filings.toolsItem 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
THREE AND SIX MONTHS ENDED JULY 1, 2023 AND JULY 2, 2022
(Unaudited, Millions of Dollars, Except Per Share Amounts)
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Sales | $ | 4,158.9 | $ | 4,393.0 | $ | 8,090.7 | $ | 8,841.0 | |||||||||||||||
| Costs and Expenses | |||||||||||||||||||||||
| Cost of sales | $ | 3,226.8 | $ | 3,185.9 | $ | 6,323.1 | $ | 6,328.5 | |||||||||||||||
| Selling, general and administrative | 834.4 | 849.4 | 1,657.4 | 1,798.6 | |||||||||||||||||||
| Provision for credit losses | 2.9 | 3.3 | 5.0 | 14.4 | |||||||||||||||||||
| Other, net | 66.6 | 79.1 | 130.3 | 141.1 | |||||||||||||||||||
| (Gain) loss on sales of businesses | — | (0.2) | 7.6 | (0.2) | |||||||||||||||||||
| Asset impairment charge | — | 168.4 | — | 168.4 | |||||||||||||||||||
| Restructuring charges | 4.6 | 19.5 | 16.7 | 72.2 | |||||||||||||||||||
| Interest income | (45.2) | (6.5) | (85.0) | (9.3) | |||||||||||||||||||
| Interest expense | 144.6 | 78.2 | 275.5 | 132.9 | |||||||||||||||||||
| $ | 4,234.7 | $ | 4,377.1 | $ | 8,330.6 | $ | 8,646.6 | ||||||||||||||||
| (Loss) earnings from continuing operations before income taxes | (75.8) | 15.9 | (239.9) | 194.4 | |||||||||||||||||||
| Income taxes on continuing operations | (253.3) | (62.8) | (229.6) | (39.9) | |||||||||||||||||||
| Net earnings (loss) from continuing operations | 177.5 | 78.7 | (10.3) | 234.3 | |||||||||||||||||||
| Less: Net earnings attributable to non-controlling interests | — | 0.1 | — | 0.2 | |||||||||||||||||||
| Net Earnings (Loss) from Continuing Operations Attributable to Common Shareowners | $ | 177.5 | $ | 78.6 | $ | (10.3) | $ | 234.1 | |||||||||||||||
| Add: Contract adjustment payments accretion | — | 0.4 | — | 0.7 | |||||||||||||||||||
| Net Earnings (Loss) from Continuing Operations Attributable to Common Shareowners - Diluted | $ | 177.5 | $ | 79.0 | $ | (10.3) | $ | 234.8 | |||||||||||||||
| (Loss) earnings from discontinued operations before income taxes (including 2023 pre-tax loss on Security sale of $0.8 million) | (0.8) | 6.4 | (0.8) | 28.6 | |||||||||||||||||||
| Income taxes on discontinued operations | (0.3) | (2.6) | (0.3) | (0.2) | |||||||||||||||||||
| Net (loss) earnings from discontinued operations | $ | (0.5) | $ | 9.0 | $ | (0.5) | $ | 28.8 | |||||||||||||||
| Net Earnings (Loss) Attributable to Common Shareowners - Diluted | $ | 177.0 | $ | 88.0 | $ | (10.8) | $ | 263.6 | |||||||||||||||
| Net Earnings (Loss) Attributable to Stanley Black & Decker, Inc. | $ | 177.0 | $ | 87.6 | $ | (10.8) | $ | 262.9 | |||||||||||||||
| Total Comprehensive Income (Loss) Attributable to Common Shareowners | $ | 147.9 | $ | (190.1) | $ | 12.9 | $ | (42.5) | |||||||||||||||
| Basic earnings (loss) per share of common stock: | |||||||||||||||||||||||
| Continuing operations | $ | 1.19 | $ | 0.54 | $ | (0.07) | $ | 1.56 | |||||||||||||||
| Discontinued operations | $ | — | $ | 0.06 | $ | — | $ | 0.19 | |||||||||||||||
| Total basic earnings (loss) per share of common stock | $ | 1.18 | $ | 0.60 | $ | (0.07) | $ | 1.75 | |||||||||||||||
| Diluted earnings (loss) per share of common stock: | |||||||||||||||||||||||
| Continuing operations | $ | 1.18 | $ | 0.51 | $ | (0.07) | $ | 1.47 | |||||||||||||||
| Discontinued operations | $ | — | $ | 0.06 | $ | — | $ | 0.18 | |||||||||||||||
| Total diluted earnings (loss) per share of common stock | $ | 1.18 | $ | 0.57 | $ | (0.07) | $ | 1.65 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 1, 2023 AND DECEMBER 31, 2022
(Unaudited, Millions of Dollars, Except Share and Per Share Amounts)
| July 1, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | 391.4 | $ | 395.6 | |||||||
| Accounts and notes receivable, net | 1,706.7 | 1,231.0 | |||||||||
| Inventories, net | 5,282.9 | 5,861.1 | |||||||||
| Prepaid expenses | 433.1 | 441.4 | |||||||||
| Other current assets | 25.6 | 45.6 | |||||||||
| Total Current Assets | 7,839.7 | 7,974.7 | |||||||||
| Property, plant and equipment, net | 2,245.7 | 2,353.1 | |||||||||
| Goodwill | 8,509.8 | 8,502.7 | |||||||||
| Intangibles, net | 4,380.5 | 4,474.8 | |||||||||
| Other assets | 1,957.5 | 1,658.0 | |||||||||
| Total Assets | $ | 24,933.2 | $ | 24,963.3 | |||||||
| LIABILITIES AND SHAREOWNERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Short-term borrowings | $ | 1,784.0 | $ | 2,102.9 | |||||||
| Current maturities of long-term debt | 1.1 | 1.2 | |||||||||
| Accounts payable | 2,413.9 | 2,344.4 | |||||||||
| Accrued expenses | 1,940.6 | 2,120.7 | |||||||||
| Total Current Liabilities | 6,139.6 | 6,569.2 | |||||||||
| Long-term debt | 6,099.9 | 5,352.9 | |||||||||
| Deferred taxes | 589.1 | 709.2 | |||||||||
| Post-retirement benefits | 347.6 | 353.9 | |||||||||
| Other liabilities | 2,221.1 | 2,263.9 | |||||||||
| Commitments and Contingencies (Notes P and Q) | |||||||||||
| Shareowners’ Equity | |||||||||||
| Stanley Black & Decker, Inc. Shareowners’ Equity | |||||||||||
| Common stock, par value $2.50 per share: Authorized 300,000,000 shares in 2023 and 2022 Issued 176,902,738 shares in 2023 and 2022 | 442.3 | 442.3 | |||||||||
| Retained earnings | 9,083.0 | 9,333.3 | |||||||||
| Additional paid in capital | 5,072.8 | 5,055.6 | |||||||||
| Accumulated other comprehensive loss | (2,095.8) | (2,119.5) | |||||||||
| 12,502.3 | 12,711.7 | ||||||||||
| Less: cost of common stock in treasury (23,685,402 shares in 2023 and 23,919,208 shares in 2022) | (2,968.5) | (2,999.6) | |||||||||
| Stanley Black & Decker, Inc. Shareowners’ Equity | 9,533.8 | 9,712.1 | |||||||||
| Non-controlling interests | 2.1 | 2.1 | |||||||||
| Total Shareowners’ Equity | 9,535.9 | 9,714.2 | |||||||||
| Total Liabilities and Shareowners’ Equity | $ | 24,933.2 | $ | 24,963.3 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JULY 1, 2023 AND JULY 2, 2022
(Unaudited, Millions of Dollars)
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| OPERATING ACTIVITIES | |||||||||||||||||||||||
| Net earnings (loss) from continuing operations | $ | 177.5 | $ | 78.7 | $ | (10.3) | $ | 234.3 | |||||||||||||||
| Net (loss) earnings from discontinued operations | (0.5) | 9.0 | (0.5) | 28.8 | |||||||||||||||||||
| Adjustments to reconcile net earnings (loss) to cash provided by (used in) operating activities: | |||||||||||||||||||||||
| Depreciation and amortization of property, plant and equipment | 116.1 | 91.9 | 229.0 | 183.9 | |||||||||||||||||||
| Amortization of intangibles | 48.3 | 51.5 | 96.6 | 103.2 | |||||||||||||||||||
| (Gain) loss on sales of businesses | — | (0.2) | 7.6 | (0.2) | |||||||||||||||||||
| Loss on sale of discontinued operations | 0.8 | — | 0.8 | — | |||||||||||||||||||
| Asset impairment charge | — | 168.4 | — | 168.4 | |||||||||||||||||||
| Stock-based compensation expense | 12.1 | 26.3 | 46.8 | 56.6 | |||||||||||||||||||
| Changes in working capital | 278.9 | (568.0) | 97.7 | (1,904.1) | |||||||||||||||||||
| Changes in other assets and liabilities | (368.8) | (301.5) | (489.6) | (555.9) | |||||||||||||||||||
| Cash provided by (used in) operating activities | 264.4 | (443.9) | (21.9) | (1,685.0) | |||||||||||||||||||
| INVESTING ACTIVITIES | |||||||||||||||||||||||
| Capital and software expenditures | (68.3) | (145.7) | (136.5) | (285.5) | |||||||||||||||||||
| Proceeds from sales of assets | 6.6 | 6.2 | 9.5 | 15.2 | |||||||||||||||||||
| Proceeds from sales of businesses, net of cash sold | (6.3) | 0.2 | (5.7) | 0.2 | |||||||||||||||||||
| Business acquisitions, net of cash acquired | — | (9.1) | — | (45.6) | |||||||||||||||||||
| Purchases of investments | (1.2) | (9.2) | (1.6) | (9.3) | |||||||||||||||||||
| Net investment hedge settlements | — | 4.2 | — | 8.9 | |||||||||||||||||||
| Other | — | (0.9) | 3.9 | (1.6) | |||||||||||||||||||
| Cash used in investing activities | (69.2) | (154.3) | (130.4) | (317.7) | |||||||||||||||||||
| FINANCING ACTIVITIES | |||||||||||||||||||||||
| Proceeds from debt issuances, net of fees | (1.3) | (2.2) | 745.9 | 992.6 | |||||||||||||||||||
| Stock purchase contract fees | — | (9.8) | — | (19.6) | |||||||||||||||||||
| Credit facility borrowings | — | — | — | 2,250.0 | |||||||||||||||||||
| Net short-term commercial paper (repayments) borrowings | (42.0) | 746.6 | (327.9) | 1,341.4 | |||||||||||||||||||
| Proceeds from issuances of common stock | 4.0 | 5.9 | 7.1 | 19.6 | |||||||||||||||||||
| Purchases of common stock for treasury | (0.8) | (1.1) | (5.6) | (2,314.1) | |||||||||||||||||||
| Craftsman contingent consideration | (8.9) | (11.3) | (18.0) | (21.1) | |||||||||||||||||||
| Termination of interest rate swaps | — | — | — | 22.7 | |||||||||||||||||||
| Cash dividends on common stock | (119.7) | (114.0) | (239.5) | (230.3) | |||||||||||||||||||
| Other | (7.1) | (5.9) | (13.6) | (7.6) | |||||||||||||||||||
| Cash (used in) provided by financing activities | (175.8) | 608.2 | 148.4 | 2,033.6 | |||||||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (14.2) | (22.4) | (5.1) | (17.6) | |||||||||||||||||||
| Change in cash, cash equivalents and restricted cash | 5.2 | (12.4) | (9.0) | 13.3 | |||||||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 390.7 | 320.5 | 404.9 | 294.8 | |||||||||||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 395.9 | $ | 308.1 | $ | 395.9 | $ | 308.1 |
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of July 1, 2023 and December 31, 2022, as shown above:
| July 1, 2023 | December 31, 2022 | ||||||||||
| Cash and cash equivalents | $ | 391.4 | $ | 395.6 | |||||||
| Restricted cash included in Other current assets | 4.5 | 9.3 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 395.9 | $ | 404.9 |
See Notes to Unaudited Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
THREE AND SIX MONTHS ENDED JULY 1, 2023 AND JULY 2, 2022
(Unaudited, Millions of Dollars, Except Share and Per Share Amounts)
| Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non- Controlling Interests | Shareowners’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2022 | $ | — | $ | 442.3 | $ | 5,055.6 | $ | 9,333.3 | $ | (2,119.5) | $ | (2,999.6) | $ | 2.1 | $ | 9,714.2 | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | (187.8) | — | — | — | (187.8) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 52.8 | — | — | 52.8 | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $0.80 per common share | — | — | — | (119.8) | — | — | — | (119.8) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (202,552 shares) | — | — | (21.5) | — | — | 24.6 | — | 3.1 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (58,377 shares) | — | — | — | — | — | (4.8) | — | (4.8) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | — | — | 34.7 | — | — | — | — | 34.7 | |||||||||||||||||||||||||||||||||||||||
| Balance April 1, 2023 | $ | — | $ | 442.3 | $ | 5,068.8 | $ | 9,025.7 | $ | (2,066.7) | $ | (2,979.8) | $ | 2.1 | $ | 9,492.4 | |||||||||||||||||||||||||||||||
| Net earnings | — | — | — | 177.0 | — | — | — | 177.0 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (29.1) | — | — | (29.1) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $0.80 per common share | — | — | — | (119.7) | — | — | — | (119.7) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (99,627 shares) | — | — | (8.1) | — | — | 12.1 | — | 4.0 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (9,996 shares) | — | — | — | — | — | (0.8) | — | (0.8) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | — | — | 12.1 | — | — | — | — | 12.1 | |||||||||||||||||||||||||||||||||||||||
| Balance July 1, 2023 | $ | — | $ | 442.3 | $ | 5,072.8 | $ | 9,083.0 | $ | (2,095.8) | $ | (2,968.5) | $ | 2.1 | $ | 9,535.9 | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non- Controlling Interests | Shareowners’ Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance January 1, 2022 | $ | 620.3 | $ | 442.3 | $ | 4,999.2 | $ | 8,742.4 | $ | (1,845.6) | $ | (1,368.1) | $ | 1.9 | $ | 11,592.4 | |||||||||||||||||||||||||||||||
| Net earnings | — | — | — | 175.3 | — | — | 0.1 | 175.4 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (27.7) | — | — | (27.7) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $0.79 per common share | — | — | — | (116.3) | — | — | — | (116.3) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (338,897 shares) | — | — | (24.0) | — | — | 37.7 | — | 13.7 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (12,729,825 shares) | — | — | (300.0) | — | — | (2,013.0) | — | (2,313.0) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | — | — | 30.3 | — | — | — | — | 30.3 | |||||||||||||||||||||||||||||||||||||||
| Balance April 2, 2022 | $ | 620.3 | $ | 442.3 | $ | 4,705.5 | $ | 8,801.4 | $ | (1,873.3) | $ | (3,343.4) | $ | 2.0 | $ | 9,354.8 | |||||||||||||||||||||||||||||||
| Net earnings | — | — | — | 87.6 | — | — | 0.1 | 87.7 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (277.7) | — | — | (277.7) | |||||||||||||||||||||||||||||||||||||||
| Cash dividends declared — $0.79 per common share | — | — | — | (114.0) | — | — | — | (114.0) | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock (83,264 shares) | — | — | (4.4) | — | — | 10.3 | — | 5.9 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock (3,219,632 shares) | — | — | 299.9 | — | — | (301.0) | — | (1.1) | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation related | — | — | 26.3 | — | — | — | — | 26.3 | |||||||||||||||||||||||||||||||||||||||
| Balance July 2, 2022 | $ | 620.3 | $ | 442.3 | $ | 5,027.3 | $ | 8,775.0 | $ | (2,151.0) | $ | (3,634.1) | $ | 2.1 | $ | 9,081.9 | |||||||||||||||||||||||||||||||
See Notes to Unaudited Condensed Consolidated Financial Statements.
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2023
A. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Operating results for the three and six months ended July 1, 2023 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in Stanley Black & Decker, Inc.’s (the “Company”) Form 10-K for the year ended December 31, 2022, and subsequent related filings with the Securities and Exchange Commission ("SEC").
On August 19, 2022, the Company completed the sale of its Oil & Gas business. This divestiture did not qualify for discontinued operations, and therefore, the 2022 results of the Oil & Gas business were included in the Company's continuing operations through the date of sale.
On July 22, 2022, the Company completed the sale of its Convergent Security Solutions ("CSS") business comprised of the commercial electronic security and healthcare businesses. On July 5, 2022, the Company completed the sale of its Mechanical Access Solutions ("MAS") business, the automatic doors business. The CSS and MAS divestitures represented a single plan to exit the Security segment and were considered a strategic shift that had a major effect on the Company’s operations and financial results. As a result, the 2022 operating results of CSS and MAS were reported as discontinued operations in the consolidated financial statements.
The divestitures above are part of the Company's strategic commitment to simplify and streamline its portfolio to focus on the core Tools & Outdoor and Industrial businesses. Refer to Note R, Divestitures, for further discussion of these transactions.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. Certain amounts reported in previous years have been reclassified to conform to the 2023 presentation.
B. NEW ACCOUNTING STANDARDS
NEW ACCOUNTING STANDARDS ADOPTED — In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new standard requires that a buyer in a supplier finance program disclose sufficient information about the key terms of the program, the amount of outstanding confirmed obligations at period end, where the obligations are presented in the balance sheet, and a rollforward of the obligations during the annual period. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The amendments in this update should be applied retrospectively to all periods in which a balance sheet is presented, except for the rollforward requirement, which is applied prospectively. The Company adopted this standard in the first quarter of 2023, with the exception of the amendment on rollforward information. Refer to Note Q, Commitments and Guarantees, for further discussion.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The new standard expands and clarifies the use of the portfolio layer method for fair value hedges of interest rate risk. The new standard allows non-prepayable financial assets to also be included in a closed portfolio which is hedged using the portfolio layer method. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The new guidance on hedging multiple layers in a closed portfolio should be applied prospectively and the guidance on the accounting for fair value basis adjustments should be applied on a modified retrospective basis. The Company adopted this standard in the first quarter of 2023 and it did not have a material impact on its consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED — In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The new standard clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring the fair value of the security. The new standard also requires certain disclosures related to equity securities with contractual sale restrictions. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard should be applied prospectively. The Company is currently evaluating this guidance, but does not expect it to have a material impact on its consolidated financial statements.
C. EARNINGS PER SHARE
The following table reconciles net earnings (loss) attributable to common shareowners and the weighted-average shares outstanding used to calculate basic and diluted earnings (loss) per share for the three and six months ended July 1, 2023 and July 2, 2022:
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator (in millions): | |||||||||||||||||||||||
| Net Earnings (Loss) from Continuing Operations Attributable to Common Shareowners | $ | 177.5 | $ | 78.6 | $ | (10.3) | $ | 234.1 | |||||||||||||||
| Add: Contract adjustment payments accretion | — | 0.4 | — | 0.7 | |||||||||||||||||||
| Net Earnings (Loss) from Continuing Operations Attributable to Common Shareowners - Diluted | $ | 177.5 | $ | 79.0 | $ | (10.3) | $ | 234.8 | |||||||||||||||
| Net (loss) earnings from discontinued operations | (0.5) | 9.0 | (0.5) | 28.8 | |||||||||||||||||||
| Net Earnings (Loss) Attributable to Common Shareowners - Diluted | $ | 177.0 | $ | 88.0 | $ | (10.8) | $ | 263.6 |
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Denominator (in thousands): | |||||||||||||||||||||||
| Basic weighted-average shares outstanding | 149,687 | 145,353 | 149,631 | 150,385 | |||||||||||||||||||
| Dilutive effect of stock contracts and awards | 540 | 9,461 | — | 9,742 | |||||||||||||||||||
| Diluted weighted-average shares outstanding | 150,227 | 154,814 | 149,631 | 160,127 |
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Earnings (loss) per share of common stock: | |||||||||||||||||||||||
| Basic earnings (loss) per share of common stock: | |||||||||||||||||||||||
| Continuing operations | $ | 1.19 | $ | 0.54 | $ | (0.07) | $ | 1.56 | |||||||||||||||
| Discontinued operations | $ | — | $ | 0.06 | $ | — | $ | 0.19 | |||||||||||||||
| Total basic earnings (loss) per share of common stock | $ | 1.18 | $ | 0.60 | $ | (0.07) | $ | 1.75 | |||||||||||||||
| Diluted earnings (loss) per share of common stock: | |||||||||||||||||||||||
| Continuing operations | $ | 1.18 | $ | 0.51 | $ | (0.07) | $ | 1.47 | |||||||||||||||
| Discontinued operations | $ | — | $ | 0.06 | $ | — | $ | 0.18 | |||||||||||||||
| Total dilutive earnings (loss) per share of common stock | $ | 1.18 | $ | 0.57 | $ | (0.07) | $ | 1.65 |
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):
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Number of stock options | 5,857 | 4,166 | 5,796 | 3,356 |
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 had a stated amount of $100 and initially consisted of a three-year forward stock purchase contract (“2022 Purchase Contracts”) for the purchase of a variable number of shares of common stock, 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 shares associated with the forward stock purchase contracts component of the 2019 Equity Units were reflected in diluted earnings per share in the first quarter of 2022 using the if-converted method. Upon the adoption of 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), in the first quarter of 2022, the common shares that would be required to settle the applicable conversion value of the Series D Preferred Stock was included in the denominator of diluted earnings per share using the if-converted method through the date of redemption as discussed below. In accordance with the standard, the Company increased weighted-average shares outstanding used to calculate diluted earnings per share for both the three and six months ended July 2, 2022 by 4.1 million shares.
In November 2022, the Company generated cash proceeds of $750 million from the successful remarketing of the Series D Preferred Stock (the "Remarketed Series D Preferred Stock"). Upon completion of the remarketing, the holders of the 2019 Equity Units received 4,723,500 common shares and the Company issued 750,000 shares of Remarketed Series D Preferred Stock. Holders of the Remarketed Series D Preferred Stock were entitled to receive cumulative dividends, if declared by the Board of Directors, at an initial fixed rate equal to 7.5% per annum of the $1,000 per share liquidation preference (equivalent to $75.00 per annum per share). On November 15, 2022, the Company informed holders that it would redeem all outstanding shares of the Remarketed Series D Preferred Stock on December 22, 2022 at $1,007.71 per share in cash, which was equal to 100% of the liquidation preference of a share of Remarketed Series D Preferred Stock, plus accumulated and unpaid dividends to, but excluding December 22, 2022. In December 2022, the Company redeemed the Remarketed Series D Preferred Stock, paying $750 million in cash.
Refer to Note I, Equity Arrangements, for further discussion.
D. ACCOUNTS AND NOTES RECEIVABLE, NET
| (Millions of Dollars) | July 1, 2023 | December 31, 2022 | |||||||||
| Trade accounts receivable | $ | 1,603.8 | $ | 1,142.0 | |||||||
| Trade notes receivable | 85.4 | 100.1 | |||||||||
| Other accounts receivable | 105.5 | 95.5 | |||||||||
| Gross accounts and notes receivable | $ | 1,794.7 | $ | 1,337.6 | |||||||
| Allowance for credit losses | (88.0) | (106.6) | |||||||||
| Accounts and notes receivable, net | $ | 1,706.7 | $ | 1,231.0 |
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.
The changes in the allowance for credit losses for the three and six months ended July 1, 2023 and July 2, 2022 are as follows:
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Beginning balance | $ | 105.8 | $ | 107.8 | $ | 106.6 | $ | 95.9 | |||||||||||||||
| Charged to costs and expenses | 2.9 | 3.3 | 5.0 | 14.4 | |||||||||||||||||||
| Other, including recoveries and deductions (a) | (20.7) | (8.9) | (23.6) | (8.1) | |||||||||||||||||||
| Balance end of period | $ | 88.0 | $ | 102.2 | $ | 88.0 | $ | 102.2 | |||||||||||||||
(a) Amounts represent charge-offs less recoveries, the impacts of foreign currency translation, and net transfers to/from other accounts.
The Company's payment terms are generally consistent with the industries in which their businesses operate and typically range from 30-90 days globally. 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 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 Accounting Standards Codification ("ASC") 860, Transfers and Servicing, and receivables are derecognized from the Company’s consolidated balance sheet 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 July 1, 2023, 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 July 1, 2023 and December 31, 2022, net receivables of approximately $96.5 million and $110.0 million, respectively, were derecognized. Proceeds from transfers of receivables to the Purchaser totaled $119.9 million and $176.8 million for the three and six months ended July 1, 2023, respectively, and payments to the Purchaser totaled $84.0 million and $190.3 million, respectively. Proceeds from transfers of receivables to the Purchaser totaled $132.3 million and $214.6 million for the three and six months ended July 2, 2022, respectively, and payments to the Purchaser totaled $108.7 million and $204.6 million, respectively. The program resulted in a pre-tax loss of $1.5 million and $2.7 million for the three and six months ended July 1, 2023, respectively, which included service fees of $0.2 million and $0.4 million, respectively. The program resulted in a pre-tax loss of $0.9 million and $1.3 million for the three and six months ended July 2, 2022, respectively, which included service fees of $0.2 million and $0.4 million, respectively. All cash flows under the program are reported as a component of changes in working capital within operating activities in the Condensed Consolidated Statements of Cash Flows since all the cash from the Purchaser is received upon the initial sale of the receivable.
As of July 1, 2023 and December 31, 2022, the Company's deferred revenue totaled $119.0 million and $122.9 million, respectively, of which $30.5 million and $29.6 million, respectively, was classified as current. Revenue recognized for the six months ended July 1, 2023 and July 2, 2022 that was previously deferred as of December 31, 2022 and January 1, 2022 totaled $12.6 million and $11.4 million, respectively.
E. INVENTORIES, NET
| (Millions of Dollars) | July 1, 2023 | December 31, 2022 | |||||||||
| Finished products | $ | 3,257.8 | $ | 3,460.8 | |||||||
| Work in process | 238.1 | 338.7 | |||||||||
| Raw materials | 1,787.0 | 2,061.6 | |||||||||
| Total | $ | 5,282.9 | $ | 5,861.1 |
F. GOODWILL
Changes in the carrying amount of goodwill by segment are as follows:
| (Millions of Dollars) | Tools & Outdoor | Industrial | Total | ||||||||||||||
| Balance December 31, 2022 | $ | 5,939.7 | $ | 2,563.0 | $ | 8,502.7 | |||||||||||
| Foreign currency translation & other | 12.7 | (5.6) | 7.1 | ||||||||||||||
| Balance July 1, 2023 | $ | 5,952.4 | $ | 2,557.4 | $ | 8,509.8 |
G. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
| July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
| (Millions of Dollars) | Interest Rate | Notional Value | Unamortized Discount | Unamortized Gain/(Loss) Terminated Swaps 1 | Purchase Accounting FV Adjustment | Deferred Financing Fees | Carrying Value | Carrying Value | |||||||||||||||||||||
| Notes payable due 2025 | 2.30% | $ | 500.0 | $ | (0.4) | $ | — | $ | — | $ | (1.4) | $ | 498.2 | $ | 497.7 | ||||||||||||||
| Notes payable due 2026 | 3.40% | 500.0 | (0.3) | — | — | (1.1) | 498.6 | 498.3 | |||||||||||||||||||||
| Notes payable due 2026 | 6.27% | 350.0 | — | — | — | (1.4) | 348.6 | — | |||||||||||||||||||||
| Notes payable due 2026 | 3.42% | 25.0 | — | — | 1.3 | (0.1) | 26.2 | 26.4 | |||||||||||||||||||||
| Notes payable due 2026 | 1.84% | 27.2 | — | — | 1.2 | (0.2) | 28.2 | 28.0 | |||||||||||||||||||||
| Notes payable due 2028 | 6.00% | 400.0 | (0.4) | — | — | (2.0) | 397.6 | — | |||||||||||||||||||||
| Notes payable due 2028 | 7.05% | 150.0 | — | 5.4 | 5.3 | — | 160.7 | 161.8 | |||||||||||||||||||||
| Notes payable due 2028 | 4.25% | 500.0 | (0.2) | — | — | (2.4) | 497.4 | 497.2 | |||||||||||||||||||||
| Notes payable due 2028 | 3.52% | 50.0 | — | — | 3.5 | (0.2) | 53.3 | 53.7 | |||||||||||||||||||||
| Notes payable due 2030 | 2.30% | 750.0 | (1.7) | — | — | (3.5) | 744.8 | 744.5 | |||||||||||||||||||||
| Notes payable due 2032 | 3.00% | 500.0 | (0.8) | — | — | (3.1) | 496.1 | 495.9 | |||||||||||||||||||||
| Notes payable due 2040 | 5.20% | 400.0 | (0.2) | (25.3) | — | (2.4) | 372.1 | 371.3 | |||||||||||||||||||||
| Notes payable due 2048 | 4.85% | 500.0 | (0.5) | — | — | (4.6) | 494.9 | 494.8 | |||||||||||||||||||||
| Notes payable due 2050 | 2.75% | 750.0 | (1.8) | — | — | (7.7) | 740.5 | 740.3 | |||||||||||||||||||||
| Notes payable due 2060 (junior subordinated) | 4.00% | 750.0 | — | — | — | (8.7) | 741.3 | 741.2 | |||||||||||||||||||||
| Other, payable in varying amounts 2024 through 2027 | 4.10%-4.31% | 2.5 | — | — | — | — | 2.5 | 3.0 | |||||||||||||||||||||
| Total Long-term debt, including current maturities | $ | 6,154.7 | $ | (6.3) | $ | (19.9) | $ | 11.3 | $ | (38.8) | $ | 6,101.0 | $ | 5,354.1 | |||||||||||||||
| Less: Current maturities of long-term debt | (1.1) | (1.2) | |||||||||||||||||||||||||||
| Long-term debt | $ | 6,099.9 | $ | 5,352.9 |
1Unamortized gain/(loss) associated with interest rate swaps are more fully discussed in Note H, Financial Instruments.
In March 2023, the Company issued $350.0 million of senior unsecured term notes maturing March 6, 2026 ("2026 Term Notes") and $400.0 million of senior unsecured term notes maturing March 6, 2028 (“2028 Term Notes”). The 2026 Term Notes accrue interest at a fixed rate of 6.272% per annum and the 2028 Term Notes at a fixed rate of 6.0% per annum, with interest payable semi-annually in arrears, and both notes 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 $745.9 million, net of $4.1 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 program.
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 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 both notes 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 $992.6 million, net of $7.4 million of underwriting expenses and other fees associated with the transaction in the first quarter of 2022. The Company used the net proceeds from the offering for general corporate purposes, including repayment of indebtedness under the commercial paper program.
The Company has a $3.5 billion commercial paper program which includes Euro denominated borrowings in addition to U.S. Dollars. As of July 1, 2023, the Company had commercial paper borrowings outstanding of $1.8 billion of which $736.9 million in Euro denominated commercial paper was designated as a net investment hedge. Refer to Note H, Financial Instruments, for further discussion. As of December 31, 2022, the Company had $2.1 billion of borrowings outstanding, which did not include any Euro denominated commercial paper.
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 July 1, 2023 and December 31, 2022, the Company had not drawn on its five-year committed credit facility.
The Company has a $1.5 billion syndicated 364-Day Credit Agreement (the “Syndicated 364-Day Credit Agreement”) which is a revolving credit loan. Borrowings under the Syndicated 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 Syndicated 364-Day Credit Agreement. The Company must repay all advances under the Syndicated 364-Day Credit Agreement by the earlier of September 6, 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. The Syndicated 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 July 1, 2023 and December 31, 2022, the Company had not drawn on its Syndicated 364-Day Credit Agreement.
The Company has a $0.5 billion revolving credit loan (the "Club 364-Day Credit Agreement"). Borrowings under the Club 364-Day Credit Agreement may be made in U.S. Dollars and 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 Club 364-Day Credit Agreement. The Company must repay all advances under the Club 364-Day Credit Agreement by the earlier of September 6, 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 July 1, 2023 and December 31, 2022, the Company had not drawn on its Club 364-Day Credit Agreement.
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 February 2023, the Company entered into amendments to its 5-Year Credit Agreement, Syndicated 364-Day Credit Agreement, and Club 364-Day Credit Agreement to: (a) amend the definition of Adjusted EBITDA to allow for additional adjustment addbacks, not to exceed $500 million in the aggregate, for amounts incurred during each four fiscal quarter period beginning with the period ending in the third quarter of 2023 through the period ending in the second quarter of 2024, and (b) amend the minimum interest coverage ratio from 3.5 times to not less than 1.5 to 1.0 times computed quarterly, on a rolling twelve months (last twelve months) basis, for the period from and including the third quarter of 2023 through the second quarter of 2024. The minimum interest coverage ratio will revert back to 3.5 times for periods after the second quarter of 2024.
H. 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, Derivatives and Hedging, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. Financial instruments are not utilized for speculative purposes.
A summary of the fair values of the Company’s derivatives recorded in the Condensed Consolidated Balance Sheets at July 1, 2023 and December 31, 2022 is as follows:
| (Millions of Dollars) | Balance Sheet Classification | July 1, 2023 | December 31, 2022 | Balance Sheet Classification | July 1, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts Cash Flow | Other current assets | $ | 3.1 | $ | 4.5 | Accrued expenses | $ | 5.6 | $ | 4.2 | |||||||||||||||||||||||||
| LT other assets | 0.3 | — | LT other liabilities | 0.1 | — | ||||||||||||||||||||||||||||||
| Non-derivative designated as hedging instrument: | |||||||||||||||||||||||||||||||||||
| Net Investment Hedge | $ | — | $ | — | Short-term borrowings | $ | 736.9 | $ | — | ||||||||||||||||||||||||||
| Total designated as hedging instruments | $ | 3.4 | $ | 4.5 | $ | 742.6 | $ | 4.2 | |||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||||||||||||||||||||
| Foreign Exchange Contracts | Other current assets | $ | 3.0 | $ | 7.7 | Accrued expenses | $ | 13.7 | $ | 11.9 | |||||||||||||||||||||||||
| Total | $ | 6.4 | $ | 12.2 | $ | 756.3 | $ | 16.1 |
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. 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 July 1, 2023 and December 31, 2022, there were no assets that had been posted as collateral related to the above mentioned financial instruments.
During the six months ended July 1, 2023 and July 2, 2022, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash paid of $17.2 million and net cash received of $60.2 million, respectively.
CASH FLOW HEDGES
There were after-tax mark-to-market losses of $45.3 million and $44.5 million as of July 1, 2023 and December 31, 2022, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $5.1 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 the three and six months ended July 1, 2023 and July 2, 2022:
| Second Quarter 2023 | ||||||||||||||||||||||||||
| (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 | $ | — | Interest expense | $ | (1.6) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | (1.9) | Cost of sales | $ | (1.0) | $ | — |
| Year-to-Date 2023 | ||||||||||||||||||||||||||
| (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 | $ | — | Interest expense | $ | (3.1) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | (4.5) | Cost of sales | $ | (0.4) | $ | — |
| Second Quarter 2022 | ||||||||||||||||||||||||||
| (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 | $ | — | Interest expense | $ | (1.5) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | 16.9 | Cost of sales | $ | 7.2 | — |
| Year-to-Date 2022 | ||||||||||||||||||||||||||
| (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 | $ | 23.4 | Interest expense | $ | (2.7) | $ | — | |||||||||||||||||||
| Foreign Exchange Contracts | $ | 23.4 | Cost of sales | $ | 13.3 | $ | — |
A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended July 1, 2023 and July 2, 2022 is as follows:
| Second Quarter 2023 | Year-to-Date 2023 | |||||||||||||||||||||||||
| (Millions of Dollars) | Cost of Sales | Interest Expense | Cost of Sales | Interest Expense | ||||||||||||||||||||||
| Total amount in the Consolidated Statements of Operations and Comprehensive Income (Loss) in which the effects of the cash flow hedges are recorded | $ | 3,226.8 | $ | 144.6 | $ | 6,323.1 | $ | 275.5 | ||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||
| Foreign Exchange Contracts: | ||||||||||||||||||||||||||
| Hedged Items | $ | 1.0 | $ | — | $ | 0.4 | $ | — | ||||||||||||||||||
| Gain (loss) reclassified from OCI into Income | $ | (1.0) | $ | — | $ | (0.4) | $ | — | ||||||||||||||||||
| Interest Rate Swap Agreements: | ||||||||||||||||||||||||||
| Gain (loss) reclassified from OCI into Income 1 | $ | — | $ | (1.6) | $ | — | $ | (3.1) |
| Second Quarter 2022 | Year-to-Date 2022 | |||||||||||||||||||||||||
| (Millions of Dollars) | Cost of Sales | Interest Expense | Cost of Sales | Interest Expense | ||||||||||||||||||||||
| Total amount in the Consolidated Statements of Operations and Comprehensive Income (Loss) in which the effects of the cash flow hedges are recorded | $ | 3,185.9 | $ | 78.2 | $ | 6,328.5 | $ | 132.9 | ||||||||||||||||||
| Gain (loss) on cash flow hedging relationships: | ||||||||||||||||||||||||||
| Foreign Exchange Contracts: | ||||||||||||||||||||||||||
| Hedged Items | $ | (7.2) | $ | — | $ | (13.3) | $ | — | ||||||||||||||||||
| Gain (loss) reclassified from OCI into Income | $ | 7.2 | $ | — | $ | 13.3 | $ | — | ||||||||||||||||||
| Interest Rate Swap Agreements: | ||||||||||||||||||||||||||
| Gain (loss) reclassified from OCI into Income 1 | $ | — | $ | (1.5) | $ | — | $ | (2.7) |
1 Inclusive of the gain/loss amortization on terminated derivative financial instruments.
An after-tax loss of $1.4 million and gain of $2.2 million were reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the three months ended July 1, 2023 and July 2, 2022, respectively. An after-tax loss of $1.9 million and after-tax gain of $4.7 million were reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the six months ended July 1, 2023 and July 2, 2022, respectively.
Interest Rate Contracts: In prior years, the Company entered into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-debt proportions. These swap agreements, which were designated as cash flow hedges, subsequently matured or were terminated and the gain/loss was recorded in Accumulated other comprehensive loss and is being amortized to interest expense. The cash flows stemming from the maturity or termination of the swaps are presented within financing activities in the Condensed Consolidated Statements of Cash Flows. The Company has no outstanding forward starting swaps designated as cash flow hedges as of July 1, 2023 or December 31, 2022.
During 2021, the Company entered into forward starting interest rate swaps totaling $400.0 million to offset expected
variability on future interest rate payments associated with debt instruments expected to be issued in the future. During 2022, these swaps were terminated resulting in a gain of $22.7 million which is recorded in Accumulated other comprehensive loss and is being amortized to interest expense over future periods.
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 July 1, 2023 and December 31, 2022, the notional value of forward currency contracts outstanding is $570.1 million and $281.7 million, respectively, maturing on various dates through 2024 and 2023, respectively.
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 the fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. As of July 1, 2023 and December 31, 2022, the Company did not have any active fair value interest rate swaps.
A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended July 1, 2023 and July 2, 2022 is as follows:
| (Millions of Dollars) | Second Quarter 2023 Interest Expense | Year-to-Date 2023 Interest Expense | ||||||||||||
| Total amount in the Consolidated Statements of Operations and Comprehensive Income (Loss) in which the effects of the fair value hedges are recorded | $ | 144.6 | $ | 275.5 | ||||||||||
| Amortization of gain on terminated swaps | $ | (0.1) | $ | (0.2) |
| (Millions of Dollars) | Second Quarter 2022 Interest Expense | Year-to-Date 2022 Interest Expense | |||||||||
| Total amount in the Consolidated Statements of Operations and Comprehensive Income (Loss) in which the effects of the fair value hedges are recorded | $ | 78.2 | $ | 132.9 | |||||||
| Amortization of gain on terminated swaps | $ | (0.1) | $ | (0.2) |
A summary of the amounts recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of July 1, 2023 and December 31, 2022 is as follows:
| July 1, 2023 | ||||||||||||||||||||
| (Millions of Dollars) | Carrying Amount of Hedged Liability (1) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | ||||||||||||||||||
| Long-Term Debt | $ | 532.8 | Terminated Swaps | $ | (19.9) |
| December 31, 2022 | ||||||||||||||||||||
| (Millions of Dollars) | Carrying Amount of Hedged Liability (1) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | ||||||||||||||||||
| Long-Term Debt | $ | 533.1 | Terminated Swaps | $ | (20.1) |
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships.
NET INVESTMENT HEDGES
The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive loss were gains of $66.5 million and $73.8 million at July 1, 2023 and December 31, 2022, respectively.
As of July 1, 2023 and December 31, 2022, the Company had no net investment hedges with a notional value outstanding. As of July 1, 2023, the Company had Euro denominated commercial paper with a value of $736.9 million, maturing in 2023, hedging a portion of the Company's Euro denominated net investments. As of December 31, 2022, the Company had no Euro denominated commercial paper.
Maturing foreign exchange contracts resulted in no cash received or paid for the six months ended July 1, 2023 and net cash received of $8.9 million for the six months ended July 2, 2022.
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 earnings in Other, net.
The pre-tax gain or loss from fair value changes for the three and six months ended July 1, 2023 and July 2, 2022 is as follows:
| Second Quarter 2023 | ||||||||||||||||||||||||||||||||
| (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 | $ | — | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Cross Currency Swap | $ | — | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Non-derivative designated as Net Investment Hedge | $ | 2.8 | $ | — | Other, net | $ | — | $ | — |
| Year-to-Date 2023 | ||||||||||||||||||||||||||||||||
| (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 | $ | 0.2 | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Cross Currency Swap | $ | (0.1) | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Non-derivative designated as Net Investment Hedge | $ | (9.8) | $ | — | Other, net | $ | — | $ | — |
| Second Quarter 2022 | ||||||||||||||||||||||||||||||||
| (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 | $ | 2.5 | $ | — | Other, net | $ | 0.2 | $ | 0.2 | |||||||||||||||||||||||
| Cross Currency Swap | $ | (0.6) | $ | — | Other, net | $ | — | $ | — | |||||||||||||||||||||||
| Non-derivative designated as Net Investment Hedge | $ | — | $ | — | Other, net | $ | — | $ | — |
| Year-to-Date 2022 | ||||||||||||||||||||||||||||||||
| (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 | $ | 5.3 | $ | 0.6 | Other, net | $ | 0.7 | $ | 0.7 | |||||||||||||||||||||||
| Cross Currency Swap | $ | (1.4) | $ | 2.5 | Other, net | $ | 1.5 | $ | 1.5 | |||||||||||||||||||||||
| Non-derivative designated as Net Investment Hedge | $ | (0.1) | $ | — | Other, net | $ | — | $ | — |
UNDESIGNATED HEDGES
Foreign Exchange Contracts: 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 is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding is $1.1 billion as of July 1, 2023 and December 31, 2022, maturing on various dates through 2023. The (loss) gain recorded in income from changes in the fair value related to derivatives not designated as hedging instruments under ASC 815 for the three and six months ended July 1, 2023 and July 2, 2022 is as follows:
| (Millions of Dollars) | Income Statement Classification | Second Quarter 2023 | Year-to-Date 2023 | Second Quarter 2022 | Year-to-Date 2022 | ||||||||||||||||||||||||
| Foreign Exchange Contracts | Other, net | $ | (22.5) | $ | (23.5) | $ | 7.0 | $ | 7.9 |
I. EQUITY ARRANGEMENTS
In March 2022, the Company executed accelerated share repurchase ("ASR") agreements 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 provided for an initial delivery of 85% of the total notional share equivalent at execution or 10,756,770 shares of common stock. In May 2022, the Company received an additional 3,211,317 shares in aggregate, determined by the volume-weighted average price of the Company’s common stock during the term of the transaction. The final shares delivered reflect a blended settlement price of $143.18 per share for the entire transaction. In February 2022, the Company also executed open market share repurchases for a total of 1,888,601 shares of common stock for $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 November 2022, the Company amended the forward share purchase contract and updated the final settlement date to November 2024, 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.
2019 Equity Units and Capped Call Transactions
In conjunction with the issuance of the 2019 Equity Units in November 2019, as further discussed in Note C, Earnings Per Share, the Company received approximately $734.5 million in cash proceeds, net of offering expenses and underwriting costs and commissions. The proceeds were attributed to the issuance of 750,000 shares of Series D Preferred Stock for $620.3 million and $114.2 million for the present value of the quarterly payments to holders of the 2022 Purchase Contracts ("Contract Adjustment Payments"), as discussed further below. The Series D Preferred Stock was pledged as collateral to support holders’ purchase obligations under the 2022 Purchase Contracts.
The 2019 Equity Units were accounted for as one unit of account based on the economic linkage between the 2022 Purchase Contracts and Series D Preferred Stock, as well as the combination criteria outlined in ASC 815. The 2019 Equity Units represented mandatorily convertible preferred stock.
In November 2022, upon completion of the remarketing, the holders of the 2019 Equity Units converted their Series D Preferred Stock, valued at $620.3 million, and received 4,723,500 common shares using a reference price of $131.32 per common share. The Company generated cash proceeds of $750.0 million from the successful remarketing and issued 750,000 shares of Remarketed Series D Preferred Stock. On November 15, 2022, the Company informed holders that it would redeem all outstanding shares of the Remarketed Series D Preferred Stock on December 22, 2022 at $1,007.71 per share in cash, which was equal to 100% of the liquidation preference of a share of Remarketed Series D Preferred Stock, plus accumulated and unpaid dividends to, but excluding December 22, 2022. In December 2022, the Company redeemed the Remarketed Series D Preferred Stock, paying $750 million in cash.
The Company paid Contract Adjustment Payments to holders of the 2022 Purchase Contracts 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 the Series D Preferred Stock 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 November 15, 2022, the Company paid the final contract adjustment payment related to the 2022 Purchase Contracts.
J. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in the 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 31, 2022 | $ | (1,907.4) | $ | (44.5) | $ | 73.8 | $ | (241.4) | $ | (2,119.5) | ||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 32.8 | (2.7) | (7.3) | (5.4) | 17.4 | |||||||||||||||||||||||||||
| Reclassification adjustments to earnings | — | 1.9 | — | 4.4 | 6.3 | |||||||||||||||||||||||||||
| Net other comprehensive income (loss) | 32.8 | (0.8) | (7.3) | (1.0) | 23.7 | |||||||||||||||||||||||||||
| Balance - July 1, 2023 | $ | (1,874.6) | $ | (45.3) | $ | 66.5 | $ | (242.4) | $ | (2,095.8) |
| (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 - January 1, 2022 | $ | (1,543.0) | $ | (49.8) | $ | 71.8 | $ | (324.6) | $ | (1,845.6) | ||||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (359.3) | 32.5 | 3.0 | 19.2 | (304.6) | |||||||||||||||||||||||||||
| Reclassification adjustments to earnings | — | (4.7) | (1.7) | 5.6 | (0.8) | |||||||||||||||||||||||||||
| Net other comprehensive (loss) income | (359.3) | 27.8 | 1.3 | 24.8 | (305.4) | |||||||||||||||||||||||||||
| Balance - July 2, 2022 | $ | (1,902.3) | $ | (22.0) | $ | 73.1 | $ | (299.8) | $ | (2,151.0) |
The Company uses the portfolio method for releasing the stranded tax effects from Accumulated other comprehensive loss. The reclassifications out of Accumulated other comprehensive loss for the six months ended July 1, 2023 and July 2, 2022 were as follows:
| (Millions of Dollars) | 2023 | 2022 | Affected line item in Consolidated Statements of Operations And Comprehensive Income (Loss) | |||||||||||||||||
| Realized (losses) gains on cash flow hedges | $ | (0.4) | $ | 13.3 | Cost of sales | |||||||||||||||
| Realized losses on cash flow hedges | (3.1) | (2.7) | Interest expense | |||||||||||||||||
| Total before taxes | $ | (3.5) | $ | 10.6 | ||||||||||||||||
| Tax effect | 1.6 | (5.9) | Income taxes | |||||||||||||||||
| Realized (losses) gains on cash flow hedges, net of tax | $ | (1.9) | $ | 4.7 | ||||||||||||||||
| Realized gains on net investment hedges | $ | — | $ | 2.2 | Other, net | |||||||||||||||
| Tax effect | — | (0.5) | Income taxes | |||||||||||||||||
| Realized gains on net investment hedges, net of tax | $ | — | $ | 1.7 | ||||||||||||||||
| Amortization of defined benefit pension items: | ||||||||||||||||||||
| Actuarial losses and prior service costs / credits | $ | (5.6) | $ | (7.2) | Other, net | |||||||||||||||
| Settlement loss | (0.1) | (0.2) | Other, net | |||||||||||||||||
| Total before taxes | $ | (5.7) | $ | (7.4) | ||||||||||||||||
| Tax effect | 1.3 | 1.8 | Income taxes | |||||||||||||||||
| Amortization of defined benefit pension items, net of tax | $ | (4.4) | $ | (5.6) |
K. NET PERIODIC BENEFIT COST — DEFINED BENEFIT PLANS
Following are the components of net periodic pension expense (benefit) for the three and six months ended July 1, 2023 and July 2, 2022:
| Second Quarter | |||||||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | ||||||||||||||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | All Plans | |||||||||||||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Service cost | $ | 2.1 | $ | 1.2 | $ | 2.8 | $ | 3.6 | $ | — | $ | — | |||||||||||||||||||||||
| Interest cost | 13.9 | 8.7 | 11.0 | 5.7 | 0.5 | 0.6 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (15.6) | (15.1) | (10.5) | (9.5) | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | 0.2 | 0.2 | (0.1) | (0.2) | — | — | |||||||||||||||||||||||||||||
| Amortization of net loss (gain) | 2.2 | 1.8 | 0.9 | 2.0 | (0.3) | (0.1) | |||||||||||||||||||||||||||||
| Settlement / curtailment loss | — | — | 0.1 | 0.2 | — | — | |||||||||||||||||||||||||||||
| Special termination benefit | — | — | — | — | — | 6.9 | |||||||||||||||||||||||||||||
| Net periodic pension expense (benefit) | $ | 2.8 | $ | (3.2) | $ | 4.2 | $ | 1.8 | $ | 0.2 | $ | 7.4 |
| Year-to-Date | |||||||||||||||||||||||||||||||||||
| Pension Benefits | Other Benefits | ||||||||||||||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | All Plans | |||||||||||||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Service cost | $ | 4.1 | $ | 2.8 | $ | 5.6 | $ | 7.5 | $ | 0.1 | $ | 0.1 | |||||||||||||||||||||||
| Interest cost | 27.4 | 16.7 | 21.6 | 11.7 | 1.0 | 0.8 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (31.1) | (30.2) | (20.6) | (19.7) | — | — | |||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | 0.4 | 0.4 | (0.3) | (0.4) | — | — | |||||||||||||||||||||||||||||
| Amortization of net loss (gain) | 4.4 | 3.3 | 1.7 | 4.1 | (0.6) | (0.2) | |||||||||||||||||||||||||||||
| Settlement / curtailment loss | — | — | 0.1 | 0.2 | — | — | |||||||||||||||||||||||||||||
| Special termination benefit | — | — | — | — | — | 6.9 | |||||||||||||||||||||||||||||
| Net periodic pension expense (benefit) | $ | 5.2 | $ | (7.0) | $ | 8.1 | $ | 3.4 | $ | 0.5 | $ | 7.6 |
The components of net periodic benefit expense other than the service cost component are included in Other, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).
L. 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 | |||||||||||||||||||
| July 1, 2023 | |||||||||||||||||||||||
| Money market fund | $ | 11.2 | $ | 11.2 | $ | — | $ | — | |||||||||||||||
| Deferred compensation plan investments | $ | 19.1 | $ | 19.1 | $ | — | $ | — | |||||||||||||||
| Derivative assets | $ | 6.4 | $ | — | $ | 6.4 | $ | — | |||||||||||||||
| Derivative liabilities | $ | 19.4 | $ | — | $ | 19.4 | $ | — | |||||||||||||||
| Non-derivative hedging instrument | $ | 736.9 | $ | — | $ | 736.9 | $ | — | |||||||||||||||
| Contingent consideration liability | $ | 260.9 | $ | — | $ | — | $ | 260.9 | |||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Money market fund | $ | 9.4 | $ | 9.4 | $ | — | $ | — | |||||||||||||||
| Equity security | $ | 3.2 | $ | 3.2 | $ | — | $ | — | |||||||||||||||
| Deferred compensation plan investments | $ | 19.0 | $ | 19.0 | $ | — | $ | — | |||||||||||||||
| Derivative assets | $ | 12.2 | $ | — | 12.2 | $ | — | ||||||||||||||||
| Derivative liabilities | $ | 16.1 | $ | — | $ | 16.1 | $ | — | |||||||||||||||
| Contingent consideration liability | $ | 268.7 | $ | — | $ | — | $ | 268.7 | |||||||||||||||
The following table provides information about the Company's financial assets and liabilities not carried at fair value:
| July 1, 2023 | December 31, 2022 | ||||||||||||||||||||||
| (Millions of Dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Other investments | $ | 6.0 | $ | 5.8 | $ | 9.3 | $ | 9.3 | |||||||||||||||
| Long-term debt, including current portion | $ | 6,101.0 | $ | 5,316.1 | $ | 5,354.1 | $ | 4,662.9 |
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 deferred compensation plan investments are considered Level 1 instruments and are recorded at their quoted market price. The fair values of the derivative financial instruments in the table above are based on current settlement values. Prior to the sale of the equity security in the first quarter of 2023, it was considered a Level 1 instrument and was recorded at its quoted market price.
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 July 1, 2023 and December 31, 2022.
As part of the Craftsman® brand acquisition in March 2017, the Company recorded a contingent consideration liability representing the Company's obligation to make 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 six months ended July 1, 2023, the Company paid $20.3 million for royalties owed. 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 $260.9 million and $268.7 million as of July 1, 2023 and December 31, 2022, respectively. Adjustments to the contingent consideration liability, with the exception of cash payments, are recorded in SG&A in the Consolidated Statements of Operations and Comprehensive Income (Loss). A 100 basis point reduction in the discount rate would result in an increase to the liability of approximately $7.9 million as of July 1, 2023.
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 liabilities discussed above, including estimated future sales projections, can materially impact the Company’s results from operations.
The Company had no significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during the first six months of 2023 or 2022.
Refer to Note H, Financial Instruments, for more details regarding derivative financial instruments, Note P, Contingencies, for more details regarding the other investments related to the WCLC trust, and Note G, Long-Term Debt and Financing Arrangements, for more information regarding the carrying values of the long-term debt.
M. RESTRUCTURING CHARGES AND OTHER COSTS
A summary of the restructuring reserve activity from December 31, 2022 to July 1, 2023 is as follows:
| (Millions of Dollars) | December 31, 2022 | Net Additions | Usage | Currency | July 1, 2023 | ||||||||||||||||||||||||
| Severance and related costs | $ | 57.0 | $ | 7.0 | $ | (39.0) | $ | (0.3) | $ | 24.7 | |||||||||||||||||||
| Facility closures and asset impairments | 5.3 | 9.7 | (12.0) | — | 3.0 | ||||||||||||||||||||||||
| Total | $ | 62.3 | $ | 16.7 | $ | (51.0) | $ | (0.3) | $ | 27.7 |
For the three and six months ended July 1, 2023, the Company recognized net restructuring charges of $4.6 million related to facility closures and $16.7 million, primarily related to severance and facility closures, respectively. The majority of the $27.7 million of reserves remaining as of July 1, 2023 is expected to be utilized within the next 12 months.
Segments: The $17 million of net restructuring charges for the six months ended July 1, 2023 includes: $10 million in the Tools & Outdoor segment; $1 million in the Industrial segment; and $6 million in Corporate.
The $5 million of net restructuring charges for the three months ended July 1, 2023 includes: $3 million in the Tools & Outdoor segment; $2 million of net reversals in the Industrial segment; and $4 million in Corporate.
Other, net is primarily comprised of intangible asset amortization expense, currency-related gains or losses, environmental remediation expense, deal costs and related consulting costs, and certain pension gains or losses. Other, net amounted to $66.6 million and $79.1 million for the three months ended July 1, 2023 and July 2, 2022, respectively. Other, net amounted to $130.3 million and $141.1 million for the six months ended July 1, 2023 and July 2, 2022, respectively. The year-over-year decreases are primarily due to income related to providing transition services to previously divested businesses.
N. INCOME TAXES
In accordance with ASC 740, Income Taxes, the Company estimates its annual effective tax rate each quarterly reporting period. Tax expense or benefit in interim periods is computed by applying the estimated annual effective tax rate to income or loss from continuing operations, and is adjusted for the tax effect of items of income and expense discretely reported in the period. The estimated annual effective tax rate used in determining income taxes on a year-to-date basis may change in subsequent interim periods. When changes to the estimated annual effective tax rate occur, the prior interim year-to-date tax expense or tax benefit is revised to reflect the revised estimated annual effective tax rate. Any adjustment is recorded in the period in which the change occurs.
For the three and six months ended July 1, 2023, the Company recognized an income tax benefit from continuing operations of $253.3 million and $229.6 million, respectively, resulting in effective tax rates of 334.2% and 95.7%, respectively. During the three months ended July 1, 2023, the Company revised its estimated annual effective tax rate to reflect a tax benefit from an intra-entity asset transfer of certain intangible assets in connection with the continued reorganization of the Company’s supply chain. Accordingly, the income tax benefit for the three months ended July 1, 2023 includes an incremental interim tax benefit to reflect the impact of the change in the estimated annual effective tax rate to the prior interim year-to-date tax expense, a portion of which is expected to reverse in future quarters of 2023. The effective tax rates for the three and six months ended July 1, 2023 differ from the U.S. statutory tax rate of 21% primarily due to the tax benefit associated with the intra-entity asset transfer described above, tax on foreign earnings at tax rates different than the U.S. tax rate, state income taxes and tax credits, partially offset by U.S. tax on foreign earnings, non-deductible expenses and losses for which a tax benefit is not recognized.
For the three and six months ended July 2, 2022, the Company recognized an income tax benefit from continuing operations of $62.8 million and $39.9 million, respectively, resulting in effective tax rates of (395.0)% and (20.5)%, respectively. These effective tax rates differ from the U.S. statutory tax rate of 21% primarily due to a benefit associated with the disposition of the Company's Oil & Gas business, the continued reorganization of the Company's supply chain, the impact of lower forecasted earnings in North America and the re-measurement of uncertain tax positions.
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.
O. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company’s operations are classified into two reportable business segments: Tools & Outdoor and Industrial.
The Tools & Outdoor segment is comprised of the Power Tools Group ("PTG"), Hand Tools, Accessories & Storage ("HTAS") and Outdoor Power Equipment ("Outdoor") businesses. 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, and 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), hand-held 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.
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 sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications.
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. 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.
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net Sales | |||||||||||||||||||||||
| Tools & Outdoor | $ | 3,542.2 | $ | 3,744.9 | $ | 6,857.6 | $ | 7,546.1 | |||||||||||||||
| Industrial | 616.7 | 648.1 | 1,233.1 | 1,294.7 | |||||||||||||||||||
| Corporate Overhead | — | — | — | 0.2 | |||||||||||||||||||
| Consolidated | $ | 4,158.9 | $ | 4,393.0 | $ | 8,090.7 | $ | 8,841.0 | |||||||||||||||
| Segment Profit | |||||||||||||||||||||||
| Tools & Outdoor | $ | 102.0 | $ | 361.6 | $ | 120.7 | $ | 740.1 | |||||||||||||||
| Industrial | 71.6 | 58.3 | 139.0 | 99.6 | |||||||||||||||||||
| Segment Profit | 173.6 | 419.9 | 259.7 | 839.7 | |||||||||||||||||||
| Corporate Overhead | (78.8) | (65.5) | (154.5) | (140.2) | |||||||||||||||||||
| Other, net | (66.6) | (79.1) | (130.3) | (141.1) | |||||||||||||||||||
| Gain (loss) on sales of businesses | — | 0.2 | (7.6) | 0.2 | |||||||||||||||||||
| Asset impairment charge | — | (168.4) | — | (168.4) | |||||||||||||||||||
| Restructuring charges | (4.6) | (19.5) | (16.7) | (72.2) | |||||||||||||||||||
| Interest income | 45.2 | 6.5 | 85.0 | 9.3 | |||||||||||||||||||
| Interest expense | (144.6) | (78.2) | (275.5) | (132.9) | |||||||||||||||||||
| (Loss) earnings from continuing operations before income taxes | $ | (75.8) | $ | 15.9 | $ | (239.9) | $ | 194.4 |
Corporate Overhead includes the corporate overhead element of SG&A, which is not allocated to the business segments.
The Company recognizes revenue at a point in time from the sale of tangible products or over time depending on when the performance obligation is satisfied. For the three and six months ended July 1, 2023 and July 2, 2022, the majority of the Company’s revenue was recognized at the time of sale. The percent of total segment revenue recognized over time for the Industrial segment for the three and six months ended July 1, 2023 was 2.2% and 2.0%, respectively. The percent of total segment revenue recognized over time for the Industrial segment for the three and six months ended July 2, 2022 was 6.1% and 6.0%, respectively.
The following table is a further disaggregation of the Industrial segment revenue for the three and six months ended July 1, 2023 and July 2, 2022:
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Engineered Fastening | $ | 497.4 | $ | 466.1 | $ | 973.7 | $ | 946.2 | |||||||||||||||
| Infrastructure | 119.3 | 182.0 | 259.4 | 348.5 | |||||||||||||||||||
| Industrial | $ | 616.7 | $ | 648.1 | $ | 1,233.1 | $ | 1,294.7 |
The following table is a summary of total assets by segment as of July 1, 2023 and December 31, 2022:
| (Millions of Dollars) | July 1, 2023 | December 31, 2022 | |||||||||
| Tools & Outdoor | $ | 20,212.5 | $ | 20,202.0 | |||||||
| Industrial | 5,233.4 | 5,284.8 | |||||||||
| 25,445.9 | 25,486.8 | ||||||||||
| Corporate assets | (512.7) | (523.5) | |||||||||
| Consolidated | $ | 24,933.2 | $ | 24,963.3 |
Corporate assets primarily consist of cash, deferred taxes, property, plant and equipment, and right-of-use lease assets. Based on the nature of the Company's cash pooling arrangements, at times the corporate-related cash accounts will be in a net liability position.
GEOGRAPHIC AREAS
The following table is a summary of net sales by geographic area for the three and six months ended July 1, 2023 and July 2, 2022:
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| United States | $ | 2,600.6 | $ | 2,731.5 | $ | 5,023.0 | $ | 5,476.0 | |||||||||||||||
| Canada | 194.7 | 243.5 | 413.0 | 480.0 | |||||||||||||||||||
| Other Americas | 221.1 | 216.1 | 414.5 | 414.4 | |||||||||||||||||||
| France | 133.3 | 128.0 | 281.6 | 268.0 | |||||||||||||||||||
| Other Europe | 700.4 | 729.8 | 1,335.8 | 1,503.4 | |||||||||||||||||||
| Asia | 308.8 | 344.1 | 622.8 | 699.2 | |||||||||||||||||||
| Consolidated | $ | 4,158.9 | $ | 4,393.0 | $ | 8,090.7 | $ | 8,841.0 |
P. CONTINGENCIES
The Company is involved in various legal proceedings relating to environmental issues, employment, product liability, workers’ compensation claims and other matters. The Company periodically reviews the status of these proceedings with both inside and outside counsel, as well as an actuary for risk insurance. Management believes that the ultimate disposition of these matters will not have a material adverse effect on operations or financial condition taken as a whole.
In the normal course of business, the Company is a party to administrative proceedings and litigation, before federal and state regulatory agencies, relating to environmental remediation with respect to claims involving the discharge of hazardous substances into the environment, generally at current and former manufacturing facilities. In addition, some of these claims assert that the Company is responsible for damages and liability, for remedial investigation and clean-up costs, with respect to sites that have never been owned or operated by the Company, but the Company has been identified as a potentially responsible party ("PRP").
In connection with the 2010 merger with Black & Decker, the Company assumed certain commitments and contingent liabilities. Black & Decker is a party to litigation and administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment 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 24 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 July 1, 2023 and December 31, 2022, the Company had reserves of $120.3 million and $129.3 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 2023 amount, $40.1 million is classified as current and $80.2 million as long-term which is expected to be paid over the estimated remediation period. As of July 1, 2023, the range of environmental remediation costs that is reasonably possible is $48.9 million to $209.6 million which is subject to change in the near term. The Company may be liable for environmental remediation of sites it no longer owns. Liabilities have been recorded on those sites in accordance with the Company's policy.
As of July 1, 2023, the Company has recorded $16.7 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 July 1, 2023, the Company's net cash obligation associated with remediation activities, including WCLC assets, is $103.6 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 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. 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. The District Court's entry of the Consent Decree was appealed by several PRPs at the site to the United States Court of Appeals for the First Circuit. The District Court's actions were affirmed by the First Circuit on February 17, 2021. 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. As of July 1, 2023, the Company has a remaining reserve of $29.1 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. 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 2023. 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 have been engaged in discovery with OCC. On February 24, 2021, the Company and other defendants filed a third party complaint against the Passaic Valley Sewerage Commissioners and forty-two municipalities to require those entities to pay their equitable share of response costs. 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 issued the Interim Remedy Proposed Plan on April 14, 2021 and the Interim Remedy ROD on September 28, 2021, selecting an alternative that the EPA estimates will cost $441 million (net present value). The CPG continues to conduct work to complete the RI/FS for the entire 17-mile River. 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 expected 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 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. The Company participated in the allocation process. The allocator selected by the EPA issued a confidential allocation report on December 28, 2020, which was reviewed by the EPA. As a result of the allocation process, on February 11, 2022, the EPA and certain parties (including the Company) reached an agreement in principle for a cash-out settlement for remediation of the entire 17-mile Lower Passaic River. On December 16, 2022, the United States lodged a Consent Decree with the United States District Court for the District of New Jersey in United States v. Alden Leeds, Inc. et al. (No. 2:22-cv-07326) that addresses the liability of 85 parties (including the Company) for an aggregate amount of $150 million based on the EPA-sponsored allocation report that found OCC 99.4% responsible for the cleanup costs of the River. The Consent Decree was subject to a 90-day public comment period (which ended March 22, 2023) after which the Court will enter or disapprove the Consent Decree. On December 20, 2022, various defendants (including the Company) in the OCC litigation filed an unopposed motion to stay the litigation for six months, which was granted by the Court on March 1, 2023. On March 2, 2023, the EPA issued a Unilateral Administrative Order requiring OCC to design the interim remedy for the upper 9 miles of the River (the “2023 UAO”). Notwithstanding the stay of the litigation commenced in 2018 (and two days after the public comment period on the Consent Decree closed), OCC filed a complaint named Occidental Chem. Corp. v. Givaudan Fragrances Corp., et al., No. 2:23‑cv-1699 at 2, 5 (D.N.J. Mar. 24, 2023) (the “2023 Litigation”) against forty parties (not including the Company) for recovery of past and future response costs it will incur in complying with the 2023 UAO. All of the defendants named in the 2023 Litigation are also defendants or third-party defendants in the litigation commenced in 2018. 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 OCC litigation is pending and the EPA settlement process has not been completed and requires court approval.
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 July 1, 2023, the Company has reserved $20.6 million for this site.
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.
Q. COMMITMENTS AND GUARANTEES
COMMITMENTS — The Company has numerous assets, predominantly real estate, vehicles and equipment, under various lease arrangements. The following is a summary of the Company's right-of-use assets and lease liabilities:
| (Millions of Dollars) | July 1, 2023 | December 31, 2022 | |||||||||
| Right-of-use assets | $510.3 | $431.5 | |||||||||
| Lease liabilities | $519.4 | $440.5 | |||||||||
| Weighted-average incremental borrowing rate | 4.4% | 3.6% | |||||||||
| Weighted-average remaining term | 8 years | 6 years |
Right-of-use assets are included within Other assets in the Condensed Consolidated Balance Sheets, while lease liabilities are included within Accrued expenses and Other liabilities, as appropriate. The Company determines its incremental borrowing rate based on interest rates from its debt issuances, taking into consideration adjustments for collateral, lease terms and foreign currency.
The Company has arrangements with third-party financial institutions that offer voluntary supply chain finance ("SCF") programs. These arrangements enable certain of the Company’s suppliers, at the supplier’s sole discretion, to sell receivables due from the Company to the financial institutions on terms directly negotiated with the financial institutions. The Company negotiates commercial terms with its suppliers, including prices, quantities, and payment terms, regardless of suppliers’ decisions to finance the receivables due from the Company under these SCF programs. The Company has no economic interest in a supplier’s decision to participate in these SCF programs, and no direct financial relationship with the financial institutions, as it relates to these SCF programs. The amounts due to the financial institutions for suppliers that voluntarily participate in these SCF programs were presented within Accounts payable on the Company’s Condensed Consolidated Balance Sheets and totaled $623.9 million and $607.5 million as of July 1, 2023 and December 31, 2022, respectively.
GUARANTEES — The Company’s financial guarantees at July 1, 2023 are as follows:
| (Millions of Dollars) | Term | Maximum Potential Payment | Carrying Amount of Liability | ||||||||||||||
| Guarantees on the residual values of leased assets | One to nine years | $ | 156.6 | $ | — | ||||||||||||
| Standby letters of credit | Up to three years | 175.3 | — | ||||||||||||||
| Commercial customer financing arrangements | Up to six years | 82.1 | 13.0 | ||||||||||||||
| Total | $ | 414.0 | $ | 13.0 |
The Company has guaranteed a portion of the residual values associated with certain of its variable rate leases. The lease guarantees are for an amount up to $156.6 million while the fair value of the underlying assets is estimated at $198.5 million. The related assets would be available to satisfy the guarantee obligations.
The Company has issued $175.3 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 P, 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 trucks necessary to function as a distributor and franchisee. In addition, the Company provides limited and full recourse guarantees to financial institutions that extend credit to certain end retail customers of its U.S. Mac Tool distributors and franchisees. The gross amount guaranteed in these arrangements is $82.1 million and the $13.0 million carrying value of the guarantees issued is recorded in Other liabilities in the Condensed 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 six months ended July 1, 2023 and July 2, 2022 are as follows:
| (Millions of Dollars) | 2023 | 2022 | |||||||||
| Balance beginning of period | $ | 126.6 | $ | 134.5 | |||||||
| Warranties and guarantees issued | 86.1 | 78.7 | |||||||||
| Warranty payments and currency | (85.1) | (82.0) | |||||||||
| Balance end of period | $ | 127.6 | $ | 131.2 |
R. DIVESTITURES
2023 DIVESTITURES
The Company did not complete any material divestitures in the first six months of 2023.
2022 DIVESTITURES
Oil & Gas business
On August 19, 2022, the Company completed the sale of its Oil & Gas business comprised of the pipeline services and equipment businesses to Pipeline Technique Limited and recognized a pre-tax loss of $8.6 million. This divestiture did not qualify for discontinued operations and therefore, its results were included in the Company's continuing operations within the Industrial segment through the date of sale. The pre-tax loss for this business was $0.9 million and $5.6 million for the three and six months ended July 2, 2022, respectively.
In addition, the Company recognized a $168.4 million pre-tax asset impairment charge to adjust the carrying amount of the long-lived assets of the Oil & Gas business to its fair value less the costs to sell during the second quarter of 2022.
Commercial Electronic Security and Healthcare businesses
On July 22, 2022, the Company completed the sale of its Convergent Security Solutions ("CSS") business comprised of the commercial electronic security and healthcare businesses to Securitas AB for net proceeds of approximately $3.1 billion and a pre-tax gain of $588 million.
As part of the purchase and sale agreement, the Company is providing transition services relating to certain administrative functions for Securitas AB for an initial period of one year or less, pending integration of these functions into their pre-existing business processes. A portion of the net proceeds received at closing was deferred to reimburse the Company for transition service costs expected to be incurred.
Mechanical Access Solutions business
On July 5, 2022, the Company completed the sale of its Mechanical Access Solutions ("MAS") business comprised of the automatic doors business to Allegion plc for net proceeds of $916.0 million and a pre-tax gain of $609 million.
As part of the purchase and sale agreement, the Company is providing transition services relating to certain administrative functions for Allegion plc for an initial period of two years or less, pending integration of these functions into their pre-existing business processes.
The CSS and MAS divestitures represented a single plan to exit the Security segment and were considered a strategic shift that had a major effect on the Company’s operations and financial results. As such, the 2022 operating results of CSS and MAS were reported as discontinued operations. These divestitures allowed the Company to invest in other areas that fit into its long-term strategy.
Summarized operating results of discontinued operations are presented in the following table for the three and six months ended July 1, 2023 and July 2, 2022:
| Second Quarter | Year-to-Date | ||||||||||||||||||||||
| (Millions of Dollars) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net Sales | $ | — | $ | 489.8 | $ | — | $ | 978.1 | |||||||||||||||
| Cost of sales | — | 325.9 | — | 638.5 | |||||||||||||||||||
| Selling, general, and administrative(1) | — | 139.6 | — | 277.8 | |||||||||||||||||||
| Other, net and restructuring charges | — | 17.9 | — | 33.2 | |||||||||||||||||||
| Loss on sale of discontinued operations | $ | (0.8) | $ | — | $ | (0.8) | $ | — | |||||||||||||||
| (Loss) earnings from discontinued operations before income taxes | $ | (0.8) | $ | 6.4 | $ | (0.8) | $ | 28.6 | |||||||||||||||
| Income taxes on discontinued operations | (0.3) | (2.6) | (0.3) | (0.2) | |||||||||||||||||||
| Net (loss) earnings from discontinued operations | $ | (0.5) | $ | 9.0 | $ | (0.5) | $ | 28.8 |
(1) Includes provision for credit losses.
The following table presents the significant non-cash items and capital expenditures for the discontinued operations with respect to CSS and MAS that are included in the Condensed Consolidated Statements of Cash Flows for the three and six months ended July 2, 2022:
| (Millions of Dollars) | Second Quarter 2022 | Year-to-Date 2022 | |||||||||
| Depreciation and amortization | $ | — | $ | 0.4 | |||||||
| Capital expenditures | $ | 2.3 | $ | 6.3 | |||||||
| Stock-based compensation | $ | 9.2 | $ | 18.5 |
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