Stanley Black & Decker 10-Q 2022-04-02

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from [ ] to [ ]

Commission File Number 001-05224

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

1000 STANLEY DRIVE

NEW BRITAIN, CT 06053

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE 860 225-5111

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

150,964,631 shares of the registrant’s common stock were outstanding as of April 22, 2022.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

THREE MONTHS ENDED APRIL 2, 2022 AND APRIL 3, 2021

(Unaudited, Millions of Dollars, Except Per Share Amounts)

See Notes to Unaudited Condensed Consolidated Financial Statements.

STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

APRIL 2, 2022 AND JANUARY 1, 2022

(Unaudited, Millions of Dollars, Except Per Share Amounts)

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The following discussion contains statements reflecting the Company's views about its future performance that constitute “forward-looking statements” under the Private Securities Litigation Act of 1995. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. Please read the information under the caption entitled “Cautionary Statement under the Private Securities Litigation Reform Act of 1995."

Throughout this Management's Discussion and Analysis (“MD&A”), references to Notes refer to the "Notes To (Unaudited) Condensed Consolidated Financial Statements" in Part 1, Item 1 of this Form 10-Q, unless otherwise indicated.

BUSINESS OVERVIEW

Strategy

The Company is a diversified global provider of hand tools, power tools, outdoor products and related accessories, engineered fastening systems and products, and services and equipment for oil & gas and infrastructure applications. The Company continues to execute a growth and acquisition strategy that involves industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth. The Company remains focused on delivering above-market organic growth with margin expansion by leveraging its proven and long-standing Stanley Black & Decker Operating Model (“SBD Operating Model”) which has continually evolved over the past 15 years as times have changed. At the center of the SBD Operating Model is the concept of the interrelationship between people and technology, which intersect and interact with the other key elements: Performance Resiliency, Extreme Innovation, Operations Excellence and Extraordinary Customer Experience. Each of these elements co-exists synergistically with the others in a systems-based approach. The Company will leverage the SBD Operating Model to continue making strides towards achieving its vision of delivering top-quartile financial performance, becoming known as one of the world’s leading innovators and elevating its commitment to social responsibility.

The Company’s growth and acquisition strategy is interdependent with its social responsibility strategy focused on workforce upskilling, product innovation, and environmental preservation including mitigating the impacts of climate change. These are core business issues that ensure the long-term viability of the Company, its customers, suppliers, and communities. The Company has established environmental, social and corporate governance ("ESG") targets embodied in its 2030 ESG strategy that include empowering 10 million makers and creators, enhancing 500 million lives through purpose-driven product innovation, becoming carbon-neutral, landfill-free across its operations, and reducing water use in water stressed and scarce areas. The carbon neutrality target includes third-party approved science-based targets to reduce absolute scope 1 and 2 greenhouse gas emissions by greater than 100% by 2030, and to reduce supply chain emissions by 35%. The Company’s ESG strategy considers all life-cycle stages including material procurement from supply chain partners, product design, manufacturing, distribution and transportation, product use, product service and end-of-life. Refer to section "Human Capital Management" in Item 1 Business of the Company’s Form 10-K for the year ended January 1, 2022 for additional information regarding the Company's commitment to upskilling its employees and improving diversity, equity and inclusion.

In terms of capital allocation, the Company remains committed, over time, to returning approximately 50% of excess capital to shareholders through a strong and growing dividend as well as opportunistically repurchasing shares. The remaining capital (approximately 50%) will be deployed towards acquisitions.

Share Repurchases And Other Securities

During the first quarter of 2022, the Company repurchased 12,645,371 shares of common stock for approximately $2.3 billion through a combination of an accelerated share repurchase ("ASR") and open market share repurchases. The ASR terms provide for an initial delivery of 85% of the total notional share equivalent at execution, or 10,756,770 shares. The final delivery of the remaining shares under the ASR is expected to be completed by the end of the second quarter of 2022. The Company plans to complete the remaining share repurchases of its planned $4 billion share repurchase program in 2023. Refer to Note J, Equity Arrangements, for further discussion.

In addition, on April 23, 2021, the Board of Directors approved repurchases by the Company of its outstanding securities other than common stock up to an aggregate amount of $3.0 billion. No repurchases have been executed pursuant to this authorization to date.

Pending Sale of Mechanical Access Solutions ("MAS")

In April 2022, the Company announced that it had reached a definitive agreement for the sale of its automatic doors business to Allegion plc for $900 million in cash. The sale is subject to regulatory approval and other customary closing conditions, and is expected to close mid-year.

Pending Sale of Convergent Security Solutions ("CSS")

In December 2021, the Company announced that it had reached a definitive agreement for the sale of most of its Security assets to Securitas AB for $3.2 billion in cash. The proposed transaction includes the Company's CSS business comprising of commercial electronic security and healthcare businesses. The transaction does not include the Company's automatic doors business. The sale is subject to regulatory approvals and other customary closing conditions, and the Company's current expectation is the transaction will close mid-year.

Net proceeds from the sale of MAS and CSS are expected to be used to fund debt reduction and to contribute to the Company's previously announced share repurchase program. The use of net proceeds towards a planned share repurchase program is consistent with the Company's long-term capital allocation strategy focused on value maximization.

Acquisitions

On December 1, 2021, the Company acquired the remaining 80 percent ownership stake in MTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment. The Company previously acquired a 20 percent interest in MTD in January 2019. With over $2.6 billion of revenue in 2021, MTD designs, manufactures and distributes lawn tractors, zero turn ride on mowers, walk behind mowers, snow blowers, residential robotic mowers, handheld outdoor power equipment and garden tools for both residential and professional consumers under well-known brands like Cub Cadet® and Troy-Bilt®.

On November 12, 2021, the Company acquired Excel Industries ("Excel"). Excel is a leading designer and manufacturer of premium commercial and residential turf-care equipment under the brands of Hustler Turf Equipment® and BigDog Mower Co®. The Company believes this is a strategically important bolt-on acquisition that bolsters the presence in the independent dealer network.

The Company expects the combination of MTD, Excel and its existing outdoor strategic business unit in Tools & Outdoor will create a global leader in the $25 billion and growing outdoor category, with strong brands and growth opportunities. As part of the integration of these businesses, the Company plans to design, develop and manufacture battery and electric-powered solutions for professional and residential users. This will position the combined businesses to be a leader as preferences shift from gas powered equipment toward electrified solutions in outdoor power equipment.

Refer to Note F, Acquisitions and Investments, for further discussion.

COVID-19 Pandemic

The novel coronavirus ("COVID-19") outbreak has adversely affected the Company's workforce and operations, as well as the operations of its customers, distributors, suppliers and contractors. The COVID-19 pandemic has also resulted in significant volatility and uncertainty in the markets in which the Company operates. To successfully navigate through this unprecedented period, the Company has remained focused on the following key priorities:

• Ensuring the health and safety of its employees and supply chain partners;

• Maintaining business continuity and financial strength and stability;

• Serving its customers as they provide essential products and services to the world; and

• Doing its part to mitigate the impact of the virus across the globe.

Segments

The Company’s operations are classified into two reportable business segments: Tools & Outdoor and Industrial.

Tools & Outdoor

The Tools & Outdoor segment is comprised of the Power Tools Group ("PTG"), Hand Tools, Accessories & Storage ("HTAS"), and Outdoor Power Equipment ("Outdoor") businesses. Annual revenues in the Tools & Outdoor segment were $12.8 billion in 2021, representing 82% of the Company’s total revenues.

The PTG business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors. Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKER® brand, and home products such as hand-held vacuums, paint tools and cleaning appliances.

The HTAS business sells hand tools, power tool accessories and storage products. Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools. Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and threading products. Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products.

The Outdoor business primarily sells corded and cordless electric lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, pressure washers and related accessories, and gas powered lawn and garden products, including lawn tractors, zero turn ride on mowers, walk behind mowers, snow blowers, residential robotic mowers, utility terrain vehicles (UTVs), handheld outdoor power equipment, garden tools, and parts and accessories to professionals and consumers under the DEWALT®, CUB CADET®, BLACK+DECKER®, CRAFTSMAN®, TROY-BILT®, and HUSTLER® brand names.

Industrial

The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. Annual revenues in the Industrial segment were $2.5 billion in 2021, representing 16% of the Company’s total revenues.

The Engineered Fastening business primarily sells highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals. The product lines include externally threaded fasteners, blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, high-strength structural fasteners, axel swage, latches, heat shields, pins, and couplings.

The Infrastructure business consists of the Attachment Tools and Oil & Gas product lines. Attachment Tools sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications. Oil & Gas sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines and provides pipeline inspection services.

RESULTS OF OPERATIONS

The Company’s results represent continuing operations and exclude the commercial electronic security, healthcare, and automatic doors businesses, unless specifically noted. These divestitures represent a single plan to exit the Security segment and are considered a strategic shift that will have a major effect on the Company's operations and financial results. Therefore, the operating results of these businesses have been classified as discontinued operations.

Certain Items Impacting Earnings

The Company has provided a discussion of its results both inclusive and exclusive of acquisition-related and other charges. Organic growth is also utilized to describe results aside from the impacts of foreign currency fluctuations, acquisitions during their initial 12 months of ownership, and divestitures. The results and measures, including gross profit, selling, general, and administrative ("SG&A"), Other, net, and segment profit, on a basis excluding acquisition-related and other charges, and organic growth are Non-GAAP financial measures. The Company considers the use of Non-GAAP financial measures relevant to aid analysis and understanding of the Company’s results and business trends aside from the material impact of these items and ensures appropriate comparability to operating results of prior periods.

The Company’s operating results at the consolidated level as discussed below include and exclude acquisition-related and other charges impacting gross profit, SG&A, and Other, net. The Company’s business segment results as discussed below include and exclude acquisition-related and other charges impacting gross profit and SG&A. These amounts for the first quarters of 2022 and 2021 are as follows:

First Quarter 2022

The Acquisition-Related Charges and Other in the table above relate to the following:

• Charges reducing Gross profit primarily pertaining to inventory step-up charges and the Russia business closure;

• Charges in SG&A primarily related to a voluntary retirement program, integration-related costs, and the Russia business closure;

• Other charges included in Earnings from continuing operations before income taxes and equity interest consisting of:

◦$1.0 million in Other, net primarily related to deal transaction costs; and

◦$52.7 million of restructuring charges pertaining to severance and related costs;

• Income taxes on continuing operations include the tax effect on the above net charges.

First Quarter 2021

The Acquisition-Related Charges and Other in the table above relate to the following:

• Charges reducing Gross profit pertaining to facility-related charges;

• Charges in SG&A primarily for functional transformation initiatives;

• Other charges included in Earnings from continuing operations before income taxes and equity interest consisting of:

◦$1.6 million in Other, net primarily related to deal transactions costs;

◦$1.0 million net loss pertaining to a previously divested business; and

◦$1.8 million of restructuring charges pertaining to severance and facility closures;

• Income taxes on continuing operations include the tax effect on the above net charges.

Below is a summary of the Company’s operating results at the consolidated level, followed by an overview of business segment performance.

Consolidated Results

Net Sales: Net sales were $4.448 billion in the first three months of 2022 compared to $3.721 billion in the first three months of 2021, representing an increase of 20%, primarily driven by a 23% increase from strategic outdoor power equipment acquisitions and a 5% increase from price realization, partially offset by a 6% and 2% decrease from volume and foreign currency, respectively. Volume was in line with expectations, but constrained by temporary electronic component supply challenges, which have continued to improve. Tools & Outdoor net sales increased 24% compared to the first three months of 2021 due to a 27% increase from the MTD and Excel acquisitions and a 5% increase in price, partially offset by a 6% decline in volume and a 2% decrease from foreign currency. Industrial net sales declined 2% compared to the first three months of 2021 as a 5% increase in price was more than offset by a 5% decline in volume and a 2% impact from foreign currency.

Gross Profit: Gross profit was $1.305 billion, or 29.3% of net sales, in the first three months of 2022 compared to $1.388 billion, or 37.3% of net sales, in the first three months of 2021. Acquisition-related and other charges, which reduced gross profit, were $88.8 million for the three months ended April 2, 2022 and $4.4 million for the three months ended April 3, 2021. Excluding these charges, gross profit was 31.3% of net sales for the three months ended April 2, 2022, compared to 37.4% for the three months ended April 3, 2021, as price realization was more than offset by commodity inflation, higher supply chain costs to serve demand and lower volumes.

SG&A Expenses: SG&A, inclusive of the provision for credit losses, was $960.3 million, or 21.6% of net sales, in the first three months of 2022, compared to $719.1 million, or 19.3% of net sales, in the first three months of 2021. Within SG&A, acquisition-related and other charges totaled $78.9 million for the three months ended April 2, 2022 and $15.0 million for the three months ended April 3, 2021. Excluding these charges, SG&A was 19.8% of net sales for the three months ended April 2, 2022, compared to 18.9% for the three months ended April 3, 2021, due to growth investments deployed across the businesses.

Distribution center costs (i.e. warehousing and fulfillment facility and associated labor costs) are classified within SG&A. This classification may differ from other companies who may report such expenses within cost of sales. Due to diversity in practice, to the extent the classification of these distribution costs differs from other companies, the Company’s gross margins may not be comparable.

Other, net: Other, net amounted to $62.0 million and $48.0 million in the first three months of 2022 and 2021, respectively. Excluding acquisition-related and other charges of $1.0 million, Other, net totaled $61.0 million for the three months ended April 2, 2022. Excluding acquisition-related and other charges of $1.6 million, Other, net totaled $46.4 million for the three months ended April 3, 2021. The increase in 2022 compared to 2021 is driven by higher intangible asset amortization due to the MTD and Excel acquisitions.

Loss on Sale of Business: During the first quarter of 2021, the Company reported a pre-tax loss of $1.0 million related to a previously divested business.

Interest, net: Net interest expense was $51.9 million in the first quarter of 2022 compared to $44.6 million in the first quarter of 2021. The year-over-year increase was primarily driven by higher U.S. interest rates and higher average balances relating to the Company's commercial paper borrowings, as well as the $2.25 billion credit facility and $1.0 billion issuance of debt in the first quarter of 2022.

Income Taxes: The Company recognized income tax expense of $22.9 million for the three months ended April 2, 2022, resulting in an effective tax rate of 12.8%. Excluding the impacts of the acquisition-related and other charges, the effective tax rate was 13.2% for the three months ended April 2, 2022. These effective tax rates differ from the U.S. statutory tax rate primarily due to a benefit associated with the Company’s supply chain reorganization, tax on foreign earnings and the re-measurement of uncertain tax position reserves. The Company recognized income tax expense of $115.5 million for the three months ended April 3, 2021, resulting in an effective tax rate of 20.1%. Excluding the impacts of the acquisition-related and other charges, the effective tax rate was 20.3% for the three months ended April 3, 2021. These effective tax rates differ from the U.S. statutory tax rate primarily due to tax on foreign earnings, the re-measurement of uncertain tax position reserves, and the tax benefit of equity-based compensation.

Business Segment Results

The Company’s reportable segments are aggregations of businesses that have similar products, services and end markets, among other factors. The Company utilizes segment profit which is defined as net sales minus cost of sales and SG&A inclusive of the provision for credit losses (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment.

The Company’s operations are classified into two reportable business segments: Tools & Outdoor and Industrial.

Tools & Outdoor:

Tools & Outdoor net sales increased $738.3 million, or 24%, in the first three months of 2022 compared to the first three months of 2021, primarily driven by a 27% increase from the MTD and Excel acquisitions and a 5% increase in price, partially offset by lower volume of 6% and 2% from unfavorable currency impacts. Organic growth from pricing improved 60 basis points versus the fourth quarter as the Company implemented new global price increases in response to commodity inflation and higher costs to serve. Regional organic revenue was relatively in line with the anticipated supply-constrained performance with emerging markets at 5% and Europe at 2%, and North America at a 3% decline. Sales from outdoor acquisitions were modestly impacted by a later start to the merchandising season due to colder weather, and are expected to be recovered in the second and third quarter.

Segment profit for the first three months of 2022 was $378.5 million, or 10.0% of net sales, compared to $644.7 million, or 21.0% of net sales, in the first three months of 2021. Excluding acquisition-related and other charges of $153.7 million and $4.2 million for the three months ended April 2, 2022 and April 3, 2021, respectively, segment profit was 14.0% of net sales in the first three months of 2022 and 21.2% in the first three months of 2021, as the initial benefit from price realization was more than offset by inflation, higher supply chain costs, growth investments and lower volume.

Industrial:

Industrial net sales decreased $11.1 million, or 2%, in the first three months of 2022 compared to the first three months of 2021, as a 5% increase in price was more than offset by a 5% decline in volume and 2% from unfavorable currency impacts. Engineered Fastening organic revenues were down 1% as general industrial fastener growth was primarily offset by a market driven decline in automotive. Infrastructure organic revenues were up 4%, as 13% growth in Attachment Tools was partially offset by lower pipeline project activity in Oil & Gas.

Industrial segment profit for the first three months of 2022 totaled $41.3 million, or 6.4% of net sales, compared to $99.8 million, or 15.2% of net sales, in the corresponding 2021 period. Excluding acquisition-related and other charges of $3.5 million and $3.6 million for the three months ended April 2, 2022 and April 3, 2021, respectively, segment profit amounted to 6.9% of net sales in the first three months of 2022 compared to 15.7% in the first three months of 2021 as the initial benefit from price realization was more than offset by commodity inflation and lower volume in higher-margin automotive and aerospace fasteners.

Corporate Overhead

Corporate Overhead includes the corporate overhead element of SG&A, which is not allocated to the business segments. Corporate Overhead amounted to $74.7 million in 2022 compared to $75.8 million in 2021. Excluding acquisition-related and other charges of $10.5 million for the three months ended April 2, 2022 and $11.6 million for the three months ended April 3, 2021, the corporate overhead element of SG&A was $64.2 million for the three months ended April 2, 2022 and April 3, 2021.

RESTRUCTURING ACTIVITIES

A summary of the restructuring reserve activity from January 1, 2022 to April 2, 2022 is as follows:

For the three months ended April 2, 2022, the Company recognized net restructuring charges of $52.7 million, primarily related to severance and related costs. The Company expects to achieve annual net cost savings of approximately $137 million by the end of 2022 related to the restructuring costs incurred during the three months ended April 2, 2022. The majority of the $59.8 million of reserves remaining as of April 2, 2022 is expected to be utilized within the next 12 months.

Segments: The $53 million of net restructuring charges for the three months ended April 2, 2022 includes: $43 million in the Tools & Outdoor segment; $8 million in the Industrial segment; and $2 million in Corporate.

The anticipated annual net cost savings of approximately $53 million related to the 2022 restructuring actions include: $110 million in the Tools & Outdoor segment; $14 million in the Industrial segment; and $13 million in Corporate.

2022 OUTLOOK

This outlook discussion is intended to provide broad insight into the Company's near-term earnings and cash flow generation prospects. For the full year 2022, the Company projects mid-twenties total revenue growth year-over-year. The Company is revising its 2022 diluted earnings per share outlook to $7.20 - $8.30 on a diluted GAAP basis, from $10.10 to $10.70, and on an adjusted diluted EPS basis to $9.50 to $10.50 from $12.00 to $12.50. Free cash flow is expected to be approximately $1.0 billion to $1.5 billion as the Company focuses on serving its customers while leveraging the SBD Operating Model to drive working capital efficiency. Through the first quarter, $2.3 billion of the planned $4 billion share repurchase was initiated and the Company expects completion of the total program in 2023. The Company remains focused on disciplined capital allocation which aims to balance share repurchase activity with its commitment to dividends and strong investment grade credit ratings.

The Company has changed the following assumptions for 2022 from its prior outlook: MAS divestiture will approximate $0.30 of dilution to earnings per share; Russia business closure will approximate $0.15 of dilution to earnings per share; an incremental $600 million in commodity and transit inflation will approximate $3.50 of incremental dilution to earnings per share; and incremental pricing actions, first quarter out performance and other will approximate $1.70 of incremental accretion per diluted share.

The difference between the 2022 diluted earnings per share outlook and the diluted earnings per share range, excluding charges, is $2.20 - $2.30, consisting of acquisition-related and other charges. These forecasted charges primarily relate to restructuring expenses, a voluntary retirement program, the Russia business closure, integration costs and non-cash inventory step-up charges.

FINANCIAL CONDITION

Liquidity, Sources and Uses of Capital: The Company’s primary sources of liquidity are cash flows generated from operations and available lines of credit under various credit facilities.

Operating Activities: Cash flows used in operations were $1.241 billion in the first quarter of 2021 compared to $157.8 million in the corresponding period of 2021. The year-over-year change was mainly attributable to higher inventory levels to meet demand within the Tools & Outdoor segment, coupled with longer lead times related to the global supply chain, and to a lesser extent, lower earnings.

Free Cash Flow: Free cash flow, as defined in the table below, was an outflow of $1.381 billion in the first quarter of 2022 compared to $246.1 million in the corresponding period of 2021. The year-over-year decrease in free cash flow was primarily due to increased inventory investments to support the strong demand outlook. This inventory level is planned to decline sequentially [beginning in the back half of 2022]. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners, and is useful information for investors. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company’s common and preferred stock and business acquisitions, among other items.

Investing Activities: Cash flows used in investing activities totaled $163.4 million in the first quarter of 2022 primarily due to capital and software expenditures of $139.8 million and purchase price adjustment payments for previously acquired businesses of $36.5 million. Cash flows used in investing activities totaled $147.9 million in the first three months of 2021, primarily due to capital and software expenditures of $88.3 million and net investment hedge settlements of $52.6 million.

Financing Activities: Cash flows provided by financing activities totaled $1.425 billion in the first quarter of 2022 primarily driven by net short-term borrowings of $2.845 billion and proceeds from debt issuances, net of fees, of $994.8 million, partially offset by share repurchases of $2.313 billion and cash dividend payments on common stock of $116.3 million. Cash flows used in financing activities totaled $95.0 million in the first three months of 2021 primarily driven by cash dividend payments on common stock of $110.1 million, partially offset by proceeds from issuances of common stock of $64.1 million.

Credit Ratings & Liquidity:

The Company maintains strong investment grade credit ratings from the major U.S. rating agencies on its senior unsecured debt (S&P A, Fitch A-, Moody's Baa1), as well as its commercial paper program (S&P A-1, Fitch F1, Moody's P-2). There were no changes to any of the Company's credit ratings during the first quarter of 2022. Failure to maintain strong investment grade credit rating levels could adversely affect the Company’s cost of funds, liquidity and access to capital markets, but would not have an adverse effect on the Company’s ability to access its existing committed credit facilities.

Cash and cash equivalents totaled $165.8 million and $142.1 million as of April 2, 2022 and January 1, 2022, respectively, which was primarily held in the U.S.

As a result of the Tax Cuts and Jobs Act (the “Act”), the Company's tax liability related to the one-time transition tax associated with unremitted foreign earnings and profits totaled $287 million at April 2, 2022. The Act permits a U.S. company to elect to pay the net tax liability interest-free over a period of up to eight years. The Company has considered the implications of paying the required one-time transition tax and believes it will not have a material impact on its liquidity.

The Company has a $3.5 billion commercial paper program which includes Euro denominated borrowings in addition to U.S. Dollars. As of April 2, 2022 and January 1, 2022, the Company had borrowings outstanding of $2.8 billion and $2.2 billion, respectively.

The Company has a five-year $2.5 billion committed credit facility (the “5-Year Credit Agreement”). Borrowings under the 5-Year Credit Agreement may be made in U.S. Dollars, Euros or Pounds Sterling. A sub-limit amount of $814.3 million is designated for swing line advances which may be drawn in Euros pursuant to the terms of the 5-Year Credit Agreement. Borrowings bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and specific terms of the 5-Year Credit Agreement. The Company must repay all advances under the 5-Year Credit Agreement by the earlier of September 8, 2026 or upon termination. The 5-Year Credit Agreement is designated to be a liquidity back-stop for the Company's $3.5 billion U.S. Dollar and Euro commercial paper program. As of April 2, 2022 and January 1, 2022, the Company had not drawn on its five-year committed credit facility.

The Company has a 364-Day $1.0 billion committed credit facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit Agreement may be made in U.S. Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the 364-Day Credit Agreement. The Company must repay all advances under the 364-Day Credit Agreement by the earlier of September 7, 2022 or upon termination. The Company may, however, convert all advances outstanding upon termination into a term loan that shall be repaid in full no later than the first anniversary of the termination date provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. The 364-Day Credit Agreement serves as part of the liquidity back-stop for the Company’s $3.5 billion U.S. Dollar and Euro commercial paper program. As of April 2, 2022 and January 1, 2022, the Company had not drawn on its 364-Day committed credit facility.

The Company has a second 364-Day $1.0 billion committed credit facility (the "Second 364-Day Credit Agreement"). Borrowings under the Second 364-Day Credit Agreement may be made in U.S. Dollars and Euros and bear interest at a base rate plus an applicable margin determined at the time of the borrowing. The Company must repay all advances under the Second 364-Day Credit Agreement by the earlier of November 15, 2022 or upon termination. The Company may, however, convert all advances outstanding upon termination into a term loan that shall be repaid in full no later than the first anniversary of the termination date provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. As of April 2, 2022 and January 1, 2022, the Company had not drawn on its Second 364-Day Credit Agreement.

In January 2022, the Company executed a third 364-Day $2.5 billion committed credit facility (the "Third 364-Day Credit Agreement"). Borrowings under the Third 364-Day Credit Agreement shall be made in U.S. Dollars and bear interest at a base rate plus an applicable margin determined at the time of the borrowing. The Company must repay all advances under the Third 364-Day Credit Agreement by the earlier of January 25, 2023 or upon termination. The Company may, however, convert all advances outstanding upon termination into a term loan that shall be repaid in full no later than the first anniversary of the termination date provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. As of April 2, 2022, the Company had $2.3 billion outstanding on its Third 364-Day Credit Agreement.

In February 2022, the Company issued $500.0 million of senior unsecured term notes maturing February 24, 2025 ("2025 Term Notes") and $500.0 million of senior unsecured term notes maturing May 15, 2032 (“2032 Term Notes”). The 2025 Term Notes will accrue interest at a fixed rate of 2.3% per annum and the 2032 Term Notes at a fixed rate of 3.0% 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 $991.9 million, net of approximately $8.1 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 indebtedness under the commercial paper facilities.

In November 2019, the Company issued 7,500,000 Equity Units with a total notional value of $750 million ("2019 Equity Units"). Each unit has a stated amount of $100 and initially consists of a three-year forward stock purchase contract ("2022 Purchase Contracts") for the purchase of a variable number of shares of common stock, 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 million in cash proceeds from the 2019 Equity Units, net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series D Preferred Stock. The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures in December 2019. The Company also used $19 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. 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. On or after December 22, 2022, the Company may elect to redeem for cash, all or any portion of the outstanding shares of the Series D Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series D Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date. Upon a successful remarketing of the Series D Preferred Stock (the "Remarketed Series D Preferred Stock"), the Company will receive additional cash proceeds of $750 million and issue shares of Remarketed Series D Preferred Stock. The Company pays the holders of the 2022 Purchase Contracts quarterly contract adjustment payments, which commenced February 15, 2020. As of April 2, 2022, the present value of the contract adjustment payments was approximately $29 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 million, plus an additional amount related to the forward component of the contract. In February 2022, the Company amended the settlement date to April 2023, or earlier at the Company's option.

Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Equity Arrangements, for further discussion of the Company's financing arrangements.

OTHER MATTERS

Critical Accounting Estimates: There have been no significant changes in the Company’s critical accounting estimates during the first quarter of 2022.

Refer to the “Other Matters” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the year ended January 1, 2022 for a discussion of the Company’s critical accounting estimates.

There has been no significant change in the Company’s exposure to market risk during the first quarter of 2022. Refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the year ended January 1, 2022 for further discussion.

Disclosure Controls and Procedures

Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and its President and Chief Financial Officer, the Company has, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined under Rule 13a-15(e) of the Exchange Act). Based upon that evaluation, the Company’s Chief Executive Officer and its President and Chief Financial Officer have concluded that, as of April 2, 2022, the Company’s disclosure controls and procedures are effective.

Remediation of Material Weakness

To address the previously reported material weakness in internal control over financial reporting described in Part II, Item 9A of the Company's 2021 Form 10-K, the Company enhanced and revised the design of existing controls and procedures to properly account for financial instruments with debt- and equity-like features, including the impact to the calculation of earnings per share. During the first quarter of fiscal 2022, the Company successfully completed the testing necessary to conclude that the material weakness has been remediated.

Changes in Internal Control Over Financial Reporting

Except for the changes related to the Company's remediation efforts described above, there has been no change in the Company’s internal control over financial reporting that occurred during the first quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION

REFORM ACT OF 1995

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including any projections or guidance of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include, among others, the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “anticipate” or any other similar words.

Although the Company believes that the expectations reflected in any of its forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of its forward-looking statements. The Company's future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in the Company's filings with the Securities and Exchange Commission.

Important factors that could cause the Company's actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in its forward-looking statements include, among others, the following: (i) successfully developing, marketing and achieving sales from new products and services and the continued acceptance of current products and services; (ii) macroeconomic factors, including global and regional business conditions (such as Brexit), commodity prices, inflation and deflation, and currency exchange rates; (iii) laws, regulations and governmental policies affecting the Company's activities in the countries where it does business, including those related to tariffs, taxation, data privacy, anti-bribery, anti-corruption, government contracts and trade controls such as section 301 tariffs and section 232 steel and aluminum tariffs; (iv) the economic, political, cultural and legal environment of emerging markets, particularly Latin America, Russia, China and Turkey; (v) realizing the anticipated benefits of mergers, acquisitions, joint ventures, strategic alliances or divestitures; (vi) pricing pressure and other changes within competitive markets; (vii) availability and price of raw materials, component parts, freight, energy, labor and sourced finished goods; (viii) the impact the tightened credit markets and change to LIBOR and other benchmark rates may have on the Company or its customers or suppliers; (ix) the extent to which the Company has to write off accounts receivable or assets or experiences supply chain disruptions in connection with bankruptcy filings by customers or suppliers; (x) the Company's ability to identify and effectively execute productivity improvements and cost reductions; (xi) potential business and distribution disruptions, including those related to physical security threats, information technology or cyber-attacks, epidemics, pandemics, sanctions, political unrest, war, terrorism or natural disasters; (xii) the continued consolidation of customers, particularly in consumer channels and the Company’s continued reliance on significant customers; (xiii) managing franchisee relationships; (xiv) the impact of poor weather conditions and climate change; (xv) maintaining or improving production rates in the Company's manufacturing facilities, responding to significant changes in customer preferences, product demand and fulfilling demand for new and existing products, and learning, adapting and integrating new technologies into products, services and processes; (xvi) changes in the competitive landscape in the Company's markets; (xvii) the Company's non-U.S. operations, including sales to non-U.S. customers; (xviii) the impact from demand changes within world-wide markets associated with homebuilding and remodeling; (xix) potential adverse developments in new or pending litigation and/or government investigations; (xx) the incurrence of debt and changes in the Company's ability to obtain debt on commercially reasonable terms and at competitive rates; (xxi) substantial pension and other postretirement benefit obligations; (xxii) potential regulatory liabilities, including environmental, privacy, data breach, workers compensation and product liabilities; (xxiii) attracting and retaining key employees, managing a workforce in many jurisdictions, work stoppages or other labor disruptions; (xxiv) the Company's ability to keep abreast with the pace of technological change; (xxv) changes in accounting estimates; (xxvi) the Company’s ability to protect its intellectual property rights and associated reputational impacts; (xxvii) the continued adverse effects of the COVID-19 pandemic and an indeterminate recovery period; (xxviii) the possibility that the Company does not achieve the intended financial benefits from the acquisition of MTD; (xxix) the failure to consummate, or a delay in the consummation of, the Security sale transactions for various reasons (including but not limited to failure to receive, or delay in receiving, required regulatory approvals and meet customary closing conditions); (xxx) the failure to undertake or complete, or a delay in the timing of, the share repurchase program; and (xxxi) failure to realize the expected benefits of the Company's capital allocation strategy and share repurchase program.

Additional factors that could cause actual results to differ materially from forward-looking statements are set forth in the Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q, including under the heading “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the Condensed Consolidated Financial Statements and the related Notes.

Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company has identified that certain expenses it incurred in previous years constituted undisclosed perquisites. The Company has voluntarily disclosed this information to the U.S. Securities and Exchange Commission ("SEC") and is cooperating with the SEC’s investigation of this matter.

For the named executive officers in fiscal year 2021, the Company has calculated the amount of the undisclosed perquisites to be approximately $204,000 in 2020 and approximately $335,000 in 2019. These amounts relate principally to use of corporate aircraft and have been included in the Company’s proxy statement for its 2022 annual shareholders meeting.

The Company is committed to upholding the highest standards of corporate governance and is continuously focused on ensuring the effectiveness of its policies, procedures, and controls. The Company is in the process, with the assistance of professional advisors, of reviewing and further enhancing relevant policies, procedures, and controls.

Currently the Company does not believe that this matter will have a material impact on its financial condition or results of operations, although it is possible that a loss related to this matter may be incurred. Given the ongoing nature of this matter, management cannot predict the duration, scope, or outcome of the SEC’s investigation or estimate the potential magnitude of any such loss or range of loss, or the cost of the ongoing SEC investigation. Any determination that the Company’s expense and perquisite reporting practices were not in compliance with existing laws or regulations could result in the imposition of fines, civil or criminal penalties, equitable remedies, including disgorgement, injunctive relief, or other sanctions against the Company. The Company also may become a party to litigation or other legal proceedings over these matters.

In the normal course of business, the Company is involved in various lawsuits and claims, including product liability, environmental, intellectual property, contract and commercial, advertising, employment and distributor claims, and administrative proceedings. The Company does not expect that the resolution of these matters will have a materially adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

There have been no material changes to the risk factors as disclosed in the Company’s Form 10-K for the year ended January 1, 2022 filed with the Securities and Exchange Commission on February 22, 2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information about the Company’s purchases of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act during the three months ended April 2, 2022:

(a)Shares of common stock in this column totaling 36,495 and 47,851 for the months ended March 5, 2022 and April 2, 2022, respectively, were deemed surrendered to the Company by participants in various benefit plans of the Company to satisfy the participants’ taxes related to vesting or delivery of time-vesting restricted share units under those plans. Shares in this column totaling 1,888,601 for the month ended March 5, 2022 were open market share repurchases.

(b)On February 16, 2022, the Board of Directors terminated the previous repurchase program (the "April 2021 Program") and approved a new repurchase program of up to the greater of (i) 20.0 million shares of the Company’s common stock; and (ii) the number of shares of the Company’s common stock in the aggregate that can be purchased for an amount up to $2.5 billion (the "February 2022 Program"). On April 21, 2022, the Board terminated the February 2022 Program and approved a new share repurchase program of up to 20 million shares of the Company’s common stock (the “April 2022

Program”). The April 2022 Program does not have an expiration date. The Company may repurchase shares under the April 2022 Program through open market purchases, privately negotiated transactions or share repurchase programs, including one or more accelerated share repurchase programs (under which an initial payment for the entire repurchase amount may be made at the inception of the program). Such repurchases may be funded from cash on hand, short-term borrowings or other sources of cash at the Company’s discretion, and the Company is under no obligation to repurchase any shares pursuant to the repurchase program. The currently authorized shares available for repurchase under the April 2022 Program do not include (i) approximately 3.6 million shares reserved and authorized for purchase under the Company’s approved repurchase program in place prior to the April 2022 Program relating to a forward share purchase contract entered into in March 2015; or (ii) the shares reserved and authorized for repurchase under the February 2022 Program relating to the remaining shares to be delivered pursuant to the ASR (defined below) in the second quarter of 2022. In March 2022, the Company executed an accelerated share repurchase ("ASR") with a notional amount of $2.0 billion, which was funded through borrowings under one of its existing 364-Day committed credit facilities. The ASR terms provide for an initial delivery of 85% of the total notional share equivalent at execution, or approximately 10.8 million shares. The final delivery of the remaining shares under the ASR is expected to be completed by the end of the second quarter of 2022. The total amount of shares to be ultimately delivered will be determined at the end of the calculation period based on the volume weighted average price ("VWAP") of the Company's stock (inclusive of a VWAP discount) during that period. In the event that the Company's stock price increases significantly during the calculation period, the Company may be required to settle the transaction by delivering common shares or may elect to make a cash payment. Refer to Note J, Equity Arrangements, of the Notes to (Unaudited) Condensed Consolidated Financial Statements in Part I, Item 1 for further discussion.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.