Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

BUSINESS OVERVIEW

Strategy

The Company is a global provider of hand tools, power tools, outdoor products and related accessories, as well as a leading provider of engineered fastening solutions and attachment tools for infrastructure applications. The Company continues to execute a business strategy that involves organic growth in excess of the market and industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth over the long term. Over the past two years, the Company has focused the portfolio on its leading positions in the Tools & Outdoor and Industrial businesses. Leveraging the benefits of a more focused portfolio, the Company initiated a business transformation in mid-2022 that includes reinvestment for faster growth as well as the $2.0 billion Global Cost Reduction Program through 2025. The Company’s primary areas of strategic focus are as follows:

• Advancing innovation, electrification and global market penetration to achieve organic revenue growth of 2 to 3 times the market;

• Streamlining and simplifying the organization, and investing in initiatives that more directly impact the Company's customers and end users;

• Returning adjusted gross margins to historical 35%+ levels by accelerating the operations and supply chain transformation to improve fill rates and better match inventory with customer demand; and

• Prioritizing cash flow generation and inventory optimization.

The Company also remains focused on leveraging its long-standing Stanley Black & Decker Operating Model (“SBD Operating Model”) to deliver capital efficient growth and margin expansion.

The Company’s business strategy is interdependent with its social responsibility strategy focused on workforce upskilling, product innovation, and environmental preservation including mitigating the impacts of climate change. These are core business areas that ensure the long-term viability of the Company, its customers, suppliers, employee base, and communities. In 2017, the Company established an environmental, social and corporate governance ("ESG") strategy to drive positive impact for people, products, and the planet.

The recent portfolio transformation prompted the Company to re-baseline its ESG data and update its ESG targets to align with the more focused Company, while maintaining continuity with the legacy ESG pillars of people, products, and planet. The updated strategy and targets will be described in more detail within the Company’s ESG report to be released in August 2023. The Company's renewed ESG priorities are as follows:

• Supporting the long-term viability of the skilled trades that the Company serves and which are integral to thriving economic communities by focusing philanthropic efforts on growing these trades;

• Driving responsible product innovation by considering sustainability throughout all aspects of the product lifecycle, including material procurement from supply chain partners, product design, manufacturing, distribution and transportation, product use, product service, and end-of-life; and

• Improving the sustainability of its operations by reducing carbon emissions, waste to landfill, and water use in water-stressed and scarce areas.

Refer to section "Human Capital Management" in Item 1. Business of the Company’s Form 10-K for the year ended December 31, 2022 for additional information regarding the Company's commitment to supporting its employees and improving diversity, equity and inclusion.

In terms of capital allocation, the Company remains committed, over time, to returning excess capital to shareholders through a strong and growing dividend as well as opportunistically repurchasing shares. In the near term, the Company intends to direct any capital in excess of the quarterly dividend on its common stock toward debt reduction and internal investments.

Share Repurchases And Other Securities

During the first quarter of 2022, the Company repurchased 12,645,371 shares of common stock for approximately $2.3 billion through a combination of an accelerated share repurchase ("ASR") and open market share repurchases. The ASR terms provided for an initial delivery of 85% of the total notional share equivalent at execution, or 10,756,770 shares. The final delivery of the remaining shares totaling 3,211,317 under the ASR was completed during the second quarter of 2022. Refer to Note I, Equity Arrangements, for further discussion.

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

Divestitures

On August 19, 2022, the Company sold its Oil & Gas business comprised of the pipeline services and equipment businesses to Pipeline Technique Limited.

On July 22, 2022, the Company sold 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.

On July 5, 2022, the Company sold its Mechanical Access Solutions ("MAS") business comprised of the automatic doors business to Allegion plc for net proceeds of $916.0 million.

Proceeds from the sale of these businesses were used to repay borrowings made in the first quarter of 2022 to fund the Company's share repurchase program previously discussed. The use of proceeds to support a share repurchase program is consistent with the Company's long-term capital allocation strategy.

The Company has also divested several smaller businesses in recent years that allowed the Company to invest in other areas that fit into its long-term strategy.

Refer to Note R, Divestitures, for further discussion of the Company's divestitures.

Global Cost Reduction Program

In mid-2022, the Company launched a program comprised of a series of initiatives designed to generate cost savings by resizing the organization and reducing inventory with the ultimate objective of driving long-term growth, improving profitability and generating strong cash flow. These initiatives are expected to optimize the cost base as well as provide a platform to fund investments to accelerate growth in the core businesses. The program consists of a selling, general, and administrative ("SG&A") planned annualized cost savings of $500 million by the end of 2023 and a supply chain transformation expected to deliver $1.5 billion of annualized cost savings by 2025 to achieve projected 35%+ adjusted gross margins.

The $500 million in SG&A savings is expected to be generated by simplifying the corporate structure, optimizing organizational spans and layers and reducing indirect spend and is expected to be achieved by the end of 2023. These savings are intended to fund $300 million to $500 million of innovation and commercial investments through 2025 to accelerate organic growth. The charges associated with the SG&A savings were reflected in acquisition-related and other charges in 2022.

The $1.5 billion of annualized cost savings from the supply chain transformation will be driven by:

• Leveraging strategic sourcing and contract manufacturing;

• Consolidating facilities and optimizing the distribution network, which began with the announcement of select US manufacturing facility transfers and closures in the first quarter of 2023;

• Executing the SBD Operating Model to deliver operational excellence through efficiency, simplified organizational design and inventory optimization; and

• Platforming products and implementing initiatives to drive a SKU reduction.

The charges associated with the supply chain transformation are reflected in the acquisition-related and other charges for the three and six months ended July 1, 2023 detailed below in "Results From Operations" and the full year estimate of acquisition-related and other charges detailed below in "2023 Outlook". The cash investment required over the next two to three years to achieve the $1.5 billion of annualized supply chain cost savings is expected to be approximately $0.9 billion to $1.0 billion, of which approximately 40% is expected to be capital expenditures. The Company will continue prioritizing capital expenditures consistent with its existing approach and expects total capital expenditures, inclusive of the supply chain transformation, to approximate 3.0% to 3.5% of net sales annually.

During first half of 2023 and since inception of the program, the Company has generated approximately $460 million and $660 million, respectively, of run-rate pre-tax savings, driven by a leaner organizational structure and enhanced cost controls. These savings are comprised of supply chain efficiency benefits, which will support gross margin improvements as the benefits turn through inventory, and SG&A savings. The Company believes that it remains on track to generate run-rate savings of

approximately $1 billion by the end of 2023 and grow to approximately $2 billion of annualized savings by 2025. In addition, the Company has reduced inventory by approximately $1.4 billion since the end of the second quarter of 2022 and expects further inventory and working capital reductions to support free cash flow generation in 2023.

Segments

The Company’s operations are classified into two reportable business segments: Tools & Outdoor and Industrial. Both reportable segments have significant international operations and are exposed to translational and transactional impacts from fluctuations in foreign currency exchange rates.

Tools & Outdoor

The Tools & Outdoor segment is comprised of the Power Tools Group ("PTG"), Hand Tools, Accessories & Storage ("HTAS"), and Outdoor Power Equipment ("Outdoor") businesses. Annual revenues in the Tools & Outdoor segment were $14.4 billion in 2022, representing 85% of the Company’s total revenues.

The PTG business includes both professional and consumer products. Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, 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.

Industrial

The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. Annual revenues in the Industrial segment were $2.5 billion in 2022, representing 15% of the Company’s total revenues.

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

The Infrastructure business sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications.

RESULTS OF OPERATIONS

As previously discussed, the Company sold its CSS and MAS businesses in July 2022. These 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. Therefore, the 2022 operating results of these businesses were classified as discontinued operations through their respective dates of sale. The divestiture of the Oil & Gas business 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 in the third quarter of 2022.

Certain Items Impacting Earnings and Non-GAAP Financial Measures

The Company has provided a discussion of its results both inclusive and exclusive of acquisition-related and other charges. The results and measures, including gross profit, SG&A, Other, net, Income taxes, and segment profit (including Corporate Overhead), on a basis excluding acquisition-related and other charges, free cash flow, and organic growth are Non-GAAP financial measures. The Company considers the use of Non-GAAP financial measures relevant to aid analysis and understanding of the Company’s results and business trends aside from the material impact of these items and ensures appropriate comparability to operating results of prior periods. Supplemental Non-GAAP information should not be considered in isolation or as a substitute for the related GAAP financial measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies.

With the exception of forecasted free cash flow included in 2023 Outlook as discussed below, the Non-GAAP financial measures of gross profit, SG&A, Other, net, Income taxes, and segment profit (including Corporate Overhead), presented on a basis excluding acquisition-related and other charges, as well as free cash flow and organic growth are defined and reconciled to their most directly comparable GAAP financial measures below. Due to high variability and difficulty in predicting items that impact cash flow from operations, a reconciliation of forecasted free cash flow to its most directly comparable GAAP estimate has been omitted. The Company believes such a reconciliation would also imply a degree of precision that is inappropriate for this forward-looking measure.

The Company’s operating results at the consolidated level as discussed below include and exclude acquisition-related and other charges impacting gross profit, SG&A, Other, net, and Income taxes. The Company’s business segment results as discussed below include and exclude acquisition-related and other charges impacting gross profit and SG&A. These amounts for the second quarter and year-to-date periods of 2023 and 2022 are as follows:

Second Quarter 2023

			(Millions of Dollars)						GAAP						Acquisition- Related Charges & Other						Non-GAAP
			Gross profit						$	932.1					$	51.4					$	983.5
			Selling, general and administrative1						837.3						(25.4)						811.9
			Operating profit						94.8						76.8						171.6
			Loss from continuing operations before income taxes						(75.8)						71.1						(4.7)
			Income taxes on continuing operations						(253.3)						265.5						12.2
			Net Earnings (Loss) from Continuing Operations Attributable to Common Shareowners - Diluted						$	177.5					(194.4)						(16.9)
			Diluted earnings (loss) per share of common stock - Continuing operations						$	1.18					$	(1.29)					$	(0.11)
1			Includes provision for credit losses

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

• Charges reducing Gross profit primarily pertaining to footprint actions and other costs associated with the supply chain transformation;

• Charges in SG&A primarily related to costs of providing transition services for previously divested businesses and supply chain transformation costs;

• Other charges included in Loss from continuing operations before income taxes consisting of:

◦Income of $10.3 million in Other, net primarily related to providing transition services to previously divested businesses; and

◦$4.6 million of restructuring charges primarily pertaining to facility closures;

• Income taxes on continuing operations include the tax effect on the above net charges. Refer to Note N, Income Taxes, for further discussion.

Year-To-Date 2023

			(Millions of Dollars)						GAAP						Acquisition- Related Charges & Other						Non-GAAP
			Gross profit						1,767.6						$	124.8					$	1,892.4
			Selling, general and administrative1						1,662.4						(46.1)						1,616.3
			Operating profit						105.2						170.9						276.1
			Loss from continuing operations before income taxes						(239.9)						177.9						(62.0)
			Income taxes on continuing operations						(229.6)						245.1						15.5
			Net Loss from Continuing Operations Attributable to Common Shareowners - Diluted						(10.3)						(67.2)						(77.5)
			Diluted loss per share of common stock - Continuing operations						$	(0.07)					$	(0.45)					$	(0.52)
1			Includes provision for credit losses

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

• Charges reducing Gross profit primarily pertaining to footprint actions and other costs associated with the supply chain transformation;

• Charges in SG&A primarily related to costs of providing transition services for previously divested businesses, as well as supply chain transformation and integration-related costs;

• Other charges included in Loss from continuing operations before income taxes consisting of:

◦Income of $17.3 million in Other, net primarily related to providing transition services to previously divested businesses;

◦$7.6 million loss pertaining to divested businesses; and

◦$16.7 million of restructuring charges primarily pertaining to severance and facility closures;

• Income taxes on continuing operations include the tax effect on the above net charges. Refer to Note N, Income Taxes, for further discussion.

Second Quarter 2022

			(Millions of Dollars)						GAAP						Acquisition- Related Charges & Other						Non-GAAP
			Gross profit						1,207.1						$	16.6					$	1,223.7
			Selling, general and administrative1						852.7						(32.9)						819.8
			Operating profit						354.4						49.5						403.9
			Earnings from continuing operations before income taxes						15.9						248.1						264.0
			Income taxes on continuing operations						(62.8)						52.5						(10.3)
			Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted						$	79.0					195.6						274.6
			Diluted earnings per share of common stock - Continuing operations						$	0.51					$	1.26					$	1.77
1			Includes provision for credit losses

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

• Charges reducing Gross profit primarily pertaining to inventory step-up charges;

• Charges in SG&A primarily related to integration-related costs;

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

◦$10.9 million in Other, net primarily related to a voluntary retirement program;

◦$0.2 million gain pertaining to a previously divested business;

◦$168.4 million asset impairment charge related to the Oil & Gas business; and,

◦$19.5 million of restructuring charges primarily pertaining to severance and related costs;

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

Year-To-Date 2022

			(Millions of Dollars)						GAAP						Acquisition- Related Charges & Other						Non-GAAP
			Gross profit						$	2,512.5					$	105.4					$	2,617.9
			Selling, general and administrative1						1,813.0						(111.8)						1,701.2
			Operating profit						699.5						217.2						916.7
			Earnings from continuing operations before income taxes						194.4						469.5						663.9
			Income taxes on continuing operations						(39.9)						82.3						42.4
			Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted						234.8						387.2						622.0
			Diluted earnings per share of common stock - Continuing operations						$	1.47					$	2.41					$	3.88
1			Includes provision for credit losses

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

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

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

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

◦$11.9 million in Other, net primarily related to a voluntary retirement program and deal transaction costs;

◦$0.2 million gain on a previously divested business;

◦$168.4 million asset impairment charge related to the Oil & Gas business; and,

◦$72.2 million of restructuring charges primarily pertaining to severance and related costs;

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

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

Consolidated Results

Net Sales: Net sales were $4.159 billion in the second quarter of 2023 compared to $4.393 billion in the second quarter of 2022, representing a decrease of 5%, as a 1% increase from price realization was more than offset by a 5% decrease from volume and a 1% impact from the Oil & Gas divestiture. Tools & Outdoor net sales decreased 5% compared to the second quarter of 2022 due to a 1% increase in price and a 6% decline in volume. Industrial net sales decreased by 5% compared to the second quarter of 2022 as a 4% increase in price was more than offset by a 1% decrease in both volume and foreign currency as well as a 7% impact from the Oil & Gas divestiture.

Net sales were $8.091 billion in the first half of 2023 compared to $8.841 billion in the first half of 2022, representing a decrease of 8%, as a 2% increase from price realization was more than offset by an 8% decrease in volume, a 1% decrease from foreign currency and a 1% impact from the Oil & Gas divestiture. Tools & Outdoor net sales decreased 9% compared to the first half of 2022 as a 1% increase from price realization was more than offset by a 9% decline in volume and a 1% decrease from foreign currency. Industrial net sales decreased 5% compared to the first half of 2022 as a 4% increase in price was more than offset by a 1% decrease in volume, a 2% decrease from foreign currency and a 6% impact from the Oil & Gas divestiture.

Gross Profit: Gross profit was $932.1 million, or 22.4% of net sales, in the second quarter of 2023 compared to $1.207 billion, or 27.5% of net sales, in the second quarter of 2022. Acquisition-related and other charges, which reduced gross profit, were $51.4 million for the three months ended July 1, 2023 and $16.6 million for the three months ended July 2, 2022. Excluding these charges, gross profit was 23.6% of net sales for the three months ended July 1, 2023, compared to 27.9% for the three months ended July 2, 2022, as price realization was more than offset by the impact of production curtailments, selling through high-cost inventory and lower volumes.

Gross profit was $1.768 billion, or 21.8% of net sales, in the first half of 2023 compared to $2.513 billion, or 28.4% of net sales, in the first half of 2022. Acquisition-related and other charges, which reduced gross profit, were $124.8 million for the six months ended July 1, 2023 and $105.4 million for the six months ended July 2, 2022. Excluding these charges, gross profit was 23.4% of net sales for the six months ended July 1, 2023, compared to 29.6% for the six months ended July 2, 2022, driven by

the factors discussed above that impacted the second quarter of 2023.

SG&A Expenses: SG&A, inclusive of the provision for credit losses, was $837.3 million, or 20.1% of net sales, in the second quarter of 2023, compared to $852.7 million, or 19.4% of net sales, in the second quarter of 2022 reflecting cost reductions. Within SG&A, acquisition-related and other charges totaled $25.4 million for the three months ended July 1, 2023 and $32.9 million for the three months ended July 2, 2022. Excluding these charges, SG&A was 19.5% of net sales for the three months ended July 1, 2023, compared to 18.7% for the three months ended July 2, 2022, due to lower sales volume.

SG&A, inclusive of the provision for credit losses, was $1.662 billion, or 20.5% of net sales, in the first half of 2023, compared to $1.813 billion, or 20.5% of net sales, in the first half of 2022 reflecting cost reductions. Within SG&A, acquisition-related and other charges totaled $46.1 million for the six months ended July 1, 2023 and $111.8 million for the six months ended July 2, 2022. Excluding these charges, SG&A was 20.0% of net sales for the six months ended July 1, 2023, compared to 19.2% for the six months ended July 2, 2022, due to lower sales volume.

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

Other, net: Other, net amounted to $66.6 million and $79.1 million in the second quarter of 2023 and 2022, respectively. Excluding income of $10.3 million from acquisition-related and other charges, Other, net totaled $76.9 million for the three months ended July 1, 2023. Excluding acquisition-related and other charges of $10.9 million, Other, net totaled $68.2 million for the three months ended July 2, 2022. The increase in 2023 compared to 2022 is driven by higher pension costs.

Other, net amounted to $130.3 million and $141.1 million in the first half of 2023 and 2022, respectively. Excluding income of $17.3 million from acquisition-related and other charges, Other, net totaled $147.6 million for the six months ended July 1, 2023. Excluding acquisition-related and other charges of $11.9 million, Other, net totaled $129.2 million for the six months ended July 2, 2022. The year-over-year increase was primarily due to losses from the Company's investments as well as higher pension costs.

(Gain) Loss on Sales of Businesses: During the first six months of 2023, the Company reported a pre-tax loss of $7.6 million primarily related to the divestiture of a small business in the Industrial segment. During the second quarter of 2022, the Company reported a pre-tax gain of $0.2 million related to a previously divested business.

Asset Impairment Charge: During the second quarter of 2022, the Company recorded a pre-tax impairment loss of $168.4 million related to the Oil & Gas business. Refer to Note R, Divestitures, for additional information on the divestiture of the Oil & Gas business.

Interest, net: Net interest expense was $99.4 million in the second quarter of 2023 compared to $71.7 million in the second quarter of 2022. On a year-to-date basis, net interest expense was $190.5 million in 2023 and $123.6 million in 2022. The year-over-year increases were primarily driven by higher U.S. interest rates and debt issuances in March 2023.

Income Taxes: 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.

Excluding the impacts of acquisition-related and other charges, for the three and six months ended July 1, 2023, the Company recognized income tax expense on continuing operations of $12.2 million and $15.5 million, respectively, resulting in effective tax rates of (259.6)% and (25.0)%, respectively. As discussed above, the estimated annual effective tax rate, as adjusted for the impacts of acquisition-related and other charges, was revised during the three months ended July 1, 2023 to reflect a tax benefit from an intra-entity asset transfer of certain intangible assets. Accordingly, the income tax expense for the three months ended July 1, 2023, excluding the impacts of acquisition-related and other charges, includes an incremental interim tax expense 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% due to the items discussed above.

Refer to Note N, Income Taxes, for additional information on the impacts of the annual effective income tax rate.

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.

Excluding the impacts of the acquisition-related and other charges, for the three and six months ended July 2, 2022, the Company recognized an income tax benefit of $10.3 million and income tax expense of $42.4 million, respectively, resulting in effective tax rates of (3.9)% and 6.4%, respectively. These effective tax rates differ from the U.S. statutory tax rate due to the items discussed above, excluding the benefit associated with the disposition of the Company's Oil & Gas business.

Business Segment Results

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

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

Tools & Outdoor:

			Second Quarter												Year-to-Date
(Millions of Dollars)			2023						2022						2023						2022
Net sales			$	3,542.2					$	3,744.9					$	6,857.6					$	7,546.1
Segment profit			$	102.0					$	361.6					$	120.7					$	740.1
% of Net sales			2.9		%				9.7		%				1.8		%				9.8		%

Tools & Outdoor net sales decreased $202.7 million, or 5%, in the second quarter of 2023 compared to the second quarter of 2022 due to a 1% increase in price and a 6% decline in volume. Organic revenue decreased 6%, 1% and 3% in North America, Europe and emerging markets, respectively. The overall 5% organic decline was a result of lower consumer outdoor and DIY market demand and modestly reduced channel inventory. Second quarter U.S. retail point-of-sale demand was above pre-pandemic 2019 levels, supported by strength in professional demand and price.

Tools & Outdoor net sales decreased $688.5 million, or 9%, in the first half of 2023 compared to the first half of 2022, as a 1% increase from price realization was more than offset by a 9% decline in volume and a 1% decrease from foreign currency. Organic revenue decreased 9%, 6% and 3% in North America, Europe and emerging markets, respectively. The overall 8% organic decline was a result of the same factors that impacted the second quarter of 2023. Similar to the second half of 2022, U.S. retail point-of-sale demand for the first half of 2023 grew versus pre-pandemic 2019 levels, supported by same the factors discussed above for the second quarter of 2023.

Segment profit for the second quarter of 2023 was $102.0 million, or 2.9% of net sales, compared to $361.6 million, or 9.7% of net sales, in the second quarter of 2022. Excluding acquisition-related and other charges of $55.8 million and $41.3 million for the three months ended July 1, 2023 and July 2, 2022, respectively, segment profit was 4.5% of net sales in the second quarter of 2023 and 10.8% in the second quarter of 2022, as the benefit from price realization was more than offset by selling through high-cost inventory, production curtailment costs and lower volume.

Segment profit for the first half of 2023 was $120.7 million, or 1.8% of net sales, compared to $740.1 million, or 9.8% of net sales, in the first half of 2022. Excluding acquisition-related and other charges of $135.0 million and $195.0 million for the six months ended July 1, 2023 and July 2, 2022, respectively, segment profit was 3.7% of net sales in the first half of 2023 and 12.4% in the first half of 2022, as the benefit from price realization was more than offset by selling through high-cost inventory, commodity inflation, higher supply chain costs, production curtailment costs and lower volume.

Industrial:

			Second Quarter												Year-to-Date
(Millions of Dollars)			2023						2022						2023						2022
Net sales			$	616.7					$	648.1					$	1,233.1					$	1,294.7
Segment profit			$	71.6					$	58.3					$	139.0					$	99.6
% of Net sales			11.6		%				9.0		%				11.3		%				7.7		%

Industrial net sales decreased $31.4 million, or 5%, in the second quarter of 2023 compared to the second quarter of 2022, as a 4% increase in price was more than offset by a 1% decrease in both volume and foreign currency as well as a 7% impact from the Oil & Gas divestiture. Engineered Fastening organic revenues were up by 8%, with double digit growth in aerospace and automotive, which was partially offset by softer industrial markets. Attachment Tools organic revenues were down 14% due to customer destocking.

Industrial net sales decreased $61.6 million, or 5%, in the first half of 2023 compared to the first half of 2022, as a 4% increase in price was more than offset by a 1% decrease in volume, a 2% decrease from foreign currency and a 6% impact from the Oil & Gas divestiture. Engineered Fastening organic revenues increased 6%, driven by the same factors discussed above that impacted the second quarter of 2023. Attachment Tools organic revenues decreased 5% as strong price realization was more than offset by customer destocking.

Industrial segment profit for the second quarter of 2023 totaled $71.6 million, or 11.6% of net sales, compared to $58.3 million, or 9.0% of net sales, in the corresponding 2022 period. Excluding acquisition-related and other charges of $8.5 million and $1.9 million for the three months ended July 1, 2023 and July 2, 2022, respectively, segment profit amounted to 13.0% of net sales in the second quarter of 2023, up 370 basis points from 9.3% in the second quarter of 2022, due to price realization and cost control.

Industrial segment profit for the first half of 2023 totaled $139.0 million, or 11.3% of net sales, compared to $99.6 million, or 7.7% of net sales, in the corresponding 2022 period. Excluding acquisition-related and other charges of $8.8 million and $5.4 million for the six months ended July 1, 2023 and July 2, 2022, respectively, segment profit amounted to 12.0% of net sales in the first half of 2023 compared to 8.1% in the first half of 2022, as price realization, productivity and cost control were partially offset by commodity inflation.

Corporate Overhead

Corporate Overhead includes the corporate overhead element of SG&A, which is not allocated to the business segments. Corporate Overhead amounted to $78.8 million and $65.5 million in the second quarter of 2023 and 2022, respectively. Excluding acquisition-related and other charges of $12.5 million for the three months ended July 1, 2023 and $6.3 million for the three months ended July 2, 2022, the corporate overhead element of SG&A was $66.3 million and $59.2 million for the three months ended July 1, 2023 and July 2, 2022, respectively.

On a year-to-date basis, the corporate overhead element of SG&A amounted to $154.5 million in 2023 compared to $140.2 million in 2022. Excluding acquisition-related and other charges of $27.1 million for the six months ended July 1, 2023 and $16.8 million for the six months ended July 2, 2022, the corporate overhead element of SG&A was $127.4 million and $123.4 million for the six months ended July 1, 2023 and July 2, 2022, respectively.

RESTRUCTURING ACTIVITIES

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 facility closures and severance, respectively. The Company expects to achieve annual net cost savings of approximately $24 million by the end of 2024 related to the restructuring costs incurred during the six months ended July 1, 2023. 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.

The anticipated annual net cost savings of approximately $24 million related to the 2023 restructuring actions include: $19 million in the Tools & Outdoor segment; $2 million in the Industrial segment; and $3 million in Corporate.

2023 OUTLOOK

This outlook discussion is intended to provide broad insight into the Company's near-term earnings and cash flow generation prospects. The Company expects 2023 diluted earnings per share to approximate ($1.25) to ($0.50) on a GAAP basis, revised from ($1.65) to $0.60. The Company expects diluted earnings per share excluding acquisition-related and other charges to approximate $0.70 to $1.30, revised from $0.00 to $2.00. The Company expects 2023 free cash flow to approximate $0.6 billion to $0.9 billion, revised from $0.5 billion to $1.0 billion, significantly ahead of net income, as the Company focuses on serving its customers and executing its transformation while leveraging the SBD Operating Model to drive working capital efficiency. The Company continues to prioritize free cash flow generation and intends to make investments to support faster organic growth. The Company's outlook reflects a range of demand for the second half of 2023.

The difference between 2023 diluted earnings per share outlook and the diluted earnings per share range, excluding charges, is approximately $1.80 to $1.95, consisting of other charges primarily due to the supply chain transformation under the Global Cost Reduction Program and acquisition-related charges.

FINANCIAL CONDITION

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

Operating Activities: Cash flows provided by operations were $264.4 million in the second quarter of 2023 compared to cash used in operations of $443.9 million in the corresponding period of 2022, primarily driven by lower inventory balances due to

improving supply chain conditions and planned production curtailments. Year-to-date cash flows used in operations were $21.9 million in 2023 compared to $1.685 billion in 2022. The year-over-year change was primarily driven by the same factors discussed above as well as lower earnings from continuing operations.

Free Cash Flow: Free cash flow, as defined in the table below, was an inflow of $196.1 million in the second quarter of 2023 compared to an outflow of $589.6 million in the corresponding period of 2022. On a year-to-date basis, free cash flow was an outflow of $158.4 million and $1.971 billion in 2023 and 2022, respectively. The year-over-year improvements in free cash flow during both periods were primarily due to the same factors discussed above in operating activities as well as lower planned capital expenditures in the first half of 2023. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners, and is useful information for investors. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company’s common stock and business acquisitions, among other items.

			Second Quarter												Year-to-Date
(Millions of Dollars)			2023						2022						2023						2022
Net cash provided by (used in) operating activities			$	264.4					$	(443.9)					$	(21.9)					$	(1,685.0)
Less: capital and software expenditures			(68.3)						(145.7)						(136.5)						(285.5)
Free cash flow			$	196.1					$	(589.6)					$	(158.4)					$	(1,970.5)

Investing Activities: Cash flows used in investing activities totaled $69.2 million and $154.3 million in the second quarter of 2023 and 2022, respectively, primarily due to capital and software expenditures of $68.3 million and $145.7 million, respectively.

Year-to-date cash flows used in investing activities totaled $130.4 million in 2023 primarily due to capital and software expenditures of $136.5 million. Cash flows used in investing activities totaled $317.7 million in the first half of 2022, primarily due to capital and software expenditures of $285.5 million and acquisitions of businesses, net of cash acquired, of $45.6 million.

Financing Activities: Cash flows used in financing activities totaled $175.8 million in the second quarter of 2023 primarily driven by cash dividend payments on common stock of $119.7 million and net repayments of short-term commercial paper borrowings of $42.0 million. Cash flows provided by financing activities totaled $608.2 million in the second quarter of 2022 primarily driven by net short-term commercial paper borrowings of $746.6 million, partially offset by cash dividend payments on common stock of $114.0 million.

Cash flows provided by financing activities totaled $148.4 million in the first half of 2023, primarily driven by proceeds from debt issuances, net of fees, of $745.9 million, partially offset by net repayments of short-term commercial paper borrowings of $327.9 million and cash dividend payments on common stock of $239.5 million. Cash flows provided by financing activities totaled $2.034 billion in the first half of 2022, primarily driven by credit facility borrowings of $2.250 billion, net short-term commercial paper borrowings of $1.341 billion, and proceeds from debt issuances, net of fees, of $992.6 million, partially offset by share repurchases of $2.314 billion and cash dividend payments on common stock of $230.3 million.

Credit Ratings & Liquidity:

The Company maintains strong investment grade credit ratings from the major U.S. rating agencies on its senior unsecured debt (S&P A, Fitch BBB+, Moody's Baa2), as well as its commercial paper program (S&P A-1, Fitch F2, Moody's P-2). In the first quarter of 2023, Fitch downgraded the Company's senior unsecured debt credit rating to BBB+, from its previous rating of A-, and its commercial paper program to F2, from its previous rating of F1. Failure to maintain strong investment grade rating levels could adversely affect the Company’s cost of funds, liquidity and access to capital markets, but would not have an adverse effect on the Company’s ability to access its existing committed credit facilities.

Cash and cash equivalents totaled $391.4 million and $395.6 million as of July 1, 2023 and December 31, 2022, respectively, which was primarily held in foreign jurisdictions.

As a result of the Tax Cuts and Jobs Act (the “Act”), the Company's tax liability related to the one-time transition tax associated with unremitted foreign earnings and profits totaled $174 million at July 1, 2023. The Act permits a U.S. company to elect to pay the net tax liability interest-free over a period of up to eight years. The Company has considered the implications of paying the required one-time transition tax and believes it will not have a material impact on its liquidity.

The Company has a $3.5 billion commercial paper program which includes Euro denominated borrowings in addition to U.S. Dollars. As of 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.

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 March 2015, the Company entered into a forward share purchase contract with a financial institution counterparty for 3,645,510 shares of common stock. The contract obligates the Company to pay $350 million, plus an additional amount related to the forward component of the contract. In November 2022, the Company amended the settlement date to November 2024, or earlier at the Company's option.

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

OTHER MATTERS

Critical Accounting Estimates: There have been no significant changes in the Company’s critical accounting estimates during the second quarter of 2023.

Refer to the “Other Matters” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Form 10-K for the year ended December 31, 2022 for a discussion of the Company’s critical accounting estimates.