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/A, unless otherwise indicated.
Reprocessing
As discussed in the Explanatory Note to this Quarterly Report on Form 10-Q/A and
Note A, Significant Accounting Policies - Restatement, the Company has restated
certain information contained in its previously issued unaudited interim
consolidated financial statements for the periods ended October 2, 2021, July 3,
2021 and April 3, 2021, as well as the related comparative interim periods in
2020 (collectively, the "Affected Periods"), to correct the errors in its
original accounting for the Equity Units. The restatement relates to the
correction of basic and diluted earnings per share, as applicable, and the
classification of certain amounts in the consolidated balance sheets, statements
of cash flows and statements of changes in shareowners' equity. The corrections
have no impact on the Company's net earnings, total assets, cash flows from
operations or business segment information. Furthermore, any forward-looking
statements herein are as of the Original Form 10-Q for the period ended October
2, 2021, filed with the SEC on November 12, 2021. Refer to Note A, Significant
Accounting Policies - Restatement, for further discussion regarding the
restatement impacts. In addition, for further information regarding the matters
leading to the restatement and related findings with respect to the Company's
internal control over financial reporting, refer to Item 4. Controls and
Procedures in Part I of this Quarterly Report on Form 10-Q/A.
BUSINESS OVERVIEW
Strategy
The Company is a diversified global industrial provider of hand tools, power
tools, outdoor products and related accessories, engineered fastening systems
and products, services and equipment for oil & gas and infrastructure
applications, commercial electronic security and monitoring systems, healthcare
solutions, and automatic doors. The Company continues to execute a growth and
acquisition strategy over the long-term that involves industry, geographic and
customer diversification to foster sustainable revenue, earnings and cash flow
growth. The Company remains focused on delivering above-market organic growth
with margin expansion by leveraging its proven and long-standing Stanley Black &
Decker Operating Model ("SBD Operating Model") which has continually evolved
over the past 15 years as times have changed. At the center of the SBD Operating
Model is the concept of the interrelationship between people and technology,
which intersect and interact with the other key elements: Performance
Resiliency, Extreme Innovation, Operations Excellence and Extraordinary Customer
Experience. Each of these elements co-exists synergistically with the others in
a systems-based approach. The Company will leverage the SBD Operating Model to
continue making strides towards achieving its vision of delivering top-quartile
financial performance, becoming known as one of the world's leading innovators
and elevating its commitment to social responsibility.
The Company's growth and acquisition strategy is interdependent with its social
responsibility (ESG) strategy focused on workforce upskilling, product
innovation, and environmental preservation including mitigating the impacts of
climate change. These are core business issues that ensure the long-term
viability of the Company, its customers, suppliers, and communities. The Company
has established environmental, social and corporate governance targets embodied
in its 2030 Corporate Social Responsibility ("CSR") strategy that include
upskilling 10 million makers and creators, enhancing 500 million lives through
purpose driven product innovation, becoming carbon-positive, landfill-free, and
reducing water use in water stressed and scarce areas. The carbon positive
target includes third-party approved science-based targets to reduce absolute
scope 1 and 2 greenhouse gas emissions by greater than 100% by 2030, and to
reduce supply chain emissions by 35%. The Company's CSR strategy considers all
life-cycle stages including material procurement from supply chain partners,
product design, manufacturing, distribution and transportation, product use,
product service and end-of-life. Refer to section "Human Capital Management" in
Item 1 Business of the Company's Form 10-K/A for the year ended January 2, 2021
for additional information regarding the Company's commitment to upskilling its
employees and improving diversity, equity and inclusion.
In terms of capital allocation, the Company remains committed, over time, to
returning approximately 50% of free cash flow to shareholders through a strong
and growing dividend as well as opportunistically repurchasing shares. The
remaining free cash flow (approximately 50%) will be deployed towards
acquisitions.
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COVID-19 Pandemic
The novel coronavirus (COVID-19) outbreak has adversely affected the Company's
workforce and operations, as well as the operations of its customers,
distributors, suppliers and contractors. The COVID-19 pandemic has also resulted
in significant volatility and uncertainty in the markets in which the Company
operates. To successfully navigate through this unprecedented period, the
Company has remained focused on the following key priorities:
•Ensuring the health and safety of its employees and supply chain partners;
•Maintaining business continuity and financial strength and stability;
•Serving its customers as they provide essential products and services to the
world; and
•Doing its part to mitigate the impact of the virus across the globe.
To respond to the volatile and uncertain environment, the Company implemented a
comprehensive cost reduction and efficiency program in 2020, which delivered
approximately $625 million of net savings across 2021 and 2020. Cost actions
executed under the program included headcount reductions, furloughs, reduced
employee work schedules, a voluntary retirement program, and footprint
rationalizations. The Company took steps in 2020 to make some of the cost
actions permanent while certain employees were returned to full-time status.
This ensured the sustainability of the cost reduction program into 2021 while
providing more employment stability for the Company's remaining associates.
Acquisitions
On February 24, 2020, the Company acquired Consolidated Aerospace Manufacturing,
LLC ("CAM"), an industry-leading manufacturer of specialty fasteners and
components for the aerospace and defense markets. The acquisition further
diversified the Company's presence in the industrial markets and expanded its
portfolio of specialty fasteners in the aerospace and defense markets.
Pending Acquisitions
On August 16, 2021, the Company agreed to acquire the remaining 80 percent
ownership stake in MTD Holdings, Inc. ("MTD"), a privately held global
manufacturer of outdoor power equipment, for $1.6 billion in cash. The Company
previously acquired a 20 percent interest in MTD in January 2019 for $234
million in cash. With over $2.5 billion of revenue in the last twelve months,
MTD designs, manufactures and distributes lawn tractors, zero turn mowers, walk
behind mowers, snow blowers, residential robotic mowers, handheld outdoor power
equipment and garden tools for both residential and professional consumers under
well-known brands like Cub Cadet® and Troy-Bilt®. The Company expects the
combination of businesses will create a global leader in the $25 billion and
growing outdoor category, with strong brands and growth opportunities. Upon
closing of the remaining 80 percent ownership stake, the acquisition will be
accounted for as a business combination using the acquisition method of
accounting and consolidated into the Company's Tools & Storage segment. The
transaction is subject to customary closing conditions, including regulatory
approvals, and is expected to close in the fourth quarter of 2021.
On September 12, 2021, the Company reached an agreement to acquire Excel
Industries ("Excel") for $375 million in cash. Excel is a leading designer and
manufacturer of premium commercial and residential turf-care equipment under the
brands of Hustler Turf Equipment and BigDog Mower Co. The Company believes this
is a strategically important bolt-on acquisition as it builds an outdoor
products leader. The acquisition will be accounted for as a business combination
using the acquisition method of accounting and consolidated into the Company's
Tools & Storage segment. The transaction is subject to customary closing
conditions, including regulatory approvals, and is expected to close in the
fourth quarter of 2021.
Refer to Note F, Acquisitions and Investments, for further discussion.
Segments
The Company's operations are classified into three reportable business segments,
which also represent its operating segments: Tools & Storage, Industrial and
Security.
Tools & Storage
The Tools & Storage segment is comprised of the Power Tools Group ("PTG"), Hand
Tools, Accessories & Storage ("HTAS"), and Outdoor Products Group ("OPG")
businesses. Annual revenues in the Tools & Storage segment were $10.3 billion in
2020, representing 71% of the Company's total revenues.
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The PTG business includes both professional and consumer products. Professional
products include professional grade corded and cordless electric power tools and
equipment including drills, impact wrenches and drivers, grinders, saws, routers
and sanders, as well as pneumatic tools and fasteners including nail guns,
nails, staplers and staples, concrete and masonry anchors. Consumer products
include corded and cordless electric power tools sold primarily under the
BLACK+DECKER® brand, and home products such as hand-held vacuums, paint tools
and cleaning appliances.
The HTAS business sells hand tools, power tool accessories and storage products.
Hand tools include measuring, leveling and layout tools, planes, hammers,
demolition tools, clamps, vises, knives, saws, chisels and industrial and
automotive tools. Power tool accessories include drill bits, screwdriver bits,
router bits, abrasives, saw blades and threading products. Storage products
include tool boxes, sawhorses, medical cabinets and engineered storage solution
products.
OPG’s business primarily sells corded and cordless electric lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, pressure washers and related accessories to professionals and consumers under the BLACK+DECKER®, CRAFTSMAN® and DEWALT® brands.
Industrial
The industrial segment includes technical fastening and infrastructure businesses. The annual revenues of the Industrial segment were $2.3 billion in 2020, representing 16% of the Company’s total revenue.
The Engineered Fastening business primarily sells highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals. The product lines include externally threaded fasteners, blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, high-strength structural fasteners, axel swage, latches, heat shields, pins, and couplings. The Infrastructure business consists of the Attachment Tools and Oil & Gas product lines. Attachment Tools sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications. Oil & Gas sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines, and provides pipeline inspection services.
Security
The Security segment is comprised of the Convergent Security Solutions ("CSS")
and Mechanical Access Solutions ("MAS") businesses. Annual revenues in the
Security segment were $1.9 billion in 2020, representing 13% of the Company's
total revenues.
The CSS business designs, supplies and installs commercial electronic security
systems and provides electronic security services, including alarm monitoring,
video surveillance, fire alarm monitoring, systems integration and system
maintenance. Purchasers of these systems typically contract for ongoing security
systems monitoring and maintenance at the time of initial equipment
installation. The business also sells healthcare solutions, which include asset
tracking, infant protection, pediatric protection, patient protection, wander
management, fall management, and emergency call products. The MAS business
primarily sells automatic doors.
RESULTS OF OPERATIONS
Certain Items Impacting Earnings
The Company has provided a discussion of its results both inclusive and
exclusive of acquisition-related and other charges. Organic growth is also
utilized to describe results aside from the impacts of foreign currency
fluctuations, acquisitions during their initial 12 months of ownership, and
divestitures. The results and measures, including gross profit, selling,
general, and administrative ("SG&A"), Other, net, and segment profit, on a basis
excluding acquisition-related and other charges, and organic growth are Non-GAAP
financial measures. The Company considers the use of Non-GAAP financial measures
relevant to aid analysis and understanding of the Company's results and business
trends aside from the material impact of these items and ensures appropriate
comparability to operating results of prior periods.
The Company's operating results at the consolidated level as discussed below
include and exclude acquisition-related and other charges impacting gross
profit, SG&A, and Other, net. The Company's business segment results as
discussed below include and exclude acquisition-related and other charges
impacting gross profit and SG&A. These amounts for the third quarter and
year-to-date periods of 2021 and 2020 are as follows:
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Third Quarter and Year-To-Date 2021 The Company reported approximately $43 million and $116 million in pre-tax charges in the third quarter and year-to-date 2021 periods, respectively, which were comprised of the following: •$5 million and $12 million for the third quarter and year-to-date 2021 periods, respectively, reducing Gross Profit pertaining to facility-related charges; •$24 million and $68 million for the third quarter and year-to-date 2021 periods, respectively, in SG&A primarily for functional transformation initiatives; •$8 million and $10 million for the third quarter and year-to-date 2021 periods, respectively, in Other, net primarily related to deal transaction costs; •$4 million net loss for the year-to-date 2021 period pertaining to divested businesses; and •$6 million and $22 million for the third quarter and year-to-date 2021 periods, respectively, in Restructuring charges pertaining to severance and facility closures. The tax effect on the above charges during the third quarter and year-to-date periods of 2021 was approximately $10 million and $28 million, respectively. In addition, the Company's share of MTD's net earnings included an after-tax charge for the year-to-date 2021 period of $11 million related primarily to a one-time retroactive duty on imports of a specific component. The above items resulted in net after-tax charges of approximately $33 million, or $0.20 per diluted share, and $99 million, or $0.61 per diluted share, respectively, for the third quarter and year-to-date 2021 periods. Third Quarter and Year-To-Date 2020 The Company reported approximately $89 million and $320 million in net pre-tax charges in the third quarter and year-to-date 2020 periods, respectively, which were comprised of the following: •$7 million and $59 million for the third quarter and year-to-date 2020 periods, respectively, reducing Gross Profit pertaining to a cost reduction program and inventory step-up charges; •$36 million and $145 million for the third quarter and year-to-date 2020 periods, respectively, in SG&A primarily for a cost reduction program, Security business transformation and margin resiliency initiatives; •$3 million and $41 million for the third quarter and year-to-date 2020 periods, respectively, in Other, net primarily related to a cost reduction program and deal transaction costs; and •$43 million and $75 million for the third quarter and year-to-date 2020 periods, respectively, in Restructuring charges pertaining to severance and facility closures. The tax effect on the above charges during the third quarter and year-to-date periods of 2020 was approximately $21 million and $75 million, respectively. The Company also recorded a one-time tax benefit of $119 million in the second quarter of 2020 associated with a supply chain reorganization. In addition, the Company's share of MTD's net earnings included an after-tax charge during the third quarter and year-to-date 2020 periods of $3 million and $7 million, respectively, related primarily to restructuring charges. The above items resulted in net after-tax charges of approximately $71 million, or $0.44 per diluted share, and $134 million, or $0.83 per diluted share, respectively, for the third quarter and year-to-date 2020 periods. 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 $4.263 billion in the third quarter of 2021 compared
to $3.850 billion in the third quarter of 2020, representing an increase of 11%
driven by an 8% increase in volume, 2% increase in price and favorable foreign
currency impacts of 1%. Tools & Storage net sales increased 14% compared to the
third quarter of 2020 due to an 11% increase in volume, 2% increase in price and
favorable currency impacts of 1%. Industrial net sales increased 1% compared to
the third quarter of 2020 primarily due to a 2% increase in price and favorable
currency impacts of 1%, partially offset by a 1% decrease from both volume and
an Oil & Gas product line divestiture. Net sales in the Security segment
increased 5% compared to the third quarter of 2020 driven by increased volume of
7%, favorable impacts from foreign currency of 1% and 1% increases from both
price and acquisitions, partially offset by a 5% decline from divestitures.
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Net sales were $12.761 billion in the first nine months of 2021 compared to
$10.127 billion in the first nine months of 2020, representing an increase of
26%, driven by a 22% increase in volume, 2% increase in price and favorable
foreign currency impacts of 3%, partially offset by a 1% decline related to
divestitures. Tools & Storage net sales increased 34% compared to the first nine
months of 2020 due to a 29% increase in volume, favorable foreign currency
impacts of 3% and a 2% increase in price. Industrial net sales increased 9%
compared to the first nine months of 2020 primarily due to increased volume of
6%, favorable currency impacts of 2%, a 1% increase in price and a 1% increase
related to the CAM acquisition, partially offset by a 1% decrease from an Oil &
Gas product line divestiture. Net sales in the Security segment increased 8%
compared to the first nine months of 2020 driven by a 6% increase in volume,
favorable impacts from foreign currency of 4% and a 1% increase due to both
price and acquisitions, partially offset by a 4% decline from divestitures.
Gross Profit: Gross profit was $1.392 billion, or 32.6% of net sales, in the
third quarter of 2021 compared to $1.376 billion, or 35.7% of net sales, in the
third quarter of 2020. Acquisition-related and other charges, which reduced
gross profit, were $5.0 million for the three months ended October 2, 2021 and
$7.0 million for the three months ended September 26, 2020. Excluding these
charges, gross profit was 32.8% of net sales for the three months ended
October 2, 2021, compared to 35.9% for the three months ended September 26,
2020, as volume, price, productivity and mix benefits from innovation were more
than offset by accelerated commodity, transportation and labor inflation
required to meet strong demand.
Gross profit was $4.499 billion, or 35.3% of net sales, in the first nine months
of 2021 compared to $3.412 billion, or 33.7% of net sales, in the first nine
months of 2020. Acquisition-related and other charges, which reduced gross
profit, were $12.3 million for the nine months ended October 2, 2021 and
$58.7 million for the nine months ended September 26, 2020. Excluding these
charges, gross profit was 35.4% of net sales for the nine months ended
October 2, 2021, compared to 34.3% for the nine months ended September 26, 2020.
The year-over-year change was primarily driven by volume, price, productivity
and mix benefits from innovation, and savings from the 2020 cost reduction
program, partially offset by accelerated commodity, transportation and labor
inflation required to meet strong demand.
SG&A Expenses: SG&A, inclusive of the provision for credit losses, was $898.8
million, or 21.1% of net sales, in the third quarter of 2021, compared to $738.9
million, or 19.2% of net sales, in the third quarter of 2020. Within SG&A,
acquisition-related and other charges totaled $15.9 million for the three months
ended October 2, 2021 and $36.0 million for the three months ended September 26,
2020. Excluding these charges, SG&A was 20.5% of net sales for the three months
ended October 2, 2021, compared to 18.3% for the three months ended
September 26, 2020, as growth investment was deployed across the businesses.
SG&A, inclusive of the provision for credit losses, was $2.653 billion, or 20.8%
of net sales, in the first nine months of 2021, compared to $2.219 billion, or
21.9% of net sales, in the first nine months of 2020. Within SG&A,
acquisition-related and other charges totaled $59.5 million for the nine months
ended October 2, 2021 and $145.0 million for the nine months ended September 26,
2020. Excluding these charges, SG&A was 20.3% of net sales for the nine months
ended October 2, 2021, compared to 20.5% for the nine months ended September 26,
2020. The year-over-year change was primarily driven by savings from the 2020
cost reduction program partially offset by growth investments deployed across
the businesses.
Distribution center costs (i.e. warehousing and fulfillment facility and
associated labor costs) are classified within SG&A. This classification may
differ from other companies who may report such expenses within cost of sales.
Due to diversity in practice, to the extent the classification of these
distribution costs differs from other companies, the Company's gross profit may
not be comparable.
Corporate Overhead: The corporate overhead element of SG&A, which is not
allocated to the business segments, is comprised of world headquarters facility
expense, cost for the executive management team and expenses pertaining to
certain centralized functions that benefit the entire Company but are not
directly attributable to the businesses, such as legal and corporate finance
functions. Corporate overhead amounted to $76.5 million, or 1.8% of net sales,
in the third quarter of 2021 compared to $62.8 million, or 1.6% of net sales, in
the third quarter of 2020. Excluding acquisition-related and other charges of
$6.4 million for the three months ended October 2, 2021 and $17.9 million for
the three months ended September 26, 2020, the corporate overhead element of
SG&A was 1.6% and 1.2%, in the third quarter of 2021 and 2020, respectively. The
increase in 2021 compared to 2020 was primarily due to higher employee-related
costs.
On a year-to-date basis, the corporate overhead element of SG&A amounted to
$244.6 million, or 1.9% of net sales, in 2021 compared to $190.4 million, or
1.9% of net sales, in 2020. Excluding acquisition-related and other charges of
$25.5 million for the nine months ended October 2, 2021 and $49.7 million for
the nine months ended September 26, 2020, the corporate overhead element of SG&A
was 1.7% and 1.4%, in the first nine months of 2021 and 2020, respectively. The
year-over-year change was primarily due to higher employee-related costs.
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Other, net: Other, net amounted to $39.5 million and $74.3 million in the third
quarter of 2021 and 2020, respectively. Excluding acquisition-related and other
charges of $8.1 million and $3.2 million in the third quarter of 2021 and 2020,
respectively, Other, net totaled $31.4 million and $71.1 million, respectively,
during these periods. The year-over-year change was primarily due to
appreciation of Stanley Ventures' investments.
Other, net amounted to $152.3 million and $236.1 million in the first nine
months of 2021 and 2020, respectively. Excluding acquisition-related and other
charges of $10.2 million and $41.9 million in the first nine months of 2021 and
2020, respectively, Other, net totaled $142.1 million and $194.2 million,
respectively, during these periods. The year-over-year change was primarily due
to appreciation of Stanley Ventures' investments.
Loss on sale of businesses: The Company reported a pre-tax loss on the disposal of $3.6 million for nine months ended October 2, 2021.
Interest, net: Net interest expense was $43.5 million in the third quarter of
2021 compared to $50.7 million in the third quarter of 2020. On a year-to-date
basis, net interest expense was $131.9 million in 2021 compared to $155.1
million in 2020. The year-over-year decrease for both periods was primarily
driven by lower U.S. interest rates and lower average balances relating to the
Company's commercial paper borrowings. On a year-to-date basis, the decrease was
partially offset by lower interest income due to a decline in rates.
Income Taxes: The Company recognized a net income tax benefit of $0.4 million
and income tax expense of $192.8 million for the three and nine months ended
October 2, 2021, respectively, resulting in effective tax rates of (0.1)% and
12.6%. Excluding the impacts of the acquisition-related and other charges, the
effective tax rates were 2.0% and 13.3% for the three and nine months ended
October 2, 2021, respectively. These effective tax rates differ from the U.S.
statutory tax rate primarily due to a benefit associated with the Company's
supply chain reorganization, tax on foreign earnings, the re-measurement of
uncertain tax position reserves, the re-measurement of the deferred tax assets
and liabilities due to foreign corporate income tax rate changes, and the tax
benefit of equity-based compensation.
The Company recognized income tax expense of $78.4 million and a net tax benefit
of $26.0 million for the three and nine months ended September 26, 2020,
respectively, resulting in effective tax rates of 16.7% and (3.6)%. Excluding
the one-time benefit of $118.8 million recorded in the second quarter of 2020 to
reverse a deferred tax liability previously established related to certain
unremitted earnings of foreign subsidiaries not permanently reinvested as a
result of initiating a supply chain reorganization, and the impacts of the
acquisition-related and other charges, the effective tax rates were 17.8% and
16.0% for the three and nine months ended September 26, 2020, respectively.
These effective tax rates differ from the U.S. statutory tax rate primarily due
to tax on foreign earnings, the re-measurement of uncertain tax position
reserves, an intra-entity transfer of certain intellectual property rights, and
the tax benefit of equity-based compensation.
Business Segment Results
The Company's reportable segments are aggregations of businesses that have
similar products, services and end markets, among other factors. The Company
utilizes segment profit, which is defined as net sales minus cost of sales and
SG&A inclusive of the provision for credit losses (aside from corporate overhead
expense), and segment profit as a percentage of net sales to assess the
profitability of each segment.
The Company's operations are classified into three reportable business segments,
which also represent its operating segments: Tools & Storage, Industrial and
Security.
Tools & Storage:
Third Quarter Year-to-Date
(Millions of Dollars) 2021 2020 2021 2020
Net sales $ 3,185.9 $ 2,804.1 $ 9,445.3 $ 7,072.1
Segment profit $ 485.8 $ 597.1 $ 1,772.2 $ 1,177.0
% of Net sales 15.2 % 21.3 % 18.8 % 16.6 %
Tools & Storage net sales increased $381.8 million, or 14%, in the third quarter
of 2021 compared to the third quarter of 2020. Sales volume increased by 11%,
while price and foreign currency increased sales by 2% and 1%, respectively. All
regions delivered organic growth with growth in North America, Europe and
emerging markets of 9%, 20% and 28%, respectively. Demand was robust across all
markets as the secular shifts related to the reconnection with the home and
garden and
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eCommerce were amplified by the Company's industry-leading innovation and strong
professional demand. North America reflected retail growth as well as
consistently strong commercial and industrial channels. Point-of-sale demand
remained at robust levels in U.S. retail and channel inventory ended below
historical levels. Europe experienced growth across all major geographies and
the commercial, retail brick and mortar, and eCommerce channels. Emerging
markets growth was pervasive across all regions and was led by strong
professional demand.
Tools & Storage net sales increased $2,373.2 million, or 34%, in the first nine
months of 2021 compared to the first nine months of 2020. Sales volume increased
by 29%, while foreign currency and price increased sales by 3% and 2%,
respectively. All regions saw organic growth and share gain with organic growth
in North America, Europe and emerging markets of 25%, 41% and 56%, respectively.
The year-over-year change was primarily driven by the same factors that impacted
the third quarter of 2021, as discussed above.
Segment profit for the third quarter of 2021 was $485.8 million, or 15.2% of net
sales, compared to $597.1 million, or 21.3% of net sales, in the third quarter
of 2020. Excluding acquisition-related and other charges of $14.2 million and
$5.6 million for the three months ended October 2, 2021 and September 26, 2020,
respectively, segment profit was 15.7% of net sales in the third quarter of 2021
and 21.5% in the third quarter of 2020, as volume, price, productivity and
benefits from innovation were more than offset by accelerating transit costs to
meet strong demand, commodity inflation and new growth investments.
Segment profit for the first nine months of 2021 was $1.772 billion, or 18.8% of
net sales, compared to $1.177 billion, or 16.6% of net sales, in the first nine
months of 2020. Excluding acquisition-related and other charges of $27.6 million
and $37.1 million for the nine months ended October 2, 2021 and September 26,
2020, respectively, segment profit was 19.1% of net sales in the first nine
months of 2021 and 17.2% in the first nine months of 2020. The year-over-year
change was primarily driven by volume, price, productivity and mix benefits from
innovation, and savings from the 2020 cost reduction program, partially offset
by accelerating transit costs to meet strong demand, commodity inflation and new
growth investments.
Industrial:
Third Quarter Year-to-Date
(Millions of Dollars) 2021 2020 2021 2020
Net sales $ 593.5 $ 586.6 $ 1,853.4 $ 1,694.8
Segment profit $ 43.8 $ 63.8 $ 207.4 $ 136.7
% of Net sales 7.4 % 10.9 % 11.2 % 8.1 %
Industrial net sales increased $6.9 million, or 1%, in the third quarter of 2021
compared to the third quarter of 2020, primarily due to a 2% increase in price
and favorable currency impacts of 1%, partially offset by a 1% decrease from
both volume and an Oil & Gas product line divestiture. Engineered Fastening
organic growth was down 1% as strong general industrial growth was offset by
market-driven aerospace declines and lower automotive OEM production resulting
from the global semiconductor shortage. Infrastructure organic revenues were up
7% as 16% organic growth in Attachment Tools was partially offset by lower
pipeline project activity in Oil & Gas.
On a year-to-date basis, Industrial net sales increased $158.6 million, or 9%,
in the first nine months of 2021 compared to the first nine months of 2020, as
increases of 6% from volume, 2% from favorable currency and 1% from both price
and acquisitions were partially offset by a 1% decline related to an Oil & Gas
product line divestiture. Engineered Fastening organic revenues increased 10% as
strong automotive and general industrial markets were partially offset by
market-driven aerospace declines and lower automotive OEM production resulting
from the global semiconductor shortage. Infrastructure organic revenues
decreased 2% as growth in Attachment Tools was more than offset by lower
pipeline project activity in Oil & Gas.
Industrial segment profit for the third quarter of 2021 totaled $43.8 million,
or 7.4% of net sales, compared to $63.8 million, or 10.9% of net sales, in the
corresponding 2020 period. Excluding acquisition-related and other charges of
$3.2 million and $8.4 million for the three months ended October 2, 2021 and
September 26, 2020, respectively, segment profit amounted to 7.9% of net sales
in the third quarter of 2021 compared to 12.3% in the third quarter of 2020 as
the benefits from price and productivity were more than offset by commodity
inflation, growth investments and volume declines in higher-margin automotive
and aerospace fasteners.
Year-to-date segment profit for the first nine months of 2021 totaled $207.4
million, or 11.2% of net sales, compared to $136.7 million, or 8.1% of net
sales, in the corresponding 2020 period. Excluding acquisition-related and other
charges of $9.8 million and $59.4 million for the nine months ended October 2,
2021 and September 26, 2020, respectively, segment profit amounted to 11.7% of
net sales in the first nine months of 2021 compared to 11.6% in the first nine
months of 2020. The year-over-year change was primarily driven by volume, price,
productivity and benefits from the 2020 cost savings program partially offset by
commodity inflation, growth investments and unfavorable mix.
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Security:
Third Quarter Year-to-Date
(Millions of Dollars) 2021 2020 2021 2020
Net sales $ 483.8 $ 459.5 $ 1,462.5 $ 1,360.1
Segment profit $ 39.6 $ 39.3 $ 111.1 $ 69.4
% of Net sales 8.2 % 8.6 % 7.6 % 5.1 %
Security net sales increased $24.3 million, or 5%, in the third quarter of 2021
compared to the third quarter of 2020, as an increase of 7% from volume,
favorable impacts from foreign currency of 1% and 1% increases from both price
and acquisitions were partially offset by a 5% decline from divestitures. North
America organic growth was 12% driven by strong backlog conversion in commercial
electronic security and growth within automatic doors and healthcare. Europe was
positive organically led by data-driven product solutions in France which is one
of the new Health and Safety growth opportunities.
On a year-to-date basis, net sales increased $102.4 million, or 8%, in the first
nine months of 2021 compared to the first nine months of 2020, as an increase of
6% from volume, favorable impacts from foreign currency of 4% and a 1% increase
from both price and acquisitions was partially offset by a 4% decline from
divestitures. North America and Europe organic revenues increased 9% and 5%,
respectively, primarily due to the same factors that impacted the third quarter
of 2021, as discussed above.
Security segment profit for the third quarter of 2021 was $39.6 million, or 8.2%
of net sales, compared to $39.3 million, or 8.6% of net sales, in the
corresponding 2020 period. Excluding acquisition-related and other charges of
$5.0 million and $11.1 million for the three months ended October 2, 2021 and
September 26, 2020, respectively, segment profit amounted to 9.2% of net sales
in the third quarter of 2021 compared to 11.0% in the third quarter of 2020, as
price and volume gains were more than offset by higher labor costs,
pandemic-related inefficiencies and growth investments.
Year-to-date segment profit for the first nine months of 2021 was $111.1
million, or 7.6% of net sales, compared to $69.4 million, or 5.1% of net sales,
in the corresponding 2020 period. Excluding acquisition-related and other
charges of $16.8 million and $57.5 million for the nine months ended October 2,
2021 and September 26, 2020, respectively, segment profit amounted to 8.7% and
9.3% of net sales in the first nine months of 2021 and 2020, respectively. The
year-over-year decrease was primarily driven by the factors discussed above that
impacted the third quarter of 2021.
RESTRUCTURING ACTIVITIES A summary of restructuring reserve activity January 2, 2021 at
October 2, 2021 is as follows:
January 2, October 2,
(Millions of Dollars) 2021 Net Additions Usage Currency 2021
Severance and related costs $ 87.5 $ 5.9 $ (49.9) $ 2.0 $ 45.5
Facility closures and asset
impairments 2.7 16.2 (15.3) - 3.6
Total $ 90.2 $ 22.1 $ (65.2) $ 2.0 $ 49.1
For the three and nine months ended October 2, 2021, the Company recognized net
restructuring charges of $5.8 million and $22.1 million, respectively, primarily
related to severance and facility-related costs. The Company expects to achieve
annual net cost savings of approximately $31 million by the end of 2022 related
to the restructuring costs incurred during the nine months ended October 2,
2021. The majority of the $49.1 million of reserves remaining as of October 2,
2021 is expected to be utilized within the next 12 months.
Segments: The $22 million of net restructuring charges for the nine months ended
October 2, 2021 includes: $7 million pertaining to the Tools & Storage segment;
$2 million pertaining to the Industrial segment; $9 million pertaining to the
Security segment; and $4 million relating to Corporate.
The $6 million of net restructuring charges for the three months ended
October 2, 2021 includes: $1 million of net reversals pertaining to the Tools &
Storage segment; $5 million pertaining to the Security segment; and $2 million
relating to Corporate.
The anticipated annual net cost savings of approximately $31 million related to
the 2021 restructuring actions include: $7 million in the Tools & Storage
segment; $10 million in the Industrial segment; $13 million in the Security
segment; and $1 million in Corporate.
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FINANCIAL CONDITION
Liquidity, Sources and Uses of Capital: The Company’s primary sources of liquidity are cash flow generated from operations and lines of credit available under various credit facilities.
Operating Activities: Cash flows provided by operations were $4.6 million in the
third quarter of 2021 compared to $677.2 million in the corresponding period of
2020. Year-to-date cash flows provided by operations were $291.2 million
compared to $600.2 million in the corresponding period of 2020. The
year-over-year change was mainly attributable to higher inventory balances to
support strong demand in the Tools and Storage segment.
Free Cash Flow: Free cash flow, as defined in the table below, was an outflow of
$124.5 million in the third quarter of 2021 compared to an inflow of $615.1
million in the corresponding period of 2020. On a year-to-date basis, free cash
flow was an outflow of $31.3 million in 2021 compared to an inflow of $390.7
million in 2020. Free cash flow decreased in both periods due to higher
inventory balances to support strong demand in the Tools and Storage segment and
higher capital expenditures as discussed below. Management considers free cash
flow an important indicator of its liquidity, as well as its ability to fund
future growth and provide dividends to shareowners, and is useful information
for investors. Free cash flow does not include deductions for mandatory debt
service, other borrowing activity, discretionary dividends on the Company's
common and preferred stock and business acquisitions, among other items.
Third Quarter
Year to date
(Millions of Dollars) 2021 2020 2021 2020 Net cash provided by operating activities $ 4.6 $ 677.2 $ 291.2 $ 600.2 Less: capital and software expenditures (129.1) (62.1) (322.5) (209.5) Free cash flow $ (124.5) $ 615.1 $ (31.3) $ 390.7
Investing activities: Cash flows used in investing activities totaled $143.0 million and $63.8 million in the third quarters of 2021 and 2020, respectively, primarily due to capital expenditures and software $129.1 million and $62.1 millionrespectively.
Year-to-date cash flows used in investing activities totaled $399.7 million in
2021 primarily due to capital and software expenditures of $322.5 million and
net investment hedge settlements of $53.9 million. Cash flows used in investing
activities totaled $1.484 billion in the first nine months of 2020, primarily
due to the CAM acquisition of $1.301 billion, net of cash acquired, and capital
and software expenditures of $209.5 million.
Capital expenditures increased in both periods due to current year growth
investments as well as planned lower capital expenditures levels during 2020 in
response to the uncertainty around the long-term impact of the COVID-19 pandemic
on the Company's business.
Financing Activities: Cash flows provided by financing activities totaled $7.8
million in the third quarter of 2021 primarily driven by net short-term
borrowings under the Company's commercial paper program of $149.6 million,
partially offset by cash dividend payments on common stock of $126.0 million.
Cash flows used in financing activities totaled $810.2 million in the third
quarter of 2020 primarily driven by net payments on short-term borrowings under
the Company's commercial paper program of $712.9 million and cash dividend
payments on common stock of $109.6 million.
Year-to-date cash flows used in financing activities totaled $940.5 million in
the first nine months of 2021 primarily driven by the redemption and conversion
of the Remarketed Series C Preferred Stock for $750.0 million and cash dividend
payments on common stock of $347.7 million, partially offset by net short-term
borrowings under the Company's commercial paper program of $150.7 million and
proceeds from issuances of common stock of $108.1 million. Cash flows provided
by financing activities totaled $1.274 billion in the first nine months of 2020
primarily driven by net proceeds from debt issuances of $1.483 billion, proceeds
generated from the remarketing of the Series C Preferred Stock of $750 million
and proceeds of $93.8 million from issuances of common stock, partially offset
by net short-term borrowings under the Company's commercial paper program of
$341.8 million, cash dividend payments of $321.0 million and the Craftsman
deferred purchase price payment of $250.0 million.
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Credit Ratings & Liquidity:
The Company maintains strong investment grade credit ratings from the major
U.S. rating agencies on its senior unsecured debt (S&P A, Fitch A-, Moody's
Baa1), and its commercial paper program (S&P A-1, Fitch F1, Moody's P-2). There
were no changes to any of the Company's credit ratings during the first nine
months of 2021, however, S&P and Fitch revised their outlook to 'stable' from
'negative' in the first half of the year as a result of the Company's strong
performance during the COVID-19 pandemic. Failure to maintain strong investment
grade credit rating levels could adversely affect the Company's cost of funds,
liquidity and access to capital markets, but would not have an adverse effect on
the Company's ability to access its existing committed credit facilities.
Cash and cash equivalents totaled $293 million as of October 2, 2021, comprised
of $71 million in the U.S. and $222 million in foreign jurisdictions. As of
January 2, 2021, cash and cash equivalents totaled $1.381 billion, comprised of
$1.119 billion in the U.S. and $262 million 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 $290 million at October 2, 2021. 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.
In October 2021, the Company increased the commercial paper program from $3.0
billion to $3.5 billion, which includes Euro denominated borrowings in addition
to U.S. Dollars. As of October 2, 2021, the Company had $147.0 million of
borrowings outstanding. As of January 2, 2021, the Company had no borrowings
outstanding.
In September 2021, the Company amended and restated its existing five-year
$2.0 billion committed credit facility with the concurrent execution of a new
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 October 2, 2021, and January 2, 2021, the Company had not drawn
on its five-year committed credit facility.
In September 2021, the Company terminated its 364-Day $1.0 billion credit
facility and concurrently executed a new 364-Day $1.0 billion committed credit
facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit
Agreement may be made in U.S. Dollars or Euros and bear interest at a floating
rate plus an applicable margin dependent upon the denomination of the borrowing
and pursuant to the terms of the 364-Day Credit Agreement. The Company must
repay all advances under the 364-Day Credit Agreement by the earlier of
September 7, 2022 or upon termination. The Company may, however, convert all
advances outstanding upon termination into a term loan that shall be repaid in
full no later than the first anniversary of the termination date provided that
the Company, among other things, pays a fee to the administrative agent for the
account of each lender. The 364-Day Credit Agreement serves as part of the
liquidity back-stop for the Company's $3.5 billion U.S. Dollar and Euro
commercial paper program previously discussed. As of October 2, 2021, and
January 2, 2021, the Company had not drawn on its 364-Day committed credit
facility.
In November 2019, the Company issued 7,500,000 Equity Units with a total
notional value of $750 million ("2019 Equity Units"). Each unit has a stated
amount of $100 and initially consisted of a three-year forward stock purchase
contract ("2022 Purchase Contracts") for the purchase of a variable number of
shares of common stock, on November 15, 2022, for a price of $100, and a 10%
beneficial ownership interest in one share of 0% Series D Cumulative Perpetual
Convertible Preferred Stock, without par, with a liquidation preference of
$1,000 per share ("Series D Preferred Stock"). The Company received
approximately $735 million in cash proceeds from the 2019 Equity Units, net of
offering expenses and underwriting costs and commissions, and issued 750,000
shares of Series D Preferred Stock. The proceeds were used, together with cash
on hand, to redeem the 2052 Junior Subordinated Debentures in December 2019. The
Company also used $19 million of the proceeds to enter into capped call
transactions utilized to hedge potential economic dilution. On and after
November 15, 2022, the Series D Preferred Stock may be converted into common
stock at the option of the holder. At the election of the Company, upon
conversion, the Company may deliver cash, common stock, or a combination
thereof. On or after December 22, 2022, the Company may elect to redeem for
cash, all or any portion of the outstanding shares of the Series D Preferred
Stock at a redemption price equal to 100% of the liquidation preference, plus
any accumulated and unpaid dividends. If the Company calls the Series D
Preferred Stock for redemption, holders may convert their shares immediately
preceding the redemption date. Upon a successful remarketing of the Series D
Preferred Stock (the "Remarketed Series D Preferred Stock"), the Company will
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receive additional cash proceeds of $750 million and issue shares of the
Remarketed Series D Preferred Stock. The Company pays the holders of the 2022
Purchase Contracts quarterly contract adjustment payments, which commenced
February 15, 2020. As of October 2, 2021, the present value of the contract
adjustment payments was approximately $48 million.
In March 2018, the Company purchased from a financial institution "at-the-money"
capped call options with an approximate term of three years, on 3.2 million
shares of its common stock (subject to customary anti-dilution adjustments) for
an aggregate premium of $57 million. In February 2020, the Company net-share
settled 0.6 million of the 3.2 million capped call options on its common stock
and received 61,767 shares using an average reference price of $162.26 per
common share. On June 9, 2020, the Company amended the 2018 capped call options
to align with and offset the potential economic dilution associated with the
common shares issuable upon conversion of the Remarketed Series C Preferred
Stock, as further discussed below. Subsequent to the amendment, the capped call
options had an initial lower strike price of $148.34 and an upper strike price
of $165.00, which was approximately 30% higher than the closing price of the
Company's common stock on June 9, 2020. During the second quarter of 2021, the
Company net-share settled the remaining capped call options on its common stock
and received 344,004 shares using an average reference price of $209.80 per
common share.
In May 2017, the Company issued 7,500,000 Equity Units with a total notional
value of $750 million ("2017 Equity Units"). Each unit had a stated amount of
$100 and initially consisted of a three-year forward stock purchase contract
("2020 Purchase Contracts") for the purchase of a variable number of shares of
common stock, on May 15, 2020, for a price of $100, and a 10% beneficial
ownership interest in one share of 0% Series C Cumulative Perpetual Convertible
Preferred Stock, without par, with a liquidation preference of $1,000 per share
("Series C Preferred Stock"). The Company received approximately $727 million in
cash proceeds from the 2017 Equity Units, net of offering expenses and
underwriting costs and commissions, and issued 750,000 shares of Series C
Preferred Stock. The proceeds were used for general corporate purposes,
including repayment of short-term borrowings. The Company also used $25 million
of the proceeds to enter into capped call transactions utilized to hedge
potential economic dilution.
In May 2020, the Company generated cash proceeds of $750 million from the
successful remarketing of the Series C Preferred Stock (the "Remarketed Series C
Preferred Stock"), as described more fully in Note J, Equity Arrangements. Upon
completion of the remarketing, the holders of the 2017 Equity Units received
5,463,750 common shares and the Company issued 750,000 shares of Remarketed
Series C Preferred Stock. Holders of the Remarketed Series C Preferred Stock are
entitled to receive cumulative dividends, if declared by the Board of Directors,
at an initial fixed rate equal to 5.0% per annum of the $1,000 per share
liquidation preference (equivalent to $50.00 per annum per share). In connection
with the remarketing, the conversion rate was reset to 6.7352 shares of the
Company's common stock, which was equivalent to a conversion price of
approximately $148.47 per share. Beginning on May 15, 2020, the holders have the
option to convert the Remarketed Series C Preferred Stock into common stock. At
the election of the Company, upon conversion, the Company may deliver cash,
common stock, or a combination thereof. The Company did not have the right to
redeem the Series C Preferred Stock prior to May 15, 2021. On April 28, 2021,
the Company informed holders that it would redeem all outstanding shares of the
Remarketed Series C Preferred Stock on June 3, 2021 (the "Redemption Date") at
$1,002.50 per share in cash (the "Redemption Price"), which was equal to 100% of
the liquidation preference of a share of Remarketed Series C Preferred Stock,
plus accumulated and unpaid dividends to, but excluding, the Redemption Date. If
a holder elected to convert its shares of Remarketed Series C Preferred Stock
prior to the Redemption Date, the Company elected a combination settlement with
a specified cash amount of $1,000 per share. In June 2021, the Company redeemed
the Remarketed Series C Preferred Stock and settled all conversions, paying $750
million in cash and issuing 1,469,055 common shares.
In March 2015, the Company entered into a forward share purchase contract with a
financial institution counterparty for 3,645,510 shares of common stock. The
contract obligates the Company to pay $350.0 million, plus an additional amount
related to the forward component of the contract, by April 2022, or earlier at
the Company's option.
Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Equity Arrangements, for a more detailed discussion of the Company’s financing arrangements.
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Table of Contents OTHER MATTERS Critical Accounting Estimates: There have been no significant changes in the Company's critical accounting estimates during the third quarter of 2021. 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/A for the year ended January 2, 2021 for a discussion of the Company's critical accounting estimates.
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