UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 30, 2019.
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from [ ] to [ ]
Commission File Number 001-05224
STANLEY BLACK & DECKER, INC. | |||||||||
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT | 06-0548860 | |
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) | (I.R.S. EMPLOYER IDENTIFICATION NUMBER) | |
1000 STANLEY DRIVE NEW BRITAIN, CONNECTICUT | 06053 | |
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) | (ZIP CODE) | |
(860) 225-5111 | |||||||||
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | þ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
Emerging growth company | ¨ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ¨ | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
151,532,363 shares of the registrant’s common stock were outstanding as of April 19, 2019.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 30, 2019 AND MARCH 31, 2018
(Unaudited, Millions of Dollars, Except Per Share Amounts)
Year-to-Date | |||||||
2019 | 2018 | ||||||
Net Sales | $ | 3,333.6 | $ | 3,209.3 | |||
Costs and Expenses | |||||||
Cost of sales | $ | 2,228.0 | $ | 2,043.6 | |||
Selling, general and administrative | 760.6 | 778.8 | |||||
Provision for doubtful accounts | 18.3 | 6.8 | |||||
Other, net | 65.4 | 58.0 | |||||
Restructuring charges | 8.7 | 22.9 | |||||
Interest expense | 74.4 | 63.2 | |||||
Interest income | (16.6 | ) | (15.8 | ) | |||
$ | 3,138.8 | $ | 2,957.5 | ||||
Earnings before income taxes and equity interest | 194.8 | 251.8 | |||||
Income taxes | 24.7 | 81.7 | |||||
Net earnings before equity interest | $ | 170.1 | $ | 170.1 | |||
Share of net earnings of equity method investment | 0.3 | — | |||||
Net earnings | $ | 170.4 | $ | 170.1 | |||
Less: Net gain (loss) attributable to non-controlling interests | 0.5 | (0.5 | ) | ||||
Net Earnings Attributable to Common Shareowners | $ | 169.9 | $ | 170.6 | |||
Total Comprehensive Income Attributable to Common Shareowners | $ | 170.9 | $ | 266.4 | |||
Earnings per share of common stock: | |||||||
Basic | $ | 1.15 | $ | 1.13 | |||
Diluted | $ | 1.13 | $ | 1.11 | |||
Dividends per share of common stock | $ | 0.66 | $ | 0.63 | |||
Weighted-average shares outstanding (in thousands): | |||||||
Basic | 147,863 | 150,612 | |||||
Diluted | 149,908 | 153,905 | |||||
See Notes to (Unaudited) Condensed Consolidated Financial Statements.
3
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 30, 2019 AND DECEMBER 29, 2018
(Unaudited, Millions of Dollars, Except Per Share Amounts)
March 30, 2019 | December 29, 2018 | ||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 281.8 | $ | 288.7 | |||
Accounts and notes receivable, net | 1,882.1 | 1,607.8 | |||||
Inventories, net | 2,791.6 | 2,373.5 | |||||
Other current assets | 298.4 | 299.4 | |||||
Total Current Assets | 5,253.9 | 4,569.4 | |||||
Property, plant and equipment, net | 1,927.4 | 1,915.2 | |||||
Goodwill | 9,265.9 | 8,956.7 | |||||
Intangibles, net | 3,762.4 | 3,484.4 | |||||
Other assets | 1,250.7 | 482.3 | |||||
Total Assets | $ | 21,460.3 | $ | 19,408.0 | |||
LIABILITIES AND SHAREOWNERS' EQUITY | |||||||
Current Liabilities | |||||||
Short-term borrowings | $ | 1,780.7 | $ | 376.1 | |||
Current maturities of long-term debt | 3.1 | 2.5 | |||||
Accounts payable | 2,264.3 | 2,233.2 | |||||
Accrued expenses | 1,718.1 | 1,389.8 | |||||
Total Current Liabilities | 5,766.2 | 4,001.6 | |||||
Long-term debt | 3,909.4 | 3,819.8 | |||||
Deferred taxes | 744.4 | 705.3 | |||||
Post-retirement benefits | 581.8 | 595.4 | |||||
Other liabilities | 2,521.8 | 2,446.0 | |||||
Commitments and Contingencies (Notes R and S) | |||||||
Shareowners’ Equity | |||||||
Stanley Black & Decker, Inc. Shareowners’ Equity | |||||||
Preferred stock, without par value: Authorized 10,000,000 shares in 2019 and 2018 Issued and outstanding 750,000 shares in 2019 and 2018 | 750.0 | 750.0 | |||||
Common stock, par value $2.50 per share: Authorized 300,000,000 shares in 2019 and 2018 Issued 176,902,738 shares in 2019 and 2018 | 442.3 | 442.3 | |||||
Retained earnings | 6,291.3 | 6,219.0 | |||||
Additional paid in capital | 4,622.5 | 4,621.0 | |||||
Accumulated other comprehensive loss | (1,813.3 | ) | (1,814.3 | ) | |||
ESOP | (6.3 | ) | (10.5 | ) | |||
10,286.5 | 10,207.5 | ||||||
Less: cost of common stock in treasury | (2,354.0 | ) | (2,371.3 | ) | |||
Stanley Black & Decker, Inc. Shareowners’ Equity | 7,932.5 | 7,836.2 | |||||
Non-controlling interests | 4.2 | 3.7 | |||||
Total Shareowners’ Equity | 7,936.7 | 7,839.9 | |||||
Total Liabilities and Shareowners’ Equity | $ | 21,460.3 | $ | 19,408.0 | |||
See Notes to (Unaudited) Condensed Consolidated Financial Statements.
4
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 30, 2019 AND MARCH 31, 2018
(Unaudited, Millions of Dollars)
Year-to-Date | |||||||
2019 | 2018 | ||||||
OPERATING ACTIVITIES | |||||||
Net earnings | $ | 170.4 | $ | 170.1 | |||
Adjustments to reconcile net earnings to cash used in operating activities: | |||||||
Depreciation and amortization of property, plant and equipment | 94.0 | 81.3 | |||||
Amortization of intangibles | 43.8 | 42.3 | |||||
Share of net earnings of equity method investment | (0.3 | ) | — | ||||
Changes in working capital | (616.8 | ) | (544.3 | ) | |||
Changes in other assets and liabilities | (122.4 | ) | (98.8 | ) | |||
Cash used in operating activities | (431.3 | ) | (349.4 | ) | |||
INVESTING ACTIVITIES | |||||||
Capital and software expenditures | (89.6 | ) | (106.3 | ) | |||
Business acquisitions, net of cash acquired | (676.2 | ) | (1.2 | ) | |||
Purchase of investments | (245.4 | ) | (4.0 | ) | |||
Net investment hedge settlements | 3.9 | (17.5 | ) | ||||
Other | — | 2.7 | |||||
Cash used in investing activities | (1,007.3 | ) | (126.3 | ) | |||
FINANCING ACTIVITIES | |||||||
Payment on long-term debt | (400.0 | ) | — | ||||
Proceeds from debt issuance, net of fees | 496.9 | — | |||||
Stock purchase contract fees | (10.1 | ) | (10.1 | ) | |||
Net short-term borrowings | 1,419.9 | 382.0 | |||||
Premium paid on equity option | — | (57.3 | ) | ||||
Proceeds from issuances of common stock | 10.2 | 13.1 | |||||
Purchases of common stock for treasury | (8.1 | ) | (11.4 | ) | |||
Cash dividends on common stock | (97.6 | ) | (94.9 | ) | |||
Other | (3.0 | ) | (5.5 | ) | |||
Cash provided by financing activities | 1,408.2 | 215.9 | |||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 4.8 | 27.9 | |||||
Change in cash, cash equivalents and restricted cash | (25.6 | ) | (231.9 | ) | |||
Cash, cash equivalents and restricted cash, beginning of period | 311.4 | 655.1 | |||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | $ | 285.8 | $ | 423.2 | |||
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of March 30, 2019 and December 29, 2018, as shown above:
March 30, 2019 | December 29, 2018 | ||||||
Cash and cash equivalents | $ | 281.8 | $ | 288.7 | |||
Restricted cash included in Other current assets | 4.0 | 22.7 | |||||
Cash, cash equivalents and restricted cash | $ | 285.8 | $ | 311.4 | |||
See Notes to (Unaudited) Condensed Consolidated Financial Statements.
5
STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
THREE MONTHS ENDED MARCH 30, 2019 AND MARCH 31, 2018
(Unaudited, Millions of Dollars, Except Per Share Amounts)
Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | ESOP | Treasury Stock | Non- Controlling Interests | Shareowners’ Equity | |||||||||||||||||||||||||||
Balance December 29, 2018 | $ | 750.0 | $ | 442.3 | $ | 4,621.0 | $ | 6,219.0 | $ | (1,814.3 | ) | $ | (10.5 | ) | $ | (2,371.3 | ) | $ | 3.7 | $ | 7,839.9 | ||||||||||||||
Net earnings | — | — | — | 169.9 | — | — | — | 0.5 | 170.4 | ||||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 1.0 | — | — | — | 1.0 | ||||||||||||||||||||||||||
Cash dividends declared — $0.66 per share | — | — | — | (97.6 | ) | — | — | — | — | (97.6 | ) | ||||||||||||||||||||||||
Issuance of common stock | — | — | (15.2 | ) | — | — | — | 25.4 | — | 10.2 | |||||||||||||||||||||||||
Repurchase of common stock (61,663 shares) | — | — | — | — | — | — | (8.1 | ) | — | (8.1 | ) | ||||||||||||||||||||||||
Stock-based compensation related | — | — | 16.7 | — | — | — | — | — | 16.7 | ||||||||||||||||||||||||||
ESOP | — | — | — | — | — | 4.2 | — | — | 4.2 | ||||||||||||||||||||||||||
Balance March 30, 2019 | $ | 750.0 | $ | 442.3 | $ | 4,622.5 | $ | 6,291.3 | $ | (1,813.3 | ) | $ | (6.3 | ) | $ | (2,354.0 | ) | $ | 4.2 | $ | 7,936.7 | ||||||||||||||
Preferred Stock | Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | ESOP | Treasury Stock | Non- Controlling Interests | Shareowners’ Equity | |||||||||||||||||||||||||||
Balance December 30, 2017 | $ | 750.0 | $ | 442.3 | $ | 4,643.2 | $ | 5,998.7 | $ | (1,589.1 | ) | $ | (18.8 | ) | $ | (1,924.1 | ) | $ | 2.8 | $ | 8,305.0 | ||||||||||||||
Net earnings | — | — | — | 170.6 | — | — | — | (0.5 | ) | 170.1 | |||||||||||||||||||||||||
Other comprehensive income | — | — | — | — | 95.8 | — | — | — | 95.8 | ||||||||||||||||||||||||||
Cash dividends declared — $0.63 per share | — | — | — | (94.8 | ) | — | — | — | — | (94.8 | ) | ||||||||||||||||||||||||
Issuance of common stock | — | — | (13.0 | ) | — | — | — | 26.1 | — | 13.1 | |||||||||||||||||||||||||
Repurchase of common stock (69,880 shares) | — | — | — | — | — | — | (11.4 | ) | — | (11.4 | ) | ||||||||||||||||||||||||
Premium paid on equity option | — | — | (57.3 | ) | — | — | — | — | — | (57.3 | ) | ||||||||||||||||||||||||
Non-controlling interest dissolution | — | — | — | — | — | — | — | 0.3 | 0.3 | ||||||||||||||||||||||||||
Stock-based compensation related | — | — | 17.7 | — | — | — | — | — | 17.7 | ||||||||||||||||||||||||||
ESOP | — | — | — | — | — | 3.3 | — | — | 3.3 | ||||||||||||||||||||||||||
Balance March 31, 2018 | $ | 750.0 | $ | 442.3 | $ | 4,590.6 | $ | 6,074.5 | $ | (1,493.3 | ) | $ | (15.5 | ) | $ | (1,909.4 | ) | $ | 2.6 | $ | 8,441.8 | ||||||||||||||
See Notes to (Unaudited) Condensed Consolidated Financial Statements.
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STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2019
A. | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Operating results for the three months ended March 30, 2019 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in Stanley Black & Decker, Inc.’s (the “Company”) Form 10-K for the year ended December 29, 2018, and subsequent related filings with the Securities and Exchange Commission ("SEC").
In March 2019, the Company acquired the International Equipment Solutions Attachments businesses, Paladin and Pengo, ("IES Attachments"), a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The IES Attachments acquisition is being accounted for as a business combination using the acquisition method of accounting. The results of IES Attachments subsequent to the date of acquisition are being consolidated into the Company's Industrial segment.
In January 2019, the Company acquired a 20 percent interest in MTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment. MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning on July 1, 2021 and ending on January 2, 2029. In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD’s 2018 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), with an equitable sharing arrangement for future EBITDA growth. The Company is applying the equity method of accounting to the MTD investment.
In April 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson") from the Doncasters Group, which excluded Nelson's automotive stud welding business. The acquisition was accounted for as a business combination using the acquisition method of accounting and the results have been consolidated into the Company's Industrial segment for all periods subsequent to the date of acquisition.
Refer to Note F, Acquisitions and Investments, for further discussion of these transactions.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. Certain amounts reported in the previous year have been reclassified to conform to the 2019 presentation.
Financial Instruments
Derivative financial instruments are employed to manage risks, including foreign currency, interest rate exposures and commodity prices and are not used for trading or speculative purposes. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure. The Company recognizes all derivative instruments in the balance sheet at fair value.
Changes in the fair value of derivatives are recognized periodically either in earnings or in shareowners’ equity as a component of other comprehensive income (loss) ("OCI"), depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Changes in the fair value of derivatives accounted for as fair value hedges are recorded in earnings in the same caption as the changes in the fair value of the hedged items. Gains and losses on derivatives designated as cash flow hedges, to the extent they are included in the assessment of effectiveness, are recorded in OCI and subsequently reclassified to earnings to offset the impact of the
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hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in accumulated other comprehensive income (loss) would be recognized in earnings. Changes in the fair value of derivatives that are designated and qualify as a hedge of the net investment in foreign operations, to the extent they are included in the assessment of effectiveness, are reported in OCI and are deferred until disposal of the underlying assets. Gains and losses representing components excluded from the assessment of effectiveness for cash flow and fair value hedges are recognized in earnings on a straight-line basis in the same caption as the hedged item over the term of the hedge. Gains and losses representing components excluded from the assessment of effectiveness for net investment hedges are recognized in earnings on a straight-line basis in Other, net over the term of the hedge.
The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to interest expense over the remaining period of the debt originally covered by the terminated swap.
Changes in the fair value of derivatives not designated as hedges are reported in Other, net in the consolidated statements of operations. Refer to Note I, Financial Instruments, for further discussion.
Revenue Recognition
The Company’s revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For its customer contracts, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. The majority of the Company’s revenues are recorded at a point in time from the sale of tangible products.
A portion of the Company’s revenues within the Security and Infrastructure businesses is generated from equipment leased to customers. Customer arrangements are identified as leases if they include transfer of a tangible asset which is provided to the customer in exchange for payments typically at fixed rates payable monthly, quarterly or annually. Customer leases may include terms to allow for extension of leases for a short period of time, but typically do not provide for customer termination prior to the initial term. Some customer leases include terms to allow the customer to purchase the underlying asset, which occurs occasionally, and virtually no customer leases include residual value guarantee clauses. Within the Security business, the underlying asset typically has no value at termination of the customer lease, so no residual value asset is recorded in the financial statements. For Infrastructure business leases, underlying assets are assessed for functionality at termination of the lease and, if necessary, an impairment to the leased asset value is recorded.
Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service and evidence of the fair value of the advertising, in which case the expense is classified as selling, general, and administrative expense.
The Company’s revenues can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified (including equipment lease obligations)
and the transaction price is allocated based on the amount of consideration the Company expects to be entitled to in exchange for transferring the promised good or service to the customer.
Sales of security monitoring systems may have multiple performance obligations, including equipment, installation and monitoring or maintenance services. In most instances, the Company allocates the appropriate amount of consideration to each performance obligation based on the standalone selling price ("SSP") of the distinct goods or services performance obligation. In circumstances where SSP is not observable, the Company allocates the consideration for the performance obligations by utilizing one of the following methods: expected cost plus margin, the residual approach, or a mix of these estimation methods.
For performance obligations that the Company satisfies over time, revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company utilizes the method that most accurately depicts the progress toward completion of the performance obligation.
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The Company’s contract sales for the installation of security intruder systems and other construction-related projects are generally recorded under the input method. The input method recognizes revenue on the basis of the Company’s efforts or inputs to the satisfaction of a performance obligation relative to the total inputs expected to satisfy that performance obligation. Revenue recognized on security contracts in process are based upon the allocated contract price and related total inputs of the project at completion. The extent of progress toward completion is generally measured using input methods based on labor metrics. Revisions to these estimates as contracts progress have the effect of increasing or decreasing profits each period. Provisions for anticipated losses are made in the period in which they become determinable. The revenues for monitoring and monitoring-related services are recognized as services are rendered over the contractual period.
The Company utilizes the output method for contract sales in the Oil & Gas product line. The output method recognizes revenue based on direct measurements of the customer value of the goods or services transferred to date relative to the remaining goods or services promised under the contract. The output method includes methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered.
Contract assets or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, the Company records a contract asset. Conversely, if the measure of the remaining performance obligations exceeds the measure of the remaining rights, the Company records a contract liability.
Incremental costs of obtaining or fulfilling a contract with a customer that are expected to be recovered are recognized and classified in Other current assets or Other assets, as appropriate, in the consolidated balance sheet and are typically amortized over the contract period. The Company recognizes the incremental costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less.
Customer billings for services not yet rendered are deferred and recognized as revenue as the services are rendered. The associated deferred revenue is included in Accrued expenses or Other liabilities, as appropriate, in the consolidated balance sheet.
Refer to Note D, Accounts and Notes Receivable, for further discussion.
B. NEW ACCOUNTING STANDARDS
NEW ACCOUNTING STANDARDS ADOPTED — In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The new guidance permits, but does not require, companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Act”) on items within accumulated other comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this standard in the first quarter of 2019 and did not elect to reclassify the stranded tax effects of the Act on items within accumulated other comprehensive income to retained earnings. The Company uses the portfolio method for releasing the stranded tax effects from accumulated other comprehensive income.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("new lease standard"). The objective of the new lease standard is to increase transparency and comparability among organizations by requiring recognition of all lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In March 2019, the FASB issued ASU 2019-01, Codification Improvements, Leases (Topic 842), and in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Targeted Improvements, Leases (Topic 842). In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. These ASUs provide clarification on how to apply certain aspects of the new lease standard and allow entities to initially apply the standards from the adoption date. These standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted these standards in the first quarter of 2019 utilizing the new transition method to apply the standards from the adoption date. The Company recorded lease liabilities and a right-of-use asset in its consolidated balance sheet upon adoption. The standards did not impact the Company's consolidated statements of operations or retained earnings. Refer to Note D, Accounts and Notes Receivable, and Note S, Commitments and Guarantees, for further discussion.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED — In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
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requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The standard modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The standard modifies disclosure requirements of fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the timing of its adoption of this standard.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
C. | EARNINGS PER SHARE |
The following table reconciles net earnings attributable to common shareowners and the weighted-average shares outstanding used to calculate basic and diluted earnings per share for the three months ended March 30, 2019 and March 31, 2018:
Year-to-Date | ||||||||
2019 | 2018 | |||||||
Numerator (in millions): | ||||||||
Net Earnings Attributable to Common Shareowners | $ | 169.9 | $ | 170.6 | ||||
Denominator (in thousands): | ||||||||
Basic weighted-average shares outstanding | 147,863 | 150,612 | ||||||
Dilutive effect of stock contracts and awards | 2,045 | 3,293 | ||||||
Diluted weighted-average shares outstanding | 149,908 | 153,905 | ||||||
Earnings per share of common stock: | ||||||||
Basic | $ | 1.15 | $ | 1.13 | ||||
Diluted | $ | 1.13 | $ | 1.11 | ||||
The following weighted-average stock options were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive (in thousands):
Year-to-Date | ||||||
2019 | 2018 | |||||
Number of stock options | 2,326 | 1,164 | ||||
As described in detail in Note J, Equity Arrangements, the Company issued 7,500,000 Equity Units in May 2017 with a total notional value of $750.0 million. Each unit initially consists of 750,000 shares of convertible preferred stock and forward stock purchase contracts. On and after May 15, 2020, the convertible 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
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combination thereof. The conversion rate was initially 6.1627 shares of common stock per one share of convertible preferred stock, which was equivalent to an initial conversion price of approximately $162.27 per share of common stock. As of March 30, 2019, due to the customary anti-dilution provisions, the conversion rate was 6.1820, equivalent to a conversion price of approximately $161.76 per share of common stock. The convertible preferred stock is excluded from the denominator of the diluted earnings per share calculation on the basis that the convertible preferred stock will be settled in cash except to the extent that the conversion value of the convertible preferred stock exceeds its liquidation preference. Therefore, before any redemption or conversion, the common shares that would be required to settle the applicable conversion value in excess of the liquidation preference, if the Company elects to settle such excess in common shares, are included in the denominator of diluted earnings per share in periods in which they are dilutive. The shares related to the convertible preferred stock were anti-dilutive during 2019 and during February and March 2018.
D. ACCOUNTS AND NOTES RECEIVABLE
(Millions of Dollars) | March 30, 2019 | December 29, 2018 | |||||
Trade accounts receivable | $ | 1,718.2 | $ | 1,437.1 | |||
Trade notes receivable | 137.5 | 150.0 | |||||
Other accounts receivable | 146.5 | 122.7 | |||||
Gross accounts and notes receivable | $ | 2,002.2 | $ | 1,709.8 | |||
Allowance for doubtful accounts | (120.1 | ) | (102.0 | ) | |||
Accounts and notes receivable, net | $ | 1,882.1 | $ | 1,607.8 | |||
Long-term receivables, net | $ | 154.8 | $ | 153.7 | |||
Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses. Long-term receivables, net of $154.8 million and $153.7 million at March 30, 2019 and December 29, 2018, respectively, are reported within Other assets in the Condensed Consolidated Balance Sheets. The Company's financing receivables are predominantly related to certain security equipment leases with commercial businesses. As of March 30, 2019, the current portion of finance receivables within Trade notes receivable approximated $78.8 million. Generally, the Company retains legal title to any equipment under lease and holds the right to repossess such equipment in an event of default. All financing receivables are interest-bearing and the Company has not classified any financing receivables as held-for-sale. Interest income earned from financing receivables that are not delinquent is recorded on the effective interest method.
The Company considers any financing receivable that has not been collected within 90 days of original billing date as past-due or delinquent. The Company’s payment terms are generally consistent with the industries in which their businesses operate and typically range from 30-90 days globally. Additionally, the Company considers the credit quality of all past-due or delinquent financing receivables as nonperforming. The Company does not adjust the promised amount of consideration for the effects of a significant financing component when the period between transfer of the product and receipt of payment is less than one year. Any significant financing components for contracts greater than one year are included in revenue over time.
The following is a summary of the expected timing of receipt of payments from customers on an undiscounted basis as of March 30, 2019 relating to the Company’s finance receivables and operating leases:
(Millions of Dollars) | Total | Within 1 Year | 2 Years | 3 Years | 4 Years | 5 Years | Thereafter | |||||||||||||||||||||
Finance receivables | $ | 218.9 | $ | 78.8 | $ | 58.4 | $ | 47.6 | $ | 25.3 | $ | 8.7 | $ | 0.1 | ||||||||||||||
Operating leases | $ | 52.0 | $ | 49.7 | $ | 1.6 | $ | 0.6 | $ | 0.1 | $ | — | $ | — | ||||||||||||||
The following is a summary of lease revenue and sales-type lease profit for the three months ended March 30, 2019:
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(Millions of Dollars) | Year-to-Date 2019 | |||
Sales-type lease revenue | $ | 21.9 | ||
Lease interest revenue | 3.2 | |||
Operating lease revenue | 36.7 | |||
Total lease revenue | $ | 61.8 | ||
Sales-type lease profit | $ | 8.7 | ||
In October 2018, the Company entered into a new accounts receivable sale program. According to the terms, the Company sells certain of its trade accounts receivables at fair value to a wholly owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS"). The BRS, in turn, can sell such receivables to a third-party financial institution (“Purchaser”) for cash. The Purchaser’s maximum cash investment in the receivables at any time is $110.0 million. The purpose of the program is to provide liquidity to the Company. These transfers qualify as sales under ASC 860, Transfers and Servicing, and receivables are derecognized from the Company’s consolidated balance sheet when the BRS sells those receivables to the Purchaser. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities. At March 30, 2019, the Company did not record a servicing asset or liability related to its retained responsibility based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.
At March 30, 2019 and December 29, 2018, approximately $25.9 million and $100.1 million of net receivables were derecognized. Proceeds from transfers of receivables to the Purchaser totaled $93.5 million and payments to the Purchaser totaled $167.7 million for the three months ended March 30, 2019. Gross receivables sold to the BRS amounted to $386.1 million ($309.2 million, net) for the three months ended March 30, 2019. The program resulted in a pre-tax loss of $1.4 million for the three months ended March 30, 2019, which included service fees of $0.3 million. All cash flows under the program are reported as a component of changes in working capital within operating activities in the Condensed Consolidated Statements of Cash Flows since all the cash from the Purchaser is received upon the initial sale of the receivable.
As of March 30, 2019 and December 29, 2018, the Company's deferred revenue totaled $204.1 million and $202.0 million, respectively, of which $98.7 million and $98.6 million, respectively, was classified as current. Revenue recognized for the three months ended March 30, 2019 and March 31, 2018 that was previously deferred as of December 29, 2018 and December 30, 2017 totaled $49.2 million and $51.2 million, respectively.
As of March 30, 2019, approximately $1.159 billion of revenue from long-term contracts primarily in the Security segment was unearned related to customer contracts which were not completely fulfilled and will be recognized on a decelerating basis over the next 5 years. This amount excludes any of the Company's contracts with an original expected duration of one year or less.
E. | INVENTORIES |
The components of Inventories, net at March 30, 2019 and December 29, 2018 are as follows:
(Millions of Dollars) | March 30, 2019 | December 29, 2018 | |||||
Finished products | $ | 2,008.5 | $ | 1,707.4 | |||
Work in process | 170.7 | 150.8 | |||||
Raw materials | 612.4 | 515.3 | |||||
Total | $ | 2,791.6 | $ | 2,373.5 | |||
As part of the IES Attachments acquisition in the first quarter of 2019, the Company acquired net inventory with an estimated fair value of $75.0 million. Refer to Note F, Acquisitions and Investments, for further discussion of the IES Attachments acquisition.
F. ACQUISITIONS AND INVESTMENTS
2019 INVESTMENTS
On January 2, 2019, the Company acquired a 20 percent interest in MTD Holdings Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment, for $234 million in cash. With annual revenue of approximately $2.4 billion, MTD manufactures and distributes gas-powered lawn tractors, zero turn mowers, walk behind mowers, snow throwers, trimmers, chain saws, utility vehicles and other outdoor power equipment. Under the terms of the agreement, the Company has the option
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to acquire the remaining 80 percent of MTD beginning on July 1, 2021 and ending on January 2, 2029. In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD’s 2018 EBITDA, with an equitable sharing arrangement for future EBITDA growth. The Company is applying the equity method of accounting to the MTD investment.
During 2019, the Company made additional immaterial investments that are not accounted for under the equity method. The Company acquired less than a 20 percent interest in each investment and does not have the ability to significantly influence any of the investees.
2019 ACQUISITIONS
IES Attachments
On March 8, 2019, the Company acquired IES Attachments for $653.0 million, net of cash acquired and an estimated working capital adjustment. IES Attachments is a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The Company expects the acquisition to further diversify the Company's presence in the industrial markets, expand its portfolio of attachment solutions and provide a meaningful platform for continued growth. The results of IES Attachments are being consolidated into the Company's Industrial segment.
The IES Attachments acquisition is being accounted for as a business combination using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The estimated fair value of identifiable net assets acquired, which includes $81.7 million of working capital, $84.9 million of deferred tax liabilities, and $328.0 million of intangible assets, is $341.3 million. The related goodwill is $311.7 million. The amount allocated to intangible assets includes $304.0 million for customer relationships. The weighted-average useful life assigned to the intangible assets is 14 years.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected cost synergies of the combined business, assembled workforce, and the going concern nature of IES Attachments. It is estimated that $2.4 million of goodwill, relating to the pre-acquisition historical tax basis of goodwill, will be deductible for tax purposes.
The acquisition accounting for IES Attachments is preliminary in all respects. During the measurement period, the Company expects to record adjustments relating to the finalization of intangible assets, inventory and property, plant and equipment valuations, working capital accounts, leases, various opening balance sheet contingencies, and various income tax matters, amongst others.
A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results from operations. The Company will complete its acquisition accounting as soon as reasonably possible within the measurement period.
Other 2019 Acquisition
During 2019, the Company completed one smaller acquisition for $23.3 million, net of cash acquired, which is being consolidated into the Company's Industrial segment. The estimated fair value of the identifiable net assets acquired, which includes $5.3 million of working capital, is $10.1 million. The related goodwill is $13.2 million.
The acquisition accounting for this acquisition is preliminary in certain respects. During the measurement period, the Company expects to record adjustments relating to working capital accounts, various opening balance sheet contingencies and various income tax matters, amongst others. These adjustments are not expected to have a material impact on the Company’s consolidated financial statements.
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2018 ACQUISITIONS
Nelson Fasteners Systems
On April 2, 2018, the Company acquired Nelson for $430.1 million, net of cash acquired and an estimated working capital adjustment. Nelson is complementary to the Company's product offerings, enhances its presence in the general industrial end markets, expands its portfolio of highly-engineered fastening solutions, and will deliver cost synergies. The results of Nelson have been consolidated into the Industrial segment.
The Nelson acquisition was accounted for as a business combination using the acquisition method of accounting. The acquisition accounting for Nelson was completed during the first quarter of 2019. The measurement period adjustments recorded in the first quarter of 2019 did not have a material impact to the Company's Condensed Consolidated Financial Statements. The fair value of identifiable net assets acquired, which included $64.7 million of working capital and $167.0 million of intangible assets, was $212.5 million. The related goodwill was $217.6 million. The amount allocated to intangible assets included $149.0 million for customer relationships. The useful lives assigned to the intangible assets ranged from 12 to 15 years.
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the expected cost synergies of the combined business, assembled workforce, and the going concern nature of Nelson. Goodwill is not expected to be deductible for tax purposes.
Other 2018 Acquisitions
During 2018, the Company completed six smaller acquisitions for a total purchase price of $105.1 million, net of cash acquired. The estimated fair value of the identifiable net assets acquired, which includes $13.4 million of working capital and $35.5 million of intangible assets, is $38.0 million. The related goodwill is $67.1 million. The amount allocated to intangible assets includes $32.0 million for customer relationships. The useful lives assigned to intangible assets range from 10 to 14 years.
The acquisition accounting for these acquisitions is preliminary in certain respects. During the measurement period, the Company expects to record adjustments relating to working capital accounts, various opening balance sheet contingencies and various income tax matters, amongst others. These adjustments are not expected to have a material impact on the Company’s consolidated financial statements.
ACTUAL AND PRO-FORMA IMPACT OF THE ACQUISTIONS
Actual Impact from Acquisitions
The Company's Consolidated Statements of Operations and Comprehensive Income for the three months ended March 30, 2019 include net sales of $26.3 million and a net loss of $8.4 million from the 2019 acquisitions. The net loss includes amortization relating to intangible assets recorded upon acquisition, inventory step-up charges, transaction costs, and other integration-related costs.
Pro-forma Impact from Acquisitions
The following table presents supplemental pro-forma information as if the 2019 acquisitions had occurred on December 31, 2017 and the 2018 acquisitions had occurred on January 1, 2017. The pro-forma consolidated results are not necessarily indicative of what the Company’s consolidated net sales and net earnings would have been had the Company completed the acquisitions on the aforementioned dates. In addition, the pro-forma consolidated results do not purport to project the future results of the Company.
First Quarter | ||||||||
(Millions of Dollars, except per share amounts) | 2019 | 2018 | ||||||
Net sales | $ | 3,409.7 | $ | 3,375.4 | ||||
Net earnings attributable to common shareowners | $ | 182.5 | $ | 162.8 | ||||
Diluted earnings per share | $ | 1.22 | $ | 1.06 | ||||
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2019 Pro-forma Results
The 2019 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2019 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made:
• | Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the acquisition accounting that would have been incurred from December 30, 2018 to the acquisition dates. |
• | Because the 2019 acquisitions were assumed to occur on December 31, 2017, there were no acquisition-related costs or inventory step-up charges factored into the 2019 pro-forma period, as such expenses would have occurred in the first year following the assumed acquisition date. |
2018 Pro-forma Results
The 2018 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2018 and 2019 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made:
• | Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the acquisition accounting that would have been incurred from December 31, 2017 to March 31, 2018 for the 2018 and 2019 acquisitions. |
• | Depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from December 31, 2017 to March 31, 2018. |
• | Additional expense for acquisition-related costs and inventory step-up charges relating to the 2019 acquisitions, as such expenses would have been incurred from December 31, 2017 to March 31, 2018. |
• | Because the 2018 acquisitions were assumed to occur on January 1, 2017, there were no acquisition-related costs or inventory step-up charges factored into the 2018 pro-forma period, as such expenses would have occurred in the first year following the assumed acquisition date. |
G. GOODWILL
Changes in the carrying amount of goodwill by segment are as follows:
(Millions of Dollars) | Tools & Storage | Industrial | Security | Total | |||||||||||
Balance December 29, 2018 | $ | 5,154.3 | $ | 1,679.7 | $ | 2,122.7 | $ | 8,956.7 | |||||||
Acquisition adjustments | (0.9 | ) | 323.1 | 0.9 | 323.1 | ||||||||||
Foreign currency translation and other | 8.4 | (8.0 | ) | (14.3 | ) | (13.9 | ) | ||||||||
Balance March 30, 2019 | $ | 5,161.8 | $ | 1,994.8 | $ | 2,109.3 | $ | 9,265.9 | |||||||
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H. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt and financing arrangements at March 30, 2019 and December 29, 2018 are as follows:
March 30, 2019 | December 29, 2018 | ||||||||||||||||||||||||||||
(Millions of Dollars) | Interest Rate | Original Notional | Unamortized Discount | Unamortized Gain/(Loss) Terminated Swaps 1 | Purchase Accounting FV Adjustment | Deferred Financing Fees | Carrying Value | Carrying Value 2 | |||||||||||||||||||||
Notes payable due 2021 | 3.40% | $ | 400.0 | $ | (0.1 | ) | $ | 9.3 | $ | — | $ | (0.9 | ) | $ | 408.3 | $ | 409.1 | ||||||||||||
Notes payable due 2022 | 2.90% | 754.3 | (0.2 | ) | — | — | (2.3 | ) | 751.8 | 751.6 | |||||||||||||||||||
Notes payable due 2026 | 3.40% | 500.0 | (0.7 | ) | — | — | (3.2 | ) | 496.1 | — | |||||||||||||||||||
Notes payable due 2028 | 7.05% | 150.0 | — | 10.1 | 9.8 | — | 169.9 | 170.4 | |||||||||||||||||||||
Notes payable due 2028 | 4.25% | 500.0 | (0.4 | ) | — | — | (4.2 | ) | 495.4 | 495.7 | |||||||||||||||||||
Notes payable due 2040 | 5.20% | 400.0 | (0.3 | ) | (31.5 | ) | — | (2.9 | ) | 365.3 | 364.9 | ||||||||||||||||||
Notes payable due 2048 | 4.85% | 500.0 | (0.5 | ) | — | — | (5.5 | ) | 494.0 | 494.4 | |||||||||||||||||||
Notes payable due 2052 (junior subordinated) | 5.75% | 750.0 | — | — | — | (18.3 | ) | 731.7 | 731.6 | ||||||||||||||||||||
Notes payable due 2053 (junior subordinated) | 7.08% | — | — | — | — | — | — | 396.7 | |||||||||||||||||||||
Other, payable in varying amounts through 2022 | 0.00% - 4.50% | — | — | — | — | — | — | 7.9 | |||||||||||||||||||||
Total long-term debt, including current maturities | $ | 3,954.3 | $ | (2.2 | ) | $ | (12.1 | ) | $ | 9.8 | $ | (37.3 | ) | $ | 3,912.5 | $ | 3,822.3 | ||||||||||||
Less: Current maturities of long-term debt | (3.1 | ) | (2.5 | ) | |||||||||||||||||||||||||
Long-term debt | $ | 3,909.4 | $ | 3,819.8 | |||||||||||||||||||||||||
1Unamortized gain/(loss) associated with interest rate swaps are more fully discussed in Note I, Financial Instruments.
2Finance lease balances as of December 29, 2018 have been reclassified to lease liabilities in accordance with the adoption of the new lease standard in the first quarter of 2019. Refer to Note B, New Accounting Standards.
In March 2019, the Company issued $500.0 million of senior unsecured notes, maturing on March 1, 2026 ("2026 Term Notes"). The 2026 Term Notes will accrue interest at a fixed rate of 3.40% per annum with interest payable semi-annually in arrears. The 2026 Term Notes rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated debt. The Company received net cash proceeds of $496.9 million which reflects the notional amount offset by a discount, 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 other borrowings.
In February 2019, the Company redeemed all of the outstanding 2053 Junior Subordinated Debentures for $405.7 million representing 100% of the principal amount plus accrued and unpaid interest. The Company recognized a net pre-tax loss of $3.2 million from the redemption, which was comprised of a $7.8 million loss related to the write-off of deferred financing fees partially offset by a $4.6 million gain relating to an unamortized terminated interest rate swap as described in more detail in Note I, Financial Instruments.
The Company has a $3.0 billion commercial paper program which includes Euro denominated borrowings in addition to U.S. Dollars. As of March 30, 2019, the Company had $1,776.5 million of borrowings outstanding, of which approximately $898.1 million in Euro denominated commercial paper was designated as a Net Investment Hedge. As of December 29, 2018, the Company had $373.0 million of borrowings outstanding, of which approximately $228.9 million in Euro denominated commercial paper was designated as a Net Investment Hedge. Refer to Note I, Financial Instruments, for further discussion.
The Company has a five-year $2.0 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 $653.3 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 12, 2023 or upon termination. The 5 Year Credit Agreement is designated to be a liquidity back-stop for the Company's $3.0 billion U.S. Dollar and Euro commercial paper program. As of March 30, 2019, and December 29, 2018, the Company had not drawn on its five-year committed credit facility.
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The Company has a 364-Day $1.0 billion committed credit facility (the “364 Day Credit Agreement”). Borrowings under the 364 Day Credit Agreement may be made in U.S. Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the 364 Day Credit Agreement. The Company must repay all advances under the 364 Day Credit Agreement by the earlier of September 11, 2019 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 a liquidity back-stop for the Company’s $3.0 billion U.S. Dollar and Euro commercial paper program. As of March 30, 2019, and December 29, 2018, the Company had not drawn on its 364-Day committed credit facility.
I. FINANCIAL INSTRUMENTS
The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure.
If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, Derivatives and Hedging, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. Financial instruments are not utilized for speculative purposes.
A summary of the fair values of the Company’s derivatives recorded in the Condensed Consolidated Balance Sheets at March 30, 2019 and December 29, 2018 is as follows:
(Millions of Dollars) | Balance Sheet Classification | March 30, 2019 | December 29, 2018 | Balance Sheet Classification | March 30, 2019 | December 29, 2018 | |||||||||||||
Derivatives designated as hedging instruments: | |||||||||||||||||||
Interest Rate Contracts Cash Flow | LT other assets | $ | — | $ | — | LT other liabilities | $ | 9.9 | $ | — | |||||||||
Foreign Exchange Contracts Cash Flow | Other current assets | 19.9 | 18.1 | Accrued expenses | 1.0 | 0.6 | |||||||||||||
LT other assets | 1.1 | — | LT other liabilities | — | — | ||||||||||||||
Net Investment Hedge | Other current assets | 29.1 | 5.7 | Accrued expenses | 4.7 | 1.5 | |||||||||||||
LT other assets | — | — | LT other liabilities | 11.2 | 13.8 | ||||||||||||||
Non-derivative designated as hedging instrument: | |||||||||||||||||||
Net Investment Hedge | — | — | Short-term borrowings | 898.1 | 228.9 | ||||||||||||||
Total designated as hedging | $ | 50.1 | $ | 23.8 | $ | 924.9 | $ | 244.8 | |||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||
Foreign Exchange Contracts | Other current assets | $ | 5.4 | $ | 9.1 | Accrued expenses | $ | 9.4 | $ | 5.4 | |||||||||
Total | $ | 55.5 | $ | 32.9 | $ | 934.3 | $ | 250.2 | |||||||||||
The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.
During the three months ended March 30, 2019 and March 31, 2018, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of $17.3 million and net cash paid of $15.9 million, respectively.
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CASH FLOW HEDGES
There were after-tax mark-to-market losses of $29.0 million and $26.8 million as of March 30, 2019 and December 29, 2018, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax gain of $0.9 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates.
The tables below detail pre-tax amounts of derivatives designated as cash flow hedges in Accumulated other comprehensive loss during the periods in which the underlying hedged transactions affected earnings for the three months ended March 30, 2019 and March 31, 2018:
Year-to-Date 2019 | ||||||||||||||
(Millions of Dollars) | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing | ||||||||||
Interest Rate Contracts | $ | (10.9 | ) | Interest expense | $ | (4.0 | ) | $ | — | |||||
Foreign Exchange Contracts | $ | 7.0 | Cost of sales | $ | (0.2 | ) | $ | — | ||||||
Year-to-Date 2018 | ||||||||||||||
(Millions of Dollars) | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Reclassified from OCI to Income | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing | ||||||||||
Interest Rate Contracts | $ | 18.0 | Interest expense | $ | (3.8 | ) | $ | — | ||||||
Foreign Exchange Contracts | $ | (6.7 | ) | Cost of sales | $ | (2.8 | ) | $ | — | |||||
A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 30, 2019 and March 31, 2018 are as follows:
Year-to-Date 2019 | |||||||
(Millions of Dollars) | Cost of Sales | Interest Expense | |||||
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded | $ | 2,228.0 | $ | 74.4 | |||
Gain (loss) on cash flow hedging relationships: | |||||||
Foreign Exchange Contracts: | |||||||
Hedged Items | $ | 0.2 | $ | — | |||
Gain (loss) reclassified from OCI into Income | $ | (0.2 | ) | $ | — | ||
Interest Rate Swap Agreements: | |||||||
Gain (loss) reclassified from OCI into Income 1 | $ | — | $ | (4.0 | ) | ||
Year-to-Date 2018 | |||||||
(Millions of Dollars) | Cost of Sales | Interest Expense | |||||
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded | $ | 2,043.6 | $ | 63.2 | |||
Gain (loss) on cash flow hedging relationships: | |||||||
Foreign Exchange Contracts: | |||||||
Hedged Items | $ | 2.8 | $ | — | |||
Gain (loss) reclassified from OCI into Income | $ | (2.8 | ) | $ | — | ||
Interest Rate Swap Agreements: | |||||||
Gain (loss) reclassified from OCI into Income 1 | $ | — | $ | (3.8 | ) | ||
1 Inclusive of the gain/loss amortization on terminated derivative financial instruments.
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An after-tax loss of $2.1 million and $4.6 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the three months ended March 30, 2019 and March 31, 2018, respectively, during the periods in which the underlying hedged transactions affected earnings.
Interest Rate Contracts: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-debt proportions. During the three months ended March 30, 2019, the Company entered into forward starting interest rate swaps totaling $450.0 million to offset the expected variability on future interest rate payments associated with debt instruments expected to be issued in the future. Swaps with a notional amount of $250.0 million matured during the quarter resulting in a loss of $1.0 million, which was recorded in Accumulated other comprehensive loss and will be amortized to earnings as interest expense over future periods. The cash flows stemming from the maturity of such interest rate swaps designated as cash flow hedges are presented within other financing activities in the Condensed Consolidated Statements of Cash Flows. As of March 30, 2019, the Company had $200.0 million of forward starting swaps outstanding. As of December 29, 2018, there were no active forward starting swaps designated as cash flow hedges.
Foreign Currency Contracts
Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with functional currencies different than their own, which creates currency-related volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases and sales of inventory. Gains and losses reclassified from Accumulated other comprehensive loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At March 30, 2019 and December 29, 2018, the notional value of forward currency contracts outstanding was $614.3 million maturing on various dates through 2020 and $240.0 million maturing on various dates through 2019, respectively.
Purchased Option Contracts: The Company and its subsidiaries have entered into various intercompany transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its intercompany obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from Accumulated other comprehensive loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. As of March 30, 2019 and December 29, 2018, the notional value of purchased option contracts was $269.5 million and $370.0 million, respectively, maturing on various dates through 2019.
FAIR VALUE HEDGES
Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In prior years, the Company entered into interest rate swaps related to certain of its notes payable which were subsequently terminated. Amortization of the gain/loss on previously terminated swaps is reported as a reduction of interest expense. Prior to termination, the changes in the fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. As of March 30, 2019 and December 29, 2018, the Company did not have any active fair value interest rate swaps.
A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 30, 2019 and March 31, 2018 is as follows:
(Millions of Dollars) | Year-to-Date 2019 Interest Expense | Year-to-Date 2018 Interest Expense | |||||
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the fair value hedges are recorded | $ | 74.4 | $ | 63.2 | |||
Amortization of gain on terminated swaps | $ | (5.4 | ) | $ | (0.8 | ) | |
In February 2019, the Company redeemed all of the outstanding 2053 Junior Subordinated Debentures as discussed in Note H, Long-Term Debt and Financing Arrangements. As a result, the Company recorded a pre-tax gain of $4.6 million relating to the remaining unamortized gain on swap termination related to this debt.
A summary of the amounts recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of March 30, 2019 and December 29, 2018 is as follows:
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March 30, 2019 | ||||||||||
(Millions of Dollars) | Carrying Amount of Hedged Liability (1) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | ||||||||
Current Maturities of Long-Term Debt | $ | 3.1 | Terminated Swaps | $ | 3.1 | |||||
Long-Term Debt | $ | 3,909.4 | Terminated Swaps | $ | (15.2 | ) | ||||
December 29, 2018 | ||||||||||
(Millions of Dollars) | Carrying Amount of Hedged Liability (1) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability | ||||||||
Current Maturities of Long-Term Debt | $ | 2.5 | Terminated Swaps | $ | 2.1 | |||||
Long-Term Debt | $ | 3,819.8 | Terminated Swaps | $ | (10.0 | ) | ||||
NET INVESTMENT HEDGES
The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive loss were gains of $85.9 million and $63.3 million at March 30, 2019 and December 29, 2018, respectively.
As of March 30, 2019, the Company had foreign exchange forward contracts maturing on various dates in 2019 with notional values totaling $325.2 million outstanding hedging a portion of its British pound sterling, Swedish krona and Euro denominated net investments; cross currency swaps with notional values totaling $1.5 billion maturing on various dates through 2023 hedging a portion of its Japanese yen, Euro, Swedish krona and Swiss franc denominated net investments; an option contract with a notional value totaling $35.1 million maturing in 2019 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of $898.1 million maturing in 2019 hedging a portion of its Euro denominated net investments. As of December 29, 2018, the Company had foreign exchange contracts maturing on various dates through 2019 with notional values totaling $262.4 million outstanding hedging a portion of its British pound sterling, Swedish krona and Euro denominated net investments; a cross currency swap with a notional value totaling $250.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investment; an option contract with a notional value totaling $35.1 million maturing in 2019 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of $228.9 million maturing in 2019 hedging a portion of its Euro denominated net investments.
Maturing foreign exchange contracts resulted in net cash received of $3.9 million and net cash paid of $17.5 million for the three months ended March 30, 2019 and March 31, 2018, respectively.
Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets. Gains and losses representing components excluded from the assessment of effectiveness are recognized in earnings in Other, net on a straight-line basis over the term of the hedge.
The pre-tax gain or loss from fair value changes for the three months ended March 30, 2019 and March 31, 2018 was as follows:
Year-to-Date 2019 | ||||||||||||||||||
(Millions of Dollars) | Total Gain (Loss) Recorded in OCI | Excluded Component Recorded in OCI | Income Statement Classification | Total Gain (Loss) Reclassified from OCI to Income | Excluded Component Amortized from OCI to Income | |||||||||||||
Forward Contracts | $ | (1.2 | ) | $ | 4.2 | Other, net | $ | 1.0 | $ | 1.0 | ||||||||
Cross Currency Swap | $ | 25.9 | $ | 13.4 | Other, net | $ | 7.7 | $ | 7.7 | |||||||||
Option Contracts | $ | (1.0 | ) | $ | — | Other, net | $ | — | $ | — | ||||||||
Non-derivative designated as Net Investment Hedge | $ | 15.6 | $ | — | Other, net | $ | — | $ | — | |||||||||
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Year-to-Date 2018 | ||||||||||||||||||
(Millions of Dollars) | Total Gain (Loss) Recorded in OCI | Excluded Component Recorded in OCI | Income Statement Classification | Total Gain (Loss) Reclassified from OCI to Income | Excluded Component Amortized from OCI to Income | |||||||||||||
Forward Contracts | $ | (26.5 | ) | $ | 3.9 | Other, net | $ | 1.8 | $ | 1.8 | ||||||||
Cross Currency Swap | $ | 1.5 | $ | 6.9 | Other, net | $ | 1.7 | $ | 1.7 | |||||||||
Option Contracts | $ | (3.5 | ) | $ | — | Other, net | $ | — | $ | — | ||||||||
Non-derivative designated as Net Investment Hedge | $ | (12.6 | ) | $ | — | Other, net | $ | — | $ | — | ||||||||
UNDESIGNATED HEDGES
Foreign Exchange Contracts: Foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding at March 30, 2019 was $1.0 billion, maturing on various dates through 2019. The total notional amount of the forward contracts outstanding at December 29, 2018 was $1.0 billion, maturing on various dates through 2019. The impacts of changes in the fair value related to derivatives not designated as hedging instruments under ASC 815 for the three months ended March 30, 2019 and March 31, 2018 are as follows:
(Millions of Dollars) | Income Statement Classification | Year-to-Date 2019 Amount of Gain (Loss) Recorded in Income on Derivative | Year-to-Date 2018 Amount of Gain (Loss) Recorded in Income on Derivative | ||||||
Foreign Exchange Contracts | Other, net | $ | 2.3 | $ | 17.1 | ||||
J. EQUITY ARRANGEMENTS
In April 2018, the Company repurchased 1,399,732 shares of common stock for approximately $200.0 million. In July 2018, the Company repurchased 2,086,792 shares of common stock for approximately $300.0 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 $57.3 million, or an average of $17.96 per share. The premium paid was recorded as a reduction of Shareowners’ equity. The purpose of the capped call options is to hedge the risk of stock price appreciation between the lower and upper strike prices of the capped call options for a future share repurchase.
The capped call has an initial lower strike price of $156.86 and an upper strike price of $203.92, which was approximately 30% higher than the closing price of the Company's common stock on March 13, 2018. As of March 30, 2019, due to the customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of $156.76 and an adjusted upper strike price of $203.79. The aggregate fair value of the options at March 30, 2019 was $29.7 million.
The capped call transactions may be settled by net share settlement (the default settlement method) or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement. The number of shares the Company will receive will be determined by the terms of the contracts using a volume-weighted-average price calculation for the market value of the Company's common stock, over an averaging period. The market value determined will then be measured against the applicable strike price of the capped call transactions.
In March 2015, the Company entered into a forward share purchase contract with a financial counterparty for 3,645,510 shares of common stock. The contract obligates the Company to pay $350.0 million, plus an additional amount related to the forward component of the contract. In June 2018, the Company amended the settlement date to April 2021, or earlier at the Company's option. The reduction of common shares outstanding was recorded at the inception of the forward share purchase contract in March 2015 and factored into the calculation of weighted-average shares outstanding at that time.
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$750 Million Equity Units and Capped Call Transactions
In May 2017, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million (“$750 million Equity Units”). Each unit has a stated amount of $100 and initially consists 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 $726.0 million in net cash proceeds from the $750 million Equity Units net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series C Preferred Stock, recording $750.0 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used $25.1 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution as described in more detail below.
Convertible Preferred Stock
In May 2017, the Company issued 750,000 shares of Series C Preferred Stock, without par, with a liquidation preference of $1,000 per share. The convertible preferred stock will initially not bear any dividends and the liquidation preference of the convertible preferred stock will not accrete. The convertible preferred stock has no maturity date, and will remain outstanding unless converted by holders or redeemed by the Company. Holders of shares of the convertible preferred stock will generally have no voting rights.
The Series C Preferred Stock is pledged as collateral to support holders’ purchase obligations under the 2020 Purchase Contracts and can be remarketed. In connection with any successful remarketing, the Company may (but is not required to) modify certain terms of the convertible preferred stock, including the dividend rate, the conversion rate, and the earliest redemption date. After any successful remarketing in connection with which the dividend rate on the convertible preferred stock is increased, the Company will pay cumulative dividends on the convertible preferred stock, if declared by the board of directors, quarterly in arrears from the applicable remarketing settlement date.
On and after May 15, 2020, the Series C Preferred Stock may be converted into common stock at the option of the holder. The initial conversion rate was 6.1627 shares of common stock per one share of Series C Preferred Stock, which was equivalent to an initial conversion price of approximately $162.27 per share of common stock. As of March 30, 2019, due to the customary anti-dilution provisions, the conversion rate was 6.1820, equivalent to a conversion price of approximately $161.76 per share of common stock. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof.
The Company may not redeem the Series C Preferred Stock prior to June 22, 2020. At the election of the Company, on or after June 22, 2020, the Company may redeem for cash, all or any portion of the outstanding shares of the Series C 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 C Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date.
2020 Purchase Contracts
The 2020 Purchase Contracts obligate the holders to purchase, on May 15, 2020, for a price of $100 in cash, a maximum number of 5.4 million shares of the Company’s common stock (subject to customary anti-dilution adjustments). The 2020 Purchase Contract holders may elect to settle their obligation early, in cash. The Series C Preferred Stock is pledged as collateral to guarantee the holders’ obligations to purchase common stock under the terms of the 2020 Purchase Contracts. The initial settlement rate determining the number of shares that each holder must purchase will not exceed the maximum settlement rate, and is determined over a market value averaging period immediately preceding May 15, 2020.
The initial maximum settlement rate of 0.7241 was calculated using an initial reference price of $138.10, equal to the last reported sale price of the Company's common stock on May 11, 2017. As of March 30, 2019, due to the customary anti-dilution provisions, the maximum settlement rate was 0.7264, equivalent to a reference price of $137.67. If the applicable market value of the Company's common stock is less than or equal to the reference price, the settlement rate will be the maximum settlement rate; and if the applicable market value of common stock is greater than the reference price, the settlement rate will be a number of shares of the Company's common stock equal to $100 divided by the applicable market value. Upon settlement of the 2020 Purchase Contracts, the Company will receive additional cash proceeds of $750 million.
The Company will pay the holders of the 2020 Purchase Contracts quarterly payments ("Contracts Adjustment Payments") at a rate of 5.375% per annum, payable quarterly in arrears on February 15, May 15, August 15 and November 15, which
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commenced August 15, 2017. The $117.1 million present value of the Contract Adjustment Payments reduced Shareowners’ Equity at inception. As each quarterly Contract Adjustment Payment is made, the related liability is reduced and the difference between the cash payments and the present value will accrete to interest expense, approximately $1.3 million per year over the three-year term. As of March 30, 2019, the present value of the Contract Adjustment Payments was $49.0 million.
The holders can settle the purchase contracts early, for cash, subject to certain exceptions and conditions in the prospectus supplement. Upon early settlement of any purchase contracts, the Company will deliver the number of shares of its common stock equal to 85% of the number of shares of common stock that would have otherwise been deliverable.
Capped Call Transactions
In order to offset the potential economic dilution associated with the common shares issuable upon conversion of the Series C Preferred Stock, to the extent that the conversion value of the convertible preferred stock exceeds its liquidation preference, the Company entered into capped call transactions with three major financial institutions (the "counterparties").
The capped call transactions have a term of approximately three years and are intended to cover the number of shares issuable upon conversion of the Series C Preferred Stock. Subject to customary anti-dilution adjustments, the capped call had an initial lower strike price of $162.27, which corresponds to the minimum 6.1627 settlement rate of the Series C Preferred Stock, and an upper strike price of $179.53, which is approximately 30% higher than the closing price of the Company's common stock on May 11, 2017. As of March 30, 2019, due to the customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of $161.76 and an adjusted upper strike price of $178.97.
The capped call transactions may be settled by net share settlement (the default settlement method) or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement. The number of shares the Company will receive will be determined by the terms of the contracts using a volume-weighted-average price calculation for the market value of the Company's common stock, over an averaging period. The market value determined will then be measured against the applicable strike price of the capped call transactions. The Company expects the capped call transactions to offset the potential dilution upon conversion of the Series C Preferred Stock if the calculated market value is greater than the lower strike price but less than or equal to the upper strike price of the capped call transactions. Should the calculated market value exceed the upper strike price of the capped call transactions, the dilution mitigation will be limited based on such capped value as determined under the terms of the contracts.
With respect to the impact on the Company, the capped call transactions and $750 million Equity Units, when taken together, result in the economic equivalent of having the conversion price on $750 million Equity Units at $178.97, the upper strike price of the capped call as of March 30, 2019.
The Company paid $25.1 million, or an average of $5.43 per option, to enter into capped call transactions on 4.6 million shares of common stock. The $25.1 million premium paid was a reduction of Shareowners’ Equity. The aggregate fair value of the options at March 30, 2019 was $15.0 million.
K. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables summarize the changes in the balances for each component of Accumulated other comprehensive loss:
(Millions of Dollars) | Currency translation adjustment and other | Unrealized (losses) gains on cash flow hedges, net of tax | Unrealized gains (losses) on net investment hedges, net of tax | Pension (losses) gains, net of tax | Total | |||||||||||||||
Balance - December 29, 2018 | $ | (1,481.2 | ) | $ | (26.8 | ) | $ | 63.3 | $ | (369.6 | ) | $ | (1,814.3 | ) | ||||||
Other comprehensive (loss) income before reclassifications | (18.9 | ) | (4.3 | ) | 29.2 | (3.4 | ) | 2.6 | ||||||||||||
Reclassification adjustments to earnings | — | 2.1 | (6.6 | ) | 2.9 | (1.6 | ) | |||||||||||||
Net other comprehensive (loss) income | (18.9 | ) | (2.2 | ) | 22.6 | (0.5 | ) | 1.0 | ||||||||||||
Balance - March 30, 2019 | $ | (1,500.1 | ) | $ | (29.0 | ) | $ | 85.9 | $ | (370.1 | ) | $ | (1,813.3 | ) | ||||||
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(Millions of Dollars) | Currency translation adjustment and other | Unrealized (losses) gains on cash flow hedges, net of tax | Unrealized gains (losses) on net investment hedges, net of tax | Pension gains (losses), net of tax | Total | |||||||||||||||
Balance - December 30, 2017 | $ | (1,108.2 | ) | $ | (112.6 | ) | $ | 3.4 | $ | (371.7 | ) | $ | (1,589.1 | ) | ||||||
Other comprehensive income (loss) before reclassifications | 122.9 | 8.3 | (32.9 | ) | (7.2 | ) | 91.1 | |||||||||||||
Reclassification adjustments to earnings | — | 4.6 | (2.8 | ) | 2.9 | 4.7 | ||||||||||||||
Net other comprehensive income (loss) | 122.9 | 12.9 | (35.7 | ) | (4.3 | ) | 95.8 | |||||||||||||
Balance - March 31, 2018 | $ | (985.3 | ) | $ | (99.7 | ) | $ | (32.3 | ) | $ | (376.0 | ) | $ | (1,493.3 | ) | |||||
The reclassifications out of Accumulated other comprehensive loss for the three months ended March 30, 2019 and March 31, 2018 were as follows:
(Millions of Dollars) | 2019 | 2018 | Affected line item in Consolidated Statements of Operations And Comprehensive Income | |||||||
Realized losses on cash flow hedges | $ | (0.2 | ) | $ | (2.8 | ) | Cost of sales | |||
Realized losses on cash flow hedges | (4.0 | ) | (3.8 | ) | Interest expense | |||||
Total before taxes | $ | (4.2 | ) | $ | (6.6 | ) | ||||
Tax effect | 2.1 | 2.0 | Income taxes | |||||||
Realized losses on cash flow hedges, net of tax | $ | (2.1 | ) | $ | (4.6 | ) | ||||
Realized gains on net investment hedges | $ | 8.7 | $ | 3.5 | Other, net | |||||
Tax effect | (2.1 | ) | (0.7 | ) | Income taxes | |||||
Realized gains on net investment hedges, net of tax | $ | 6.6 | $ | 2.8 | ||||||
Amortization of defined benefit pension items: | ||||||||||
Actuarial losses and prior service costs / credits | $ | (3.8 | ) | $ | (3.8 | ) | Other, net | |||
Tax effect | 0.9 | 0.9 | Income taxes | |||||||
Amortization of defined benefit pension items, net of tax | $ | (2.9 | ) | $ | (2.9 | ) | ||||
L. NET PERIODIC BENEFIT COST — DEFINED BENEFIT PLANS
Following are the components of net periodic pension expense (benefit) for the three months ended March 30, 2019 and March 31, 2018:
Year-to-Date | |||||||||||||||||||||||
Pension Benefits | Other Benefits | ||||||||||||||||||||||
U.S. Plans | Non-U.S. Plans | All Plans | |||||||||||||||||||||
(Millions of Dollars) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
Service cost | $ | 3.0 | $ | 1.8 | $ | 3.7 | $ | 3.9 | $ | 0.1 | $ | 0.1 | |||||||||||
Interest cost | 11.8 | 10.4 | 7.7 | 7.5 | 0.4 | 0.4 | |||||||||||||||||
Expected return on plan assets | (15.4 | ) | (16.8 | ) | (11.6 | ) | (12.2 | ) | — | — | |||||||||||||
Amortization of prior service cost (credit) | 0.2 | 0.2 | (0.2 | ) | (0.4 | ) | (0.3 | ) | (0.3 | ) | |||||||||||||
Amortization of net loss (gain) | 2.0 | 1.9 | 2.2 | 2.4 | (0.1 | ) | — | ||||||||||||||||
Settlement / curtailment loss | — | — | 0.1 | 0.1 | — | — | |||||||||||||||||
Net periodic pension expense (benefit) | $ | 1.6 | $ | (2.5 | ) | $ | 1.9 | $ | 1.3 | $ | 0.1 | $ | 0.2 | ||||||||||
The components of net periodic benefit cost other than the service cost component are included in Other, net in the Consolidated Statements of Operations and Comprehensive Income.
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M. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurement, defines, establishes a consistent framework for measuring, and expands disclosure requirements about fair value. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs and significant value drivers are observable.
Level 3 — Instruments that are valued using unobservable inputs.
The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. The Company holds various financial instruments to manage these risks. These financial instruments are carried at fair value and are included within the scope of ASC 820. The Company determines the fair value of these financial instruments through the use of matrix or model pricing, which utilizes observable inputs such as market interest and currency rates. When determining fair value for which Level 1 evidence does not exist, the Company considers various factors including the following: exchange or market price quotations of similar instruments, time value and volatility factors, the Company’s own credit rating and the credit rating of the counter-party.
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis for each of the hierarchy levels:
(Millions of Dollars) | Total Carrying Value | Level 1 | Level 2 | Level 3 | |||||||||||
March 30, 2019 | |||||||||||||||
Money market fund | $ | 6.0 | $ | 6.0 | $ | — | $ | — | |||||||
Derivative assets | $ | 55.5 | $ | — | $ | 55.5 | $ | — | |||||||
Derivative liabilities | $ | 36.2 | $ | — | $ | 36.2 | $ | — | |||||||
Non-derivative hedging instrument | $ | 898.1 | $ | — | $ | 898.1 | $ | — | |||||||
Contingent consideration liability | $ | 174.3 | $ | — | $ | — | $ | 174.3 | |||||||
December 29, 2018 | |||||||||||||||
Money market fund | $ | 4.8 | $ | 4.8 | $ | — | $ | — | |||||||
Derivative assets | $ | 32.9 | $ | — | $ | 32.9 | $ | — | |||||||
Derivative liabilities | $ | 21.3 | $ | — | $ | 21.3 | $ | — | |||||||
Non-derivative hedging instrument | $ | 228.9 | $ | — | $ | 228.9 | $ | — | |||||||
Contingent consideration liability | $ | 169.2 | $ | — | $ | — | $ | 169.2 | |||||||
The following table provides information about the Company's financial assets and liabilities not carried at fair value:
March 30, 2019 | December 29, 2018 | ||||||||||||||
(Millions of Dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||
Other investments | $ | 6.4 | $ | 6.7 | $ | 7.6 | $ | 7.7 | |||||||
Long-term debt, including current portion | $ | 3,912.5 | $ | 4,159.1 | $ | 3,822.3 | $ | 3,905.4 | |||||||
The money market fund and other investments related to the West Coast Loading Corporation ("WCLC") trust are considered Level 1 instruments within the fair value hierarchy. The long-term debt instruments are considered Level 2 instruments and are measured using a discounted cash flow analysis based on the Company’s marginal borrowing rates. The differences between the carrying values and fair values of long-term debt are attributable to the stated interest rates differing from the Company's marginal borrowing rates. The fair values of the Company's variable rate short-term borrowings approximate their carrying values at March 30, 2019 and December 29, 2018. The fair values of the derivative financial instruments in the table above are based on current settlement values.
As part of the Craftsman® brand acquisition in March 2017, the Company recorded a contingent consideration liability representing the Company's obligation to make future payments to Transform Holdco, LLC, which operates Sears and Kmart
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retail locations, of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032, which was valued at $134.5 million as of the acquisition date. The first payment is due the second quarter of 2020 relating to royalties owed for the previous twelve quarters, and future payments will be due quarterly through the first quarter of 2032. The estimated fair value of the contingent consideration liability is determined using a discounted cash flow analysis taking into consideration future sales projections, forecasted payments to Transform Holdco, LLC, based on contractual royalty rates, and the related tax impacts. The estimated fair value of the contingent consideration liability was $174.3 million and $169.2 million as of March 30, 2019 and December 29, 2018, respectively. A 100 basis point reduction in the discount rate would result in an increase to the liability of approximately $8 million as of March 30, 2019.
The Company had no significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during the first three months of 2019 or 2018.
Refer to Note I, Financial Instruments, for more details regarding derivative financial instruments, Note R, Contingencies, for more details regarding the other investments related to the WCLC trust, and Note H, Long-Term Debt and Financing Arrangements, for more information regarding the carrying values of the long-term debt.
N. OTHER COSTS AND EXPENSES
Other, net is primarily comprised of intangible asset amortization expense, currency-related gains or losses, environmental remediation expense, acquisition-related transaction and consulting costs, and certain pension gains or losses. During the three months ended March 30, 2019 and March 31, 2018, Other, net included $16.1 million and $5.9 million in acquisition-related transaction and consulting costs, respectively.
O. RESTRUCTURING CHARGES
A summary of the restructuring reserve activity from December 29, 2018 to March 30, 2019 is as follows:
(Millions of Dollars) | December 29, 2018 | Net Additions | Usage | Currency | March 30, 2019 | ||||||||||||||
Severance and related costs | $ | 105.7 | $ | 7.2 | $ | (24.3 | ) | $ | (0.4 | ) | $ | 88.2 | |||||||
Facility closures and asset impairments | 3.1 | 1.5 | (1.3 | ) | — | 3.3 | |||||||||||||
Total | $ | 108.8 | $ | 8.7 | $ | (25.6 | ) | $ | (0.4 | ) | $ | 91.5 | |||||||
For the three months ended March 30, 2019, the Company recognized net restructuring charges of $8.7 million. This amount reflects $7.2 million of net severance charges associated with the reduction of approximately 259 employees and $1.5 million of facility closure and other restructuring costs.
The majority of the $91.5 million of reserves remaining as of March 30, 2019 is expected to be utilized within the next 12 months.
Segments: The $9 million of net restructuring charges for the three months ended March 30, 2019 includes: $1 million of net reversals pertaining to the Tools & Storage segment; $5 million of net charges pertaining to the Security segment; $2.0 million of net charges pertaining to the Industrial segment; and $3 million of net charges pertaining to Corporate.
P. INCOME TAXES
The Company recognized income tax expense of $24.7 million for the three months ended March 30, 2019, resulting in an effective tax rate of 12.7%. Excluding the impacts of the acquisition-related charges, the effective tax rate was 15.0% for the three months ended March 30, 2019. This effective tax rate differs from the U.S. statutory tax rate primarily due to tax on foreign earnings and the effective settlements of income tax audits.
The Company recognized income tax expense of $81.7 million for the three months ended March 31, 2018, resulting in an effective tax rate of 32.4%. The income tax expense in the first quarter of 2018 included a provisional charge of $23.1 million adjusting the provisional amounts recorded in the fourth quarter of 2017 associated with the Act. The changes to the provisional amounts resulting from the Act increased the effective tax rate by 9.1%. Excluding the impact of the tax and acquisition-related charges, the effective tax rate was 23.0% in the first quarter of 2018. This effective tax rate differed from the U.S. statutory tax rate primarily due to tax on foreign earnings and the settlement of certain income tax audits.
The Company is subject to examinations by taxing authorities in U.S. federal, state, and foreign jurisdictions. The Company considers many factors when evaluating and estimating its tax positions and the impact on income tax expense, which may
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require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next 12 months. However, based on the uncertainties associated with litigation and the status of examinations, including the protocols of finalizing audits by the relevant tax authorities which could include formal legal proceedings, it is not possible to reasonably estimate the impact of any such change.
Q. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company's operations are classified into three reportable business segments, which also represent its operating segments: Tools & Storage, Industrial and Security.
The Tools & Storage segment is comprised of the Power Tools & Equipment ("PTE") and Hand Tools, Accessories & Storage ("HTAS") businesses. The PTE 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, lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, edgers and related accessories, 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 Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. The Engineered Fastening business primarily sells engineered fastening products and systems designed for specific applications. The product lines include 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, and high-strength structural fasteners. The Infrastructure business consists of the Oil & Gas and Hydraulics product lines. 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. Hydraulics sells hydraulic tools, attachments and accessories.
The Security segment is comprised of the Convergent Security Solutions ("CSS") and Mechanical Access Solutions ("MAS") businesses. 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.
The Company utilizes segment profit, which is defined as net sales minus cost of sales and SG&A inclusive of the provision for doubtful accounts (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), restructuring charges, interest expense, interest income, income taxes and share of net earnings of equity method investment. Refer to Note O, Restructuring Charges, for the amount of net restructuring charges by segment. Corporate overhead 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. Transactions between segments are not material. Segment assets primarily include cash, accounts receivable, inventory, other current assets, property, plant and equipment, and intangible assets. Net sales and long-lived assets are attributed to the geographic regions based on the geographic locations of the end customer and the Company subsidiary, respectively.
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Year-to-Date | |||||||
(Millions of Dollars) | 2019 | 2018 | |||||
NET SALES | |||||||
Tools & Storage | $ | 2,292.3 | $ | 2,215.8 | |||
Industrial | 555.0 | 504.2 | |||||
Security | 486.3 | 489.3 | |||||
Total | $ | 3,333.6 | $ | 3,209.3 | |||