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

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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 its long-term business strategy focused on organic growth in excess of the market and industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth. 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 environmental, social and corporate governance ("ESG") strategy focused on diversity, equity and inclusion ("DEI"), growing the trades, 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.

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 are described in more detail within the Company’s 2022 ESG report 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 and pursuing zero waste to landfill.

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 DEI.

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 growth 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"), which provided for an initial delivery of 85% of the total notional share equivalent at execution, or 10,756,770 shares, and open market share repurchases for a total of 1,888,601 shares. The final delivery of the remaining shares under the ASR totaled 3,211,317 and 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 pre-tax cost savings of $500 million by the end of 2023 and a supply chain transformation expected to deliver $1.5 billion of pre-tax run-rate 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 pre-tax run-rate 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
Reducing complexity through platforming products and implementing initiatives to drive a SKU reduction.

The one-time charges associated with the supply chain transformation are reflected in the acquisition-related and other charges for the three and nine months ended September 30, 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 to achieve the $1.5 billion of pre-tax run-rate 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 the first nine months of 2023 and since inception of the program, the Company has generated approximately $675 million and $875 million, respectively, of pre-tax run-rate 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 is well positioned to modestly exceed its initial pre-tax run-rate savings target of $1 billion by the end of 2023 and is on track to grow to approximately $2 billion of pre-tax run-rate savings by year-end 2025. In addition, the Company has reduced inventory by approximately $1.7 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®, 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, organic revenue 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, organic revenue 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 third quarter and year-to-date periods of 2023 and 2022 are as follows:

Third Quarter 2023


	(Millions of Dollars)	GAAP		Acquisition- Related Charges & Other		Non-GAAP
	Gross profit	$	1,060.6	$	32.2	$	1,092.8
	Selling, general and administrative1	794.3		(29.4)		764.9
	Operating profit	266.3		61.6		327.9
	(Loss) earnings from continuing operations before income taxes	(57.0)		191.0		134.0
	Income taxes on continuing operations	(61.7)		37.5		(24.2)
	Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted	$	4.7	153.5		158.2
	Diluted earnings per share of common stock - Continuing operations	$	0.03	$	1.02	$	1.05
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) earnings from continuing operations before income taxes consisting of:

◦Income of $5.5 million in Other, net primarily related to providing transition services to previously divested businesses;

◦$124.0 million non-cash impairment charge relating to the Irwin and Troy-Bilt trade names; and

◦$10.9 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.

Year-To-Date 2023


	(Millions of Dollars)	GAAP		Acquisition- Related Charges & Other		Non-GAAP
	Gross profit	2,828.2		$	157.0	$	2,985.2
	Selling, general and administrative1	2,456.7		(75.5)		2,381.2
	Operating profit	371.5		232.5		604.0
	(Loss) earnings from continuing operations before income taxes	(296.9)		368.9		72.0
	Income taxes on continuing operations	(291.3)		282.6		(8.7)
	Net (Loss) Earnings from Continuing Operations Attributable to Common Shareowners - Diluted	(5.6)		86.3		80.7
	Diluted (loss) earnings per share of common stock - Continuing operations	$	(0.04)	$	0.58	$	0.54
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) earnings from continuing operations before income taxes consisting of:

◦Income of $22.8 million in Other, net primarily related to providing transition services to previously divested businesses;

◦$7.6 million loss pertaining to divested businesses;

◦$124.0 million non-cash impairment charge relating to the Irwin and Troy-Bilt trade names; and

◦$27.6 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.

Third Quarter 2022


	(Millions of Dollars)	GAAP		Acquisition- Related Charges & Other		Non-GAAP
	Gross profit	1,018.1		$	(2.5)	$	1,015.6
	Selling, general and administrative1	799.8		(41.3)		758.5
	Operating profit	218.3		38.8		257.1
	(Loss) earnings from continuing operations before income taxes	(4.3)		118.7		114.4
	Income taxes on continuing operations	(40.9)		39.4		(1.5)
	Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted	$	36.9	79.3		116.2
	Diluted earnings per share of common stock - Continuing operations	$	0.24	$	0.52	$	0.76
1	Includes provision for credit losses

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

A net benefit to Gross profit primarily pertaining to reserve adjustments relating to the Russia business closure;
Charges in SG&A primarily related to integration-related costs;
Other charges included in (Loss) earnings from continuing operations before income taxes consisting of:

◦$2.7 million in Other, net primarily related to deal transaction costs;

◦$8.6 million loss pertaining to the sale of the Oil & Gas business; and

◦$68.6 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. Refer to Note N, Income Taxes, for further discussion.

Year-To-Date 2022


	(Millions of Dollars)	GAAP		Acquisition- Related Charges & Other		Non-GAAP
	Gross profit	$	3,530.6	$	102.9	$	3,633.5
	Selling, general and administrative1	2,612.8		(153.1)		2,459.7
	Operating profit	917.8		256.0		1,173.8
	Earnings from continuing operations before income taxes	190.1		588.2		778.3
	Income taxes on continuing operations	(80.8)		121.7		40.9
	Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted	271.7		466.5		738.2
	Diluted earnings per share of common stock - Continuing operations	$	1.72	$	2.95	$	4.67
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 integration-related costs, a voluntary retirement program, and the Russia business closure;
Other charges included in Earnings from continuing operations before income taxes consisting of:

◦$14.6 million in Other, net primarily related to a voluntary retirement program and deal transactions costs;

◦$8.4 million net loss primarily relating to the sale of the Oil & Gas business;

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

◦$140.8 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. Refer to Note N, Income Taxes, for further discussion.

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 $3.954 billion in the third quarter of 2023 compared to $4.120 billion in the third quarter of 2022, representing a decrease of 4%, as a 1% increase from foreign currency was more than offset by a 3% decrease in volume, a 1% decrease from price and a 1% impact from the Oil & Gas divestiture. Tools & Outdoor net sales decreased 4% compared to the third quarter of 2022 as a 1% increase from foreign currency was more than offset by a 3% decrease in volume and a 2% decrease from price. Industrial net sales decreased 4% compared to the third quarter of 2022 as a 2% increase in price and a 1% increase from foreign currency were more than offset by a 4% decrease in volume as well as a 3% impact from the Oil & Gas divestiture.

Net sales were $12.045 billion in the first nine months of 2023 compared to $12.961 billion in the first nine months of 2022, representing a decrease of 7%, as a 1% increase from price was more than offset by a 7% decrease in volume and a 1% impact from the Oil & Gas divestiture. Tools & Outdoor net sales decreased 7% compared to the first nine months of 2022 due to a 7% decline in volume. Industrial net sales decreased 5% compared to the first nine months of 2022 as a 4% increase in price was more than offset by a 2% decrease in volume, a 1% decrease from foreign currency and a 6% impact from the Oil & Gas divestiture.

Gross Profit: Gross profit was $1.061 billion, or 26.8% of net sales, in the third quarter of 2023 compared to $1.018 billion, or 24.7% of net sales, in the third quarter of 2022. Acquisition-related and other charges, which reduced gross profit, were $32.2 million for the three months ended September 30, 2023 and a net benefit of $2.5 million for the three months ended October 1, 2022. Excluding these amounts, gross profit was 27.6% of net sales for the three months ended September 30, 2023, compared to 24.7% for the three months ended October 1, 2022, as lower inventory destocking costs, supply chain transformation benefits and lower shipping costs more than offset the impact from lower organic revenue.

Gross profit was $2.828 billion, or 23.5% of net sales, in the first nine months of 2023 compared to $3.531 billion, or 27.2% of net sales, in the first nine months of 2022. Acquisition-related and other charges, which reduced gross profit, were $157.0 million for the nine months ended September 30, 2023 and $102.9 million for the nine months ended October 1, 2022.

Excluding these charges, gross profit was 24.8% of net sales for the nine months ended September 30, 2023, compared to 28.0% for the nine months ended October 1, 2022, as price realization, supply chain transformation benefits and lower shipping costs were more than offset by the impact of selling through high-cost inventory, production curtailments and lower volumes.

SG&A Expenses: SG&A, inclusive of the provision for credit losses, was $794.3 million, or 20.1% of net sales, in the third quarter of 2023, compared to $799.8 million, or 19.4% of net sales, in the third quarter of 2022. Within SG&A, acquisition-related and other charges totaled $29.4 million for the three months ended September 30, 2023 and $41.3 million for the three months ended October 1, 2022. Excluding these charges, SG&A was 19.3% of net sales for the three months ended September 30, 2023, compared to 18.4% for the three months ended October 1, 2022, due to lower sales volume.

SG&A, inclusive of the provision for credit losses, was $2.457 billion, or 20.4% of net sales, in the first nine months of 2023, compared to $2.613 billion, or 20.2% of net sales, in the first nine months of 2022. Within SG&A, acquisition-related and other charges totaled $75.5 million for the nine months ended September 30, 2023 and $153.1 million for the nine months ended October 1, 2022. Excluding these charges, SG&A was 19.8% of net sales for the nine months ended September 30, 2023, compared to 19.0% for the nine months ended October 1, 2022, due to lower sales volume. SG&A declined year-over-year on an absolute dollar basis reflecting cost reductions.

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 $94.0 million and $69.1 million in the third quarter of 2023 and 2022, respectively. Excluding income of $5.5 million from acquisition-related and other charges, Other, net totaled $99.5 million for the three months ended September 30, 2023. Excluding acquisition-related and other charges of $2.7 million, Other, net totaled $66.4 million for the three months ended October 1, 2022. The increase in 2023 compared to 2022 is driven by higher pension and environmental costs as well as write-downs on certain investments.

Other, net amounted to $224.3 million and $210.2 million in the first nine months of 2023 and 2022, respectively. Excluding income of $22.8 million from acquisition-related and other charges, Other, net totaled $247.1 million for the nine months ended September 30, 2023. Excluding acquisition-related and other charges of $14.6 million, Other, net totaled $195.6 million for the nine months ended October 1, 2022. The year-over-year increase was primarily driven by the same factors noted above for the quarter.

Loss on Sales of Businesses: During the first nine 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 third quarter of 2022, the Company reported a pre-tax loss of $8.6 million related to the sale of the Oil & Gas business. The Company also recognized a $0.2 million pre-tax gain in the second quarter of 2022 related to a previously divested business, resulting in a net pre-tax loss of $8.4 million for the first nine months of 2022.

Asset Impairment Charges: During the third quarter of 2023, the Company recorded a pre-tax impairment loss of $124.0 million related to the Irwin and Troy-Bilt trade names. Refer to Note M, Restructuring Charges and Other Costs, for additional information. 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 $94.4 million in the third quarter of 2023 compared to $76.3 million in the third quarter of 2022. On a year-to-date basis, net interest expense was $284.9 million in 2023 and $199.9 million in 2022. The year-over-year increases were primarily driven by higher U.S. interest rates and debt issuances in March 2023, partially offset by higher interest income due to an increase in rates.

Income Taxes: For the three and nine months ended September 30, 2023, the Company recognized an income tax benefit from continuing operations of $61.7 million and $291.3 million, respectively, resulting in effective tax rates of 108.2% and 98.1%, respectively. The income tax benefit for the three months ended September 30, 2023 includes an incremental interim tax benefit to reflect the impact of a change in the estimated annual effective tax rate to the prior interim year-to-date tax benefit, a portion of which is expected to reverse in the fourth quarter of 2023. The effective tax rates for the three and nine months ended September 30, 2023 differ from the U.S. statutory tax rate of 21% primarily due to a tax benefit associated with the intra-entity asset transfer of certain intangible assets, 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 nine months ended September 30, 2023, the Company recognized an income tax benefit on continuing operations of $24.2 million and $8.7 million, respectively, resulting in effective tax rates of (18.1)% and (12.1)%, respectively. The effective tax rates for the three and nine months ended September 30, 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 in interim periods of changes in its estimated annual effective income tax rate.

For the three and nine months ended October 1, 2022, the Company recognized an income tax benefit from continuing operations of $40.9 million and $80.8 million, respectively, resulting in effective tax rates of 951.2% and (42.5)%, respectively. The effective tax rate for the three months ended October 1, 2022 differs from the U.S. statutory tax rate primarily due to the continued reorganization of the supply chain and the impact of lower forecasted earnings in North America, offset by tax on foreign earnings and the re-measurement of uncertain tax positions. The effective tax rate for the nine months ended October 1, 2022 differs from the U.S. statutory tax rate primarily due to a benefit associated with the disposition of the Company's Oil & Gas business in addition to the items discussed above.

Excluding the impacts of the acquisition-related and other charges, for the three and nine months ended October 1, 2022, the Company recognized an income tax benefit of $1.5 million and income tax expense of $40.9 million, respectively, resulting in effective tax rates of (1.3)% and 5.3%, 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:


	Third Quarter						Year-to-Date
(Millions of Dollars)	2023			2022			2023			2022
Net sales	$	3,355.3		$	3,494.7		$	10,212.9		$	11,040.8
Segment profit	$	273.4		$	228.4		$	394.1		$	968.5
% of Net sales	8.1		%	6.5		%	3.9		%	8.8		%

Tools & Outdoor net sales decreased $139.4 million, or 4%, in the third quarter of 2023 compared to the third quarter of 2022 as a 1% increase from foreign currency was more than offset by a 3% decline in volume and a 2% decrease from price to support regained cordless promotions. Organic revenue decreased 5%, 3% and 4% in North America, Europe and emerging markets, respectively. The overall 5% organic decline was a result of lower consumer outdoor and DIY market demand. Third quarter U.S. retail point-of-sale demand remained above pre-pandemic 2019 levels, supported by strength in professional demand and price.

Tools & Outdoor net sales decreased $827.9 million, or 7%, in the first nine months of 2023 compared to the first nine months of 2022 due to a 7% decline in volume. Organic revenue decreased 7%, 5% and 4% in North America, Europe and emerging markets, respectively. The overall 7% organic decline was a result of lower consumer outdoor and DIY market demand.

Segment profit for the third quarter of 2023 was $273.4 million, or 8.1% of net sales, compared to $228.4 million, or 6.5% of net sales, in the third quarter of 2022. Excluding acquisition-related and other charges of $39.4 million and $10.6 million for the three months ended September 30, 2023 and October 1, 2022, respectively, segment profit was 9.3% of net sales in the third quarter of 2023 and 6.8% in the third quarter of 2022, as reduced sell-through of high-cost inventory, supply chain transformation savings and reduced shipping costs were partially offset by lower organic revenue.

Segment profit for the first nine months of 2023 was $394.1 million, or 3.9% of net sales, compared to $968.5 million, or 8.8% of net sales, in the first nine months of 2022. Excluding acquisition-related and other charges of $174.4 million and $205.6 million for the nine months ended September 30, 2023 and October 1, 2022, respectively, segment profit was 5.6% of net sales in the first nine months of 2023 and 10.6% in the first nine months of 2022. The year-over-year decline was primarily a result of selling through high-cost inventory, production curtailments and lower volume.

Industrial:


	Third Quarter						Year-to-Date
(Millions of Dollars)	2023			2022			2023			2022
Net sales	$	598.6		$	624.8		$	1,831.7		$	1,919.5
Segment profit	$	62.5		$	68.4		$	201.5		$	168.0
% of Net sales	10.4		%	10.9		%	11.0		%	8.8		%

Industrial net sales decreased $26.2 million, or 4%, in the third quarter of 2023 compared to the third quarter of 2022, as a 2% increase in price and a 1% increase from foreign currency were more than offset by a 4% decline in volume and a 3% impact from the Oil & Gas divestiture. Engineered Fastening organic revenues were up 6%, with double-digit growth in aerospace and high-single digit growth in automotive, which was partially offset by customer destocking in industrial markets. Attachment Tools organic revenues were down 26% due to continued customer inventory reductions.

Industrial net sales decreased $87.8 million, or 5%, in the first nine months of 2023 compared to the first nine months of 2022, as a 4% increase in price was more than offset by a 2% decrease in volume, a 1% 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 third quarter of 2023. Attachment Tools organic revenues decreased 12% as strong price realization was more than offset by customer destocking.

Industrial segment profit for the third quarter of 2023 totaled $62.5 million, or 10.4% of net sales, compared to $68.4 million, or 10.9% of net sales, in the corresponding 2022 period. Excluding acquisition-related and other charges of $10.5 million and $1.0 million for the three months ended September 30, 2023 and October 1, 2022, respectively, segment profit amounted to 12.2% of net sales in the third quarter of 2023, up 110 basis points from 11.1% in the third quarter of 2022, due to price realization and cost control.

Industrial segment profit for the first nine months of 2023 totaled $201.5 million, or 11.0% of net sales, compared to $168.0 million, or 8.8% of net sales, in the corresponding 2022 period. Excluding acquisition-related and other charges of $19.3 million and $6.4 million for the nine months ended September 30, 2023 and October 1, 2022, respectively, segment profit amounted to 12.1% of net sales in the first nine months of 2023 compared to 9.1% in the first nine months of 2022, due to price realization, productivity and cost control.

Corporate Overhead

Corporate Overhead includes the corporate overhead element of SG&A, which is not allocated to the business segments. Corporate Overhead amounted to $69.6 million and $78.5 million in the third quarter of 2023 and 2022, respectively. Excluding acquisition-related and other charges of $11.7 million for the three months ended September 30, 2023 and $27.2 million for the three months ended October 1, 2022, the corporate overhead element of SG&A was $57.9 million and $51.3 million for the three months ended September 30, 2023 and October 1, 2022, respectively.

On a year-to-date basis, the corporate overhead element of SG&A amounted to $224.1 million in 2023 compared to $218.7 million in 2022. Excluding acquisition-related and other charges of $38.8 million for the nine months ended September 30, 2023 and $44.0 million for the nine months ended October 1, 2022, the corporate overhead element of SG&A was $185.3 million and $174.7 million for the nine months ended September 30, 2023 and October 1, 2022, respectively.

RESTRUCTURING ACTIVITIES

A summary of the restructuring reserve activity from December 31, 2022 to September 30, 2023 is as follows:


(Millions of Dollars)	December 31, 2022		Net Additions		Usage		Currency		September 30, 2023
Severance and related costs	$	57.0	$	13.4	$	(47.1)	$	0.2	$	23.5
Facility closures and asset impairments	5.3		14.2		(17.1)		—		2.4
Total	$	62.3	$	27.6	$	(64.2)	$	0.2	$	25.9

For the three and nine months ended September 30, 2023, the Company recognized net restructuring charges of $10.9 million and $27.6 million, respectively, primarily related to severance and facility closures. The Company expects to achieve annual net cost savings of approximately $28 million by the end of 2024 related to the restructuring costs incurred during the nine months ended September 30, 2023. The majority of the $25.9 million of reserves remaining as of September 30, 2023 is expected to be utilized within the next 12 months.

Segments:

The $28 million of net restructuring charges for the nine months ended September 30, 2023 includes: $20 million in the Tools & Outdoor segment; $1 million in the Industrial segment; and $7 million in Corporate.

The $11 million of net restructuring charges for the three months ended September 30, 2023 includes: $10 million in the Tools & Outdoor segment and $1 million in Corporate.

The anticipated annual net cost savings of approximately $28 million related to the 2023 restructuring actions include: $23 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 ($1.45) to ($1.00) on a GAAP basis, revised from ($1.25) to ($0.50), incorporating a third quarter $124 million pre-tax non-cash impairment charge related to the Irwin and Troy-Bilt trade names. The Company expects diluted earnings per share excluding acquisition-related and other charges to approximate $1.10 to $1.40, revised from $0.70 to $1.30. The Company is reiterating its target for 2023 free cash flow generation to approximate $0.6 billion to $0.9 billion, significantly ahead of net income, due to ongoing inventory reductions.

The difference between 2023 diluted earnings per share outlook and the diluted earnings per share range, excluding charges, is approximately $2.40 to $2.55, consisting of charges primarily due to the supply chain transformation under the Global Cost Reduction Program, non-cash asset impairment charges and integration-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 $443.9 million in the third quarter of 2023 compared to cash used in operations of $425.6 million in the corresponding period of 2022, primarily driven by inventory reductions due to

improving supply chain conditions and planned production curtailments. Year-to-date cash flows provided by operations were $422.0 million in 2023 compared to cash used in operations of $2.111 billion in 2022. The year-over-year change was primarily driven by inventory, which reached higher than historical levels in the first half of 2022 to meet demand expectations at the time within the Tools & Outdoor segment, as well as longer lead times experienced during 2021 and 2022 related to global supply chain challenges.

Free Cash Flow: Free cash flow, as defined in the table below, was an inflow of $364.0 million in the third quarter of 2023 compared to an outflow of $540.0 million in the corresponding period of 2022. On a year-to-date basis, free cash flow was an inflow of $205.6 million in 2023 compared to an outflow of $2.511 billion in 2022. 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 nine months 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.


	Third Quarter				Year-to-Date
(Millions of Dollars)	2023		2022		2023		2022
Net cash provided by (used in) operating activities	$	443.9	$	(425.6)	$	422.0	$	(2,110.6)
Less: capital and software expenditures	(79.9)		(114.4)		(216.4)		(399.9)
Free cash flow	$	364.0	$	(540.0)	$	205.6	$	(2,510.5)

Investing Activities: Cash flows used in investing activities were $76.4 million in the third quarter of 2023, primarily due to capital expenditures of $79.9 million. Cash flows provided by investing activities were $4.015 billion in the third quarter of 2022, primarily due to net proceeds from sales of businesses of $4.147 billion, partially offset by capital and software expenditures of $114.4 million.

Year-to-date cash flows used in investing activities totaled $206.8 million in 2023 primarily due to capital and software expenditures of $216.4 million. Cash flows provided by investing activities totaled $3.697 billion in the first nine months of 2022, primarily due to net proceeds from sales of businesses of $4.147 billion, partially offset by capital and software expenditures of $399.9 million.

Financing Activities: Cash flows used in financing activities totaled $387.7 million in the third quarter of 2023 primarily driven by net repayments of short-term commercial paper borrowings of $266.4 million and cash dividend payments on common stock of $121.3 million. Cash flows used in financing activities totaled $3.405 billion in the third quarter of 2022 primarily driven by credit facility repayments of $2.5 billion, net repayments of short-term commercial paper borrowings of $763.4 million, and cash dividend payments on common stock of $115.5 million.

Cash flows used in financing activities totaled $239.3 million in the first nine months of 2023, primarily driven by net repayments of short-term commercial paper borrowings of $594.3 million and cash dividend payments on common stock of $360.8 million, partially offset by net proceeds from debt issuances of $745.3 million. Cash flows used in financing activities totaled $1.371 billion in the first nine months of 2022, primarily driven by credit facility repayments of $2.5 billion, share repurchases of $2.319 billion, and cash dividend payments on common stock of $345.8 million, partially offset by credit facility borrowings of $2.5 billion, net proceeds from debt issuances of $992.6 million, and net short-term commercial paper borrowings of $328.0 million.

Credit Ratings & Liquidity:

The Company maintains 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-2, 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. In the third quarter of 2023, S&P downgraded the Company's senior unsecured debt credit rating to A-, from its previous rating of A, and its commercial paper program to A-2, from its previous rating of A-1. Failure to maintain 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 $347.8 million and $395.6 million as of September 30, 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 September 30, 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 September 30, 2023, the Company had commercial paper borrowings outstanding of $1.5 billion, of which $553.0 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 September 30, 2023, and December 31, 2022, the Company had not drawn on its five-year committed credit facility.

In September 2023, the Company terminated its $1.5 billion syndicated 364-Day Credit Agreement ("the Syndicated 364-Day Credit Agreement") dated September 2022, as amended. There were no outstanding borrowings under the Syndicated 364-Day Credit Agreement upon termination and as of December 31, 2022. Contemporaneously, the Company entered into a new $1.5 billion syndicated 364-Day Credit Agreement (the "2023 Syndicated 364-Day Credit Agreement") which is a revolving credit loan. The borrowings under the 2023 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 2023 Syndicated 364-Day Credit Agreement. The Company must repay all advances under the 2023 Syndicated 364-Day Credit Agreement by the earlier of September 4, 2024 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 2023 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 September 30, 2023, the Company had not drawn on its 2023 Syndicated 364-Day Credit Agreement.

In September 2023, the Company terminated its $0.5 billion revolving credit loan (the "Club 364-Day Credit Agreement") dated September 2022, as amended. There were no outstanding borrowings under the Club 364-Day Agreement upon termination and as of December 31, 2022.

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 an amendment to its 5-Year 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. The amended provisions described above also apply to the 2023 Syndicated 364-Day Credit Agreement.

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 $745.3 million, net of $4.7 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:

During the third quarter of 2023, as a result of new leadership within the Tools & Outdoor segment, the Company reviewed its brand portfolio resulting in a decision to shift prioritization and investment to its major brands, while leveraging certain of its specialty brands in a more focused manner. As a result of this shift in brand prioritization, and in connection with the preparation of its financial statements for the quarter ended September 30, 2023, the Company tested its indefinite-lived trade names for impairment utilizing a discounted cash flow valuation model. The key assumptions used included discount rates, royalty rates, and perpetual growth rates applied to updated sales projections. The Company determined that the fair values of its indefinite-lived trade names exceeded their respective carrying amounts, with the exception of the Irwin and Troy-Bilt trade names. The Company recognized a $124.0 million pre-tax, non-cash impairment charge related to these trade names in the third quarter of 2023. Subsequent to this impairment charge, the carrying value of the Irwin and Troy-Bilt trade names totaled $113.0 million. The Company intends to continue utilizing these trade names, which represented approximately 5% of 2022 net sales for the Tools & Outdoor segment, indefinitely in more focused product categories and end markets. Refer to Note M, Restructuring Charges and Other Costs, for further discussion.

In the third quarter of 2023, the Company also performed its annual goodwill impairment testing and determined that the fair values of each of its reporting units exceeded their respective carrying amounts. For the Engineered Fastening reporting unit, which included approximately $2.017 billion of goodwill as of September 30, 2023, the Company determined that the fair value, estimated using a discounted cash flow valuation model, exceeded its carrying amount by 16%. The key assumptions applied to the cash flow projections for the Engineered Fastening reporting unit included a 10.0% discount rate, near-term revenue growth rates over the next six years, which represented a compound annual growth rate of approximately 5%, and a 3% perpetual growth rate. For the Infrastructure reporting unit, which included approximately $534 million of goodwill as of September 30, 2023, the Company determined that the fair value, estimated using a discounted cash flow valuation model, exceeded its carrying amount by 13%. The key assumptions applied to the cash flow projections for the Infrastructure reporting unit included a 10.5% discount rate, near-term revenue growth rates over the next six years, which represented a compound annual growth rate of approximately 5%, and a 3% perpetual growth rate. The assumptions for the Engineered Fastening and Infrastructure reporting units contemplated business, market and overall economic conditions. Management continues to be confident in the long-term viability and success of both reporting units, particularly given their market positions, growth prospects, such as automotive electrification and the aerospace market recovery, and geographies served. The fair value for the Tools & Outdoor reporting unit, which was estimated using a discounted cash flow valuation model, exceeded its respective carrying amount by 44%.

There have been no changes in the Company’s critical accounting estimates during the third 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.

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