filings.toolsItem 16. FORM 10-K SUMMARY
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Item 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| STANLEY BLACK & DECKER, INC. | ||||||||
| By: | /s/ James M. Loree | |||||||
| James M. Loree, President and Chief Executive Officer | ||||||||
| Date: | February 18, 2021 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
| Signature | Title | Date | |||||||||||||||
| /s/ James M. Loree | President and Chief Executive Officer | February 18, 2021 | |||||||||||||||
| James M. Loree | |||||||||||||||||
| /s/ Donald Allan, Jr. | Executive Vice President and Chief Financial Officer | February 18, 2021 | |||||||||||||||
| Donald Allan, Jr. | |||||||||||||||||
| /s/ Jocelyn S. Belisle | Vice President and Chief Accounting Officer | February 18, 2021 | |||||||||||||||
| Jocelyn S. Belisle | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Andrea J. Ayers | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| George W. Buckley | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Patrick D. Campbell | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Carlos M. Cardoso | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Robert B. Coutts | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Debra A. Crew | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Michael D. Hankin | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Dmitri L. Stockton | |||||||||||||||||
| * | Director | February 18, 2021 | |||||||||||||||
| Irving Tan |
| *By: /s/ Janet M. Link | ||
| Janet M. Link (As Attorney-in-Fact) |
Schedule II — Valuation and Qualifying Accounts
Stanley Black & Decker, Inc. and Subsidiaries
Fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018
(Millions of Dollars)
| ADDITIONS | |||||||||||||||||||||||||||||
| Beginning Balance | Charged To Costs And Expenses | Charged To Other Accounts (b) | (a) Deductions | Ending Balance | |||||||||||||||||||||||||
| Allowance for Credit Losses: | |||||||||||||||||||||||||||||
| Year Ended 2020 | $ | 112.4 | $ | 41.1 | $ | 23.7 | $ | (36.1) | $ | 141.1 | |||||||||||||||||||
| Year Ended 2019 | $ | 102.0 | $ | 33.0 | $ | 5.9 | $ | (28.5) | $ | 112.4 | |||||||||||||||||||
| Year Ended 2018 | $ | 80.4 | $ | 28.0 | $ | 12.5 | $ | (18.9) | $ | 102.0 | |||||||||||||||||||
| Tax Valuation Allowance: | |||||||||||||||||||||||||||||
| Year Ended 2020 (c) | $ | 1,065.0 | $ | 312.0 | $ | (8.6) | $ | (309.5) | $ | 1,058.9 | |||||||||||||||||||
| Year Ended 2019 | $ | 626.7 | $ | 461.5 | $ | (0.5) | $ | (22.7) | $ | 1,065.0 | |||||||||||||||||||
| Year Ended 2018 | $ | 516.7 | $ | 146.2 | $ | (6.4) | $ | (29.8) | $ | 626.7 |
(a)With respect to the allowance for credit losses, deductions represent amounts charged-off less recoveries of accounts previously charged-off.
(b)Amounts represent the impact of foreign currency translation, acquisitions and net transfers to/from other accounts.
(c)Refer to Note Q, Income Taxes, of the Notes to Consolidated Financial Statements in Item 8 for further discussion.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Stanley Black & Decker, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
In February 2020, the Company acquired Consolidated Aerospace Manufacturing, LLC ("CAM") for approximately $1.4 billion. Since Stanley Black & Decker, Inc. has not yet fully incorporated the internal controls and procedures of CAM into Stanley Black & Decker, Inc.'s internal control over financial reporting, management excluded this business from its assessment of the effectiveness of internal control over financial reporting as of January 2, 2021. CAM accounted for 6% of Stanley Black & Decker, Inc.'s total assets as of January 2, 2021 and 2% of Stanley Black & Decker, Inc.'s net sales for the year then ended.
Management has assessed the effectiveness of Stanley Black & Decker, Inc.’s internal control over financial reporting as of January 2, 2021. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control — Integrated Framework (2013 Framework). Management concluded that based on its assessment, Stanley Black & Decker, Inc.’s internal control over financial reporting was effective as of January 2, 2021. Ernst & Young LLP, Registered Public Accounting Firm included in this annual report, has issued an attestation report on the registrant’s internal control over financial reporting, a copy of which appears on page 65.
| /s/ James M. Loree | |||||
| James M. Loree, President and Chief Executive Officer |
| /s/ Donald Allan, Jr. | |||||
| Donald Allan, Jr., Executive Vice President and Chief Financial Officer |
Report of Independent Registered Public Accounting Firm
To the Shareowners and Board of Directors of Stanley Black & Decker, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Stanley Black & Decker, Inc. (the Company) as of January 2, 2021 and December 28, 2019, the related consolidated statements of operations, comprehensive income, shareowners’ equity and cash flows for each of the three years in the period ended January 2, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Accounting for Acquisition of Consolidated Aerospace Manufacturing, LLC | ||||||||
| Description of the Matter | As discussed in Note E of the consolidated financial statements, the Company acquired the specialty fasteners and components manufacturer, Consolidated Aerospace Manufacturing, LLC, on February 24, 2020 for a total purchase price of approximately $1.46 billion, net of cash acquired. The Company allocated the purchase price, on a preliminary basis, to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $590 million and resulting goodwill of approximately $633 million. Auditing the Company's accounting for the acquired intangible assets involved subjective auditor judgment due to the significant estimation required in management’s determination of the fair value of customer relationships. The significant estimation was primarily due to the sensitivity of the significant assumptions in determining fair value, including discount rates, projected revenue growth rates and profit margins. These assumptions related to the future performance of the acquired business, are forward-looking and could be affected by future economic and market conditions. |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s accounting for business combinations. Our audit procedures included, among other procedures, testing controls over the valuation of customer relationships, including the valuation models and underlying assumptions used to develop such estimates. To test the estimated fair value of the customer relationships, we performed audit procedures that included, among other procedures, evaluating the appropriateness of the valuation methodologies and testing the significant assumptions used in the model, as described above, including the completeness and accuracy of the underlying data. We compared the significant assumptions to current industry, market and economic trends, to the historical results of the acquired business and to other guideline companies within the same industry. We performed sensitivity analyses to evaluate the change in the fair value of the customer relationships that would result from changes in the discount rates, projected revenue growth rates and profit margins. We involved our internal valuation specialists to assist with our evaluation of the methodology used by the Company as well as certain assumptions within the valuation. | |||||||
| Annual Test of Impairment of Goodwill in the Infrastructure Reporting Unit | ||||||||
| Description of the Matter | At January 2, 2021, the Company’s goodwill balance was approximately $10,038 million. As discussed in Note A of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is initially assigned to its reporting units as of the relevant acquisition date. Auditing management’s annual goodwill impairment test for the Infrastructure reporting unit was challenging and highly judgmental due to the significant estimation required. In particular, the fair value estimate was sensitive to the significant assumption of revenue growth, which is affected by expected future market or economic conditions. A substantial portion of the revenues of the Infrastructure reporting unit are derived from customers’ investments in cyclical industries that typically are subject to severe economic cycles, partially driven by the prices of oil and of scrap metal, which could have an impact on the goodwill impairment analysis for the Infrastructure reporting unit. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the determination of fair value, including the significant assumption of revenue growth discussed above, used in the Infrastructure goodwill impairment analysis. Our audit procedures included, among other procedures, testing controls over the Company’s budgetary process and management’s review of that information. To test the estimated fair value of the Infrastructure reporting unit, we performed audit procedures that included, among other procedures, assessing the Company’s methodologies and testing the revenue growth assumption discussed above and the underlying data used by the Company in its analysis. We compared the revenue growth rates used by management to current industry and economic trends, including, among other factors, the price of oil and scrap metal, and considering the Company’s business model, customer base, product mix and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses to evaluate the change in the fair value of the reporting unit that would result from changes in the revenue growth assumption. In addition, we evaluated the reconciliation of the combined estimated fair value of the Company’s reporting units to the market capitalization of the Company and assessed the resulting control premium. Further, we involved our internal valuation specialists to assist in the evaluation of the methodology and certain assumptions used to estimate the fair value of the Infrastructure reporting unit. | |||||||
| Uncertain Tax Positions | ||||||||
| Description of the Matter | At January 2, 2021, the Company had recorded a liability for uncertain tax positions of approximately $444 million. As discussed in Notes A and Q of the consolidated financial statements, the Company conducts business globally and, as a result, is subject to income tax in a number of locations, including many state and foreign jurisdictions. Uncertainty in a tax position may arise as tax laws are subject to interpretation. The Company uses significant judgment in (1) determining whether a tax position’s technical merits are more likely than not to be sustained and (2) measuring the amount of tax benefit that qualifies for recognition. The Company considers many factors when evaluating and estimating its tax positions such as, but not limited to, the settlements of on-going audits. Auditing the measurement and determination of whether a tax position is more likely than not to be upheld under examination is challenging and subjective due to the Company’s global operations, the many tax jurisdictions in which it operates, the distinctive nature and unique facts and circumstances of each tax position and the interpretations of tax law and legal rulings. Many of these same factors also make it challenging to audit the completeness of the uncertain tax reserves. |
| How We Addressed the Matter in Our Audit | We identified and tested controls around the Company’s judgments and determinations on tax positions, including the Company’s process to verify that all uncertain tax positions are identified and considered as part of the analysis, controls addressing completeness of the uncertain tax positions and the determination of the more-likely-than-not amount of the positions to be upheld. With the support of our tax professionals, we performed an evaluation of the Company’s estimates with respect to uncertain tax positions including the technical merits of the Company’s tax positions. This included assessing the Company’s analysis of jurisdictions with potential tax liabilities and other international tax considerations. We considered the Company’s judgments and the factors involved with each significant tax position. To support our evaluation, we used our knowledge of, and experience with, the application of international and local income tax laws by the relevant income tax authorities to evaluate the Company’s accounting for those tax positions. We analyzed the Company’s assumptions and data used to determine the amount of tax benefit to recognize and tested the completeness and accuracy of the data used to determine the amount of tax benefits recognized and tested the accuracy of such calculations. We also evaluated the Company’s income tax disclosures included in Note Q to the consolidated financial statements in relation to these matters. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1932.
Hartford, Connecticut
February 18, 2021
Report of Independent Registered Public Accounting Firm
To the Shareowners and the Board of Directors of Stanley Black & Decker, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Stanley Black & Decker, Inc.’s internal control over financial reporting as of January 2, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Stanley Black & Decker, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 2, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Consolidated Aerospace Manufacturing, LLC (“CAM”), which is included in the 2020 consolidated financial statements of the Company and constituted 6% of total assets as of January 2, 2021 and 2% of net sales for the fiscal year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of CAM.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of January 2, 2021 and December 28, 2019, the related consolidated statements of operations, comprehensive income, shareowners' equity and cash flows for each of the three fiscal years in the period ended January 2, 2021, and the related notes and schedule listed in the Index at Item 15(a) and our report dated February 18, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 18, 2021
Consolidated Statements of Operations
Fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018
(Millions of Dollars, Except Per Share Amounts)
| 2020 | 2019 | 2018 | |||||||||||||||
| Net Sales | $ | 14,534.6 | $ | 14,442.2 | $ | 13,982.4 | |||||||||||
| Costs and Expenses | |||||||||||||||||
| Cost of sales | $ | 9,566.7 | $ | 9,636.7 | $ | 9,131.3 | |||||||||||
| Selling, general and administrative | 3,048.5 | 3,008.0 | 3,143.7 | ||||||||||||||
| Provision for credit losses | 41.1 | 33.0 | 28.0 | ||||||||||||||
| Other, net | 262.8 | 249.1 | 287.0 | ||||||||||||||
| Loss (gain) on sales of businesses | 13.5 | (17.0) | 0.8 | ||||||||||||||
| Restructuring charges | 83.0 | 154.1 | 160.3 | ||||||||||||||
| Loss on debt extinguishments | 46.9 | 17.9 | — | ||||||||||||||
| Interest income | (18.0) | (53.9) | (68.7) | ||||||||||||||
| Interest expense | 223.1 | 284.3 | 277.9 | ||||||||||||||
| $ | 13,267.6 | $ | 13,312.2 | $ | 12,960.3 | ||||||||||||
| Earnings before income taxes and equity interest | 1,267.0 | 1,130.0 | 1,022.1 | ||||||||||||||
| Income taxes | 41.4 | 160.8 | 416.3 | ||||||||||||||
| Net earnings before equity interest | $ | 1,225.6 | $ | 969.2 | $ | 605.8 | |||||||||||
| Share of net earnings (losses) of equity method investment | 9.1 | (11.2) | — | ||||||||||||||
| Net earnings | $ | 1,234.7 | $ | 958.0 | $ | 605.8 | |||||||||||
| Less: Net earnings attributable to non-controlling interests | 0.9 | 2.2 | 0.6 | ||||||||||||||
| Net earnings attributable to Stanley Black & Decker, Inc. | $ | 1,233.8 | $ | 955.8 | $ | 605.2 | |||||||||||
| Less: Preferred stock dividends | 23.4 | — | — | ||||||||||||||
| Net Earnings Attributable to Common Shareowners | $ | 1,210.4 | $ | 955.8 | $ | 605.2 | |||||||||||
| Earnings per share of common stock: | |||||||||||||||||
| Basic | $ | 7.85 | $ | 6.44 | $ | 4.06 | |||||||||||
| Diluted | $ | 7.77 | $ | 6.35 | $ | 3.99 |
See Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
Fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018
(Millions of Dollars)
| 2020 | 2019 | 2018 | |||||||||||||||
| Net Earnings Attributable to Common Shareowners | $ | 1,210.4 | $ | 955.8 | $ | 605.2 | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Currency translation adjustment and other | 281.9 | (36.0) | (373.0) | ||||||||||||||
| (Losses) gains on cash flow hedges, net of tax | (48.8) | (27.4) | 85.8 | ||||||||||||||
| (Losses) gains on net investment hedges, net of tax | (24.5) | 34.0 | 59.9 | ||||||||||||||
| Pension (losses) gains, net of tax | (37.7) | (40.9) | 2.1 | ||||||||||||||
| Other comprehensive income (loss) | $ | 170.9 | $ | (70.3) | $ | (225.2) | |||||||||||
| Comprehensive income attributable to common shareowners | $ | 1,381.3 | $ | 885.5 | $ | 380.0 |
See Notes to Consolidated Financial Statements.
Consolidated Balance Sheets
January 2, 2021 and December 28, 2019
(Millions of Dollars)
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 1,381.0 | $ | 297.7 | |||||||
| Accounts and notes receivable, net | 1,512.2 | 1,454.6 | |||||||||
| Inventories, net | 2,737.4 | 2,255.0 | |||||||||
| Prepaid expenses | 370.7 | 395.4 | |||||||||
| Other current assets | 34.7 | 53.9 | |||||||||
| Total Current Assets | 6,036.0 | 4,456.6 | |||||||||
| Property, Plant and Equipment, net | 2,053.8 | 1,959.5 | |||||||||
| Goodwill | 10,038.1 | 9,237.5 | |||||||||
| Customer Relationships, net | 1,735.1 | 1,317.3 | |||||||||
| Trade Names, net | 2,277.3 | 2,253.6 | |||||||||
| Other Intangible Assets, net | 43.0 | 51.1 | |||||||||
| Other Assets | 1,383.0 | 1,321.0 | |||||||||
| Total Assets | $ | 23,566.3 | $ | 20,596.6 | |||||||
| LIABILITIES AND SHAREOWNERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Short-term borrowings | $ | 1.5 | $ | 337.3 | |||||||
| Current maturities of long-term debt | — | 3.1 | |||||||||
| Accounts payable | 2,446.4 | 2,087.8 | |||||||||
| Accrued expenses | 2,110.4 | 1,977.5 | |||||||||
| Total Current Liabilities | 4,558.3 | 4,405.7 | |||||||||
| Long-Term Debt | 4,245.4 | 3,176.4 | |||||||||
| Deferred Taxes | 568.0 | 731.2 | |||||||||
| Post-Retirement Benefits | 642.6 | 609.4 | |||||||||
| Other Liabilities | 2,485.6 | 2,531.7 | |||||||||
| Commitments and Contingencies (Notes R and S) | |||||||||||
| Shareowners’ Equity | |||||||||||
| Stanley Black & Decker, Inc. Shareowners’ Equity | |||||||||||
| Preferred stock, without par value: Authorized 10,000,000 shares in 2020 and 2019 Issued and outstanding 1,500,000 shares in 2020 and 2019 | 1,500.0 | 1,500.0 | |||||||||
| Common stock, par value $2.50 per share: Authorized 300,000,000 shares in 2020 and 2019 Issued 176,902,738 shares in 2020 and 2019 | 442.3 | 442.3 | |||||||||
| Retained earnings | 7,547.6 | 6,772.8 | |||||||||
| Additional paid in capital | 4,832.7 | 4,492.9 | |||||||||
| Accumulated other comprehensive loss | (1,713.7) | (1,884.6) | |||||||||
| ESOP | — | (2.3) | |||||||||
| 12,608.9 | 11,321.1 | ||||||||||
| Less: cost of common stock in treasury (16,150,476 shares in 2020 and 23,396,329 shares in 2019) | (1,549.3) | (2,184.8) | |||||||||
| Stanley Black & Decker, Inc. Shareowners’ Equity | 11,059.6 | 9,136.3 | |||||||||
| Non-controlling interests | 6.8 | 5.9 | |||||||||
| Total Shareowners’ Equity | 11,066.4 | 9,142.2 | |||||||||
| Total Liabilities and Shareowners’ Equity | $ | 23,566.3 | $ | 20,596.6 |
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018
(Millions of Dollars)
| 2020 | 2019 | 2018 | |||||||||||||||
| Operating Activities: | |||||||||||||||||
| Net earnings | $ | 1,234.7 | $ | 958.0 | $ | 605.8 | |||||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization of property, plant and equipment | 376.5 | 372.8 | 331.2 | ||||||||||||||
| Amortization of intangibles | 201.6 | 187.4 | 175.3 | ||||||||||||||
| Inventory step-up amortization | 29.0 | 7.4 | 9.6 | ||||||||||||||
| Loss (gain) on sales of businesses | 13.5 | (17.0) | 0.8 | ||||||||||||||
| Loss on debt extinguishments | 46.9 | 17.9 | — | ||||||||||||||
| Stock-based compensation expense | 109.1 | 88.8 | 76.5 | ||||||||||||||
| Provision for credit losses | 41.1 | 33.0 | 28.0 | ||||||||||||||
| Share of net (earnings) losses of equity method investment | (9.1) | 11.2 | — | ||||||||||||||
| Deferred tax (benefit) expense | (241.7) | (17.9) | 191.1 | ||||||||||||||
| Other non-cash items | 44.7 | (13.8) | 10.1 | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable | (39.6) | 137.8 | (48.8) | ||||||||||||||
| Inventories | (401.5) | 137.7 | (401.6) | ||||||||||||||
| Accounts payable | 310.4 | (169.1) | 211.0 | ||||||||||||||
| Deferred revenue | (0.3) | 8.5 | 1.5 | ||||||||||||||
| Other current assets | (100.2) | (183.6) | (4.4) | ||||||||||||||
| Other long-term assets | (14.0) | (37.3) | 28.9 | ||||||||||||||
| Accrued expenses | 381.7 | 123.6 | 70.1 | ||||||||||||||
| Defined benefit liabilities | (40.2) | (47.6) | (44.7) | ||||||||||||||
| Other long-term liabilities | 79.5 | (92.1) | 20.5 | ||||||||||||||
| Net cash provided by operating activities | 2,022.1 | 1,505.7 | 1,260.9 | ||||||||||||||
| Investing Activities: | |||||||||||||||||
| Capital and software expenditures | (348.1) | (424.7) | (492.1) | ||||||||||||||
| Sales of assets | 19.9 | 100.1 | 45.2 | ||||||||||||||
| Business acquisitions, net of cash acquired | (1,324.4) | (685.4) | (524.6) | ||||||||||||||
| Sales of businesses, net of cash sold | 59.1 | 76.6 | (3.0) | ||||||||||||||
| Purchases of investments | (18.7) | (260.6) | (21.7) | ||||||||||||||
| Net investment hedge settlements | 41.0 | 8.0 | 25.7 | ||||||||||||||
| Other | (5.9) | (22.6) | (18.6) | ||||||||||||||
| Net cash used in investing activities | (1,577.1) | (1,208.6) | (989.1) | ||||||||||||||
| Financing Activities: | |||||||||||||||||
| Payments on long-term debt | (1,154.3) | (1,150.0) | (977.5) | ||||||||||||||
| Proceeds from debt issuances, net of fees | 2,222.5 | 496.2 | 990.0 | ||||||||||||||
| Net short-term (repayments) borrowings | (342.6) | (18.1) | 433.2 | ||||||||||||||
| Stock purchase contract fees | (59.8) | (40.3) | (40.3) | ||||||||||||||
| Purchases of common stock for treasury | (26.2) | (27.5) | (527.1) | ||||||||||||||
| Proceeds from issuances of preferred stock | — | 735.0 | — | ||||||||||||||
| Premium paid on equity options | — | (19.2) | (57.3) | ||||||||||||||
| Premium paid on debt extinguishment | (48.7) | — | — | ||||||||||||||
| Proceeds from issuances of common stock | 897.0 | 146.0 | 38.5 | ||||||||||||||
| Craftsman deferred purchase price | (250.0) | — | — | ||||||||||||||
| Craftsman contingent consideration | (45.9) | — | — | ||||||||||||||
| CAM contingent consideration | (94.4) | — | — | ||||||||||||||
| Termination of interest rate swaps | (20.5) | (1.0) | (22.7) | ||||||||||||||
| Cash dividends on common stock | (431.8) | (402.0) | (384.9) | ||||||||||||||
| Cash dividends on preferred stock | (18.8) | — | — | ||||||||||||||
| Other | (10.6) | (11.6) | (13.5) | ||||||||||||||
| Net cash provided by (used in) financing activities | 615.9 | (292.5) | (561.6) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 22.8 | (1.4) | (53.9) | ||||||||||||||
| Change in cash, cash equivalents and restricted cash | 1,083.7 | 3.2 | (343.7) | ||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of year | 314.6 | 311.4 | 655.1 | ||||||||||||||
| Cash, cash equivalents and restricted cash, end of year | $ | 1,398.3 | $ | 314.6 | $ | 311.4 |
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of January 2, 2021 and December 28, 2019, as shown above:
| January 2, 2021 | December 28, 2019 | ||||||||||
| Cash and cash equivalents | $ | 1,381.0 | $ | 297.7 | |||||||
| Restricted cash included in Other current assets | 17.3 | 16.9 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 1,398.3 | $ | 314.6 |
See Notes to Consolidated Financial Statements.
Consolidated Statements of Changes in Shareowners’ Equity
Fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018
(Millions of Dollars, Except Per Share Amounts)
| Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | ESOP | Treasury Stock | Non- Controlling Interests | Shareowners’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance December 30, 2017 | $ | 750.0 | $ | 442.3 | $ | 4,643.2 | $ | 5,998.7 | $ | (1,589.1) | $ | (18.8) | $ | (1,924.1) | $ | 2.8 | $ | 8,305.0 | |||||||||||||||||||||||||||||||||||
| Net earnings | 605.2 | 0.6 | 605.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (225.2) | (225.2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $2.58 per share | (384.9) | (384.9) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (941,854 shares) | (41.4) | 79.9 | 38.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (3,677,435 shares) | (527.1) | (527.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest buyout | 0.3 | 0.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Premium paid on equity option | (57.3) | (57.3) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | 76.5 | 76.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP | 8.3 | 8.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 29, 2018 | $ | 750.0 | $ | 442.3 | $ | 4,621.0 | $ | 6,219.0 | $ | (1,814.3) | $ | (10.5) | $ | (2,371.3) | $ | 3.7 | $ | 7,839.9 | |||||||||||||||||||||||||||||||||||
| Net earnings | 955.8 | 2.2 | 958.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (70.3) | (70.3) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $2.70 per share | (402.0) | (402.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (2,391,336 shares) | (68.0) | 214.0 | 146.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (187,377 shares) | (27.5) | (27.5) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock (750,000 shares) | 750.0 | (15.5) | 734.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity units - stock contract fees | (114.2) | (114.2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Premium paid on equity option | (19.2) | (19.2) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | 88.8 | 88.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP | 8.2 | 8.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 28, 2019 | $ | 1,500.0 | $ | 442.3 | $ | 4,492.9 | $ | 6,772.8 | $ | (1,884.6) | $ | (2.3) | $ | (2,184.8) | $ | 5.9 | $ | 9,142.2 | |||||||||||||||||||||||||||||||||||
| Net earnings | 1,233.8 | 0.9 | 1,234.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 170.9 | 170.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $2.78 per common share | (431.8) | (431.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $50.00 per annum per preferred share | (23.4) | (23.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (7,474,394 shares) | 225.3 | 671.7 | 897.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (228,541 shares) | 10.0 | (36.2) | (26.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issuance costs | (4.6) | (4.6) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | 109.1 | 109.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ESOP | 2.3 | 2.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of ASU 2016-13 | (3.8) | (3.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance January 2, 2021 | $ | 1,500.0 | $ | 442.3 | $ | 4,832.7 | $ | 7,547.6 | $ | (1,713.7) | $ | — | $ | (1,549.3) | $ | 6.8 | $ | 11,066.4 |
See Notes to Consolidated Financial Statements.
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 53 weeks in fiscal year 2020 and 52 weeks in the fiscal years 2019 and 2018.
In February 2020, the Company acquired Consolidated Aerospace Manufacturing, LLC ("CAM"), an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets. The acquisition is being accounted for as a business combination using the acquisition method of accounting and the results have been consolidated into the Company's Industrial segment. In March 2019, the Company acquired International Equipment Solutions Attachments businesses, Paladin and Pengo, ("IES Attachments"). In April 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson"), which excluded Nelson's automotive stud welding business. The results of IES Attachments and Nelson have been consolidated into the Company's Industrial segment. The 2019 and 2018 acquisitions were accounted for as business combinations using the acquisition method of accounting.
In January 2019, the Company acquired a 20 percent interest in MTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment. MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning 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 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), with an equitable sharing arrangement for future EBITDA growth. The Company is applying the equity method of accounting to the MTD investment.
Refer to Note E, Acquisitions and Investments, for further discussion on these transactions.
In November 2020, the Company sold its commercial electronic operations in five countries in Europe and emerging markets within the Security segment. In October 2020, the Company sold a product line in Oil & Gas within the Industrial segment. The operating results of these businesses have been reported in the Consolidated Financial Statements through the date of sale in 2020 and for the years ended December 28, 2019 and December 29, 2018.
In the second quarter of 2019, the Company sold its Sargent & Greenleaf mechanical locks business within the Security segment. The operating results of this business have been reported in the Consolidated Financial Statements through the date of sale in 2019 and for the year ended December 29, 2018.
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 2020 presentation.
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 credit losses. 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. The Company's payment terms are generally consistent with the industries in which its businesses operate and typically range from 30-90 days globally. Additionally, the Company considers the credit
quality of all past-due or delinquent financing receivables as 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.
ALLOWANCE FOR CREDIT LOSSES — The Company maintains an allowance for credit losses, which represents an estimate of expected losses over the remaining contractual life of its receivables. The allowance is determined using two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. 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 rates, write-off experience, and forecasts of future economic conditions. 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 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 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 a 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.
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 royalty savings attributable to owning the intangible assets. Intangible assets with definite lives are amortized over their estimated useful lives to reflect 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 2020, 2019 or 2018.
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 on 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 contracts with customers, 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.
A portion of the Company’s revenues within the Security and Infrastructure businesses is generated from equipment leased to customers. Customer arrangements are identified as leases if they include transfer of a tangible asset which is provided to the customer in exchange for payments typically at fixed rates payable monthly, quarterly or annually. Customer leases may include terms to allow for extension of leases for a short period of time, but typically do not provide for customer termination prior to the initial term. Some customer leases include terms to allow the customer to purchase the underlying asset, which occurs occasionally, and virtually no customer leases include residual value guarantee clauses. Within the Security business, the
underlying asset typically has no value at termination of the customer lease, so no residual value asset is recorded in the financial statements. For Infrastructure business leases, underlying assets are assessed for functionality at termination of the lease and, if necessary, an impairment to the leased asset value is recorded.
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 contract 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 product line. 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 $76.8 million in 2020, $90.4 million in 2019 and $101.3 million in 2018. Expense pertaining to cooperative advertising with customers reported as a reduction of Net Sales was $357.3 million in 2020, $323.2 million in 2019 and $315.8 million in 2018. Cooperative advertising with customers classified as SG&A expense amounted to $17.8 million in 2020, $6.9 million in 2019 and $5.4 million in 2018.
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 $347.8 million, $326.7 million and $316.0 million in 2020, 2019 and 2018, 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 earnings in the period that includes the enactment date. The Company recognizes the tax on global intangible low-taxed income as a period expense in the period the tax is incurred.
The Company records net deferred tax assets to the extent that it is more likely than not that these assets will be realized. In making this determination, management considers all available positive and negative evidence, including future reversals of existing temporary differences, estimates of future taxable income, tax-planning strategies, and the realizability of net operating loss carryforwards. In the event that it is determined that an asset is not more likely that not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the unrealizable amount would be charged to earnings in the period in which that determination is made. Conversely, if the Company were to determine that it would be able to realize deferred tax assets in the future in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company records uncertain tax positions in accordance with ASC 740, which requires a two-step process. First, management determines whether it is more likely than not that a tax position will be sustained based on the technical merits of the position and second, for those tax positions that meet the more likely than not threshold, management recognizes the largest amount of the tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related taxing authority. The Company maintains
an accounting policy of recording interest and penalties on uncertain tax positions as a component of Income taxes in the Consolidated Statements of Operations.
The Company is subject to income tax in a number of locations, including many state and foreign jurisdictions. Significant judgment is required when calculating the worldwide provision for income taxes. Many factors are considered when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next twelve months. These changes may be the result of settlements of ongoing audits, litigation, or other proceedings with taxing authorities. The Company periodically assesses its liabilities and contingencies for all tax years still subject to audit based on the most current available information, which involves inherent uncertainty.
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 August 2018, the FASB issued Accounting Standards Update ("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. The Company adopted this standard in the first quarter of 2020 and it did not have a material impact 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 Company adopted this standard in the fourth quarter of 2020 and it did not have a material impact 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 Company adopted this standard in the first quarter of 2020 and it did not have a material 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. The Company adopted this standard in the first quarter of 2020 and it did not have an impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The new standard amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including accounts and notes receivable. The Company adopted this standard in the first quarter of 2020 and recognized a $3.8 million cumulative-effect adjustment to opening retained earnings related to the Company's allowance for credit losses on accounts and notes receivable. Refer to Note B, Accounts and Notes Receivable, Net, for further discussion.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED — In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new standard reduces the number of accounting models for convertible debt instruments and convertible preferred stock, and amends the guidance for the derivatives scope exception for contracts in an entity's own equity. The standard also amends and makes targeted improvements to the related earnings per share guidance. The ASU is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The standard allows for either modified or full retrospective transition methods. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new standard provides optional expedients and exceptions that companies can apply during a limited time period to account for contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. Companies may elect to apply these optional expedients and exceptions beginning March 12, 2020 through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). The objective of the new reference rate reform standard is to clarify the scope of Topic 848 and provide explicit guidance to help
companies applying optional expedients and exceptions. This ASU is effective immediately for all entities that have applied optional expedients and exceptions. The Company is currently evaluating these standards to determine the impact they may have on it consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company will adopt this guidance in the first quarter of 2021 and does not expect it to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The new standard simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The new standard also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company will adopt this guidance in the first quarter of 2021 and does not expect it to have a material impact on its consolidated financial statements.
B. ACCOUNTS AND NOTES RECEIVABLE
| (Millions of Dollars) | 2020 | 2019 | |||||||||
| Trade accounts receivable | $ | 1,345.7 | $ | 1,284.0 | |||||||
| Trade notes receivable | 156.1 | 156.7 | |||||||||
| Other accounts receivable | 151.5 | 126.3 | |||||||||
| Gross accounts and notes receivable | 1,653.3 | 1,567.0 | |||||||||
| Allowance for credit losses | (141.1) | (112.4) | |||||||||
| Accounts and notes receivable, net | $ | 1,512.2 | $ | 1,454.6 | |||||||
| Long-term receivable, net | $ | 139.9 | $ | 146.1 |
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 receivables, net of $139.9 million and $146.1 million at January 2, 2021 and December 28, 2019, respectively, are reported within Other Assets in the Consolidated Balance Sheets. The Company's financing receivables are predominantly related to certain security equipment sales-type leases with commercial businesses. As of January 2, 2021, the current portion of finance receivables within Trade notes receivable approximated $80.3 million. Generally, the Company retains legal title to any equipment under lease and holds 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 are recorded on the effective interest method.
The changes in the allowance for credit losses at January 2, 2021 are as follows:
| (Millions of Dollars) | Balance December 28, 2019 | Cumulative Effect Adjustment (a) | Charged To Costs and Expenses | Charged To Other Accounts (b) | Deductions (c) | Balance January 2, 2021 | ||||||||||||||||||||||||||||||||
| Accounts receivable | $ | 99.3 | $ | 2.9 | $ | 41.1 | $ | 15.3 | $ | (31.9) | $ | 126.7 | ||||||||||||||||||||||||||
| Notes receivable | $ | 13.1 | $ | 0.9 | $ | — | $ | 4.6 | $ | (4.2) | $ | 14.4 | ||||||||||||||||||||||||||
| Total | $ | 112.4 | $ | 3.8 | $ | 41.1 | $ | 19.9 | $ | (36.1) | $ | 141.1 |
(a) Represents the cumulative-effect adjustment to opening retained earnings due to the adoption of ASU 2016-13. Refer to Note A, Significant Accounting Policies, for further discussion.
(b) Amounts represent the impacts of foreign currency translation, acquisitions and net transfers to/from other accounts.
(c) Amounts represent charge-offs less recoveries of accounts previously charged-off.
The Company considers any financing receivable that has not been collected within 90 days of original billing date as past-due or delinquent. The Company's payment terms are generally consistent with the industries in which their businesses operate and typically range from 30-90 days globally. Additionally, the Company considers the credit quality of all past-due or delinquent
financing receivables as 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.
The following is a summary of the expected timing of receipt of payments from customers on an undiscounted basis as of January 2, 2021 relating to the Company's lease receivables:
| (Millions of Dollars) | Total | Within 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | Thereafter | |||||||||||||||||||||||||||||||||||||
| Finance receivables | $ | 209.5 | $ | 80.3 | $ | 56.5 | $ | 38.9 | $ | 21.4 | $ | 8.1 | $ | 4.3 | ||||||||||||||||||||||||||||||
| Operating leases | $ | 39.7 | $ | 38.5 | $ | 0.9 | $ | 0.3 | $ | — | $ | — | $ | — |
The following is a summary of lease revenue and sales-type lease profit for the years ended January 2, 2021 and December 28, 2019:
| (Millions of Dollars) | 2020 | 2019 | ||||||||||||||||||
| Sales-type lease revenue | $ | 113.0 | $ | 88.9 | ||||||||||||||||
| Lease interest revenue | 13.3 | 12.7 | ||||||||||||||||||
| Operating lease revenue | 131.5 | 148.9 | ||||||||||||||||||
| Total lease revenue | $ | 257.8 | $ | 250.5 | ||||||||||||||||
| Sales-type lease profit | $ | 45.0 | $ | 35.3 |
The Company has an accounts receivable sale program. According to the terms, the Company sells certain of its trade accounts receivables at fair value to a wholly owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS"). The BRS, in turn, can 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, Transfers and Servicing, 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 January 2, 2021, 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 January 2, 2021 and December 28, 2019, net receivables of approximately $86.8 million and $100.0 million, respectively, were derecognized. Proceeds from transfers of receivables to the Purchaser totaled $259.6 million and $495.4 million for the years ended January 2, 2021 and December 28, 2019, respectively, and payments to the Purchaser totaled $272.8 million and $495.5 million, respectively. The program resulted in a pre-tax loss of $1.7 million and $3.6 million for the years ended January 2, 2021 and December 28, 2019, respectively, which included service fees of $0.6 million and $0.9 million, respectively. 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.
As of January 2, 2021 and December 28, 2019, the Company's deferred revenue totaled $207.6 million and $209.8 million, respectively, of which $108.7 million and $108.9 million, respectively, was classified as current. Revenue recognized for the years ended January 2, 2021 and December 28, 2019 that was previously deferred as of December 28, 2019 and December 29, 2018 totaled $96.8 million and $96.4 million, respectively.
As of January 2, 2021, approximately $1.107 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) | 2020 | 2019 | |||||||||
| Finished products | $ | 1,922.5 | $ | 1,526.0 | |||||||
| Work in process | 222.3 | 162.0 | |||||||||
| Raw materials | 592.6 | 567.0 | |||||||||
| Total | $ | 2,737.4 | $ | 2,255.0 |
Net inventories in the amount of $1.3 billion at January 2, 2021 and $1.1 billion at December 28, 2019 were valued at the lower of LIFO cost or market. If the LIFO method had not been used, inventories would have been higher than reported by $52.5 million at January 2, 2021 and $78.1 million at December 28, 2019.
As part of the CAM acquisition in the first quarter of 2020, the Company acquired net inventory with an estimated fair value of
$124.3 million. Refer to Note E, Acquisitions and Investments, for further discussion of the CAM acquisition.
D. PROPERTY, PLANT AND EQUIPMENT
| (Millions of Dollars) | 2020 | 2019 | |||||||||
| Land | $ | 140.5 | $ | 112.2 | |||||||
| Land improvements | 56.4 | 52.6 | |||||||||
| Buildings | 655.2 | 630.3 | |||||||||
| Leasehold improvements | 192.6 | 172.1 | |||||||||
| Machinery and equipment | 3,077.5 | 2,812.8 | |||||||||
| Computer software | 557.7 | 510.8 | |||||||||
| Property, plant & equipment, gross | $ | 4,679.9 | $ | 4,290.8 | |||||||
| Less: accumulated depreciation and amortization | (2,626.1) | (2,331.3) | |||||||||
| Property, plant & equipment, net | $ | 2,053.8 | $ | 1,959.5 |
Depreciation and amortization expense associated with property, plant and equipment was as follows:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Depreciation | $ | 332.6 | $ | 325.2 | $ | 288.4 | |||||||||||
| Amortization | 43.9 | 47.6 | 42.8 | ||||||||||||||
| Depreciation and amortization expense | $ | 376.5 | $ | 372.8 | $ | 331.2 |
E. ACQUISITIONS AND INVESTMENTS
2020 ACQUISITION
CAM
On February 24, 2020, the Company acquired CAM for a total estimated purchase price of approximately $1.46 billion, net of cash acquired. The purchase price consists of an initial cash payment of approximately $1.30 billion, net of cash acquired, and future payments up to $200.0 million contingent on The Boeing Company ("Boeing") 737 MAX Airplanes receiving Federal Aviation Administration ("FAA") authorization to return to service and Boeing achieving certain production levels, which were valued at $155.3 million as of the acquisition date.
In November 2020, the FAA rescinded the 737 MAX grounding order and as a result of the subsequent return to revenue service of the 737 MAX in December 2020, the Company paid $100 million to the former owners of CAM. The remaining contingent consideration was remeasured at January 2, 2021 and the Company concluded the achievement of certain production levels based on Boeing’s future forecast is remote and released the remaining $55.3 million contingent consideration liability to the Consolidated Statements of Operations in Other, net.
CAM is an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets. The acquisition further diversifies the Company's presence in the industrial markets and expands its portfolio of specialty fasteners in the aerospace and defense markets. The results of CAM subsequent to the date of acquisition are included in the Company's Industrial segment.
The CAM acquisition is being accounted for as a business combination using the acquisition method of accounting, which requires, among other things, certain assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The following table summarizes the estimated acquisition date value of identifiable net assets acquired and liabilities assumed:
| (Millions of Dollars) | |||||
| Cash and cash equivalents | $ | 35.8 | |||
| Accounts receivable, net | 48.3 | ||||
| Inventories, net | 124.3 | ||||
| Prepaid expenses and other assets | 2.6 | ||||
| Property, plant and equipment | 127.0 | ||||
| Trade names | 25.0 | ||||
| Customer relationships | 565.0 | ||||
| Accounts payable | (25.9) | ||||
| Accrued expenses | (26.9) | ||||
| Deferred taxes | (16.3) | ||||
| Other liabilities | (0.3) | ||||
| Total identifiable net assets | $ | 858.6 | |||
| Goodwill | 633.2 | ||||
| Contingent consideration | (155.3) | ||||
| Total consideration paid | $ | 1,336.5 |
The weighted-average useful life assigned to the intangible assets is 20 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 and assembled workforce. It is estimated that $569.8 million of goodwill will be deductible for tax purposes.
The acquisition accounting for CAM is substantially complete with the exception of certain tax matters. The Company will complete its acquisition accounting in the first quarter of 2021. Any measurement period adjustments resulting from the finalization of the Company’s acquisition accounting 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 2020 Acquisition
During 2020, the Company completed one smaller acquisition for $28.2 million, net of cash acquired. The estimated acquisition date value of the identifiable net assets acquired is $13.4 million, which includes $14.8 million of customer relationships. The related goodwill is $14.8 million. The useful life assigned to the customer relationships is 8 years. The results of this acquisition subsequent to the date of acquisition are included in the Company's Security segment.
The acquisition accounting for this acquisition is preliminary in certain respects. During the measurement period, the Company
expects to record adjustments relating to working capital accounts and various opening balance sheet contingencies, amongst others. These adjustments are not expected to have a material impact on the Company’s Consolidated Financial Statements.
2019 ACQUISITIONS
IES Attachments
On March 8, 2019, the Company acquired IES Attachments for $653.5 million, net of cash acquired. IES Attachments is a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition further diversified the Company's presence in the industrial markets, expanded its portfolio of attachment solutions
and provided a meaningful platform for growth. The results of IES Attachments subsequent to the date of acquisition are included in the Company's Industrial segment.
The IES Attachments acquisition was accounted for as a business combination using the acquisition method of accounting, which requires, among other things, certain assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The estimated acquisition date value of identifiable net assets acquired, which included $77.8 million of working capital (primarily inventory), $78.3 million of deferred tax liabilities, and $328.0 million of intangible assets, was $342.2 million. The related goodwill was $311.3 million. The amount allocated to intangible assets included $304.0 million for customer relationships. The weighted-average useful life assigned to the intangible assets was 14 years.
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the expected cost synergies of the combined business and assembled workforce. It is estimated that $2.4 million of goodwill, relating to the pre-acquisition historical tax basis of goodwill, will be deductible for tax purposes.
The acquisition accounting for IES Attachments is complete. The measurement period adjustments recorded in 2020 did not have a material impact to the Company's Consolidated Financial Statements.
Other 2019 Acquisitions
During 2019, the Company completed five smaller acquisitions for $40.8 million, net of cash acquired. The estimated acquisition date value of the identifiable net assets acquired, which included $5.9 million of working capital and $8.8 million of customer relationships, was $19.0 million. The related goodwill was $21.8 million. The useful lives assigned to the customer relationships ranged from 8 to 10 years. The results of these acquisitions subsequent to the dates of acquisition are included in the Company's Industrial and Security segments. The acquisition accounting for these acquisitions is complete. The measurement period adjustments recorded in 2020 did not have a material impact to the Company's Consolidated Financial Statements.
2018 ACQUISITIONS
Nelson Fastener Systems
On April 2, 2018, the Company acquired Nelson for $424.2 million, net of cash acquired. Nelson was complementary to the Company's product offerings, enhanced its presence in the general industrial end markets, and expanded its portfolio of highly-engineered fastening solutions. The results of Nelson are included in the Company's Industrial segment.
The Nelson acquisition was accounted for as a business combination using the acquisition method of accounting. The acquisition date value of identifiable net assets acquired, which included $64.2 million of working capital and $167.0 million of intangible assets, was $211.8 million. The related goodwill was $216.9 million. The amount allocated to intangible assets included $149.0 million for customer relationships. The useful lives assigned to the intangible assets ranged from 12 to 15 years.
Goodwill was 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.
Other 2018 Acquisitions
During 2018, the Company completed six smaller acquisitions for a total purchase price of $104.5 million, net of cash acquired. The acquisition date value of the identifiable net assets acquired, which included $13.4 million of working capital and $35.5 million of intangible assets, was $38.1 million. The related goodwill was $66.4 million. The amount allocated to intangible assets included $32.0 million for customer relationships. The useful lives assigned to intangible assets ranged from 10 to 14 years.
ACTUAL AND PRO-FORMA IMPACT FROM ACQUISITIONS
Actual Impact from Acquisitions
The net sales and net loss from the 2020 acquisitions included in the Company's Consolidated Statements of Operations for the year ended January 2, 2021 are shown in the table below. The net loss includes amortization expense relating to intangible assets recorded upon acquisition, inventory step-up charges, transaction costs, and other integration-related costs.
| (Millions of Dollars) | 2020 | ||||
| Net sales | $ | 233.9 | |||
| Net loss attributable to common shareowners | $ | (89.4) |
Pro-forma Impact from Acquisitions
The following table presents supplemental pro-forma information as if the 2020 acquisitions had occurred on December 30, 2018 and the 2019 acquisitions had occurred on December 31, 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 the aforementioned dates. 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) | 2020 | 2019 | |||||||||
| Net sales | $ | 14,592.6 | $ | 14,903.7 | |||||||
| Net earnings attributable to common shareowners | 1,256.7 | 923.0 | |||||||||
| Diluted earnings per share | $ | 8.06 | $ | 6.13 |
2020 Pro-forma Results
The 2020 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2020 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 acquisition accounting that would have been incurred from December 29, 2019 to the acquisition dates.
-
Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from December 29, 2019 to the acquisition date of CAM.
-
Because the 2020 acquisitions were assumed to occur on December 30, 2018, there were no acquisition-related costs or inventory step-up charges factored into the 2020 pro-forma year, as such expenses would have occurred in the first year following the assumed acquisition date.
2019 Pro-forma Results
The 2019 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2019 and 2020 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 acquisition accounting that would have been incurred from December 30, 2018 to the acquisition dates of the 2019 acquisitions and for the year ended December 28, 2019 for the 2020 acquisitions.
-
Additional depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from December 30, 2018 to the acquisition date of IES attachments and for the year ended December 28, 2019 for CAM.
-
Additional expense for acquisition-related costs and inventory step-up charges relating to the 2020 acquisitions, as such expenses would have been incurred during the year ended December 28, 2019.
-
Because the 2019 acquisitions were assumed to occur on December 31, 2017, there were no acquisition-related costs or inventory step-up charges factored into the 2019 pro-forma period, as such expenses would have occurred in the first year following the assumed acquisition date.
INVESTMENTS
On January 2, 2019, the Company acquired a 20 percent interest in MTD, a privately held global manufacturer of outdoor power equipment, for $234 million in cash. With annual revenues of approximately $2.6 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 Company is applying the equity method of accounting to the MTD investment.
During 2020, 2019 and 2018, the Company made additional immaterial investments in new and emerging start-up companies focused on innovation, breakthrough products and advanced technologies. These investments, which are included in Other assets in the Consolidated Balance Sheets, do not qualify for equity method accounting as the Company acquired less than 20 percent interest in each investment and does not have the ability to significantly influence the operating or financial decisions of any of the investees.
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 29, 2018 | $ | 5,154.3 | $ | 1,679.7 | $ | 2,122.7 | $ | 8,956.7 | |||||||||||||||
| Acquisitions | (1.3) | 320.5 | 8.2 | 327.4 | |||||||||||||||||||
| Foreign currency translation and other | 8.8 | (4.7) | (50.7) | (46.6) | |||||||||||||||||||
| Balance December 28, 2019 | $ | 5,161.8 | $ | 1,995.5 | $ | 2,080.2 | $ | 9,237.5 | |||||||||||||||
| Acquisitions | 0.1 | 635.7 | 14.9 | 650.7 | |||||||||||||||||||
| Foreign currency translation and other | 85.8 | 15.3 | 48.8 | 149.9 | |||||||||||||||||||
| Balance January 2, 2021 | $ | 5,247.7 | $ | 2,646.5 | $ | 2,143.9 | $ | 10,038.1 |
The goodwill amount for the CAM acquisition is subject to change based upon the finalization of the acquisition accounting during the measurement period. Refer to Note E, Acquisitions and Investments, for further discussion.
In accordance with ASC 350, Intangibles - Goodwill and Other, a portion of the goodwill associated with the Security segment was allocated to the aforementioned commercial electronic security divestiture based on the relative fair value of the business disposed of and the portion of the reporting unit that was retained. Accordingly, goodwill for the Security segment was reduced by $31.3 million and included in the gain on sale of this divestiture in 2020. Refer to Note T, Divestitures, for further discussion.
As required by the Company's policy, goodwill and indefinite-lived trade names were tested for impairment in the third quarter of 2020. The Company assessed the fair values of its reporting units utilizing a discounted cash flow valuation model. 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 six years. These assumptions contemplated business, market and overall economic conditions. Based on the results of the annual impairment testing performed in the third quarter of 2020, the Company determined that the fair values of each of its reporting units exceeded their respective carrying amounts.
INTANGIBLE ASSETS — Intangible assets at January 2, 2021 and December 28, 2019 were as follows:
| 2020 | 2019 | ||||||||||||||||||||||
| (Millions of Dollars) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||
| Amortized Intangible Assets — Definite lived | |||||||||||||||||||||||
| Patents and copyrights | $ | 45.5 | $ | (44.0) | $ | 42.4 | $ | (41.5) | |||||||||||||||
| Trade names | 220.8 | (141.1) | 194.5 | (127.2) | |||||||||||||||||||
| Customer relationships | 3,369.1 | (1,634.0) | 2,739.0 | (1,421.7) | |||||||||||||||||||
| Other intangible assets | 232.4 | (190.9) | 233.1 | (182.9) | |||||||||||||||||||
| Total | $ | 3,867.8 | $ | (2,010.0) | $ | 3,209.0 | $ | (1,773.3) |
Indefinite-lived trade names totaled $2.198 billion at January 2, 2021 and $2.186 billion at December 28, 2019. The year-over-year change is primarily due to currency fluctuations.
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. With the exception of an immaterial trade name, the Company determined that the fair values of its indefinite-lived trade names exceeded their respective carrying amounts.
Intangible assets amortization expense by segment was as follows:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Tools & Storage | $ | 61.5 | $ | 73.1 | $ | 75.5 | |||||||||||
| Industrial | 96.6 | 69.6 | 50.7 | ||||||||||||||
| Security | 43.5 | 44.7 | 49.1 | ||||||||||||||
| Consolidated | $ | 201.6 | $ | 187.4 | $ | 175.3 |
Future amortization expense in each of the next five years amounts to $201.8 million for 2021, $192.7 million for 2022, $183.9 million for 2023, $175.4 million for 2024, $156.9 million for 2025 and $947.1 million thereafter.
G. ACCRUED EXPENSES
Accrued expenses at January 2, 2021 and December 28, 2019 were as follows:
| (Millions of Dollars) | 2020 | 2019 | |||||||||
| Payroll and related taxes | $ | 324.2 | $ | 262.4 | |||||||
| Income and other taxes | 241.0 | 243.9 | |||||||||
| Customer rebates and sales returns | 229.6 | 112.0 | |||||||||
| Insurance and benefits | 80.4 | 69.8 | |||||||||
| Restructuring costs | 90.2 | 147.8 | |||||||||
| Derivative financial instruments | 185.3 | 22.4 | |||||||||
| Warranty costs | 81.5 | 69.6 | |||||||||
| Deferred revenue | 108.7 | 108.9 | |||||||||
| Freight costs | 93.5 | 72.9 | |||||||||
| Environmental costs | 46.7 | 57.8 | |||||||||
| Deferred purchase price | — | 249.2 | |||||||||
| Current lease liability | 138.8 | 141.3 | |||||||||
| Other | 490.5 | 419.5 | |||||||||
| Total | $ | 2,110.4 | $ | 1,977.5 |
H. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt and financing arrangements at January 2, 2021 and December 28, 2019 were as follows:
| January 2, 2021 | December 29, 2019 | ||||||||||||||||||||||||||||
| (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 | |||||||||||||||||||||
| Notes payable due 2021 | 3.40% | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 406.0 | ||||||||||||||
| Notes payable due 2022 | 2.90% | — | — | — | — | — | — | 752.3 | |||||||||||||||||||||
| Notes payable due 2026 | 3.40% | 500.0 | (0.5) | — | — | (2.3) | 497.2 | 496.5 | |||||||||||||||||||||
| Notes payable due 2028 | 7.05% | 150.0 | — | 8.2 | 7.9 | — | 166.1 | 168.3 | |||||||||||||||||||||
| Notes payable due 2028 | 4.25% | 500.0 | (0.3) | — | — | (3.5) | 496.2 | 495.8 | |||||||||||||||||||||
| Notes payable due 2030 | 2.30% | 750.0 | (2.3) | — | — | (4.8) | 742.9 | — | |||||||||||||||||||||
| Notes payable due 2040 | 5.20% | 400.0 | (0.2) | (29.0) | — | (2.7) | 368.1 | 366.5 | |||||||||||||||||||||
| Notes payable due 2048 | 4.85% | 500.0 | (0.5) | — | — | (5.2) | 494.3 | 494.1 | |||||||||||||||||||||
| Notes payable due 2050 | 2.75% | 750.0 | (2.0) | — | — | (8.1) | 739.9 | — | |||||||||||||||||||||
| Notes payable due 2060 (junior subordinated) | 4.00% | 750.0 | — | — | — | (9.3) | 740.7 | — | |||||||||||||||||||||
| Total long-term debt, including current maturities | $ | 4,300 | $ | (5.8) | $ | (20.8) | $ | 7.9 | $ | (35.9) | $ | 4,245.4 | $ | 3,179.5 | |||||||||||||||
| Less: Current maturities of long-term debt | — | (3.1) | |||||||||||||||||||||||||||
| Long-term debt | $ | 4,245.4 | $ | 3,176.4 |
1 Unamortized gain (loss) associated with interest rate swaps are more fully discussed in Note I, Financial Instruments.
As of January 2, 2021, the total aggregate annual principal maturities of long-term debt for the next five years and thereafter are as follows: no principal maturities from 2021 to 2025, and $4.3 billion thereafter. These maturities represent the principal amounts to be paid and accordingly exclude the remaining $7.9 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 $26.6 million pertaining to unamortized termination gains and losses on interest rate swaps and unamortized discounts on the notes as described in Note I, Financial Instruments, and $35.9 million of unamortized deferred financing fees. Interest paid during 2020, 2019 and 2018 amounted to $192.1 million, $252.9 million and $249.6 million, respectively.
In November 2020, the Company issued $750.0 million of senior unsecured term notes maturing November 15, 2050 ("2050 Term Notes"). The 2050 Term Notes will accrue interest at a fixed rate of 2.75% per annum, with interest payable semi-annually in arrears, and rank equally in right of payment with all of the Company's existing and future unsecured unsubordinated debt. The Company received total net proceeds from this offering of approximately $739.9 million, net of approximately $10.1 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 2050 Term Notes, the Company redeemed the 3.4% senior unsecured term notes due 2021 (“2021 Term Notes”) and the 2.9% senior unsecured term notes due 2022 (“2022 Term Notes”) for approximately $1.2 billion representing the outstanding principal amounts, accrued and unpaid interest, and a make-whole premium. The Company recognized a net pre-tax loss of $46.9 million from the extinguishment, which was comprised of the $48.7 million make-whole premium payment and a $1.7 million loss related to the write-off of deferred financing fees, partially offset by a $3.5 million gain relating to the write-off of unamortized fair value swap terminations. The Company also recognized a pre-tax loss of $19.6 million relating to the unamortized loss on cash flow swap terminations related to the 2022 Term Notes. Refer to Note I, Financial Instruments, for further discussion.
In February 2020, the Company issued $750.0 million of senior unsecured term notes maturing March 15, 2030 ("2030 Term Notes") and $750.0 million of fixed-to-fixed reset rate junior subordinated debentures maturing March 15, 2060 (“2060 Junior Subordinated Debentures”). The 2030 Term Notes accrue interest at a fixed rate of 2.3% per annum, with interest payable semi-annually in arrears, and rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated debt. The 2060 Junior Subordinated Debentures bear interest at a fixed rate of 4.0% per annum, payable semi-annually in arrears, up to but excluding March 15, 2025. From and including March 15, 2025, the interest rate will be reset for each subsequent five-year reset period equal to the Five-Year Treasury Rate plus 2.657%. The Five-Year Treasury Rate is based on the average yields on actively traded U.S. treasury securities adjusted to constant maturity, for five-year maturities. On each five-year reset date, the 2060 Junior Subordinated Debentures can be called at 100% of the principal amount, plus accrued interest, if any. The 2060 Junior Subordinated Debentures are unsecured and rank subordinate and junior in right of payment to all of the Company’s existing and future senior debt. The Company received total net proceeds from these offerings
of approximately $1.483 billion, net of underwriting expenses and other fees associated with the transactions. The net proceeds from these offerings were used for general corporate purposes, including acquisition funding.
In March 2019, the Company issued $500.0 million of senior unsecured notes maturing on March 1, 2026 ("2026 Term Notes"). The 2026 Term Notes accrue interest at a fixed rate of 3.40% per annum with interest payable semi-annually in arrears. The 2026 Term Notes rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated debt. The Company received net cash proceeds of $496.2 million which reflected the notional amount offset by a discount, underwriting expenses, and other fees associated with the transaction. The Company used the net proceeds from the offering for general corporate purposes, including repayment of other borrowings.
In November 2018, the Company issued $500.0 million of senior unsecured notes maturing on November 15, 2028 ("2028 Term Notes") and $500.0 million of senior unsecured notes maturing on November 15, 2048 ("2048 Term Notes"). The 2028 Term Notes and 2048 Term Notes 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 reflected 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.
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 bore interest at an annual rate equal to three-month LIBOR plus 4.304%, payable quarterly in arrears. In February 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. The Company recognized a net pre-tax loss of $3.2 million from the redemption, which was comprised of a $7.8 million loss related to the write-off of deferred financing fees partially offset by a $4.6 million gain relating to an unamortized terminated interest rate swap as described in more detailed in Note I, Financial Instruments.
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. In December 2019, the Company redeemed all of the outstanding 2052 Junior Subordinated Debentures for $760.5 million, which represented 100% of the principal amount plus accrued and unpaid interest. The Company recognized a pre-tax loss of $17.9 million from the redemption related to the write-off of unamortized deferred financing fees.
Commercial Paper and Credit Facilities
The Company has a $3.0 billion commercial paper program which includes Euro denominated borrowings in addition to U.S. Dollars. As of January 2, 2021, the Company had no borrowings outstanding. As of December 28, 2019, the Company had $335.5 million of borrowings outstanding representing Euro denominated commercial paper, which was designated as a net investment hedge. Refer to Note I, Financial Instruments, for further discussion.
The Company has a five-year $2.0 billion committed credit facility (the "5-Year Credit Agreement"). Borrowings under the 5-Year Credit Agreement may be made in U.S. Dollars, Euros or Pounds Sterling. A sub-limit amount of $653.3 million is designated for swing line advances which may be drawn in Euros pursuant to the terms of the 5-Year Credit Agreement. Borrowings bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and specific terms of the 5-Year Credit Agreement. The Company must repay all advances under the 5-Year Credit Agreement by the earlier 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 January 2, 2021 and December 28, 2019, the Company had not drawn on its five-year committed credit facility.
In September 2020, the Company terminated its 364-day $1.0 billion committed credit facility and concurrently executed a new 364-Day $1.0 billion committed credit facility (the "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 8, 2021 or upon termination. The Company may, however, convert all advances outstanding upon termination into a term loan that shall be repaid in full no later than the first anniversary of the termination date provided that the Company, among other things, pays a fee to the administrative agent for
the account of each lender. The 364-Day Credit Agreement serves as part of the liquidity back-stop for the Company’s $3.0 billion U.S. Dollar and Euro commercial paper program. As of January 2, 2021 and December 28, 2019, 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 to $469.1 million, of which $373.4 million was available at January 2, 2021. Short-term arrangements are reviewed annually for renewal.
At January 2, 2021, the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was approximately $3.5 billion. At January 2, 2021, $1.5 million was recorded as short-term borrowings relating to amounts outstanding against uncommitted lines. In addition, $95.6 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 January 2, 2021 and December 28, 2019 were 1.3% and 2.3%, respectively. The weighted-average interest rates on Euro denominated short-term borrowings for the years ended January 2, 2021 and December 28, 2019 were negative 0.2% and 0.3%, respectively.
The Company has an interest coverage covenant that must be maintained to permit continued access to its committed credit facilities described above. The interest coverage ratio tested for covenant compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted Interest Expense ("adjusted EBITDA"/"adjusted Interest Expense"). In April 2020, the Company entered into an amendment to its 5-Year Credit Agreement to: (a) amend the definition of Adjusted EBITDA to allow for additional adjustment addbacks, which primarily relate to anticipated incremental charges related to the COVID-19 pandemic, for amounts incurred beginning in the second quarter of 2020 through the second quarter of 2021, and (b) lower the minimum interest coverage ratio from 3.5 to 2.5 times for the period from and including the second quarter of 2020 through the end of fiscal year 2021. These amendments are also applicable to the new 364-Day Credit Agreement described above.
I. FINANCIAL INSTRUMENTS
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 January 2, 2021 and December 28, 2019 follows:
| (Millions of Dollars) | Balance Sheet Classification | 2020 | 2019 | Balance Sheet Classification | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
| Interest Rate Contracts Cash Flow | Other current assets | $ | — | $ | — | Accrued expenses | $ | 90.9 | $ | — | ||||||||||||||||||||||||||||
| LT other assets | — | — | LT other liabilities | — | 40.5 | |||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts Cash Flow | Other current assets | — | 7.0 | Accrued expenses | 23.7 | 7.8 | ||||||||||||||||||||||||||||||||
| Net Investment Hedge | Other current assets | 3.5 | 18.6 | Accrued expenses | 55.1 | 8.5 | ||||||||||||||||||||||||||||||||
| LT other assets | — | — | LT other liabilities | 5.7 | 2.6 | |||||||||||||||||||||||||||||||||
| Non-derivative designated as hedging instrument: | ||||||||||||||||||||||||||||||||||||||
| Net Investment Hedge | — | — | Short-term borrowings | — | 335.5 | |||||||||||||||||||||||||||||||||
| Total Designated as hedging instruments | $ | 3.5 | $ | 25.6 | $ | 175.4 | $ | 394.9 | ||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | Other current assets | $ | 10.5 | $ | 3.7 | Accrued expenses | $ | 15.6 | $ | 6.1 | ||||||||||||||||||||||||||||
| Total | $ | 14.0 | $ | 29.3 | $ | 191.0 | $ | 401.0 |
The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote. As of January 2, 2021 and December 28, 2019, there were no assets that had been posted as collateral related to the above mentioned financial instruments.
In 2020, 2019 and 2018, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of $33.4 million, $69.9 million and $2.4 million, respectively.
CASH FLOW HEDGES — There were after-tax mark-to-market losses of $103.0 million and $54.2 million as of January 2, 2021 and December 28, 2019, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $20.1 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 during the periods in which the underlying hedged transactions affected earnings for 2020, 2019 and 2018:
| 2020 (Millions of Dollars) | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing | ||||||||||||||||||||||
| Interest Rate Contracts | $ | (70.9) | Interest expense | $ | (16.3) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | (16.1) | Cost of sales | $ | 12.4 | $ | — |
| 2019 (Millions of Dollars) | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing | ||||||||||||||||||||||
| Interest Rate Contracts | $ | (40.5) | Interest expense | $ | (16.2) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | (16.7) | Cost of sales | $ | (6.5) | $ | — |
| 2018 (Millions of Dollars) | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Reclassified from OCI to Income (Effective Portion) | Gain (Loss) Recognized in Income (Ineffective Portion) | ||||||||||||||||||||||
| Interest Rate Contracts | $ | 33.1 | Interest expense | $ | (15.3) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | 35.9 | Cost of sales | $ | (17.9) | $ | — |
A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations for 2020, 2019 and 2018 is as follows:
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | Cost of Sales | Interest Expense | Cost of Sales | Interest Expense | Cost of Sales | Interest Expense | |||||||||||||||||||||||||||||
| Total amount in the Consolidated Statements of Operations in which the effects of the cash flow hedges are recorded | $ | 9,566.7 | $ | 223.1 | $ | 9,636.7 | $ | 284.3 | $ | 9,131.3 | $ | 277.9 | |||||||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | |||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts: | |||||||||||||||||||||||||||||||||||
| Hedged Items | $ | (12.4) | $ | — | $ | 6.5 | $ | — | $ | 17.9 | $ | — | |||||||||||||||||||||||
| Gain (loss) reclassified from OCI into Income | $ | 12.4 | $ | — | $ | (6.5) | $ | — | $ | (17.9) | $ | — | |||||||||||||||||||||||
| Interest Rate Swap Agreements: | |||||||||||||||||||||||||||||||||||
| Gain (loss) reclassified from OCI into Income 1 | $ | — | $ | (16.3) | $ | — | $ | (16.2) | $ | — | $ | (15.3) |
1 Inclusive of the gain/loss amortization on terminated derivative financial instruments.
For 2020, 2019 and 2018 after-tax losses of $15.4 million, $13.1 million, and $15.4 million, respectively, 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. During 2020, the Company entered into forward starting interest rate swaps totaling $1.0 billion to offset expected variability on future interest rate payments associated with debt instruments expected to be issued in the future. The Company terminated these swaps in 2020 resulting in a loss of $20.5 million, which was recorded in Accumulated other comprehensive loss and is being amortized to 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.
During 2019, the Company entered into forward starting interest rate swaps totaling $650.0 million to offset expected variability on future interest rate payments associated with debt instruments expected to be issued in the future. During 2019, swaps with a notional amount of $250.0 million matured resulting in a loss of $1.0 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 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 December 2020, the Company redeemed all of the outstanding 2021 Term Notes and 2022 Term Notes, as further discussed in Note H, Long-Term Debt and Financing Arrangements. As a result, the Company recorded a pre-tax loss of $19.6 million relating to the remaining unamortized loss on cash flow swap terminations related to the 2022 Term Notes.
As of January 2, 2021 and December 28, 2019, the Company had $400 million of forward starting swaps outstanding.
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 January 2, 2021, and December 28, 2019, the notional values of the forward currency contracts outstanding was $595.8 million and $518.2 million, respectively, maturing on various dates through 2021.
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 January 2, 2021 and December 28, 2019 there were no outstanding option contracts.
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 prior years, the Company entered into interest rate swaps related to certain of its notes payable which were subsequently terminated. Amortization of the gain/loss on previously terminated swaps is reported as a reduction of interest expense. Prior to termination, the changes in fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. The Company did not have any active fair value interest rate swaps at January 2, 2021 or December 28, 2019.
A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations for 2020, 2019 and 2018 is as follows:
| 2020 | 2019 | 2018 | ||||||||||||||||||
| (Millions of dollars) | Interest Expense | Interest Expense | Interest Expense | |||||||||||||||||
| Total amount in the Consolidated Statements of Operations in which the effects of the fair value hedges are recorded | $ | 223.1 | $ | 284.3 | $ | 277.9 | ||||||||||||||
| Amortization of gain on terminated swaps | $ | (3.0) | $ | (7.7) | $ | (3.2) |
In December 2020, the Company redeemed all of the outstanding 2021 Term Notes and 2022 Term Notes, as further discussed in Note H, Long-Term Debt and Financing Arrangements. As a result, the Company recorded a pre-tax gain of $3.5 million relating to the remaining unamortized gain on fair value swap terminations related to the 2021 Term Notes.
In February 2019, the Company redeemed all of the outstanding 2053 Junior Subordinated Debentures, as further discussed in Note H, Long-Term Debt and Financing Arrangements. As a result, the Company recorded a pre-tax gain of $4.6 million relating to the remaining unamortized gain on swap termination related to this debt.
A summary of the amounts recorded in the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of 2020 and 2019 is as follows:
| (Millions of dollars) | 2020 Carrying Amount of Hedged Liability****1 | 2020 Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | ||||||||||||||||||
| Current maturities of long-term debt | $ | — | Terminated Swaps | $ | — | |||||||||||||||
| Long-Term Debt | $ | 4,245.4 | Terminated Swaps | $ | (20.8) |
1Represents hedged items no longer designated in qualifying fair value hedging relationships.
| (Millions of dollars) | 2019 Carrying Amount of Hedged Liability****1 | 2019 Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | ||||||||||||||||||
| Current maturities of long-term debt | $ | 3.1 | Terminated Swaps | $ | 3.1 | |||||||||||||||
| Long-Term Debt | $ | 3,176.4 | Terminated Swaps | $ | (17.5) |
1Represents 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 gains of $72.8 million and $97.3 million at January 2, 2021 and December 28, 2019, respectively.
As of January 2, 2021, the Company had cross currency swaps with a notional value totaling $839.4 million maturing on various dates through 2023 hedging a portion of its Japanese yen, Euro and Swiss franc denominated net investments. As of January 2, 2021, the Company had no Euro denominated commercial paper designated as a net investment hedge.
As of December 28, 2019, the Company had cross currency swaps with a notional value totaling $1.1 billion maturing on various dates through 2023 hedging a portion of its Japanese yen, Euro and Swiss franc denominated net investments and Euro denominated commercial paper with a value of $335.5 million maturing in 2020 hedging a portion of its Euro denominated net investments.
Maturing foreign exchange contracts resulted in net cash received of $41.0 million, $8.0 million, and $25.7 million during 2020, 2019 and 2018, respectively.
Gains and losses on net investment hedges remain in Accumulated other comprehensive loss until disposal of the underlying assets. 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. 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 gains and losses from fair value changes during 2020, 2019 and 2018 were as follows:
| 2020 | ||||||||||||||||||||||||||||||||
| (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 | $ | 0.8 | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Cross Currency Swap | $ | (5.4) | $ | 60.7 | Other, net | $ | 18.2 | $ | 18.2 | |||||||||||||||||||||||
| Option Contracts | $ | — | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Non-derivative designated as Net Investment Hedge | $ | (8.5) | $ | — | Other, net | $ | — | $ | — |
| 2019 | ||||||||||||||||||||||||||||||||
| (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 | $ | 6.4 | $ | 4.6 | Other, net | $ | 4.3 | $ | 4.3 | |||||||||||||||||||||||
| Cross Currency Swap | $ | 54.8 | $ | 48.8 | Other, net | $ | 29.9 | $ | 29.9 | |||||||||||||||||||||||
| Option Contracts | $ | (3.7) | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Non-derivative designated as Net Investment Hedge | $ | 21.7 | $ | — | Other, net | $ | — | $ | — |
| 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 | $ | — | $ | — |
As discussed in Note H, Long-Term Debt and Financing Arrangements, the Company has a commercial paper program which authorizes Euro denominated borrowings in addition to U.S. Dollars. Euro denominated borrowings against this commercial paper program are designated as a net investment hedge against a portion of its Euro denominated net investment. As of January 2, 2021 the Company had no Euro denominated borrowings outstanding against this commercial paper program and as of December 28, 2019, the Company had $335.5 million in Euro denominated 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 January 2, 2021 was $1.3 billion maturing on various dates through 2021. The total notional amount of the forward contracts outstanding at December 28, 2019 was $946.8 million maturing on various dates through 2020. The gain (loss) recorded in the income statement from changes in the fair value related to derivatives not designated as hedging instruments under ASC 815 for 2020, 2019 and 2018 are as follows:
| (Millions of Dollars) | Income Statement Classification | 2020 | 2019 | 2018 | |||||||||||||||||||
| Foreign Exchange Contracts | Other-net | $ | (15.7) | $ | (4.1) | $ | 17.0 |
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 January 2, 2021, December 28, 2019, and December 29, 2018.
| 2020 | 2019 | 2018 | |||||||||||||||
| Numerator (in millions): | |||||||||||||||||
| Net Earnings Attributable to Common Shareowners | $ | 1,210.4 | $ | 955.8 | $ | 605.2 |
| Denominator (in thousands): | |||||||||||||||||
| Basic weighted-average shares outstanding | 154,176 | 148,365 | 148,919 | ||||||||||||||
| Dilutive effect of stock contracts and awards | 1,685 | 2,193 | 2,724 | ||||||||||||||
| Diluted weighted-average shares outstanding | 155,861 | 150,558 | 151,643 |
| Earnings per share of common stock: | |||||||||||||||||
| Basic | $ | 7.85 | $ | 6.44 | $ | 4.06 | |||||||||||
| Diluted | $ | 7.77 | $ | 6.35 | $ | 3.99 |
The following weighted-average stock options were not included in the computation of weighted-average diluted shares outstanding because the effect would be anti-dilutive (in thousands):
| 2020 | 2019 | 2018 | |||||||||||||||
| Number of stock options | 2,376 | 2,151 | 1,339 | ||||||||||||||
In November 2019, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million (“2019 Equity Units”). Each unit initially consists of 750,000 shares of convertible preferred stock ("Series D Preferred Stock") and forward stock purchase contracts. On and after November 15, 2022, the Series D Preferred Stock may be converted into common stock at the option of the holder. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. The conversion rate is initially 5.2263 shares of common stock per one share of Series D Preferred Stock, which was equivalent to an initial conversion price of approximately $191.34 per share of common stock. As of January 2, 2021, due to customary anti-dilution provisions, the conversion rate was 5.2269, equivalent to a conversion price of approximately $191.32 per share of common stock. The Series D 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 Series D Preferred Stock were anti-dilutive during 2020 and during November and December of 2019.
In May 2017, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million (“2017 Equity Units”). Each unit initially consisted of 750,000 shares of convertible preferred stock ("Series C Preferred Stock") and forward stock purchase contracts. In May 2020, the Company successfully remarketed the Series C Preferred Stock, generating cash proceeds of $750.0 million which were applied to settle the holders' stock purchase contract obligations, resulting in the Company issuing 5,463,750 common shares. Holders of the remarketed Series C Preferred Stock are entitled to receive cumulative dividends, if declared by the Board of Directors, at an initial fixed rate equal to 5.0% per annum of the $1,000 per share liquidation preference (equivalent to $50.00 per annum per share). In addition, holders have the option to convert the Series C Preferred Stock into common stock. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. In connection with the remarketing described above, the conversion rate was reset to 6.7352 shares of the Company's common stock per one share of Series C Preferred Stock, which was equivalent to a conversion price of approximately $148.47 per share of common stock. As of January 2, 2021, due to customary anti-dilution provisions, the conversion rate was 6.7504, equivalent to a conversion price of approximately $148.14 per share of common stock. The Series C 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 Series C Preferred Stock were anti-dilutive during certain months in 2020 and most of 2019.
See "Other Equity Arrangements" below for further details of the above transactions.
COMMON STOCK ACTIVITY — Common stock activity for 2020, 2019 and 2018 was as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Outstanding, beginning of year | 153,506,409 | 151,302,450 | 154,038,031 | ||||||||||||||
| Issued from treasury | 7,474,394 | 2,391,336 | 941,854 | ||||||||||||||
| Returned to treasury | (228,541) | (187,377) | (3,677,435) | ||||||||||||||
| Outstanding, end of year | 160,752,262 | 153,506,409 | 151,302,450 | ||||||||||||||
| 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 | 157,106,752 | 149,860,899 | 147,656,940 |
In May 2020, the Company issued 5,463,750 shares of common stock to settle the purchase contracts related to the 2017 Equity Units.
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 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 February 2020, the Company amended the settlement date to April 2022, 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.
COMMON STOCK RESERVED — Common stock shares reserved for issuance under various employee and director stock plans at January 2, 2021 and December 28, 2019 are as follows:
| 2020 | 2019 | ||||||||||
| Employee stock purchase plan | 1,480,962 | 1,593,759 | |||||||||
| Other stock-based compensation plans | 8,113,781 | 11,330,531 | |||||||||
| Total shares reserved | 9,594,743 | 12,924,290 |
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 2020, 2019 and 2018:
| 2020 | 2019 | 2018 | |||||||||||||||
| Average expected volatility | 35.0 | % | 25.0 | % | 23.0 | % | |||||||||||
| Dividend yield | 1.6 | % | 1.8 | % | 2.0 | % | |||||||||||
| Risk-free interest rate | 0.4 | % | 1.5 | % | 2.9 | % | |||||||||||
| Expected life | 5.3 years | 5.3 years | 5.3 years | ||||||||||||||
| Fair value per option | $ | 48.36 | $ | 30.09 | $ | 26.54 | |||||||||||
| Weighted-average vesting period | 2.8 years | 2.8 years | 2.9 years |
Stock Options:
The number of stock options and weighted-average exercise prices as of January 2, 2021 are as follows:
| Options | Price | ||||||||||
| Outstanding, beginning of year | 6,454,671 | $ | 122.42 | ||||||||
| Granted | 1,103,538 | 179.85 | |||||||||
| Exercised | (1,419,699) | 94.24 | |||||||||
| Forfeited | (263,264) | 148.68 | |||||||||
| Outstanding, end of year | 5,875,246 | $ | 138.84 | ||||||||
| Exercisable, end of year | 3,289,889 | $ | 121.65 |
At January 2, 2021, the range of exercise prices on outstanding stock options was $64.79 to $179.85. Stock option expense was $31.6 million, $27.7 million and $23.9 million for the years ended January 2, 2021, December 28, 2019 and December 29, 2018, respectively. At January 2, 2021, the Company had $70.8 million of unrecognized pre-tax compensation expense for stock options. This expense will be recognized over the remaining vesting periods which are 1.9 years on a weighted-average basis.
During 2020, the Company received $133.8 million in cash from the exercise of stock options. The related tax benefit from the exercise of these options was $24.6 million. During 2020, 2019 and 2018, the total intrinsic value of options exercised was $104.3 million, $143.7 million and $18.3 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 2020, 2019 and 2018, the excess tax benefit arising from tax deductions in excess of recognized compensation cost totaled $17.6 million, $25.8 million and $2.3 million, respectively, and was recorded in income tax expense.
Outstanding and exercisable stock option information at January 2, 2021 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 | 427,354 | 1.47 | $ | 67.96 | 427,354 | 1.47 | $ | 67.96 | |||||||||||||||||||||||||||
| $75.01 — $125.00 | 1,483,536 | 4.97 | 108.40 | 1,483,536 | 4.97 | 108.40 | |||||||||||||||||||||||||||||
| $125.01 and higher | 3,964,356 | 8.55 | 157.87 | 1,378,999 | 7.70 | 152.56 | |||||||||||||||||||||||||||||
| 5,875,246 | 7.13 | $ | 138.84 | 3,289,889 | 5.66 | $ | 121.65 |
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 January 2, 2021, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $234.8 million and $187.2 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 the Company's common stock at the lower of 85.0% of the fair market value of the shares on the grant date ($123.83 per share for fiscal year 2020 purchases) or 85.0% of the fair market value of the shares on the last business day of each month. A maximum of 1,600,000 shares are authorized for subscription. In conjunction with the Company’s cost savings initiatives, the ESPP was temporarily suspended in 2019 and was subsequently reinstated in 2020. During 2020, 2019 and 2018, 119,038 shares, 12,465 shares and 139,715 shares, respectively, were issued under the plan at average prices of $110.97, $103.02, and $121.00 per share, respectively, and the intrinsic value of the ESPP purchases was $3.3 million, $0.3 million and $3.1 million, respectively. For 2020, the Company received $13.2 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 2020, 2019 and 2018, respectively: dividend yield of 1.7%, 2.2% and 1.6%; expected volatility of 28.0%, 28.0% and 16.0%; risk-free interest rates of 1.6%, 2.5%, and 1.6%; and expected lives of one year. The weighted-average fair value of those purchase rights granted in 2020, 2019 and 2018 was $41.02, $27.75 and $43.69, respectively. Total compensation expense recognized for ESPP was $3.9 million in 2020, de minimus in 2019 and $6.6 million in 2018.
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 325,448 shares, 282,598 shares and 413,838 shares in 2020, 2019 and 2018, respectively. The
weighted-average grant date fair value of RSUs granted in 2020, 2019 and 2018 was $165.44, $149.14 and $133.90 per share, respectively.
Total compensation expense recognized for RSUs amounted to $35.6 million, $41.2 million and $40.1 million in 2020, 2019 and 2018, respectively. The actual tax benefit received related to the shares that were delivered in 2020 was $9.0 million. The excess tax benefit recognized was $2.3 million, $3.2 million, and $1.8 million in 2020, 2019 and 2018, respectively. As of January 2, 2021, unrecognized compensation expense for RSUs amounted to $85.6 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 January 2, 2021, 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 28, 2019 | 866,520 | $ | 139.23 | ||||||||
| Granted | 325,448 | 165.44 | |||||||||
| Vested | (291,523) | 134.48 | |||||||||
| Forfeited | (69,061) | 137.98 | |||||||||
| Non-vested at January 2, 2021 | 831,384 | $ | 151.26 |
The total fair value of shares vested (market value on the date vested) during 2020, 2019 and 2018 was $58.5 million, $56.7 million and $46.8 million, respectively.
Prior to 2020, non-employee members of the Board of Directors received annual restricted share-based grants which must be cash settled and accordingly mark-to-market accounting is applied. The Company recognized $1.6 million and $6.8 million of expense for these awards in 2020 and 2019, respectively, and $3.4 million of income in 2018. Beginning in 2020, the annual grant issued to non-employee members of the Board of Directors will be stock settled. The expense related to the 2020 annual grant was $1.4 million in 2020. Additionally, members of the Board of Directors were granted restricted share units for which compensation expense of $1.0 million, $1.2 million, and $1.2 million was recognized for 2020, 2019 and 2018, respectively.
Management Incentive Compensation Plan Performance Stock Units:
In 2020 and 2019, the Company granted Performance Stock Units (collectively "MICP-PSUs") under the Management Incentive Compensation Plan ("MICP") to participating employees. Awards are payable in shares of common stock and generally no award is made if the employee terminates employment prior to the settlement dates. The ultimate delivery of the shares related to the 2020 and 2019 MICP-PSU grant will occur ratably in 2021, 2022, and 2023 for the 2020 plan and in 2020, 2021, and 2022 for the 2019 plan. The total shares to be delivered are based on actual 2020 and 2019 performance in relation to the established goals.
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 28, 2019 | 346,011 | $ | 127.27 | ||||||||||||||
| Granted | 508,860 | 93.58 | |||||||||||||||
| Vested | (62,613) | 127.27 | |||||||||||||||
| Forfeited | (199,223) | 122.60 | |||||||||||||||
| Non-vested at January 2, 2021 | 593,035 | $ | 99.93 |
Compensation cost for these performance awards is recognized ratably over the vesting term of 3 years. Total expense recognized in 2020 and 2019 related to these MICP-PSUs approximated $18.5 million and $9.5 million, respectively. The actual tax benefit received related to the shares that were delivered in 2020 was $1.9 million.
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 settlement date. LTIP grants were made in
2018, 2019 and 2020. 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 grant value. There is a third market-based metric, 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 2021, 2022 and 2023 for the 2018, 2019 and 2020 grants, respectively. Share settlements are based on actual performance in relation to these goals.
Expense recognized for these performance awards amounted to $17.1 million in 2020, $9.0 million in 2019, and $4.7 million in 2018. With the exception of the market-based metric comprising 25% of the award, in the event performance goals are not met, compensation cost is not recognized and any previously recognized compensation cost is reversed. The actual tax benefit received related to the shares that were delivered in 2020 was $3.9 million. The excess tax benefit recognized was $0.7 million and $1.5 million in 2020 and 2019, respectively. There was no excess tax benefit recognized in 2018.
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 28, 2019 | 607,532 | $ | 131.46 | ||||||||
| Granted | 205,964 | 154.07 | |||||||||
| Vested | (97,560) | 119.34 | |||||||||
| Forfeited | (107,198) | 122.78 | |||||||||
| Non-vested at January 2, 2021 | 608,738 | $ | 142.58 |
OTHER EQUITY ARRANGEMENTS
2019 Equity Units and Capped Call Transactions
In November 2019, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million (“2019 Equity Units”). Each unit has a stated amount of $100 and initially consists of a three-year forward stock purchase contract (“2022 Purchase Contracts”) for the purchase of a variable number of shares of common stock, on November 15, 2022, for a price of $100, and a 10% beneficial ownership interest in one share of 0% Series D Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of $1,000 per share (“Series D Preferred Stock”). The Company received approximately $735.0 million in cash proceeds from the 2019 Equity Units net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series D Preferred Stock, recording $750.0 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used $19.2 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 November 2019, the Company issued 750,000 shares of Series D 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 D Preferred Stock is pledged as collateral to support holders’ purchase obligations under the 2022 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 November 15, 2022, the Series D Preferred Stock may be converted into common stock at the option of the holder. The conversion rate was initially 5.2263 shares of common stock per one share of Series D Preferred Stock, which was equivalent to an initial conversion price of approximately $191.34 per share of common stock. As of January 2, 2021, due to customary anti-dilution provisions, the conversation rate was 5.2269, equivalent to a conversion price of approximately $191.32
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 D Preferred Stock prior to December 22, 2022. At the election of the Company, on or after December 22, 2022, the Company may redeem for cash, all or any portion of the outstanding shares of the Series D Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series D Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date.
2022 Purchase Contracts
The 2022 Purchase Contracts obligate the holders to purchase, on November 15, 2022, for a price of $100 in cash, a maximum number of 4.7 million shares of the Company’s common stock (subject to customary anti-dilution adjustments). The 2022 Purchase Contract holders may elect to settle their obligation early, in cash. The Series D Preferred Stock is pledged as collateral to guarantee the holders’ obligations to purchase common stock under the terms of the 2022 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 November 15, 2022.
The initial maximum settlement rate of 0.6272 was calculated using an initial reference price of $159.45, equal to the last reported sale price of the Company's common stock on November 7, 2019. As of January 2, 2021, due to the customary anti-dilution provisions, the maximum settlement rate was 0.6272, equivalent to a reference price of $159.43. 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 the Company's 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 2022 Purchase Contracts, the Company will receive additional cash proceeds of $750 million.
The Company pays the holders of the 2022 Purchase Contracts quarterly payments (“Contract Adjustment Payments”) at a rate of 5.25% per annum, payable quarterly in arrears on February 15, May 15, August 15 and November 15, which commenced on February 15, 2020. The $114.2 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 will accrete to interest expense, approximately $1.3 million per year over the three-year term. As of January 2, 2021, the present value of the Contract Adjustment Payments was $76.3 million.
The holders can settle the purchase contracts early, for cash, subject to certain exceptions and conditions in the prospectus supplement. Upon early settlement of any purchase contracts, the Company will deliver the number of shares of its common stock equal to 85% of the number of shares of common stock that would have otherwise been deliverable.
Capped Call Transactions
In order to offset the potential economic dilution associated with the common shares issuable upon conversion of the Series D 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 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 D Preferred Stock. Subject to customary anti-dilution adjustments, the capped call has an initial lower strike price of $191.34, which corresponds to the minimum 5.2263 settlement rate of the Series D Preferred Stock, and an upper strike price of $207.29, which is approximately 30% higher than the closing price of the Company's common stock on November 7, 2019. As of January 2, 2021, due to the customary anti-dilution provisions, the capped call transactions were at an adjusted lower strike price of $191.32 and an adjusted upper strike price of $207.26.
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 D 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 2019 Equity Units, when taken together, result in the economic equivalent of having the conversion price on the 2019 Equity Units at $207.26, the upper strike price of the capped call as of January 2, 2021.
The Company paid $19.2 million, or an average of $4.90 per option, to enter into capped call transactions on 3.9 million shares of common stock. The $19.2 million premium paid was recorded as a reduction of Shareowners’ Equity. The aggregate fair value of the options at January 2, 2021 was $22.3 million.
2017 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 (“2017 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 net cash proceeds from the 2017 Equity Units net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series C Preferred Stock, recording $750.0 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 initially did not bear any dividends and the liquidation preference of the convertible preferred stock did not accrete. The convertible preferred stock has no maturity date and remains outstanding unless converted by holders or redeemed by the Company. Holders of shares of the convertible preferred stock generally have no voting rights. The Series C Preferred Stock was pledged as collateral to support holders' purchase obligations under the 2020 Purchase Contracts.
In May 2020, the Company successfully remarketed the Series C Preferred Stock. In connection with the remarketing, the conversation rate was reset to 6.7352 shares of the Company's common stock, which is equivalent to a conversion price of approximately $148.47 per share. Beginning on May 15, 2020, the holders have the option to convert the Series C Preferred Stock into common stock. At the election of the Company, upon conversion, the Company may delivery cash, common stock, or a combination thereof. As of January 2, 2021 due to the customary anti-dilution provisions, the conversion rate was 6.7504, equivalent to a conversion price of approximately $148.14 per share of common stock.
Subsequent to the remarketing, holders of the convertible preferred stock will be entitled to receive, if declared by the Board of Directors, cumulative dividends (i) from, and including May 15, 2020 to, but excluding, May 15, 2023 (the "dividend step-up date") at a fixed rate equal to 5.0% per annum of the $1,000 per share liquidation preference (equivalent to $50.00 per annum per share) and (ii) from, and including, the dividend step-up date at a fixed rate equal to 10.0% per annum of the $1,000 per share liquidation preference (equivalent to $100.00 per annum per share). Dividends will be cumulative on the $1,000 liquidation preference per share and will be payable, if declared by the Board of Directors, quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, beginning on August 15, 2020. Dividends accrued on the Series C Preferred Stock reduce net earnings for purposes of calculating earnings per share.
The Company does not have the right to redeem the Series C Preferred Stock prior to May 15, 2021. At the election of the Company, on or after May 15, 2021, 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 remarketing resulted in cash proceeds of $750.0 million, which were automatically applied to satisfy in full the related unit holders' obligations to purchase common shares under their 2020 Purchase Contracts. In May 2020, the Company issued
5,463,750 common shares, settling all 2020 Purchase Contracts using the maximum settlement rate of 0.7285 (equivalent to a reference price of $137.26 per common share).
The Company paid 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 initial present value of these Contract Adjustment Payments reduced Shareowners’ Equity at inception. As each quarterly Contract Adjustment Payment was made, the related liability was reduced and the difference between the cash payment and the present value accreted to interest expense, approximately $1.3 million per year over the three-year term. On May 15, 2020, the Company paid the final contract adjustment payment related to the 2020 Purchase Contracts.
Capped Call Transactions
In May 2017, the Company entered into capped call transactions with three major financial institutions (the "counterparties") 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 conversion preferred stock exceeds its liquidation preference. 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 paid was recorded as a reduction of Shareowners' Equity.
The capped call transactions had a term of approximately three years and were 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 had an initial lower strike price of $162.27, which corresponded to the minimum 6.1627 settlement rate of the Series C Preferred Stock at inception, and an upper strike price of $179.53, which was approximately 30% higher than the closing price of the Company's common stock on May 11, 2017. In June 2020, the capped call options expired out of the money.
2018 Capped Call Transactions
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 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.
In February 2020, the Company net-share settled 0.6 million of the 3.2 million capped call options on its common stock and received 61,767 shares using an average reference price of $162.26 per common share.
On June 9, 2020, the Company amended the 2018 capped call options to align with and offset the potential economic dilution associated with the common shares issuable upon conversion of the remarketed Series C Preferred Stock, as further discussed above. Subsequent to the amendment, the capped call options, subject to anti-dilution, had an initial lower strike price of $148.34 and an upper strike price of $165.00, which was approximately 30% higher than the closing price of the Company's common stock on June 9, 2020. As of January 2, 2021, due to the customary anti-dilution provisions, the capped call transactions had adjusted lower and upper strike prices of $148.14 and $164.77, respectively. The aggregate fair value of the options at January 2, 2021 was $53.4 million.
With the respect to the impact on the Company, the capped call transactions and Series C Preferred Stock, when taken together, result in the economic equivalent of having the conversion price on the Series C Preferred Stock at $164.77, the upper strike price of the capped call as of January 2, 2021.
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.
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 | (Losses) gains on cash flow hedges, net of tax | Gains (losses) on net investment hedges, net of tax | Pension (losses) gains, net of tax | Total | ||||||||||||||||||||||||
| Balance - December 29, 2018 | $ | (1,481.2) | $ | (26.8) | $ | 63.3 | $ | (369.6) | $ | (1,814.3) | |||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (36.0) | (40.5) | 60.0 | (53.3) | (69.8) | ||||||||||||||||||||||||
| Reclassification adjustments to earnings | — | 13.1 | (26.0) | 12.4 | (0.5) | ||||||||||||||||||||||||
| Net other comprehensive (loss) income | (36.0) | (27.4) | 34.0 | (40.9) | (70.3) | ||||||||||||||||||||||||
| Balance - December 28, 2019 | $ | (1,517.2) | $ | (54.2) | $ | 97.3 | $ | (410.5) | $ | (1,884.6) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 266.2 | (64.2) | (38.3) | (53.4) | 110.3 | ||||||||||||||||||||||||
| Adjustments related to sales of businesses | 15.7 | — | — | 0.6 | 16.3 | ||||||||||||||||||||||||
| Reclassification adjustments to earnings | — | 15.4 | 13.8 | 15.1 | 44.3 | ||||||||||||||||||||||||
| Net other comprehensive income (loss) | 281.9 | (48.8) | (24.5) | (37.7) | 170.9 | ||||||||||||||||||||||||
| Balance - January 2, 2021 | $ | (1,235.3) | $ | (103.0) | $ | 72.8 | $ | (448.2) | $ | (1,713.7) |
The reclassifications out of Accumulated other comprehensive loss for the twelve months ended January 2, 2021 and December 28, 2019 were as follows:
| (Millions of Dollars) | 2020 | 2019 | ||||||||||||||||||
| Components of accumulated other comprehensive loss | Reclassification adjustments | Reclassification adjustments | Affected line item in Consolidated Statements of Operations | |||||||||||||||||
| Realized gains (losses) on cash flow hedges | $ | 12.4 | $ | (6.5) | Cost of sales | |||||||||||||||
| Realized losses on cash flow hedges | (19.6) | — | Other, net | |||||||||||||||||
| Realized losses on cash flow hedges | (16.3) | (16.2) | Interest expense | |||||||||||||||||
| Total before taxes | $ | (23.5) | $ | (22.7) | ||||||||||||||||
| Tax effect | 8.1 | 9.6 | Income taxes | |||||||||||||||||
| Realized losses on cash flow hedges, net of tax | $ | (15.4) | $ | (13.1) | ||||||||||||||||
| Realized (losses) gains on net investment hedges | $ | (18.2) | $ | 34.2 | Other, net | |||||||||||||||
| Tax effect | 4.4 | (8.2) | Income taxes | |||||||||||||||||
| Realized (losses) gains on net investment hedges, net of tax | $ | (13.8) | $ | 26.0 | ||||||||||||||||
| Actuarial losses and prior service costs / credits | (19.5) | (15.3) | Other, net | |||||||||||||||||
| Settlement losses | (0.6) | (1.0) | Other, net | |||||||||||||||||
| Total before taxes | (20.1) | (16.3) | ||||||||||||||||||
| Tax effect | 5.0 | 3.9 | Income taxes | |||||||||||||||||
| Amortization of defined benefit pension items, net of tax | $ | (15.1) | $ | (12.4) |
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, which was suspended in the second quarter of 2020, totaled $10.9 million, $28.8 million and $28.0 million in 2020, 2019 and 2018, respectively. In addition to the regular employer match, $0.7 million was allocated to the employee's accounts for forfeitures and a surplus resulting from appreciation of the Company's share value in 2018. There was no additional employer match allocated to employee's accounts in 2020 and 2019.
In addition, approximately 9,300 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, which were suspended in the second quarter of 2020, were $5.6 million, $28.8 million, and $29.0 million in 2020, 2019 and 2018, respectively. 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 2019 and 2018, the Company made additional contributions to the ESOP for $7.2 million, and $7.0 million, respectively, which were used by the ESOP to make additional payments on the 1991 internal loan. These payments triggered the release of 226,212 and 207,049 shares of unallocated stock in 2019 and 2018, 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 $6.3 million in 2020, income of $0.5 million in 2019 and expense of $0.4 million in 2018. 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 $146.08 per share in 2020, $138.67 per share in 2019 and $139.45 per share in 2018.
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 $1.3 million, $6.3 million and $7.7 million in 2020, 2019, and 2018, respectively, net of the tax benefit which is recorded in earnings. 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 $0.1 million, $0.5 million and $1.6 million for 2020, 2019 and 2018, respectively. Both allocated and unallocated ESOP shares are treated as outstanding for purposes of computing earnings per share. As of January 2, 2021, the cumulative number of ESOP shares allocated was 15,541,357, of which participants held 1,638,044 shares. There are no unallocated shares remaining as of January 2, 2021, as all shares in the ESOP trust holding account have been released. The Company made cash contributions totaling $9.2 million in 2020, $2.2 million in 2019 and $2.3 million in 2018, excluding additional contributions of $7.2 million and $7.0 million in 2019 and 2018, respectively, as discussed previously.
PENSION AND OTHER BENEFIT PLANS — The Company sponsors pension plans covering most domestic hourly and certain executive employees, and approximately 12,500 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 multi-employer plans are different from single-employer plans in the following aspects:
a. Assets contributed to the multi-employer 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 multi-employer 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 multi-employer 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 multi-employer plans to which it contributes are individually significant to the Company’s Consolidated 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 multi-employer plans, various other defined contribution plans are sponsored worldwide.
The expense for defined contribution plans, aside from the earlier discussed ESOP plans, is as follows:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Multi-employer plan expense | $ | 7.8 | $ | 7.2 | $ | 7.3 | |||||||||||
| Other defined contribution plan expense | $ | 29.7 | $ | 36.2 | $ | 12.9 |
The components of net periodic pension expense (benefit) are as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| (Millions of Dollars) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Service cost | $ | 6.8 | $ | 12.3 | $ | 7.5 | $ | 16.1 | $ | 14.6 | $ | 15.2 | |||||||||||||||||||||||
| Interest cost | 35.3 | 47.1 | 42.8 | 22.5 | 30.3 | 28.6 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (58.7) | (61.7) | (68.7) | (41.2) | (45.6) | (46.5) | |||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | 1.0 | 1.0 | 1.1 | (0.7) | (0.6) | (1.3) | |||||||||||||||||||||||||||||
| Actuarial loss amortization | 8.5 | 8.0 | 7.8 | 11.7 | 8.6 | 8.5 | |||||||||||||||||||||||||||||
| Special termination benefit | — | — | — | 0.2 | — | — | |||||||||||||||||||||||||||||
| Settlement / curtailment loss | — | — | — | 0.6 | 1.0 | 0.7 | |||||||||||||||||||||||||||||
| Net periodic pension (benefit) expense | $ | (7.1) | $ | 6.7 | $ | (9.5) | $ | 9.2 | $ | 8.3 | $ | 5.2 |
The Company provides medical and dental benefits for certain retired employees in the United States, Brazil, and Canada. Approximately 16,100 participants are covered under these plans. Net periodic post-retirement benefit expense was comprised of the following elements:
| Other Benefit Plans | |||||||||||||||||
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Service cost | $ | 0.6 | $ | 0.3 | $ | 0.5 | |||||||||||
| Interest cost | 1.5 | 1.6 | 1.6 | ||||||||||||||
| Amortization of prior service credit | (1.3) | (1.4) | (1.3) | ||||||||||||||
| Actuarial loss amortization | 0.3 | (0.3) | — | ||||||||||||||
| Special termination benefit | 16.1 | — | — | ||||||||||||||
| Net periodic post-retirement expense | $ | 17.2 | $ | 0.2 | $ | 0.8 |
The components of net periodic benefit cost other than the service cost component are included in Other, net in the Consolidated Statements of Operations.
Changes in plan assets and benefit obligations recognized in Accumulated other comprehensive loss in 2020 are as follows:
| (Millions of Dollars) | 2020 | ||||
| Current year actuarial loss | $ | 51.9 | |||
| Amortization of actuarial loss | (19.5) | ||||
| Prior service cost from plan amendments | 0.2 | ||||
| Settlement / curtailment loss | (0.6) | ||||
| Currency / other | 18.4 | ||||
| Total loss recognized in Accumulated other comprehensive loss (pre-tax) | $ | 50.4 |
The amounts in Accumulated other comprehensive loss expected to be recognized as components of net periodic benefit costs during 2021 total $22.3 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) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Change in benefit obligation | |||||||||||||||||||||||||||||||||||
| Benefit obligation at end of prior year | $ | 1,325.4 | $ | 1,260.9 | $ | 1,449.9 | $ | 1,305.3 | $ | 52.2 | $ | 44.8 | |||||||||||||||||||||||
| Service cost | 6.8 | 12.3 | 16.1 | 14.6 | 0.6 | 0.3 | |||||||||||||||||||||||||||||
| Interest cost | 35.3 | 47.1 | 22.5 | 30.3 | 1.5 | 1.6 | |||||||||||||||||||||||||||||
| Special termination benefit | — | — | 0.2 | — | 16.1 | — | |||||||||||||||||||||||||||||
| Settlements/curtailments | — | — | (5.5) | (6.0) | — | — | |||||||||||||||||||||||||||||
| Actuarial loss (gain) | 123.3 | 130.4 | 112.0 | 140.6 | (2.9) | 8.6 | |||||||||||||||||||||||||||||
| Plan amendments | 0.1 | 1.4 | 0.1 | 0.7 | — | — | |||||||||||||||||||||||||||||
| Foreign currency exchange rate changes | — | — | 84.9 | 25.8 | (1.8) | — | |||||||||||||||||||||||||||||
| Participant contributions | — | — | 0.3 | 0.3 | — | — | |||||||||||||||||||||||||||||
| Acquisitions, divestitures, and other | (4.0) | (10.0) | (6.5) | (2.2) | — | 2.4 | |||||||||||||||||||||||||||||
| Benefits paid | (82.6) | (116.7) | (51.7) | (59.5) | (4.5) | (5.5) | |||||||||||||||||||||||||||||
| Benefit obligation at end of year | $ | 1,404.3 | $ | 1,325.4 | $ | 1,622.3 | $ | 1,449.9 | $ | 61.2 | $ | 52.2 | |||||||||||||||||||||||
| Change in plan assets | |||||||||||||||||||||||||||||||||||
| Fair value of plan assets at end of prior year | $ | 1,103.5 | $ | 1,020.7 | $ | 1,093.5 | $ | 974.3 | $ | — | $ | — | |||||||||||||||||||||||
| Actual return on plan assets | 160.9 | 190.0 | 119.3 | 133.2 | — | — | |||||||||||||||||||||||||||||
| Participant contributions | — | — | 0.3 | 0.3 | — | — | |||||||||||||||||||||||||||||
| Employer contributions | 13.7 | 19.5 | 22.0 | 22.6 | 4.5 | 5.5 | |||||||||||||||||||||||||||||
| Settlements | — | — | (5.2) | (5.6) | — | — | |||||||||||||||||||||||||||||
| Foreign currency exchange rate changes | — | — | 55.6 | 30.4 | — | — | |||||||||||||||||||||||||||||
| Acquisitions, divestitures, and other | (4.0) | (10.0) | (4.2) | (2.2) | — | — | |||||||||||||||||||||||||||||
| Benefits paid | (82.6) | (116.7) | (51.7) | (59.5) | (4.5) | (5.5) | |||||||||||||||||||||||||||||
| Fair value of plan assets at end of plan year | $ | 1,191.5 | $ | 1,103.5 | $ | 1,229.6 | $ | 1,093.5 | $ | — | $ | — | |||||||||||||||||||||||
| Funded status — assets less than benefit obligation | $ | (212.8) | $ | (221.9) | $ | (392.7) | $ | (356.4) | $ | (61.2) | $ | (52.2) | |||||||||||||||||||||||
| Unrecognized prior service cost (credit) | 3.8 | 4.7 | (17.4) | (17.5) | (0.6) | (2.0) | |||||||||||||||||||||||||||||
| Unrecognized net actuarial loss (gain) | 278.7 | 266.2 | 360.3 | 318.7 | (3.2) | 1.1 | |||||||||||||||||||||||||||||
| Net amount recognized | $ | 69.7 | $ | 49.0 | $ | (49.8) | $ | (55.2) | $ | (65.0) | $ | (53.1) |
| U.S. Plans | Non-U.S. Plans | Other Benefits | |||||||||||||||||||||||||||||||||
| (Millions of Dollars) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Amounts recognized in the Consolidated Balance Sheets | |||||||||||||||||||||||||||||||||||
| Prepaid benefit cost (non-current) | $ | — | $ | — | $ | 0.2 | $ | 0.1 | $ | — | $ | — | |||||||||||||||||||||||
| Current benefit liability | (7.3) | (7.6) | (10.2) | (9.1) | (6.8) | (4.5) | |||||||||||||||||||||||||||||
| Non-current benefit liability | (205.5) | (214.3) | (382.7) | (347.4) | (54.4) | (47.7) | |||||||||||||||||||||||||||||
| Net liability recognized | $ | (212.8) | $ | (221.9) | $ | (392.7) | $ | (356.4) | $ | (61.2) | $ | (52.2) |
| Accumulated other comprehensive loss (pre-tax): | |||||||||||||||||||||||||||||||||||
| Prior service cost (credit) | $ | 3.8 | $ | 4.7 | $ | (17.4) | $ | (17.5) | $ | (0.6) | $ | (2.0) | |||||||||||||||||||||||
| Actuarial loss (gain) | 278.7 | 266.2 | 360.3 | 318.7 | (3.2) | 1.1 | |||||||||||||||||||||||||||||
| 282.5 | 270.9 | 342.9 | 301.2 | (3.8) | (0.9) | ||||||||||||||||||||||||||||||
| Net amount recognized | $ | 69.7 | $ | 49.0 | $ | (49.8) | $ | (55.2) | $ | (65.0) | $ | (53.1) |
Actuarial losses and gains reflected in the table above are driven by changes in demographic experience, changes in assumptions, and differences in actual returns on investments compared to estimated returns. For the year ended January 2, 2021, the increase in the benefit obligation as a result of actuarial losses was primarily driven by the decline in the single equivalent discount rate used to measure these obligations. These actuarial losses were partially offset by an improved funded position, as the actual return on plan assets during the year exceeded the estimated return, and an updated mortality improvement scale which slightly reduced the projected obligation.
The accumulated benefit obligation for all defined benefit pension plans was $3.022 billion at January 2, 2021 and $2.768 billion at December 28, 2019. Information regarding pension plans in which accumulated benefit obligations exceed plan assets follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
| (Millions of Dollars) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Accumulated benefit obligation | $ | 1,401.5 | $ | 1,323.7 | $ | 1,531.8 | $ | 1,390.1 | |||||||||||||||
| Fair value of plan assets | $ | 1,191.5 | $ | 1,103.5 | $ | 1,201.3 | $ | 1,090.8 |
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) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Projected benefit obligation | $ | 1,404.3 | $ | 1,325.4 | $ | 1,619.9 | $ | 1,448.6 | |||||||||||||||
| Fair value of plan assets | $ | 1,191.5 | $ | 1,103.5 | $ | 1,227.0 | $ | 1,092.0 |
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 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| Weighted-average assumptions used to determine benefit obligations at year end: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discount rate | 2.39 | % | 3.20 | % | 4.20 | % | 1.31 | % | 1.80 | % | 2.62 | % | 2.19 | % | 3.64 | % | 4.03 | % | |||||||||||||||||||||||||||||||||||
| Rate of compensation increase | 3.00 | % | 3.50 | % | 3.00 | % | 3.29 | % | 3.30 | % | 3.44 | % | 3.50 | % | 3.50 | % | 3.50 | % | |||||||||||||||||||||||||||||||||||
| Weighted-average assumptions used to determine net periodic benefit cost: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Discount rate - service cost | 3.58 | % | 4.43 | % | 3.72 | % | 1.57 | % | 2.37 | % | 2.15 | % | 5.62 | % | 5.22 | % | 5.11 | % | |||||||||||||||||||||||||||||||||||
| Discount rate - interest cost | 2.75 | % | 3.86 | % | 3.16 | % | 1.61 | % | 2.37 | % | 2.20 | % | 3.36 | % | 4.04 | % | 3.77 | % | |||||||||||||||||||||||||||||||||||
| Rate of compensation increase | 3.00 | % | 3.00 | % | 3.00 | % | 3.30 | % | 3.44 | % | 3.45 | % | 3.50 | % | 3.50 | % | 3.50 | % | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | 5.25 | % | 6.25 | % | 6.25 | % | 3.90 | % | 4.73 | % | 4.37 | % | — | — | — |
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 3.16% weighted-average expected rate of return assumption to determine the 2021 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 January 2, 2021 and December 28, 2019 by asset category and the level of the valuation inputs within the fair value hierarchy established by ASC 820, Fair Value Measurement, are as follows:
| Asset Category (Millions of Dollars) | 2020 | Level 1 | Level 2 | ||||||||||||||
| Cash and cash equivalents | $ | 83.2 | $ | 69.0 | $ | 14.2 | |||||||||||
| Equity securities | |||||||||||||||||
| U.S. equity securities | 329.4 | 91.2 | 238.2 | ||||||||||||||
| Foreign equity securities | 234.1 | 65.7 | 168.4 | ||||||||||||||
| Fixed income securities | |||||||||||||||||
| Government securities | 821.6 | 285.8 | 535.8 | ||||||||||||||
| Corporate securities | 867.6 | — | 867.6 | ||||||||||||||
| Insurance contracts | 41.7 | — | 41.7 | ||||||||||||||
| Other | 43.5 | — | 43.5 | ||||||||||||||
| Total | $ | 2,421.1 | $ | 511.7 | $ | 1,909.4 |
| Asset Category (Millions of Dollars) | 2019 | Level 1 | Level 2 | ||||||||||||||
| Cash and cash equivalents | $ | 35.8 | $ | 16.1 | $ | 19.7 | |||||||||||
| Equity securities | |||||||||||||||||
| U.S. equity securities | 321.4 | 111.1 | 210.3 | ||||||||||||||
| Foreign equity securities | 259.4 | 95.8 | 163.6 | ||||||||||||||
| Fixed income securities | |||||||||||||||||
| Government securities | 741.6 | 271.5 | 470.1 | ||||||||||||||
| Corporate securities | 751.5 | — | 751.5 | ||||||||||||||
| Insurance contracts | 39.0 | — | 39.0 | ||||||||||||||
| Other | 48.3 | — | 48.3 | ||||||||||||||
| Total | $ | 2,197.0 | $ | 494.5 | $ | 1,702.5 |
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 2020, the funded status percentage (total plan assets divided by total projected benefit obligation) of all global pension plans was 80%, which is consistent with 79% in 2019 and 78% in 2018.
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 $41 million to its pension and other post-retirement benefit plans in 2021.
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 | $ | 1,440.2 | $ | 146.5 | $ | 146.4 | $ | 148.6 | $ | 146.4 | $ | 144.6 | $ | 707.7 |
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 6.0% for 2021, reducing gradually to 4.6% by 2028 and remaining at that level thereafter.
M. FAIR VALUE MEASUREMENTS
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 these 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 counterparty.
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 | |||||||||||||||||||
| January 2, 2021 | |||||||||||||||||||||||
| Money market fund | $ | 10.3 | $ | 10.3 | $ | — | $ | — | |||||||||||||||
| Derivative assets | $ | 14.0 | $ | — | $ | 14.0 | $ | — | |||||||||||||||
| Derivative liabilities | $ | 191.0 | $ | — | $ | 191.0 | $ | — | |||||||||||||||
| Contingent consideration liability | $ | 187.0 | $ | — | $ | — | $ | 187.0 | |||||||||||||||
| December 28, 2019 | |||||||||||||||||||||||
| Money market fund | $ | 1.2 | $ | 1.2 | $ | — | $ | — | |||||||||||||||
| Derivative assets | $ | 29.3 | $ | — | $ | 29.3 | $ | — | |||||||||||||||
| Derivative liabilities | $ | 65.5 | $ | — | $ | 65.5 | $ | — | |||||||||||||||
| Non-derivative hedging instrument | $ | 335.5 | $ | — | $ | 335.5 | $ | — | |||||||||||||||
| Contingent consideration liability | $ | 196.1 | $ | — | $ | — | $ | 196.1 |
The following table provides information about the Company's financial assets and liabilities not carried at fair value:
| January 2, 2021 | December 28, 2019 | ||||||||||||||||||||||
| (Millions of Dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Other investments | $ | 13.3 | $ | 13.9 | $ | 14.4 | $ | 14.8 | |||||||||||||||
| Long-term debt, including current portion | $ | 4,245.4 | $ | 4,934.5 | $ | 3,179.5 | $ | 3,601.0 |
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 January 2, 2021 and December 28, 2019. The fair values of derivative financial instruments in the table above are based on current settlement values.
As part of the Craftsman® brand acquisition in March 2017, the Company recorded a contingent consideration liability representing the Company's obligation to make future payments to Transform Holdco, LLC, which operates Sears and Kmart retail locations, of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032. During the year ended January 2, 2021, the Company paid $45.9 million, which included a $33.0 million payment in the second quarter of 2020 relating to royalties owed for the first twelve quarters. The Company will continue making future payments quarterly through the second 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 Transform Holdco, LLC, based on contractual royalty rates, and the related tax impacts. The estimated fair value of the contingent consideration liability was $187.0 million and $196.1 million as of January 2, 2021 and December 28, 2019, respectively. Adjustments to the contingent consideration liability, with the exception of cash payments, are recorded in SG&A in the Consolidated Statements of Operations. A 100 basis point reduction in the discount rate would result in an increase to the liability of approximately $7.4 million as of January 2, 2021.
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 contingent consideration liability discussed above, including estimated future sales projections, can materially impact the Company's results of operations.
The Company had no significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during 2020 or 2019.
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 Company's long-term debt.
N. OTHER COSTS AND EXPENSES
During 2020, the Company recognized pre-tax charges of approximately $185.0 million related to the comprehensive cost reduction and efficiency program in response to the impact of the COVID-19 pandemic. The charges were primarily related to costs associated with a voluntary retirement program as well as restructuring costs related to headcount actions, as further discussed in Note O, Restructuring Charges.
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 $28.6 million, $30.2 million, and $30.4 million were included in Other, net for the years ended January 2, 2021, December 28, 2019, and December 29, 2018, respectively. In 2020, Other, net also included a $16.1 million special termination benefit charge associated with the voluntary retirement program, a $19.6 million loss relating to the unamortized loss on cash flow swap terminations, and a $55.3 million release of a contingent consideration liability relating to the CAM acquisition. Refer to Note E, Acquisitions and Investments, for further discussion of the CAM contingent consideration. 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 $211.0 million, $255.2 million and $275.8 million for fiscal years 2020, 2019 and 2018, respectively.
O. RESTRUCTURING CHARGES
A summary of the restructuring reserve activity from December 28, 2019 to January 2, 2021 is as follows:
| (Millions of Dollars) | December 28, 2019 | Net Additions | Usage | Currency | January 2, 2021 | ||||||||||||||||||||||||
| Severance and related costs | $ | 140.3 | $ | 63.9 | $ | (111.0) | $ | (5.7) | $ | 87.5 | |||||||||||||||||||
| Facility closures and asset impairments | 7.5 | 19.1 | (23.9) | — | 2.7 | ||||||||||||||||||||||||
| Total | $ | 147.8 | $ | 83.0 | $ | (134.9) | $ | (5.7) | $ | 90.2 |
During 2020, the Company recognized net restructuring charges of $83.0 million, primarily related to severance costs associated with a cost reduction program announced in the second quarter of 2020.
The majority of the $90.2 million of reserves remaining as of January 2, 2021 is expected to be utilized within the next 12 months.
Segments: The $83 million of net restructuring charges for the year ended January 2, 2021 includes: $40 million pertaining to the Tools & Storage segment; $29 million pertaining to the Industrial segment; $9 million pertaining to the Security segment; and $5 million 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 highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals. The product lines include externally threaded fasteners, blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, high-strength structural fasteners, axel swage, latches, heat shields, pins, and couplings. The Infrastructure business consists of the Attachment Tools and Oil & Gas product lines. Attachment Tools sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications. Oil & Gas sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines and provides pipeline inspection services.
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 credit losses (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), gain or loss on sales of businesses, restructuring charges, loss on debt extinguishments, interest income, interest expense, income taxes and share of net earnings or losses of equity method investment. Corporate overhead is comprised of world headquarters facility expense, cost for the executive management team and expenses pertaining to certain centralized functions that benefit the entire Company but are not directly attributable to the businesses, such as legal and corporate finance functions. Refer to Note F, Goodwill and Intangible Assets, and Note O, Restructuring Charges, for the amount of intangible asset amortization expense and net restructuring charges, respectively, attributable to each segment. Transactions between segments are not material. Segment assets primarily include cash, accounts receivable, inventory, other current assets, property, plant and equipment, right-of-use lease assets 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) | 2020 | 2019 | 2018 | ||||||||||||||
| Net Sales | |||||||||||||||||
| Tools & Storage | $ | 10,329.7 | $ | 10,062.1 | $ | 9,814.0 | |||||||||||
| Industrial | 2,352.7 | 2,434.7 | 2,187.8 | ||||||||||||||
| Security | 1,852.2 | 1,945.4 | 1,980.6 | ||||||||||||||
| Consolidated | $ | 14,534.6 | $ | 14,442.2 | $ | 13,982.4 | |||||||||||
| Segment Profit | |||||||||||||||||
| Tools & Storage | $ | 1,841.7 | $ | 1,533.3 | $ | 1,393.1 | |||||||||||
| Industrial | 225.6 | 334.1 | 319.8 | ||||||||||||||
| Security | 108.7 | 126.6 | 169.3 | ||||||||||||||
| Segment Profit | 2,176.0 | 1,994.0 | 1,882.2 | ||||||||||||||
| Corporate overhead | (297.7) | (229.5) | (202.8) | ||||||||||||||
| Other, net | (262.8) | (249.1) | (287.0) | ||||||||||||||
| (Loss) gain on sales of businesses | (13.5) | 17.0 | (0.8) | ||||||||||||||
| Restructuring charges | (83.0) | (154.1) | (160.3) | ||||||||||||||
| Loss on debt extinguishments | (46.9) | (17.9) | — | ||||||||||||||
| Interest income | 18.0 | 53.9 | 68.7 | ||||||||||||||
| Interest expense | (223.1) | (284.3) | (277.9) | ||||||||||||||
| Earnings before income taxes and equity interest | $ | 1,267.0 | $ | 1,130.0 | $ | 1,022.1 | |||||||||||
| Capital and Software Expenditures | |||||||||||||||||
| Tools & Storage | $ | 225.6 | $ | 297.2 | $ | 353.7 | |||||||||||
| Industrial | 101.6 | 89.6 | 95.8 | ||||||||||||||
| Security | 20.9 | 37.9 | 42.6 | ||||||||||||||
| Consolidated | $ | 348.1 | $ | 424.7 | $ | 492.1 | |||||||||||
| Depreciation and Amortization | |||||||||||||||||
| Tools & Storage | $ | 308.5 | $ | 327.8 | $ | 300.1 | |||||||||||
| Industrial | 199.4 | 159.3 | 125.9 | ||||||||||||||
| Security | 70.2 | 73.1 | 80.5 | ||||||||||||||
| Consolidated | $ | 578.1 | $ | 560.2 | $ | 506.5 | |||||||||||
| Segment Assets | |||||||||||||||||
| Tools & Storage | $ | 14,294.9 | $ | 13,642.4 | $ | 13,122.6 | |||||||||||
| Industrial | 5,621.4 | 4,207.0 | 3,620.5 | ||||||||||||||
| Security | 3,493.5 | 3,448.6 | 3,413.6 | ||||||||||||||
| 23,409.8 | 21,298.0 | 20,156.7 | |||||||||||||||
| Corporate assets | 156.5 | (701.4) | (748.7) | ||||||||||||||
| Consolidated | $ | 23,566.3 | $ | 20,596.6 | $ | 19,408.0 |
Corporate assets primarily consist of cash, equity method investment, deferred taxes, property, plant and equipment and right-of-use lease assets. The increase in Corporate assets at January 2, 2021 compared to December 28, 2019 and December 29, 2018 is due to the increase in the Company's cash position. 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 21% of the Tools & Storage segment net sales in 2020 and 2019, and 17% in 2018. Sales to The Home Depot were approximately 17%, 15%, and 14% of the Tools & Storage segment net sales in 2020, 2019 and 2018, 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 January 2, 2021, December 28, 2019, and December 29, 2018, 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 January 2, 2021, December 28, 2019 and December 29, 2018:
| 2020 | 2019 | 2018 | |||||||||||||||
| Industrial | 9.2 | % | 10.9 | % | 11.9 | % | |||||||||||
| Security | 44.4 | % | 45.8 | % | 44.9 | % |
The following table is a further disaggregation of the Industrial segment revenue for the years ended January 2, 2021, December 28, 2019 and December 29, 2018:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Engineered Fastening | $ | 1,717.8 | $ | 1,738.5 | $ | 1,766.6 | |||||||||||
| Infrastructure | 634.9 | 696.2 | 421.2 | ||||||||||||||
| Industrial | $ | 2,352.7 | $ | 2,434.7 | $ | 2,187.8 |
GEOGRAPHIC AREAS
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Net Sales | |||||||||||||||||
| United States | $ | 8,800.5 | $ | 8,472.1 | $ | 7,700.3 | |||||||||||
| Canada | 687.0 | 609.9 | 628.3 | ||||||||||||||
| Other Americas | 595.5 | 717.9 | 801.5 | ||||||||||||||
| France | 581.3 | 610.2 | 627.8 | ||||||||||||||
| Other Europe | 2,791.0 | 2,870.8 | 2,989.9 | ||||||||||||||
| Asia | 1,079.3 | 1,161.3 | 1,234.6 | ||||||||||||||
| Consolidated | $ | 14,534.6 | $ | 14,442.2 | $ | 13,982.4 | |||||||||||
| Property, Plant & Equipment, net | |||||||||||||||||
| United States | $ | 1,156.7 | $ | 1,046.8 | $ | 1,018.3 | |||||||||||
| Canada | 25.5 | 27.4 | 25.5 | ||||||||||||||
| Other Americas | 121.0 | 117.9 | 112.7 | ||||||||||||||
| France | 54.9 | 57.3 | 63.9 | ||||||||||||||
| Other Europe | 349.2 | 352.3 | 356.9 | ||||||||||||||
| Asia | 346.5 | 357.8 | 337.9 | ||||||||||||||
| Consolidated | $ | 2,053.8 | $ | 1,959.5 | $ | 1,915.2 |
Q. INCOME TAXES
Significant components of the Company’s deferred tax assets and liabilities at the end of each fiscal year were as follows:
| (Millions of Dollars) | 2020 | 2019 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Depreciation | $ | 148.9 | $ | 144.9 | |||||||
| Intangible assets | 741.4 | 737.1 | |||||||||
| Liability on undistributed foreign earnings | 29.7 | 159.3 | |||||||||
| Lease right-of-use asset | 126.5 | 129.7 | |||||||||
| Other | 128.3 | 89.5 | |||||||||
| Total deferred tax liabilities | $ | 1,174.8 | $ | 1,260.5 | |||||||
| Deferred tax assets: | |||||||||||
| Employee benefit plans | $ | 244.2 | $ | 235.4 | |||||||
| Basis differences in liabilities | 89.7 | 82.0 | |||||||||
| Operating loss, capital loss and tax credit carryforwards | 808.7 | 1,100.3 | |||||||||
| Lease liability | 129.6 | 129.6 | |||||||||
| Intangible assets | 301.3 | 5.3 | |||||||||
| Capitalized research and development costs | 52.6 | — | |||||||||
| Other | 217.4 | 149.2 | |||||||||
| Total deferred tax assets | $ | 1,843.5 | $ | 1,701.8 | |||||||
| Net Deferred Tax Asset before Valuation Allowance | $ | 668.7 | $ | 441.3 | |||||||
| Valuation Allowance | $ | (1,058.9) | $ | (1,065.0) | |||||||
| Net Deferred Tax Liability after Valuation Allowance | $ | (390.2) | $ | (623.7) |
The increase in intangible deferred tax assets relates to the intra-entity asset transfer of certain intangible assets between two of the Company's foreign subsidiaries. The recognized deferred tax benefit represents the difference between the basis of the intellectual property for financial statement purposes and the basis of the intellectual property for tax purposes.
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 $1,058.9 million and $1,065.0 million on deferred tax assets existing as of January 2, 2021 and December 28, 2019, respectively. The valuation allowance in 2020 is primarily attributable to foreign and state net operating loss carryforwards, intangible assets, and foreign capital loss carryforwards. The valuation allowance in 2019 was primarily attributable to foreign and state net operating loss carryforwards and foreign capital loss carryforwards.
Beginning in 2022, the Tax Cuts and Jobs Act ("Act") eliminates the option to deduct research and development expenditures and requires taxpayers to amortize domestic expenditures over five years and foreign expenditures over fifteen years. While it is possible that Congress may modify or repeal this provision before it becomes effective, the Company has no assurance that these provisions will be modified or repealed. Therefore, based on current assumptions, this would decrease the Company's cash from operations beginning in 2022 and continue over the five year amortization period.
As of January 2, 2021, the Company has approximately $5.3 billion of unremitted foreign earnings and profits. Of the total amount, the Company has provided for deferred taxes of $29.7 million on approximately $2.2 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 $3.2 billion as of January 2, 2021 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 2021 with certain jurisdictions having indefinite carryforward periods. The foreign capital loss carryforwards of $38.8 million as of January 2, 2021 have indefinite carryforward periods.
The components of earnings before income taxes and equity interest consisted of the following:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| United States | $ | 181.2 | $ | 214.5 | $ | 444.1 | |||||||||||
| Foreign | 1,085.8 | 915.5 | 578.0 | ||||||||||||||
| Earnings before income taxes and equity interest | $ | 1,267.0 | $ | 1,130.0 | $ | 1,022.1 |
Income tax expense (benefit) consisted of the following:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 62.7 | $ | (23.7) | $ | 25.4 | |||||||||||
| Foreign | 199.8 | 195.9 | 175.0 | ||||||||||||||
| State | 20.6 | 6.5 | 24.8 | ||||||||||||||
| Total current | $ | 283.1 | $ | 178.7 | $ | 225.2 | |||||||||||
| Deferred: | |||||||||||||||||
| Federal | $ | (29.4) | $ | 5.7 | $ | 29.7 | |||||||||||
| Foreign | (208.8) | (32.9) | 132.7 | ||||||||||||||
| State | (3.5) | 9.3 | 28.7 | ||||||||||||||
| Total deferred | (241.7) | (17.9) | 191.1 | ||||||||||||||
| Income taxes | $ | 41.4 | $ | 160.8 | $ | 416.3 |
Net income taxes paid during 2020, 2019 and 2018 were $206.9 million, $250.1 million and $339.4 million, respectively. The 2020, 2019 and 2018 amounts include refunds of $90.2 million, $72.5 million and $43.7 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) | 2020 | 2019 | 2018 | ||||||||||||||
| Tax at statutory rate | $ | 266.1 | $ | 237.3 | $ | 214.6 | |||||||||||
| State income taxes, net of federal benefits | 13.0 | 22.1 | 24.7 | ||||||||||||||
| Foreign tax rate differential | (41.9) | (53.3) | (33.2) | ||||||||||||||
| Uncertain tax benefits | 20.3 | (53.1) | 4.5 | ||||||||||||||
| Change in valuation allowance | (26.8) | 10.5 | 5.1 | ||||||||||||||
| Change in deferred tax liabilities on undistributed foreign earnings | (118.8) | — | — | ||||||||||||||
| Stock-based compensation | (9.8) | (24.1) | (4.1) | ||||||||||||||
| U.S. Federal tax reform | — | — | 199.6 | ||||||||||||||
| Capital loss | (40.4) | — | — | ||||||||||||||
| U.S. federal tax on foreign earnings | (17.7) | 4.1 | 2.7 | ||||||||||||||
| Intra-entity asset transfer of intellectual property | (27.7) | — | — | ||||||||||||||
| Other | 25.1 | 17.3 | 2.4 | ||||||||||||||
| Income taxes | $ | 41.4 | $ | 160.8 | $ | 416.3 |
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 the Company's consolidated U.S. income tax returns for the 2015 and 2016 tax years. With few exceptions, as of January 2, 2021, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2012.
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) | 2020 | 2019 | 2018 | ||||||||||||||
| Balance at beginning of year | $ | 406.3 | $ | 406.3 | $ | 387.8 | |||||||||||
| Additions based on tax positions related to current year | 29.1 | 48.6 | 28.3 | ||||||||||||||
| Additions based on tax positions related to prior years | 35.8 | 78.5 | 103.0 | ||||||||||||||
| Reductions based on tax positions related to prior years | (19.3) | (91.1) | (91.5) | ||||||||||||||
| Settlements | (0.5) | (0.3) | (2.5) | ||||||||||||||
| Statute of limitations expirations | (7.9) | (35.7) | (18.8) | ||||||||||||||
| Balance at end of year | $ | 443.5 | $ | 406.3 | $ | 406.3 |
The gross unrecognized tax benefits at January 2, 2021 and December 28, 2019 include $433.3 million and $398.2 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 increased by $2.3 million in 2020 and decreased by $4.3 million in 2019 and $15.8 million in 2018. The liability for potential penalties and interest totaled $50.1 million as of January 2, 2021, $47.8 million as of December 28, 2019, and $52.1 million as of December 29, 2018. 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 twelve months. However, based on the uncertainties associated with finalizing audits with the relevant tax authorities including formal legal proceedings, it is not possible to reasonably estimate the impact of any such change.
R. COMMITMENTS AND GUARANTEES
COMMITMENTS — The Company has numerous assets, predominantly real estate, vehicles and equipment, under various lease arrangements. At inception of arrangements with vendors, the Company determines whether the contract is or contains a lease based on each party’s rights and obligations under the arrangement. If the lease arrangement also contains non-lease components, the lease and non-lease elements are separately accounted for in accordance with the appropriate accounting guidance for each item. From time to time, lease arrangements allow for, and the Company executes, the purchase of the underlying leased asset. Lease arrangements may also contain renewal options or early termination options. As part of its lease liability and right-of-use asset calculation, consideration is given to the likelihood of exercising any extension or termination options. The present value of the Company’s lease liability was calculated using a weighted-average incremental borrowing rate of approximately 3.6%. The Company determined its incremental borrowing rate based on interest rates from its debt issuances and taking into consideration adjustments for collateral, lease terms and foreign currency. As a result of acquiring right-of-use assets from new leases entered into during the year ended January 2, 2021, the Company's lease liability increased approximately $117.5 million. As of January 2, 2021, the Company recognized a lease liability of approximately $534.4 million and a right-of-use asset of approximately $522.8 million. The right-of-use asset is included within Other assets in the Consolidated Balance Sheets, while the lease liability is included within Accrued expenses and Other liabilities, as appropriate. Leases with expected durations of less than 12 months from inception (i.e. short-term leases) were excluded from the Company’s calculation of its lease liability and right-of-use asset, as permitted by ASC 842, Leases.
The Company is a party to leases for one of its major distribution centers and two of its office buildings in which the periodic rental payments vary based on interest rates (i.e. LIBOR). The leases qualify as operating leases for accounting purposes.
The following is a summary of the Company's total lease cost for the year ended January 2, 2021 and December 28, 2019:
| (Millions of Dollars) | 2020 | 2019 | |||||||||
| Operating lease cost | $ | 155.4 | $ | 151.6 | |||||||
| Short-term lease cost | 26.3 | 26.6 | |||||||||
| Variable lease cost | 7.0 | 8.5 | |||||||||
| Sublease income | (0.8) | (2.8) | |||||||||
| Total lease cost | $ | 187.9 | $ | 183.9 |
During 2020 and 2019, the Company paid approximately $149.8 million and $154.4 million, respectively, relating to leases included in the measurement of its lease liability and right-of-use asset. The weighted-average remaining term for the Company's leases is approximately 7 years.
The following is a summary of the Company's future lease obligations on an undiscounted basis at January 2, 2021:
| (Millions of Dollars) | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||||||
| Lease obligations | $ | 599.3 | $ | 141.4 | $ | 109.6 | $ | 82.3 | $ | 68.3 | $ | 50.1 | $ | 147.6 |
In 2019, the Company completed many actions within the Margin Resiliency Program and one rooftop footprint initiative resulting in a sale-leaseback arrangement related to one of its distribution centers, which resulted in cash proceeds of $93.0 million, a pre-tax gain of $69.5 million and a twelve-year lease obligation.
The Company's rental expense, exclusive of sublease income, for operating leases was $177.6 million in 2018.
The following is a summary of the Company’s future marketing commitments at January 2, 2021:
| (Millions of Dollars) | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||||||||||||||||||||||
| Marketing commitments | $ | 39.4 | $ | 27.2 | $ | 11.8 | $ | 0.4 | $ | — | $ | — | $ | — |
GUARANTEES — The Company's financial guarantees at January 2, 2021 are as follows:
| (Millions of Dollars) | Term | Maximum Potential Payment | Carrying Amount of Liability | ||||||||||||||
| Guarantees on the residual values of leased properties | One to five years | $ | 89.6 | $ | — | ||||||||||||
| Standby letters of credit | Up to three years | 162.3 | — | ||||||||||||||
| Commercial customer financing arrangements | Up to six years | 64.7 | 7.9 | ||||||||||||||
| Total | $ | 316.6 | $ | 7.9 |
The Company has guaranteed a portion of the residual values of certain leased assets including the previously discussed leases for one of its major distribution centers and two of its office buildings. The lease guarantees are for an amount up to $89.6 million while the fair value of the underlying assets is estimated at $116.1 million. The related assets would be available to satisfy the guarantee obligations and therefore it is unlikely the Company will incur any future loss associated with these guarantees.
The Company has issued $162.3 million in standby letters of credit that guarantee future payments which may be required under certain insurance programs and in relation to certain environmental remediation activities described more fully in Note S, Contingencies.
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 $64.7 million and the $7.9 million carrying value of the guarantees issued is recorded in Other liabilities in the Consolidated Balance Sheets.
The Company provides warranties on certain products 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.
The changes in the carrying amount of product warranties for the years ended January 2, 2021, December 28, 2019, and December 29, 2018:
| (Millions of Dollars) | 2020 | 2019 | 2018 | ||||||||||||||
| Balance beginning of period | $ | 100.1 | $ | 102.1 | $ | 108.5 | |||||||||||
| Warranties and guarantees issued | 128.5 | 128.1 | 110.4 | ||||||||||||||
| Warranty payments and currency | (114.8) | (130.1) | (116.8) | ||||||||||||||
| Balance end of period | $ | 113.8 | $ | 100.1 | $ | 102.1 |
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 was recorded in the fourth quarter of 2018. This charge did 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 numerous 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. If 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 January 2, 2021 and December 28, 2019, the Company had reserves of $174.2 million and $213.8 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 2020 amount, $46.7 million is classified as current and $127.5 million as long-term which is expected to be paid over the estimated remediation period. As of January 2, 2021, the range of environmental remediation costs that is reasonably possible is $102.9 million to $245.3 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 the Company's policy.
As of January 2, 2021, the Company has recorded $15.9 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 January 2, 2021, the Company's net cash obligation associated with remediation activities, including WCLC assets, is $158.3 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 were subject to public comment and Court approval. After a full hearing on March 19, 2019, the Court approved and entered the Consent Decree on April 8, 2019. The settlement resolves outstanding issues relating to Phase 1 and 2 of the litigation with the United States. The Company is complying with the terms of the settlement while several PRPs at the site have appealed the District Court's entry of the Consent Decree to the United States Court of Appeals for the First Circuit. Phase 3 of the litigation, is addressing 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 2018, a $77.7 million increase was recorded in Other, net in the Consolidated Statements of Operations. As of January 2, 2021, the Company has a remaining reserve of $74.2 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 ("ROD") 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 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 EPA subsequently clarified this statement to say that such parties would be eligible to be "funding parties" for the lower 8.3 mile remedial action with each party's share of the costs determined by the EPA based on the allocation process and the remaining parties would be "work parties" for the remedial action. The Company is participating in the allocation process. The allocator selected by the EPA issued a confidential financial report on December 28, 2020, which is under review by the EPA. The Company asserts that it did not discharge dioxins, furans or polychlorinated biphenyls and should be eligible to be a "funding party" for the lower 8.3 mile remedial action. 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. The remedial design is expected to be substantially completed in May 2021. 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. The Company and other defendants have answered the complaint and currently are engaged in discovery with OCC. On October 10, 2018, the EPA issued a letter directing the CPG to prepare a streamlined feasibility study for the upper 9 miles of the River based on an iterative approach using adaptive management strategies. The CPG submitted a revised draft Interim Remedy Feasibility Study to the EPA on December 4, 2020, which identifies various targeted dredge and cap alternatives with costs that range from $420 million to $468 million (net present value). The EPA approved the Interim Remedy Feasibility Study on December 11, 2020. The EPA announced that it intends to issue the Interim Remedy ROD in the Winter of 2020/2021. 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. As of January 2, 2021, the Company has reserved $24.7 million for this site.
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 0.1% to 1.8%, depending on the expected timing of disbursements. The discounted and undiscounted amount of the liability relative to these sites is $42.6 million and $45.9 million, respectively. The payments relative to these sites are expected to be $1.4 million in 2021, $2.9 million in 2022, $2.9 million in 2023, $3.1 million in 2024, $2.8 million in 2025, and $32.8 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 November 2, 2020, the Company sold its commercial electronic security businesses in five countries in Europe and emerging markets within the Security segment, which resulted in net proceeds of $60.9 million. The Company also sold a product line within Oil & Gas in the Industrial segment during the fourth quarter of 2020. As a result of these sales, the Company recognized a net pre-tax loss of $13.5 million in 2020, consisting of a $17.7 million loss on the sale of a product line within Oil & Gas partially offset by a $4.2 million gain on the sale of the commercial electronic security businesses. These divestitures allow the Company to invest in other areas of the Company that fit into its long-term growth strategy. 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 2020.
Following is the pre-tax income for these businesses for the years ended January 2, 2021, December 28, 2019, and December 29, 2018:
| (Millions of Dollars) | 2020 | 2019 | 2018 | |||||||||||||||||
| Pre-tax income | $ | 4.1 | $ | 3.0 | $ | 4.0 |
On May 30, 2019, the Company sold its Sargent & Greenleaf mechanical locks business within the Security segment, which resulted in net proceeds of $79.0 million and a pre-tax gain of $17.0 million. This divestiture did not qualify as a discontinued operation and is included in the Company's Consolidated Statements of Operations through the date of sale in 2019. Pre-tax income for this business was $4.6 million and $11.7 million for the years ended December 28, 2019 and December 29, 2018, respectively.
SELECTED QUARTERLY FINANCIAL DATA (unaudited)
| Quarter | ||||||||||||||||||||||||||||||||
| (Millions of Dollars, except per share amounts) | First | Second | Third | Fourth | Year | |||||||||||||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 3,129.4 | $ | 3,147.4 | $ | 3,850.2 | $ | 4,407.6 | $ | 14,534.6 | ||||||||||||||||||||||
| Gross profit | 1,023.1 | 1,012.7 | 1,376.3 | 1,555.8 | 4,967.9 | |||||||||||||||||||||||||||
| Selling, general and administrative (1) | 748.5 | 732.0 | 738.9 | 870.2 | 3,089.6 | |||||||||||||||||||||||||||
| Net earnings | 133.1 | 238.7 | 395.2 | 467.7 | 1,234.7 | |||||||||||||||||||||||||||
| Less: Net earnings attributable to non-controlling interest | (0.1) | 0.3 | 0.3 | 0.4 | 0.9 | |||||||||||||||||||||||||||
| Less: Preferred stock dividends | — | 4.7 | 9.4 | 9.3 | 23.4 | |||||||||||||||||||||||||||
| Net Earnings Attributable to Common Shareowners | $ | 133.2 | $ | 233.7 | $ | 385.5 | $ | 458.0 | $ | 1,210.4 | ||||||||||||||||||||||
| Earnings per share of common stock: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.89 | $ | 1.52 | $ | 2.47 | $ | 2.92 | $ | 7.85 | ||||||||||||||||||||||
| Diluted | $ | 0.88 | $ | 1.52 | $ | 2.44 | $ | 2.88 | $ | 7.77 | ||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 3,333.6 | $ | 3,761.3 | $ | 3,633.1 | $ | 3,714.2 | $ | 14,442.2 | ||||||||||||||||||||||
| Gross profit | 1,105.6 | 1,299.8 | 1,239.5 | 1,160.6 | 4,805.5 | |||||||||||||||||||||||||||
| Selling, general and administrative (1) | 778.9 | 782.3 | 756.1 | 723.7 | 3,041.0 | |||||||||||||||||||||||||||
| Net earnings | 170.4 | 357.4 | 231.1 | 199.1 | 958.0 | |||||||||||||||||||||||||||
| Less: Net earnings attributable to non-controlling interest | 0.5 | 1.1 | 0.6 | — | 2.2 | |||||||||||||||||||||||||||
| Net Earnings Attributable to Common Shareowners | $ | 169.9 | $ | 356.3 | $ | 230.5 | $ | 199.1 | $ | 955.8 | ||||||||||||||||||||||
| Earnings per share of common stock: | ||||||||||||||||||||||||||||||||
| Basic | $ | 1.15 | $ | 2.41 | $ | 1.55 | $ | 1.34 | $ | 6.44 | ||||||||||||||||||||||
| Diluted | $ | 1.13 | $ | 2.37 | $ | 1.53 | $ | 1.32 | $ | 6.35 |
(1) Includes provision for credit losses.
The 2020 year-to-date results above include $400 million of pre-tax acquisition-related and other charges, a $211 million tax benefit related to the pre-tax acquisition-related and other charges and a one-time tax benefit related to a supply chain reorganization, as well as $10 million of after-tax charges related to the Company's share of equity method investment earnings. 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 2020 — $62 million loss ($50 million after-tax and equity interest) | $(0.32) per diluted share | |||||||
| • Q2 2020 — $169 million loss ($13 million after-tax and equity interest) | $(0.08) per diluted share | |||||||
| • Q3 2020 — $89 million loss ($71 million after-tax and equity interest) | $(0.45) per diluted share | |||||||
| • Q4 2020 — $80 million loss ($65 million after-tax and equity interest) | $(0.41) per diluted share |
The 2019 year-to-date results above include $363 million of pre-tax acquisition-related and other charges, a $78 million tax benefit of the pre-tax acquisition-related and other charges, as well as $24 million of after-tax charges related to the Company's share of equity method investment earnings. 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 2019 — $52 million loss ($43 million after-tax and equity interest) | $(0.29) per diluted share | |||||||
| • Q2 2019 — $33 million loss ($44 million after-tax and equity interest) | $(0.29) per diluted share | |||||||
| • Q3 2019 — $114 million loss ($91 million after-tax and equity interest) | $(0.60) per diluted share | |||||||
| • Q4 2019 — $164 million loss ($131 million after-tax and equity interest) | $(0.86) per diluted share |
EXHIBIT INDEX
STANLEY BLACK & DECKER, INC.
EXHIBIT LIST
Some of the agreements included as exhibits to this Annual Report on Form 10-K (whether incorporated by reference to earlier filings or otherwise) may contain representations and warranties, recitals or other statements that appear to be statements of fact. These agreements are included solely to provide investors with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. Representations and warranties, recitals, and other common disclosure provisions have been included in the agreements solely for the benefit of the other parties to the applicable agreements and often are used as a means of allocating risk among the parties. Accordingly, such statements (i) should not be treated as categorical statements of fact; (ii) may be qualified by disclosures that were made to the other parties in connection with the negotiation of the applicable agreements, which disclosures are not necessarily reflected in the agreement or included as exhibits hereto; (iii) may apply standards of materiality in a way that is different from what may be viewed as material by or to investors in or lenders to the Company; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, representations and warranties, recitals or other disclosures contained in agreements may not describe the actual state of affairs as of the date they were made or at any other time and should not be relied on by any person other than the parties thereto in accordance with their terms. Additional information about the Company may be found in this Annual Report on Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
| 101 | The following materials from Stanley Black & Decker Inc.'s Annual Report on Form 10-K for the year ended January 2, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018; (ii) Consolidated Statements of Comprehensive Income for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018; (iii) Consolidated Balance Sheets at January 2, 2021 and December 28, 2019; (iv) Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018; (v) Consolidated Statements of Changes in Shareowners' Equity for the fiscal years ended January 2, 2021, December 28, 2019, and December 29, 2018; and (v) Notes to Consolidated Financial Statements**. | |||||||
| 104 | The cover page of Stanley Black & Decker Inc.'s Annual Report on Form 10-K for the year ended January 2, 2021, formatted in iXBRL (included within Exhibit 101). |
| * | Management contract or compensation plan or arrangement. | ||||
| P | Paper Filing | ||||
| ** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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