VALUE MEASUREMENTS
FASB 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 to manage these risks. These financial instruments are carried at fair value and are included within the scope of ASC 820. The Company determines the fair value of financial instruments through the use of matrix or model pricing, which utilizes observable inputs such as market interest and currency rates. When determining fair value 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
Carrying
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
December 29, 2018
|
|
|
|
|
|
|
|
Money market fund
|
$
|
4.8
|
|
|
$
|
4.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative assets
|
$
|
32.9
|
|
|
$
|
—
|
|
|
$
|
32.9
|
|
|
$
|
—
|
|
Derivative liabilities
|
$
|
21.3
|
|
|
$
|
—
|
|
|
$
|
21.3
|
|
|
$
|
—
|
|
Non-derivative hedging instrument
|
$
|
228.9
|
|
|
$
|
—
|
|
|
$
|
228.9
|
|
|
$
|
—
|
|
Contingent consideration liability
|
$
|
169.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
169.2
|
|
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 provides information about the Company's financial assets and liabilities not carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2018
|
|
December 30, 2017
1
|
(Millions of Dollars)
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Other investments
|
$
|
7.6
|
|
|
$
|
7.7
|
|
|
$
|
7.6
|
|
|
$
|
7.9
|
|
Long-term debt, including current portion
|
$
|
3,822.3
|
|
|
$
|
3,905.4
|
|
|
$
|
3,805.7
|
|
|
$
|
3,991.0
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A. Significant Accounting Policies
, for further discussion
As discussed in
Note E, 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
$134.5 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 of the contingent consideration liability is determined using a discounted cash flow analysis taking into consideration future sales projections, forecasted payments to Sears Holdings based on contractual royalty rates, and the related tax impacts.
The estimated fair value of the contingent consideration liability was
$169.2 million
and
$114.0 million
as of December 29, 2018 and December 30, 2017, respectively. The change in fair value was primarily driven by lower expected tax benefits of future payments to Sears Holdings as a result of recent changes in U.S. tax legislation. Approximately
$35 million
of the change in fair value was recorded in SG&A in the Consolidated Statements of Operations, while approximately
$20 million
was recorded in goodwill as an acquisition-date fair value adjustment. A 100 basis point reduction in the discount rate would result in an increase to the liability of approximately
$8 million
as of December 29, 2018.
The money market fund and other investments related to the West Coast Loading Corporation ("WCLC") trust are considered Level 1 instruments within the fair value hierarchy. The long-term debt instruments are considered Level 2 instruments and are measured using a discounted cash flow 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
December 29, 2018
and
December 30, 2017
. The fair values of foreign currency and interest rate swap agreements, comprising the derivative assets and liabilities in the table above, are based on current settlement values.
The Company had no significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during 2018 or 2017.
As discussed in
Note B, Accounts and Notes Receivable
, the Company had a deferred purchase price receivable related to sales of trade receivables. The deferred purchase price receivable was settled in full in January 2018, and historically was repaid in cash as receivables were collected, generally within
30 days
. The carrying value of the receivable as of December 30, 2017 approximated fair value.
Refer to
Note I, Financial Instruments
, for more details regarding derivative financial instruments,
Note S, 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 EXPENSES
Other, net is primarily comprised of intangible asset amortization expense (see
Note F, Goodwill and Intangible Assets
), currency-related gains or losses, environmental remediation expense, acquisition-related transaction and consulting costs, and certain pension gains or losses. Acquisition-related transaction and consulting costs of
$30.4 million
and
$58.2 million
were included in Other, net for the years ended
December 29, 2018
and December 30, 2017, respectively. In addition, Other, net included a
$77.7 million
environmental remediation charge recorded in 2018 related to a settlement with the Environmental Protection Agency ("EPA"). Refer to
Note S, Contingencies
, for further discussion of the EPA settlement.
Research and development costs, which are classified in SG&A, were
$275.8 million
,
$252.3 million
and
$204.4 million
for fiscal years
2018
,
2017
and
2016
, respectively. The increase in 2018 reflects the Company's continued focus on becoming known as one of the world's greatest innovators and its commitment to continue generating new core and breakthrough innovations.
O. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
A summary of the restructuring reserve activity from
December 30, 2017
to
December 29, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
December 30, 2017
|
|
Net
Additions
|
|
Usage
|
|
Currency
|
|
December 29, 2018
|
Severance and related costs
|
$
|
20.0
|
|
|
$
|
151.0
|
|
|
$
|
(64.1
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
105.7
|
|
Facility closures and asset impairments
|
3.2
|
|
|
9.3
|
|
|
(9.4
|
)
|
|
—
|
|
|
3.1
|
|
Total
|
$
|
23.2
|
|
|
$
|
160.3
|
|
|
$
|
(73.5
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
108.8
|
|
During
2018
, the Company recognized net restructuring charges and asset impairments of
$160.3 million
, which primarily relates to the cost reduction program in the fourth quarter of 2018. This amount reflects
$151.0 million
of net severance charges associated with the reduction of
4,184
employees and
$9.3 million
of facility closure and other restructuring costs.
The majority of the
$108.8 million
of reserves remaining as of
December 29, 2018
is expected to be utilized within the next twelve months.
Segments:
The
$160 million
of net restructuring charges and asset impairments for the year ended
December 29, 2018
includes:
$80 million
of net charges pertaining to the Tools & Storage segment;
$30 million
of net charges pertaining to the Industrial segment;
$36 million
of net charges pertaining to the Security segment; and
$14 million
of net charges pertaining to Corporate.
P. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations are classified into
three
reportable segments, which also represent its operating segments: Tools & Storage, Industrial and 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 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 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), loss (gain) on sales of businesses, pension settlement, restructuring charges and asset impairments, interest income, interest expense, and income taxes. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Refer to
Note F, Goodwill and Intangible Assets
,
and
Note O, Restructuring Charges and Asset Impairments,
for the amount of intangible asset amortization expense and net restructuring charges and asset impairments, respectively, attributable to each segment. Transactions between segments are not material. Segment assets primarily include cash, accounts receivable, inventory, other current assets, property, plant and equipment and intangible 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.
BUSINESS SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
|
2016
1
|
Net Sales
|
|
|
|
|
|
Tools & Storage
|
$
|
9,814.0
|
|
|
$
|
9,045.0
|
|
|
$
|
7,619.2
|
|
Industrial
|
2,187.8
|
|
|
1,974.3
|
|
|
1,864.0
|
|
Security
|
1,980.6
|
|
|
1,947.3
|
|
|
2,110.3
|
|
Consolidated
|
$
|
13,982.4
|
|
|
$
|
12,966.6
|
|
|
$
|
11,593.5
|
|
Segment Profit
|
|
|
|
|
|
Tools & Storage
|
$
|
1,393.1
|
|
|
$
|
1,438.9
|
|
|
$
|
1,258.4
|
|
Industrial
|
319.8
|
|
|
345.9
|
|
|
300.1
|
|
Security
|
169.3
|
|
|
211.7
|
|
|
267.9
|
|
Segment Profit
|
1,882.2
|
|
|
1,996.5
|
|
|
1,826.4
|
|
Corporate overhead
|
(202.8
|
)
|
|
(217.4
|
)
|
|
(190.9
|
)
|
Other, net
|
(287.0
|
)
|
|
(269.2
|
)
|
|
(185.9
|
)
|
(Loss) gain on sales of businesses
|
(0.8
|
)
|
|
264.1
|
|
|
—
|
|
Pension settlement
|
—
|
|
|
(12.2
|
)
|
|
—
|
|
Restructuring charges and asset impairments
|
(160.3
|
)
|
|
(51.5
|
)
|
|
(49.0
|
)
|
Interest income
|
68.7
|
|
|
40.1
|
|
|
23.2
|
|
Interest expense
|
(277.9
|
)
|
|
(222.6
|
)
|
|
(194.5
|
)
|
Earnings before income taxes
|
$
|
1,022.1
|
|
|
$
|
1,527.8
|
|
|
$
|
1,229.3
|
|
Capital and Software Expenditures
|
|
|
|
|
|
Tools & Storage
|
$
|
353.7
|
|
|
$
|
327.2
|
|
|
$
|
227.3
|
|
Industrial
|
95.8
|
|
|
76.2
|
|
|
81.1
|
|
Security
|
42.6
|
|
|
39.0
|
|
|
38.6
|
|
Consolidated
|
$
|
492.1
|
|
|
$
|
442.4
|
|
|
$
|
347.0
|
|
Depreciation and Amortization
|
|
|
|
|
|
Tools & Storage
|
$
|
300.1
|
|
|
$
|
271.9
|
|
|
$
|
203.0
|
|
Industrial
|
125.9
|
|
|
107.4
|
|
|
106.8
|
|
Security
|
80.5
|
|
|
81.4
|
|
|
98.2
|
|
Consolidated
|
$
|
506.5
|
|
|
$
|
460.7
|
|
|
$
|
408.0
|
|
Segment Assets
|
|
|
|
|
|
Tools & Storage
|
$
|
13,122.6
|
|
|
$
|
12,870.3
|
|
|
$
|
8,524.9
|
|
Industrial
|
3,620.5
|
|
|
3,413.3
|
|
|
3,359.3
|
|
Security
|
3,413.6
|
|
|
3,407.0
|
|
|
3,139.2
|
|
|
20,156.7
|
|
|
19,690.6
|
|
|
15,023.4
|
|
Assets held for sale
|
—
|
|
|
—
|
|
|
523.4
|
|
Corporate assets
|
(748.7
|
)
|
|
(592.9
|
)
|
|
108.2
|
|
Consolidated
|
$
|
19,408.0
|
|
|
$
|
19,097.7
|
|
|
$
|
15,655.0
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue and pension standards. Refer to
Note A, Significant Accounting Policies
, 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 times corporate-related cash accounts will be in a net liability position.
Sales to Lowe's were approximately
17%
,
16%
and
15%
of the Tools & Storage segment net sales in
2018
,
2017
and
2016
, respectively. Sales to The Home Depot were approximately
14%
,
13%
, and
14%
of the Tools & Storage segment net sales in
2018
,
2017
and
2016
, respectively.
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 years ended
December 29, 2018
and
December 30, 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 years ended
December 29, 2018
,
December 30, 2017
and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Industrial
|
11.9
|
%
|
|
13.4
|
%
|
|
12.7
|
%
|
Security
|
44.9
|
%
|
|
48.1
|
%
|
|
41.5
|
%
|
The following table is a further disaggregation of the Industrial segment revenue for the years ended
December 29, 2018
,
December 30, 2017
and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Engineered Fastening
|
$
|
1,766.6
|
|
|
$
|
1,554.3
|
|
|
$
|
1,489.0
|
|
Infrastructure
|
421.2
|
|
|
420.0
|
|
|
375.0
|
|
Industrial
|
$
|
2,187.8
|
|
|
$
|
1,974.3
|
|
|
$
|
1,864.0
|
|
GEOGRAPHIC AREAS
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
|
2016
1
|
Net Sales
|
|
|
|
|
|
United States
|
$
|
7,700.3
|
|
|
$
|
7,025.7
|
|
|
$
|
6,280.8
|
|
Canada
|
628.3
|
|
|
583.3
|
|
|
519.8
|
|
Other Americas
|
801.5
|
|
|
790.7
|
|
|
650.4
|
|
France
|
627.8
|
|
|
623.8
|
|
|
595.1
|
|
Other Europe
|
2,989.9
|
|
|
2,791.1
|
|
|
2,457.7
|
|
Asia
|
1,234.6
|
|
|
1,152.0
|
|
|
1,089.7
|
|
Consolidated
|
$
|
13,982.4
|
|
|
$
|
12,966.6
|
|
|
$
|
11,593.5
|
|
Property, Plant & Equipment
|
|
|
|
|
|
United States
|
$
|
1,018.3
|
|
|
$
|
850.2
|
|
|
$
|
663.4
|
|
Canada
|
25.5
|
|
|
30.0
|
|
|
29.3
|
|
Other Americas
|
112.7
|
|
|
111.2
|
|
|
95.8
|
|
France
|
63.9
|
|
|
65.1
|
|
|
57.5
|
|
Other Europe
|
356.9
|
|
|
378.0
|
|
|
322.3
|
|
Asia
|
337.9
|
|
|
308.0
|
|
|
282.9
|
|
Consolidated
|
$
|
1,915.2
|
|
|
$
|
1,742.5
|
|
|
$
|
1,451.2
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
Q. INCOME TAXES
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Act”). Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, changes to U.S. international taxation, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. Pursuant to Staff Accounting Bulletin No. 118 (“SAB 118”) issued by the SEC in December 2017, issuers were permitted up to one year from the enactment of the Act to complete the accounting for the income tax effects of the Act (“the measurement period”). The Company completed its accounting for the tax effects of the Act within the measurement period and has included those effects as a component of Income taxes in the Consolidated Statements of Operations.
Deferred tax assets and liabilities: U.S. deferred tax assets and liabilities were remeasured based on the rates at which they are expected to reverse in the future, resulting in an income tax benefit of approximately
$230.6 million
. The Company recorded an income tax provision of
$21.9 million
in 2018 as an adjustment to its provisional income tax benefit recorded in 2017 of
$252.5 million
.
Transition Tax: The one-time transition tax, which totals
$450.1 million
, is based on the Company’s post-1986 earnings and profits that were previously deferred from U.S. income taxes. In 2018, the Company recorded a
$10.6 million
adjustment to its provisional income tax payable of approximately
$460.7 million
recorded in December 2017. The Company has elected to pay its transition tax over the eight-year period provided in the Act. As of December 29, 2018, the remaining balance of the transition tax obligation is
$365.7 million
, which will be paid over the next seven years.
Indefinite reinvestment: Following enactment of the Act and the associated one-time transition tax, in general, repatriation of foreign earnings to the United States can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. While repatriation of some foreign earnings held outside the United States may be restricted by local laws, most of the Company’s foreign earnings as of December 2017 could be repatriated to the United States. As a result of the Act, the Company analyzed all unrepatriated foreign earnings as of December 2017, and concluded that it no longer asserts indefinite reinvestment on approximately
$4.8 billion
. The deferred tax liability associated with these unrepatriated foreign earnings is approximately
$217.7 million
. The Company recorded a
$188.3 million
income tax provision in 2018, mainly comprised of U.S. state and non-U.S. jurisdictional withholding taxes. The Company otherwise continues to consider the remaining undistributed earnings of its foreign subsidiaries to be permanently reinvested based on its current plans for use outside of the U.S. and accordingly no taxes have been provided on such earnings.
Significant components of the Company’s deferred tax assets and liabilities at the end of each fiscal year were as follows:
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
$
|
128.5
|
|
|
$
|
98.4
|
|
Amortization of intangibles
|
672.8
|
|
|
668.0
|
|
Liability on undistributed foreign earnings
|
202.5
|
|
|
4.9
|
|
Deferred revenue
|
19.1
|
|
|
26.5
|
|
Other
|
54.8
|
|
|
62.2
|
|
Total deferred tax liabilities
|
$
|
1,077.7
|
|
|
$
|
860.0
|
|
Deferred tax assets:
|
|
|
|
Employee benefit plans
|
$
|
222.1
|
|
|
$
|
256.4
|
|
Doubtful accounts and other customer allowances
|
14.7
|
|
|
16.3
|
|
Basis differences in liabilities
|
93.3
|
|
|
84.5
|
|
Operating loss, capital loss and tax credit carryforwards
|
710.6
|
|
|
632.2
|
|
Currency and derivatives
|
11.6
|
|
|
48.5
|
|
Other
|
121.0
|
|
|
88.6
|
|
Total deferred tax assets
|
$
|
1,173.3
|
|
|
$
|
1,126.5
|
|
Net Deferred Tax Asset (Liability) before Valuation Allowance
|
$
|
95.6
|
|
|
$
|
266.5
|
|
Valuation Allowance
|
$
|
(626.7
|
)
|
|
$
|
(516.7
|
)
|
Net Deferred Tax Liability after Valuation Allowance
|
$
|
(531.1
|
)
|
|
$
|
(250.2
|
)
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
A valuation allowance is recorded on certain deferred tax assets if it has been determined it is more likely than not that all or a portion of these assets will not be realized. The Company recorded a valuation allowance of
$626.7 million
and
$516.7 million
on deferred tax assets existing as of
December 29, 2018
and
December 30, 2017
, respectively. The valuation allowance in 2018 and 2017 was primarily attributable to foreign and state net operating loss carryforwards and foreign capital loss carryforwards.
As of
December 29, 2018
, the Company has approximately
$5.5 billion
of unremitted foreign earnings and profits. Of the total amount, the Company has provided for deferred taxes of
$202.5 million
on approximately
$3.6 billion
, which is not indefinitely reinvested primarily due to the changes brought about by the Act. The Company otherwise continues to consider the remaining undistributed earnings of its foreign subsidiaries to be permanently reinvested based on its current plans for use outside of the U.S. and accordingly no taxes have been provided on such earnings. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes applicable to such earnings are not readily determinable or practicable to calculate.
Net operating loss carryforwards of
$2.6 billion
as of
December 29, 2018
are available to reduce future tax obligations of certain U.S. and foreign companies. The net operating loss carryforwards have various expiration dates beginning in 2019 with certain jurisdictions having indefinite carryforward periods. The foreign capital loss carryforwards of
$21.3 million
as of
December 29, 2018
have indefinite carryforward periods.
The components of earnings before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
|
2016
1
|
United States
|
$
|
444.1
|
|
|
$
|
715.2
|
|
|
$
|
307.1
|
|
Foreign
|
578.0
|
|
|
812.6
|
|
|
922.2
|
|
Earnings before income taxes
|
$
|
1,022.1
|
|
|
$
|
1,527.8
|
|
|
$
|
1,229.3
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
Income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
|
2016
1
|
Current:
|
|
|
|
|
|
Federal
|
$
|
25.4
|
|
|
$
|
590.6
|
|
|
$
|
84.8
|
|
Foreign
|
175.0
|
|
|
224.6
|
|
|
191.5
|
|
State
|
24.8
|
|
|
25.4
|
|
|
10.6
|
|
Total current
|
$
|
225.2
|
|
|
$
|
840.6
|
|
|
$
|
286.9
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
29.7
|
|
|
$
|
(513.0
|
)
|
|
$
|
18.7
|
|
Foreign
|
132.7
|
|
|
(33.0
|
)
|
|
(26.1
|
)
|
State
|
28.7
|
|
|
6.3
|
|
|
(17.8
|
)
|
Total deferred
|
191.1
|
|
|
(539.7
|
)
|
|
(25.2
|
)
|
Income taxes
|
$
|
416.3
|
|
|
$
|
300.9
|
|
|
$
|
261.7
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
Net income taxes paid during
2018
,
2017
and
2016
were
$339.4 million
,
$273.6 million
and
$233.3 million
, respectively. The
2018
,
2017
and
2016
amounts include refunds of
$43.7 million
,
$28.5 million
and
$30.5 million
, respectively, primarily related to prior year overpayments and settlement of tax audits.
The reconciliation of the U.S. federal statutory income tax provision to Income taxes in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
1
|
|
2016
1
|
Tax at statutory rate
|
$
|
214.6
|
|
|
$
|
534.1
|
|
|
$
|
429.1
|
|
State income taxes, net of federal benefits
|
24.7
|
|
|
13.3
|
|
|
12.5
|
|
Foreign tax rate differential
|
(33.2
|
)
|
|
(149.0
|
)
|
|
(166.3
|
)
|
Uncertain tax benefits
|
4.5
|
|
|
64.4
|
|
|
32.0
|
|
Tax audit settlements
|
(5.2
|
)
|
|
(16.5
|
)
|
|
(10.5
|
)
|
Change in valuation allowance
|
5.1
|
|
|
(5.4
|
)
|
|
38.9
|
|
Change in deferred tax liabilities on undistributed foreign earnings
|
—
|
|
|
(94.1
|
)
|
|
(38.7
|
)
|
Basis difference for businesses Held for Sale
|
—
|
|
|
27.9
|
|
|
(27.9
|
)
|
Stock-based compensation
|
(4.1
|
)
|
|
(23.2
|
)
|
|
—
|
|
Sale of businesses
|
—
|
|
|
(47.3
|
)
|
|
—
|
|
U.S. Federal tax reform
|
199.6
|
|
|
23.6
|
|
|
—
|
|
Other-net
|
10.3
|
|
|
(26.9
|
)
|
|
(7.4
|
)
|
Income taxes
|
$
|
416.3
|
|
|
$
|
300.9
|
|
|
$
|
261.7
|
|
1
Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to
Note A, Significant Accounting Policies
, for further discussion.
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state, and foreign jurisdictions. In the normal course, the Company is subject to examinations by taxing authorities throughout the world. The Internal Revenue Service is currently examining its consolidated U.S. income tax returns for the 2010-2013 tax years. With few exceptions, as of
December 29, 2018
, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2010.
The Company’s liabilities for unrecognized tax benefits relate to U.S. and various foreign jurisdictions. The following table summarizes the activity related to the unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
387.8
|
|
|
$
|
309.8
|
|
|
$
|
283.1
|
|
Additions based on tax positions related to current year
|
28.3
|
|
|
34.6
|
|
|
14.9
|
|
Additions based on tax positions related to prior years
|
103.0
|
|
|
82.5
|
|
|
53.9
|
|
Reductions based on tax positions related to prior years
|
(91.5
|
)
|
|
(4.2
|
)
|
|
(34.2
|
)
|
Settlements
|
(2.5
|
)
|
|
(0.3
|
)
|
|
5.4
|
|
Statute of limitations expirations
|
(18.8
|
)
|
|
(34.6
|
)
|
|
(13.3
|
)
|
Balance at end of year
|
$
|
406.3
|
|
|
$
|
387.8
|
|
|
$
|
309.8
|
|
The gross unrecognized tax benefits at
December 29, 2018
and
December 30, 2017
include
$397.0 million
and
$368.7 million
, respectively, of tax benefits that, if recognized, would impact the effective tax rate. The liability for potential penalties and interest related to unrecognized tax benefits was decreased by
$15.8 million
in
2018
, increased by
$3.8 million
in
2017
and increased by
$4.6 million
in
2016
. The liability for potential penalties and interest totaled
$52.1 million
as of
December 29, 2018
,
$67.9 million
as of
December 30, 2017
, and
$64.1 million
as of
December 31, 2016
. The Company classifies all tax-related interest and penalties as income tax expense.
The Company considers many factors when evaluating and estimating its tax positions and the impact on income tax expense, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next 12 months. These changes may be the result of settlement of ongoing audits or final decisions in transfer pricing matters. The Company cannot reasonably estimate the range of the potential change.
R. COMMITMENTS AND GUARANTEES
COMMITMENTS —
The Company has non-cancelable operating lease agreements, principally related to facilities, vehicles, machinery and equipment. Minimum payments have not been reduced by minimum sublease rentals of
$2.2 million
due in the future under non-cancelable subleases. Rental expense, exclusive of sublease income, for operating leases was
$177.6 million
in
2018
,
$150.4 million
in
2017
, and
$124.2 million
in
2016
.
The following is a summary of the Company’s future commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Total
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Operating lease obligations
|
$
|
532.4
|
|
|
$
|
134.8
|
|
|
$
|
107.4
|
|
|
$
|
80.3
|
|
|
$
|
57.9
|
|
|
$
|
40.2
|
|
|
$
|
111.8
|
|
Marketing commitments
|
51.8
|
|
|
32.3
|
|
|
9.1
|
|
|
6.8
|
|
|
3.2
|
|
|
0.4
|
|
|
—
|
|
Total
|
$
|
584.2
|
|
|
$
|
167.1
|
|
|
$
|
116.5
|
|
|
$
|
87.1
|
|
|
$
|
61.1
|
|
|
$
|
40.6
|
|
|
$
|
111.8
|
|
The Company has numerous assets, predominantly real estate, vehicles and equipment, under various lease arrangements. The Company routinely exercises various lease renewal options and from time to time purchases leased assets for fair value at the end of lease terms.
The Company is a party to synthetic leases for one of its major distribution centers and two of its office buildings. The programs qualify as operating leases for accounting purposes, where only the monthly lease cost is recorded in earnings and the liability and value of the underlying assets are off-balance sheet.
GUARANTEES —
The Company's financial guarantees at
December 29, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Term
|
|
Maximum
Potential
Payment
|
|
Carrying
Amount of
Liability
|
Guarantees on the residual values of leased properties
|
One to four years
|
|
$
|
99.6
|
|
|
$
|
—
|
|
Standby letters of credit
|
Up to three years
|
|
68.0
|
|
|
—
|
|
Commercial customer financing arrangements
|
Up to six years
|
|
67.6
|
|
|
7.6
|
|
Total
|
|
|
$
|
235.2
|
|
|
$
|
7.6
|
|
The Company has guaranteed a portion of the residual value arising from its previously mentioned synthetic leases. The lease guarantees aggregate
$99.6 million
while the fair value of the underlying assets is estimated at
$117.2 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 lease guarantees.
The Company has issued
$68.0 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 truck 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
$67.6 million
and the
$7.6 million
carrying value of the guarantees issued is recorded in debt and other liabilities as appropriate in the Consolidated Balance Sheets.
The Company provides warranties which vary across its businesses. The types of product warranties offered generally range from one year to limited lifetime. There are also certain products with no warranty. Further, the Company sometimes incurs discretionary costs to service its products in connection with product performance issues. Historical warranty and service claim experience forms the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability as new information becomes available.
Following is a summary of the warranty liability activity for the years ended
December 29, 2018
,
December 30, 2017
, and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2018
|
|
2017
|
|
2016
|
Balance beginning of period
1
|
$
|
108.5
|
|
|
$
|
103.4
|
|
|
$
|
105.4
|
|
Warranties and guarantees issued
|
110.4
|
|
|
105.3
|
|
|
97.2
|
|
Warranty payments and currency
|
(116.8
|
)
|
|
(100.2
|
)
|
|
(99.2
|
)
|
Balance end of period
1
|
$
|
102.1
|
|
|
$
|
108.5
|
|
|
$
|
103.4
|
|
1
2018 beginning of period balance and 2017 end of period balance have been recast as a result of the adoption of new accounting standards. Refer to
Note A, Significant Accounting Policies
, for further discussion.
S. 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.
On January 25, 2019, IPS Worldwide, LLC ("IPS"), a third-party provider of freight payment processing services for the Company, filed for Chapter 11 bankruptcy protection and listed the Company as an unsecured creditor. As of December 29, 2018, there were outstanding obligations of approximately
$50.8 million
owed to certain of the Company's freight carriers. Such amounts had previously been remitted to IPS through a third-party financing program for ultimate payment to these freight carriers. However, due to nonperformance of IPS with respect to processing these payments and the Company's obligation to its freight carriers, an incremental
$50.8 million
charge has been recorded in the fourth quarter of 2018. This charge does not include any amounts that the Company will attempt to recover from insurance and/or through the bankruptcy proceedings, which could ultimately reduce the loss exposure recorded.
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 at current and former manufacturing 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
28
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
December 29, 2018
and
December 30, 2017
, the Company had reserves of
$246.6 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,
$58.1 million
is classified as current and
$188.5 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
$214.0 million
to
$344.3 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
December 29, 2018
, the Company has recorded
$12.4 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 and liquidated 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
December 29, 2018
, the Company's net cash obligation associated with remediation activities including WCLC is
$234.2 million
.
The EPA also asserted claims in federal court in Rhode Island against Black & Decker and Emhart related to environmental contamination found at the Centredale Manor Restoration Project Superfund Site ("Centredale"), located in North Providence, Rhode Island. The EPA discovered a variety of contaminants at the site, including but not limited to, dioxins, polychlorinated biphenyls, and pesticides. The EPA alleged that Black & Decker and Emhart 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 Emhart contested the EPA's allegation that they are responsible for the contamination, and 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 Emhart contested 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 proposed other equally-protective, more cost-effective alternatives. On June 10, 2014, the EPA issued an Administrative Order under Sec. 106 of CERCLA, instructing Black & Decker and Emhart to perform the remediation of Centredale pursuant to the ROD. Black & Decker and Emhart disputed the factual, legal and scientific bases cited by the EPA for such an administrative order and provided the EPA with numerous good-faith bases for their declination to comply with the administrative order. Black & Decker and Emhart then vigorously litigated the issue of their liability for environmental conditions at the Centredale site, including completing trial on Phase 1 of the proceedings in late July 2015 and completing trial on Phase 2 of the proceedings in April 2017. Following the Phase I trial, the Court found that dioxin contamination at the
Centredale site was not "divisible" and that Black & Decker and Emhart were jointly and severally liable for dioxin contamination at the site. Following the Phase 2 trial, the Court found that certain components of the EPA's selected remedy were arbitrary and capricious, 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 & Decker and Emhart had sufficient cause for their declination to comply with the EPA's June 10, 2014 administrative order and that no associated civil penalties or fines were warranted. The United States filed a Motion for Reconsideration concerning the Court's Phase 2 rulings and appealed the ruling to the United States Court of Appeals for the First Circuit. Black & Decker and Emhart's Motion to Dismiss the Appeal was denied without prejudice for consideration with the merits. On July 9, 2018, a Consent 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 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. Phase 3 of the litigation, which is in its relatively early stages, will address the potential allocation of liability to other PRPs who may have contributed to contamination of the Centredale site with dioxins, polychlorinated biphenyls and other contaminants of concern. Based on the Company's estimated remediation and response cost obligations arising out of the settlement 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), the Company has increased its reserve for this site. Accordingly, in the second quarter of 2018, a
$77.7 million
increase was recorded in Other, net in the Consolidated Statements of Operations. As of December 29, 2018, the Company has reserved
$145.2 million
for this site.
The Company and approximately 47 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 Record 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 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. 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' allocation to be determined through a complex settlement analysis using a third-party allocator. The Company currently is participating in the allocation process that is expected to be completed in late 2019. The Company asserts that it did not discharge dioxins, furans or polychlorinated biphenyls and should be eligible for a cash out settlement. 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 include the estimated cost ($165 million) 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 for OCC's ongoing activities in connection with the River. As of November 30, 2018, the Company's joint defense group's motion to dismiss OCC's complaint on various grounds and OCC's opposition brief were filed with the court. A decision on the motion to dismiss is expected in 2019. There has been no determination as to how the RI/FS will be modified in light of the EPA'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 litigation and 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.
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 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.
The environmental liability for certain sites that have cash payments beyond the current year that are fixed or reliably determinable have been discounted using a rate of
2.3%
to
3.3%
, depending on the expected timing of disbursements. The discounted and undiscounted amount of the liability relative to these sites is
$39.4 million
and
$49.8 million
, respectively. The payments relative to these sites are expected to be
$2.5 million
in
2019
,
$3.0 million
in
2020
,
$3.0 million
in
2021
,
$3.0 million
in
2022
,
$3.0 million
in
2023
, and
$35.3 million
thereafter.
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.
T. DIVESTITURES
On January 3, 2017, the Company sold a business within the Tools & Storage segment for
$25.6 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 included the commercial hardware brands of Best Access, phi Precision and GMT, for net proceeds of
$717.1 million
. 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
$13.7 million
. As a result of these sales, the Company recognized a net pre-tax gain of
$264.1 million
in 2017, primarily related to the sale of the mechanical security businesses. These disposals do not qualify as discontinued operations and are included in the Company's Consolidated Statements of Operations for all periods presented through their respective dates of sale in 2017. The Company recognized pre-tax income for these businesses of
$7.0 million
and
$50.0 million
for the years ended December 30, 2017 and December 31, 2016, respectively.
In January 2019, the Company entered into an agreement to sell its Sargent & Greenleaf mechanical locks business within the Security segment. The divestiture will allow the Company to invest in other areas of the Security business that fit into its long-term growth strategy. The transaction is expected to close in the first half of 2019.
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
(Millions of Dollars, except per share amounts)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
3,209.3
|
|
|
$
|
3,643.6
|
|
|
$
|
3,494.8
|
|
|
$
|
3,634.7
|
|
|
$
|
13,982.4
|
|
Gross profit
|
|
1,165.7
|
|
|
1,287.1
|
|
|
1,238.4
|
|
|
1,159.9
|
|
|
4,851.1
|
|
Selling, general and administrative
(1)
|
|
785.6
|
|
|
805.8
|
|
|
798.9
|
|
|
781.4
|
|
|
3,171.7
|
|
Net earnings (loss)
|
|
170.1
|
|
|
293.4
|
|
|
248.3
|
|
|
(106.0
|
)
|
|
605.8
|
|
Less: Net (loss) gain attributable to non-controlling interest
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
0.5
|
|
|
0.8
|
|
|
0.6
|
|
Net Earnings (Loss) Attributable to Common Shareowners
|
|
$
|
170.6
|
|
|
$
|
293.6
|
|
|
$
|
247.8
|
|
|
$
|
(106.8
|
)
|
|
$
|
605.2
|
|
Earnings (loss) per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.13
|
|
|
$
|
1.96
|
|
|
$
|
1.67
|
|
|
$
|
(0.72
|
)
|
|
$
|
4.06
|
|
Diluted
|
|
$
|
1.11
|
|
|
$
|
1.93
|
|
|
$
|
1.65
|
|
|
$
|
(0.72
|
)
|
|
$
|
3.99
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net Sales
(2)
|
|
$
|
2,856.3
|
|
|
$
|
3,286.7
|
|
|
$
|
3,359.4
|
|
|
$
|
3,464.2
|
|
|
$
|
12,966.6
|
|
Gross profit
(2)
|
|
1,066.0
|
|
|
1,213.3
|
|
|
1,253.0
|
|
|
1,246.0
|
|
|
4,778.3
|
|
Selling, general and administrative
(1)(2)
|
|
690.3
|
|
|
744.2
|
|
|
768.9
|
|
|
795.8
|
|
|
2,999.2
|
|
Net earnings
|
|
393.7
|
|
|
277.6
|
|
|
274.5
|
|
|
281.1
|
|
|
1,226.9
|
|
Less: Net loss attributable to non-controlling interest
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Net Earnings Attributable to Common Shareowners
(2)
|
|
$
|
393.7
|
|
|
$
|
277.6
|
|
|
$
|
274.5
|
|
|
$
|
281.5
|
|
|
$
|
1,227.3
|
|
Earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
Basic
(2)
|
|
$
|
2.64
|
|
|
$
|
1.86
|
|
|
$
|
1.83
|
|
|
$
|
1.88
|
|
|
$
|
8.20
|
|
Diluted
(2)
|
|
$
|
2.60
|
|
|
$
|
1.82
|
|
|
$
|
1.80
|
|
|
$
|
1.84
|
|
|
$
|
8.05
|
|
(1)
Includes provision for doubtful accounts.
(2)
Prior year amounts have been recast as a result of the adoption of the new revenue and pension standards. Refer to
Note A, Significant Accounting Policies,
for further discussion.
The 2018 year-to-date results above include
$450 million
of pre-tax acquisition-related and other charges, as well as net tax charges of
$181 million
, which is comprised of charges related to the Tax Cuts and Jobs Act ("the Act") partially offset by the tax benefit of the pre-tax acquisition-related and other charges. The net impact of the above items and effect on diluted earnings per share by quarter was as follows:
|
|
|
|
Acquisition-Related Charges & Other
|
|
Diluted EPS Impact
|
• Q1 2018 — $25 million loss ($43 million after-tax)
|
|
($0.28) per diluted share
|
• Q2 2018 — $127 million loss ($98 million after-tax)
|
|
($0.64) per diluted share
|
• Q3 2018 — $85 million loss ($66 million after-tax)
|
|
($0.43) per diluted share
|
• Q4 2018 — $213 million loss ($424 million after-tax)
|
|
($2.83) per diluted share
|
The 2017 year-to-date results above include
$156
million of pre-tax acquisition-related charges, a
$264 million
pre-tax gain on sales of businesses, primarily related to the sale of the mechanical security businesses in the first quarter, and a one-time net tax charge of
$24 million
recorded in the fourth quarter related to the Act. The net impact of the above items and effect on diluted earnings per share by quarter was as follows:
|
|
|
|
Acquisition-Related Charges & Other
|
|
Diluted EPS Impact
|
• Q1 2017 — $211 million gain ($197 million after-tax)
|
|
$1.30 per diluted share
|
• Q2 2017 — $43 million loss ($29 million after-tax)
|
|
($0.20) per diluted share
|
• Q3 2017 — $33 million loss ($24 million after-tax)
|
|
($0.16) per diluted share
|
• Q4 2017 — $27 million loss ($53 million after-tax)
|
|
($0.34) per diluted share
|