Restatement
As discussed in the Explanatory Note to this Annual Report on Form 10-K/A and Note A, Significant Accounting Policies - Restatement, the Company is restating its consolidated financial statements and related financial information for the years endedJanuary 2, 2021 ,December 28, 2019 andDecember 29, 2018 . The Restatement relates to the correction of basic and diluted earnings per share, as applicable, and the classification of certain amounts in the consolidated balance sheets, statements of cash flows and statements of changes in shareowners' equity. The corrections have no impact on the Company's net earnings, total assets, cash flows from operations or business segment information. Furthermore, any forward-looking statements herein are as of the Original Form 10-K filed with theSEC onFebruary 18, 2021 . Refer to Note A, Significant Accounting Policies - Restatement, which accompany the financial statements in Item 8 of this Annual Report on Form 10-K/A, for further discussion regarding the restatement impacts. In addition, for further information regarding the matters leading to the restatement and related findings with respect to the Company's internal control over financial reporting, refer to Item 9A. Controls and Procedures in Part II of this Annual Report on Form 10-K/A. The financial and business analysis below provides information which the Company believes is relevant to an assessment and understanding of its consolidated financial position, results of operations and cash flows. This financial and business analysis should be read in conjunction with the Consolidated Financial Statements and related notes. All references to "Notes" in this Item 7 refer to the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report. The following discussion and certain other sections of this Annual Report on Form 10-K/A contain statements reflecting the Company's views about its future performance that constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which the Company operates as well as management's beliefs and assumptions. Any statements contained herein (including without limitation statements to the effect thatStanley Black & Decker, Inc. or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. There are a number of important factors that could cause actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth, or incorporated by reference, below under the heading "Cautionary Statements Under The Private Securities Litigation Reform Act Of 1995." The Company does not intend to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Strategic Objectives The Company continues to pursue a growth and acquisition strategy, which involves industry, geographic and customer diversification to foster sustainable revenue, earnings and cash flow growth, and employ the following strategic framework in pursuit of its vision to deliver top-quartile financial performance, become known as one of the world's leading innovators and elevate its commitment to social responsibility: •Continue organic growth momentum by leveraging the SBD Operating Model to drive innovation and commercial excellence, while diversifying toward higher-growth, higher-margin businesses; •Be selective and operate in markets where brand is meaningful, the value proposition is definable and sustainable through innovation, and global cost leadership is achievable; and •Pursue acquisitive growth on multiple fronts by building upon its existing global tools platform, expanding the Industrial platform in Engineered Fastening and Infrastructure, consolidating the commercial electronic security industry, and pursuing adjacencies with sound industrial logic. Execution of the above strategy has resulted in approximately$11.5 billion of acquisitions since 2002 (excluding theBlack & Decker merger), a 20 percent investment inMTD Holdings Inc. ("MTD"), several divestitures, improved efficiency in the supply chain and manufacturing operations, and enhanced investments in organic growth, enabled by cash flow generation and increased debt capacity. In addition, the Company's continued focus on diversification and organic growth has resulted in improved financial results and an increase in its global presence. The Company also remains focused on leveraging its SBD Operating Model to deliver success in the 2020s and beyond. The latest evolution of the SBD Operating Model builds on the strength of the Company's past while embracing changes in the external environment to ensure the Company has the right 30 -------------------------------------------------------------------------------- skillsets, incorporates technology advances in all areas, maintains operational excellence, drives efficiency in business processes and resiliency into its culture, delivers extreme innovation and ensures the customer experience is world class. The operating model underpins the Company's ability to deliver above-market organic growth with margin expansion, maintain efficient levels of selling, general and administrative expenses ("SG&A") and deliver top-quartile asset efficiency. The Company's long-term financial objectives remain as follows: •4-6% organic revenue growth; •10-12% total revenue growth; •10-12% total EPS growth (7-9% organically) excluding acquisition-related charges; •Free cash flow equal to, or exceeding, net income; •Sustain 10+ working capital turns; and •Cash Flow Return On Investment ("CFROI") between 12-15%. In terms of capital allocation, the Company remains committed, over time, to returning approximately 50% of free cash flow to shareholders through a strong and growing dividend as well as opportunistically repurchasing shares. The remaining free cash flow (approximately 50%) will be deployed towards acquisitions. COVID-19 Pandemic The novel coronavirus (COVID-19) outbreak has adversely affected the Company's workforce and operations, as well as the operations of its customers, distributors, suppliers and contractors. The COVID-19 pandemic has also resulted in significant volatility and uncertainty in the markets in which the Company operates. To successfully navigate through this unprecedented period, the Company has remained focused on the following key priorities: •Ensuring the health and safety of its employees and supply chain partners; •Maintaining business continuity and financial strength and stability; •Serving its customers as they provide essential products and services to the world; and •Doing its part to mitigate the impact of the virus across the globe. To respond to the volatile and uncertain environment, the Company implemented a comprehensive cost reduction and efficiency program, which delivered approximately$500 million of savings in 2020 and is expected to deliver net savings of approximately$125 million in 2021. Cost actions executed under the program included headcount reductions, furloughs, reduced employee work schedules, a voluntary retirement program, and footprint rationalizations. The Company has taken steps to make some of the cost actions permanent while certain employees were returned to full-time status. This ensures the sustainability of the cost reduction program into 2021 while providing more employment stability for the Company's remaining associates. The program's primary focus was to: (a) adjust the Company's supply chain and manufacturing labor base to match the demand environment; (b) substantially reduce indirect spending; (c) reduce staffing, compensation and benefits in a manner that ensured the Company was prepared to respond to changes in demand; and (d) capture the significant raw material deflation opportunity from 2020. In addition, the Company reduced capital expenditures in 2020. As a result of these actions, the Company continues to believe it is in a strong financial position and has significant flexibility to continue navigating this dynamic period. However, the overall impact of the COVID-19 pandemic on the Company's business, results of operations, or liquidity remains uncertain. Refer to Financial Condition below and Item 1A. Risk Factors in Part I of this Form 10-K/A for further discussion.
Share Repurchases
In
Acquisitions and Investments OnFebruary 24, 2020 , the Company acquiredConsolidated Aerospace Manufacturing, LLC ("CAM"), an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets. The acquisition further diversifies the Company's presence in the industrial markets and expands its portfolio of specialty fasteners in the aerospace and defense markets. 31 -------------------------------------------------------------------------------- OnMarch 8, 2019 , the Company acquired theInternational Equipment Solutions Attachments businesses, Paladin and Pengo, ("IES Attachments"), manufacturers of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition further diversified the Company's presence in the industrial markets, expanded its portfolio of attachment solutions and provided a meaningful platform for growth. OnJanuary 2, 2019 , the Company acquired a 20 percent interest in 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 onJuly 1, 2021 and ending onJanuary 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 investment in MTD increases the Company's presence in the greater than$20 billion lawn and garden segment and enables the two companies to work together to pursue revenue and cost opportunities, improve operational efficiency, and introduce new and innovative products for professional and residential outdoor equipment customers, utilizing each company's respective portfolios of strong brands. OnApril 2, 2018 , the Company acquired Nelson Fastener Systems ("Nelson"), which excluded Nelson's automotive stud welding business. This acquisition, which has been integrated into the Engineered Fastening business, was complementary to the Company's product offerings, enhanced its presence in the general industrial end markets, and expanded its portfolio of highly-engineered fastening solutions. OnMarch 9, 2017 , the Company acquired the Tools business of Newell Brands ("Newell Tools") which included the highly attractive industrial cutting, hand tool and power tool accessory brands IRWIN® and LENOX®. The acquisition enhanced the Company's position within the global tools & storage industry and broadened the Company's product offerings and solutions to customers and end users, particularly within power tool accessories. OnMarch 8, 2017 , the Company purchased the Craftsman® brand from Sears Holdings Corporation ("Sears Holdings "). The acquisition provided the Company with the rights to develop, manufacture and sell Craftsman®-branded products in non-Sears Holdings channels. The acquisition significantly increased the availability of Craftsman®-branded products to consumers in previously underpenetrated channels, enhanced innovation, and added manufacturing jobs in theU.S. to support growth.
Refer to Note E, Acquisitions and Investments, for further discussion.
Divestitures
OnMay 30, 2019 , the Company sold itsSargent and Greenleaf mechanical locks business within the Security segment. OnFebruary 22, 2017 , the Company sold the majority of its mechanical security businesses, which included the commercial hardware brands of Best Access, phi Precision and GMT. These divestitures allow the Company to invest in other areas of the Company that fit into its long-term growth strategy. The Company has also divested several smaller businesses in recent years that did not fit into its long-term strategic objectives.
Refer to Note T, Divestitures, for further discussion of the Company's divestitures.
Certain Items Impacting Earnings
Throughout MD&A, the Company has provided a discussion of the results both inclusive and exclusive of acquisition-related and other charges. The results and measures, including gross profit and segment profit, on a basis excluding these amounts are considered relevant to aid analysis and understanding of the Company's results aside from the material impact of these items. These amounts are as follows: 2020
The Company reported
•$71 million reducing Gross Profit pertaining to inventory step-up charges, a cost reduction program and facility-related costs; •$176 million in SG&A primarily for a cost reduction program, Security business transformation and margin resiliency initiatives; 32 -------------------------------------------------------------------------------- •$9 million in Other, net primarily related to a cost reduction program, loss on interest rate swaps in connection with the extinguishment of debt, and deal transactions costs, partially offset by a release of a contingent consideration liability relating to the CAM acquisition; •$14 million net loss related to the sales of businesses; •$83 million in Restructuring charges pertaining to severance and facility closures; and •$47 million related to a loss on the extinguishment of debt. The tax effect on the above net charges was approximately$92 million . The Company also recorded a one-time tax benefit of$119 million associated with a supply chain reorganization. In addition, the Company's share of MTD's net earnings included an after-tax charge of approximately$10 million related primarily to restructuring charges. The amounts above resulted in net after-tax charges of$199 million , or$1.22 per diluted share.
2019
The Company reported
•$40 million reducing Gross Profit pertaining to facility-related and inventory step-up charges; •$139 million in SG&A primarily for integration-related costs, Security business transformation and margin resiliency initiatives; •$30 million in Other, net primarily related to deal transaction costs; •$17 million gain related to the sale of theSargent & Greenleaf business; •$153 million in Restructuring charges pertaining to severance and facility closures associated with a cost reduction program; and •$18 million related to a non-cash loss on the extinguishment of debt. The tax effect on the above net charges was approximately$78 million . In addition, the Company's share of MTD's net earnings included an after-tax charge of approximately$24 million primarily related to an inventory step-up adjustment. The amounts above resulted in net after-tax charges of$309 million , or$1.98 per diluted share. 2018
The Company reported
•$66 million reducing Gross Profit primarily pertaining to inventory step-up charges for the Nelson acquisition and an incremental freight charge due to nonperformance by a third-party service provider; •$158 million in SG&A primarily for integration-related costs, consulting fees, and a non-cash fair value adjustment; •$108 million in Other, net primarily related to deal transaction costs and a settlement with theEnvironmental Protection Agency ("EPA "); •$1 million related to a previously divested business; and •$117 million in Restructuring charges which primarily related to a cost reduction program. The Company also recorded a net tax charge of$181 million , which was comprised of charges related to the Tax Cuts and Jobs Act ("the Act") partially offset by the tax benefit of the above pre-tax charges. The above amounts resulted in net after-tax charges of$631 million , or$4.03 per diluted share.
Driving Further Profitable Growth by Fully Leveraging Our Core Franchises
Each of the Company's franchises share common attributes: they have world-class brands and attractive growth characteristics, they are scalable and defensible, they can differentiate through innovation, and they are powered by the SBD Operating Model. •The Tools & Storage business is the tool company to own, with strong brands, proven innovation, global scale, and a broad offering of power tools, hand tools, accessories, and storage & digital products across many channels in both developed and developing markets. •The Engineered Fastening business is a highly profitable, GDP+ growth business offering highly engineered, value-added innovative solutions with recurring revenue attributes and global scale. •The Security business, with its attractive recurring revenue, presents a significant margin accretion opportunity over the longer term and has historically provided a stable revenue stream through economic cycles, is a gateway into the 33 -------------------------------------------------------------------------------- digital world and an avenue to capitalize on rapid market or societal changes. Security has embarked on a business transformation which will apply technology to lower its cost to serve and create new commercial offerings for its small to medium enterprise and large key account customers. While diversifying the business portfolio through strategic acquisitions remains important, management recognizes that the core franchises described above are important foundations that continue to provide strong cash flow and growth prospects. Management is committed to growing these businesses through innovative product development, brand support, continued investment in emerging markets and a sharp focus on global cost competitiveness. Continuing to Invest in the Stanley Black &Decker Brands The Company has a strong portfolio of brands associated with high-quality products including STANLEY®, BLACK+DECKER®, DEWALT®, FLEXVOLT®, IRWIN®, LENOX®, CRAFTSMAN®, PORTER-CABLE®, BOSTITCH®, PROTO®, MAC TOOLS®, FACOM®, AeroScout®, Powers®, LISTA®, Vidmar®, SONITROL®, and GQ®. Among the Company's most valuable assets, STANLEY®, BLACK+DECKER® and DEWALT® are recognized as three of the world's great brands, while CRAFTSMAN® is recognized as a premier American brand. The Company's initial strategic marketing plan for 2020 was to put brand awareness into overdrive through continued sponsorships and a live presence at nearly 500 tried-and-true sporting events, includingNASCAR and NHRA racing, MajorLeague Baseball ("MLB") and global soccer withEnglish Premier League ("EPL") and FC Barcelona ("FCB"). InMarch 2020 , COVID-19 brought a halt to live sporting events worldwide and with the stands virtually empty, the Company revised its strategic marketing plan in order to bring a virtual brand experience to life. Through the power of Zoom, the Company provided fans a new kind of venue by hosting virtual VIP and customer engagement events. The Company brought the owners, the players, the drivers and the influencers together online to engage audiences and reinforce its name brands, including CRAFTSMAN®, DEWALT® and STANLEY®. In late spring and summer 2020, when sponsorship events likeNASCAR , MLB, EPL and FCB resumed with millions of fans tuning in from the comfort of home, the Company's brands were there with strong visibility thanks to prime stadium signage placement and car wraps that put CRAFTSMAN®, DEWALT®, BLACK+DECKER®, IRWIN®, MAC TOOLS® and STANLEY® front, center and in the lead. The above marketing initiatives highlight the Company's strong emphasis on brand building and commercial support, which has resulted in more than 300 billion global brand impressions from digital and traditional advertising and strong brand awareness. The Company will continue allocating its brand and advertising spend wisely to capture the emerging digital landscape, while continuing to evolve proven marketing programs to deliver famous global brands that are deeply committed to societal improvement, along with transformative technologies to build relevant and meaningful 1:1 customer, consumer, employee and shareholder relationships in support of the Company's long-term vision. The SBD Operating Model: Winning in the 2020s Over the past 15 years, the Company has successfully leveraged its proven and continually evolving operating model to focus the organization to sustain top-quartile performance, resulting in asset efficiency, above-market organic growth and expanding operating margins. In its first evolution, the Stanley Fulfillment System ("SFS") focused on streamlining operations, which helped reduce lead times, realize synergies during acquisition integrations, and mitigate material and energy price inflation. In 2015, the Company launched a refreshed and revitalized SFS operating system, entitled SFS 2.0, to drive from a more programmatic growth mentality to a true organic growth culture by more deeply embedding breakthrough innovation and commercial excellence into its businesses, and at the same time, becoming a significantly more digitally-enabled enterprise. Entering into 2020 and recognizing the changing dynamics of the world in which the Company operates, including the acceleration of technological change, geopolitical instability and the changing nature of work, the Company launched the SBD Operating Model: Winning in the 2020s. At the center of the model is the concept of the interrelationship between people and technology. The remaining four categories are: Performance Resiliency; Extreme Innovation; Operations Excellence and Extraordinary Customer Experience. Each of these elements co-exists synergistically with the others in a systems-based approach. People and Technology This pillar emphasizes the Company's belief that the right combination of digitally proficient people applying technology such as artificial intelligence, machine learning, advanced analytics, Internet of Things and others in focused ways can be an enormous source of value creation and sustainability for the Company. It also brings to light the changing nature of work and the talent and skillsets required for individuals and institutions to thrive in the future. With technology infiltrating the workplace 34 -------------------------------------------------------------------------------- at an increasingly rapid pace, the Company believes that the winners in the 2020s will invest heavily in reskilling, upskilling and lifelong learning with an emphasis on the places where people and technology intersect. In other words, technology can make humans more powerful and productive if, and only if, humans know how to apply the technology to maximum advantage. The Company has created plans and programs, as well as a new leadership model to ensure people have the right skills, tools and mindsets to thrive in this era. The ability for employees to embrace technology, learn and relearn new skills and take advantage of the opportunities presented in this new world will be critical to the Company's success. Performance Resiliency The Company views performance resiliency as the agility, flexibility and adaptability to sustain strong performance regardless of the operating environment conditions, which requires planning for the unexpected and anticipating exogenous volatility as the new normal. Technology, applied to key business processes, products and business models, will be a key enabler for value creation and performance resiliency as the Company executes sustainable, ongoing transformation across the enterprise. Extreme Innovation The Company has a historically strong foundation in innovation, launching more than 1,000 products a year, including breakthroughs such as DEWALT Flexvolt, Atomic and Xtreme. In recent years, the Company has expanded its innovation-focused internal teams and external partnerships, but now it is growing that innovation ecosystem at a rapid pace, expanding the number of external collaborations with start-ups and entrepreneurs, academic institutions, research labs and others. This innovation culture, which includes a focus on social impact in addition to the Company's traditional product and customer focus, enables the Company to introduce products to market faster and reimagine how to operate in today's technology-enabled, fast-paced world. Operations Excellence An intense focus on operations excellence and asset efficiency is mandatory in a dynamic world in which the bar for competitiveness is always moving higher. To help maintain the Company's edge, a much more agile, adaptable and technology-enabled supply chain is necessary to manufacture closer to its customers. This "Make Where We Sell" strategy will improve customer responsiveness, lower lead times, reduce costs and mitigate geopolitical and currency risk while facilitating major improvements incarbon footprint. Extraordinary Customer Experience Customers are increasingly demanding world-class experiences from their brands and expectations for execution at the customer level are growing every day. It is no longer sufficient to have great products on the shelf or in the catalog. The Company knows that to sustain market share growth, it needs to evolve and adapt to provide the types of experiences that customers now expect. Each of the Company's businesses evaluates and works to systematically improve its various customer experiences and acts on customer insights to continuously improve to the extraordinary level. As previously noted, the interaction between people and technology will define success in this area. Leveraging the SBD Operating Model, the Company is building a culture in which it strives to become known as one of the world's great innovative companies by embracing the current environment of rapid innovation and digital transformation. The Company continues to build a vast innovation focused ecosystem to pursue faster innovation and to remain aware of and open to new technologies and advances by leveraging both internal initiatives and external partnerships. The innovation ecosystem used in concert with the SBD Operating Model is anticipated to allow the Company to apply innovation to its core processes in manufacturing and back office functions to reduce operating costs and inefficiencies, develop core and breakthrough product innovations within each of its businesses, and pursue disruptive business models to either push into new markets or change existing business models before competition or new market entrants capture the opportunity. The Company continues to make progress towards this vision, as evidenced by the creation of Innovation Everywhere, a program that encourages and empowers all employees to implement value creation and cost savings using collaborative and innovative solutions, breakthrough innovation teams in each business, theStanley Ventures group, which invests capital in new and emerging start-ups in core focus areas, theTechstars partnership, which selects start-ups from around the world with the goal of bringing breakthrough technologies to market, the Manufactory 4.0, which is the Company's epicenter for Industry 4.0 technology development and partnership, and STANLEY X, aSilicon Valley based team, which is building its own set of disruptive initiatives and exploring new business models. The Company has made a significant commitment to the SBD Operating Model and management believes that its success will be characterized by continued asset efficiency, organic growth in the 4-6% range in the long-term as well as expanded operating margin rates over the next 3 to 5 years as the Company leverages the growth and pursues structural cost reductions with the margin resiliency initiatives. 35 -------------------------------------------------------------------------------- The Company believes that the SBD Operating Model will serve as a powerful value driver in the years ahead, ensuring the Company is positioned to win in the 2020s by developing and obtaining the right people and technology to deliver performance resiliency, extreme innovation, operations excellence and an extraordinary customer experience. The operating model, in concert with the Company's innovation ecosystem, will enable the Company to change as rapidly as the external environment which directly supports achievement of the Company's long-term financial objectives, including its vision, and further enables its shareholder-friendly capital allocation approach, which has served the Company well in the past and will continue to do so in the future. 36 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Below is a summary of the Company's operating results at the consolidated level, followed by an overview of business segment performance. Terminology: The term "organic" is utilized to describe results aside from the impacts of foreign currency fluctuations, acquisitions during their initial 12 months of ownership, and divestitures. This ensures appropriate comparability to operating results of prior periods.Net Sales : Net sales were$14.535 billion in 2020 compared to$14.442 billion in 2019, representing an increase of 1% driven by a 2% increase from acquisitions, primarily CAM, and a 1% increase in price, partially offset by pandemic-related volume decreases of 2%. Organic growth of 10% in the second half of 2020 and acquisitions more than offset first half pandemic related market impacts. Tools & Storage net sales increased 3% compared to 2019 due to 2% increases in both volume and price, partially offset by a decrease of 1% from foreign currency. Industrial net sales decreased 3% compared to 2019 primarily due to volume decreases of 15%, partially offset by acquisition growth of 12%. Security net sales declined 5% compared to 2019 as 1% increases in both price and small bolt-on commercial electronic security acquisitions were more than offset by a 5% decrease in volume and a 2% decrease from the sales of theSargent & Greenleaf business and the commercial electronic security businesses in five countries inEurope and emerging markets. Net sales were$14.442 billion in 2019 compared to$13.982 billion in 2018, representing an increase of 3% driven by organic growth of 3%, including a 2% increase in volume and 1% increase in price. Acquisitions, primarily IES Attachments, increased sales by 2%, while the impact of foreign currency decreased sales by 2%. Tools & Storage net sales increased 3% compared to 2018 due to increases in volume and price of 4% and 1%, respectively, partially offset by a 2% decrease from foreign currency. Industrial net sales increased 11% compared to 2018 primarily due to acquisition growth of 16%, partially offset by decreases of 3% from lower volumes and 2% from foreign currency. Security net sales declined 2% compared to 2018 as 1% increases in both price and small bolt-on commercial electronic security acquisitions were more than offset by a 3% decrease due to foreign currency and a 1% decrease from the sale of theSargent & Greenleaf business. Gross Profit: The Company reported gross profit of$4.968 billion , or 34.2% of net sales, in 2020 compared to$4.806 billion , or 33.3% of net sales, in 2019. Acquisition-related and other charges, which reduced gross profit, were$71.2 million in 2020 and$39.7 million in 2019. Excluding these charges, gross profit was 34.7% of net sales in 2020 compared to 33.5% in 2019, driven by productivity, margin resiliency initiatives and price realization. The Company reported gross profit of$4.806 billion , or 33.3% of net sales, in 2019 compared to$4.851 billion , or 34.7% of net sales, in 2018. Acquisition-related and other charges, which reduced gross profit, were$39.7 million in 2019 and$65.7 million in 2018. Excluding these charges, gross profit was 33.5% of net sales in 2019, compared to 35.2% in 2018, as volume, productivity and price were more than offset by tariffs, commodity inflation and foreign exchange. SG&A Expense: Selling, general and administrative expenses, inclusive of the provision for credit losses ("SG&A"), were$3.090 billion , or 21.3% of net sales, in 2020 compared to$3.041 billion , or 21.1% of net sales, in 2019. Within SG&A, acquisition-related and other charges totaled$176.1 million in 2020 and$139.5 million in 2019. Excluding these charges, SG&A was 20.0% of net sales in 2020 compared to 20.1% in 2019, primarily reflecting the benefits of cost management programs implemented in response to the global pandemic, partially offset by growth investments to pursue market recoveries and opportunities across the businesses that have emerged during the pandemic. SG&A expenses were$3.041 billion , or 21.1% of net sales, in 2019 compared to$3.172 billion , or 22.7% of net sales, in 2018. Acquisition-related and other charges totaled$139.5 million in 2019 and$157.8 million in 2018. Excluding these charges, SG&A was 20.1% of net sales in 2019 compared to 21.6% in 2018, primarily reflecting disciplined cost management and actions taken in response to external headwinds. Distribution center costs (i.e. warehousing and fulfillment facility and associated labor costs) are classified within SG&A. This classification may differ from other companies who may report such expenses within cost of sales. Due to diversity in practice, to the extent the classification of these distribution costs differs from other companies, the Company's gross margins may not be comparable. Such distribution costs classified in SG&A amounted to$347.8 million in 2020,$326.7 million in 2019 and$316.0 million in 2018. Corporate Overhead: The corporate overhead element of SG&A, which is not allocated to the business segments, amounted to$297.7 million , or 2.0% of net sales, in 2020,$229.5 million , or 1.6% of net sales, in 2019 and$202.8 million , or 1.5% of net sales, in 2018. Excluding acquisition-related charges of$60.3 million in 2020,$23.4 million in 2019, and$12.7 million in 37 --------------------------------------------------------------------------------
2018, the corporate overhead element of SG&A was 1.6% of net sales in 2020, compared to 1.4% of net sales in 2019 and 2018. The increase in 2020 compared to 2019 and 2018 was primarily due to higher employee-related costs.
Other, net: Other, net totaled$262.8 million in 2020 compared to$249.1 million in 2019 and$287.0 million in 2018. Excluding acquisition-related and other charges, Other, net totaled$253.8 million ,$218.9 million , and$178.9 million in 2020, 2019, and 2018, respectively. The year-over-year increase in 2020 was driven by higher intangible asset amortization and negative impacts from foreign currency. The year-over-year increase in 2019 was driven by higher intangible asset amortization and a favorable resolution of a prior claim in 2018. Loss (Gain) on Sales of Businesses: During 2020, the Company reported a$13.5 million net loss primarily relating to the sale of a product line within Oil & Gas. During 2019, the Company reported a$17.0 million gain relating to the sale of theSargent and Greenleaf business. During 2018, the Company reported a$0.8 million loss relating to a previously divested business. Loss on Debt Extinguishments: During the fourth quarter of 2020, the Company extinguished$1.154 billion of its notes payable and recognized a$46.9 million pre-tax loss primarily due to a make-whole premium payment. In 2019, the Company extinguished$750 million of its notes payable and recognized a$17.9 million pre-tax loss related to the write-off of deferred financing fees. Interest, net: Net interest expense in 2020 was$205.1 million compared to$230.4 million in 2019 and$209.2 million in 2018. The decrease in 2020 compared to 2019 was primarily driven by lowerU.S. interest rates and lower average balances relating to the Company's commercial paper borrowings, partially offset by lower interest income due to a decline in rates. The increase in net interest expense in 2019 versus 2018 was primarily driven by interest on the senior unsecured notes issued inNovember 2018 and lower interest income on deposits due to a decline in rates. Income Taxes: OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act did not have a material impact on the Company's consolidated financial statements in 2020. The Company continues to evaluate the potential impacts the CARES Act may have on its operations and consolidated financial statements in future periods. The Company's effective tax rate was 3.3% in 2020, 14.2% in 2019, and 40.7% in 2018. Excluding the one-time tax benefit of$118.8 million recorded in the second quarter of 2020 to reverse a deferred tax liability previously established related to certain unremitted earnings of foreign subsidiaries not permanently reinvested as a result of initiating a supply chain reorganization, and the impact of divestitures and acquisition-related and other charges previously discussed, the effective tax rate in 2020 was 15.1%. This effective tax rate differs from theU.S. statutory tax rate primarily due to tax on foreign earnings at tax rates different than theU.S. rate, the re-measurement of uncertain tax position reserves, the tax benefit of equity compensation, and tax benefits arising from an increase in deferred tax assets associated with the Company's supply chain reorganization and partial realignment of the Company's legal structure. Excluding the impact of divestitures and acquisition-related and other charges previously discussed, the effective tax rate in 2019 was 16.0%. This effective tax rate differed from theU.S. statutory tax rate primarily due to a portion of the Company's earnings being realized in lower-taxed foreign jurisdictions and the favorable effective settlements of income tax audits. The 2018 effective tax rate included net charges associated with the Act, which primarily related to the re-measurement of existing deferred tax balances, adjustments to the one-time transition tax, and the provision of deferred taxes on unremitted foreign earnings and profits for which the Company no longer asserted indefinite reinvestment. Excluding the impacts of the net charge related to the Act as well as the acquisition-related and other charges previously discussed, the effective tax rate in 2018 was 16.0%. This effective tax rate differed from theU.S. statutory tax rate primarily due to a portion of the Company's earnings being realized in lower-taxed foreign jurisdictions and the favorable effective settlements of income tax audits. 38 -------------------------------------------------------------------------------- Business Segment Results The Company's reportable segments are aggregations of businesses that have similar products, services and end markets, among other factors. The Company utilizes segment profit which is defined as net sales minus cost of sales and SG&A inclusive of the provision for credit losses (aside from corporate overhead expense), and segment profit as a percentage of net sales to assess the profitability of each segment. Segment profit excludes the corporate overhead expense element of SG&A, other, net (inclusive of intangible asset amortization expense), gain or loss on sales of businesses, restructuring charges, loss on debt extinguishments, interest income, interest expense, income taxes and share of net earnings or losses of equity method investment. 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. Refer to Note F,Goodwill and Intangible Assets, and Note O, Restructuring Charges, for the amount of intangible asset amortization expense and net restructuring charges, respectively, attributable to each segment. The Company classifies its business into three reportable segments, which also represent its operating segments: Tools & Storage, Industrial and Security. Tools & Storage: 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. (Millions of Dollars) 2020 2019 2018 Net sales$ 10,330 $ 10,062 $ 9,814 Segment profit$ 1,842 $ 1,533 $ 1,393 % of Net sales 17.8 % 15.2 % 14.2 % Tools & Storage net sales increased$267.6 million , or 3%, in 2020 compared to 2019 due to a 2% increase in both volume and price, partially offset by unfavorable currency of 1%. The 4% organic growth was driven by a strong second half organic performance of 18% from a consumer reconnection with the home and garden and a shift to eCommerce that emerged from the pandemic and was accelerated by a robust lineup of new and innovative products. Double digit growth was realized across all regions in the second half of 2020. For the full year,North America andEurope organic growth more than offset a decline in emerging markets. Segment profit amounted to$1.842 billion , or 17.8% of net sales, in 2020 compared to$1.533 billion , or 15.2% of net sales, in 2019. Excluding acquisition-related and other charges of$46.4 million and$44.3 million in 2020 and 2019, respectively, segment profit amounted to 18.3% of net sales in 2020 compared to 15.7% in 2019, as volume, productivity, cost control and price were partially offset by new growth investments, tariffs and currency. Tools & Storage net sales increased$248.1 million , or 3%, in 2019 compared to 2018 due to a 4% increase in volume and 1% increase in price, partially offset by unfavorable currency of 2%. The 5% organic growth was led byNorth America andEurope , more than offsetting a decline in emerging markets.North America organic growth was driven by the roll-out of the Craftsman brand and new product innovation, such as DEWALT Flexvolt, Atomic and Xtreme, partially offset by declines inCanada and industrial-focused businesses.Europe growth was supported by new products and successful commercial actions. The organic decline in emerging markets was driven by weak market conditions inTurkey ,China and certain countries inLatin America , which more than offset the benefits from price, new product launches and e-commerce expansion. Segment profit amounted to$1.533 billion , or 15.2% of net sales, in 2019 compared to$1.393 billion , or 14.2% of net sales, in 2018. Excluding acquisition-related and other charges of$44.3 million and$142.6 million in 2019 and 2018, respectively, segment profit amounted to 15.7% of net sales in 2019 compared to 15.6% in 2018, as the benefits from volume leverage, actions taken in response to external headwinds and price were partially offset by tariffs, commodity inflation, and foreign exchange. 39 --------------------------------------------------------------------------------
Industrial:
The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses. The Engineered Fastening business primarily sells highly engineered components such as fasteners, fittings and various engineered products, which are designed for specific application across multiple verticals. The product lines include externally threaded fasteners, blind rivets and tools, blind inserts and tools, drawn arc weld studs and systems, engineered plastic and mechanical fasteners, self-piercing riveting systems, precision nut running systems, micro fasteners, high-strength structural fasteners, axel swage, latches, heat shields, pins, and couplings. The Infrastructure business consists of the Attachment Tools and Oil & Gas product lines. Attachment Tools sells hydraulic tools and high quality, performance-driven heavy equipment attachment tools for off-highway applications. Oil & Gas sells and rents custom pipe handling, joint welding and coating equipment used in the construction of large and small diameter pipelines and provides pipeline inspection services. (Millions of Dollars) 2020 2019 2018 Net sales$ 2,353 $ 2,435 $ 2,188 Segment profit$ 226 $ 334 $ 320 % of Net sales 9.6 % 13.7 % 14.6 % Industrial net sales decreased$82.0 million , or 3%, in 2020 compared to 2019, due to pandemic-related market declines in volume of 15%, partially offset by acquisition growth of 12%. Engineered Fastening organic revenues decreased 15% for the full year, due to the significant impacts from the pandemic to automotive and general industrial production. Infrastructure organic revenues were down 15% from lower volumes in Attachment Tools and a sharp decline in Oil & Gas pipeline construction. The deepest segment organic revenue decline was the second quarter and each quarter thereafter delivered stronger revenue as markets recovered. Segment profit totaled$225.6 million , or 9.6% of net sales, in 2020 compared to$334.1 million , or 13.7% of net sales, in 2019. Excluding acquisition-related and other charges of$67.1 million and$25.8 million in 2020 and 2019, respectively, segment profit amounted to 12.4% of net sales in 2020 compared to 14.8% in 2019, as productivity gains and cost control were more than offset by market driven volume declines. Industrial net sales increased$246.9 million , or 11%, in 2019 compared to 2018, due to acquisition growth of 16%, partially offset by declines of 3% in volume and 2% from foreign currency. Engineered Fastening organic revenues decreased 3% as fastener penetration gains were more than offset by inventory reductions and lower production levels within industrial and automotive customers. Infrastructure organic revenues were down 2%, as growth within Oil & Gas was offset by declines in hydraulic tools from a difficult scrap steel market. Segment profit totaled$334.1 million , or 13.7% of net sales, in 2019 compared to$319.8 million , or 14.6% of net sales, in 2018. Excluding acquisition-related and other charges of$25.8 million and$26.0 million in 2019 and 2018, respectively, segment profit amounted to 14.8% of net sales in 2019 compared to 15.8% in 2018, as productivity gains and cost control were more than offset by lower volume and externally driven cost inflation.
Security:
The Security segment is comprised of the Convergent Security Solutions ("CSS") and the Mechanical Access Solutions ("MAS") businesses. The CSS business designs, supplies and installs commercial electronic security systems and provides electronic security services, including alarm monitoring, video surveillance, fire alarm monitoring, systems integration and system maintenance. Purchasers of these systems typically contract for ongoing security systems monitoring and maintenance at the time of initial equipment installation. The business also sells healthcare solutions, which include asset tracking, infant protection, pediatric protection, patient protection, wander management, fall management, and emergency call products. The MAS business primarily sells automatic doors. (Millions of Dollars) 2020 2019 2018 Net sales$ 1,852 $ 1,945 $ 1,981 Segment profit$ 109 $ 127 $ 169 % of Net sales 5.9 % 6.5 % 8.5 % Security net sales decreased$93.2 million , or 5%, in 2020 compared to 2019, as 1% increases in both price and small bolt-on commercial electronic security acquisitions were more than offset by a 5% decrease in volume attributed to the pandemic and a 2% decrease from divestitures. Organic sales forNorth America declined 3% driven by lower installations within commercial electronic security and automatic doors.Europe declined 4% organically as growth inFrance and the Nordics was offset by lower volume in theUK related to the pandemic. While customer access and sales were severely impeded by government lockdowns and safety precautions in the first half of 2020, the market and business showed recovery across the second half. 40 -------------------------------------------------------------------------------- Segment profit amounted to$108.7 million , or 5.9% of net sales, in 2020 compared to$126.6 million , or 6.5% of net sales, in 2019. Excluding acquisition-related and other charges of$73.5 million and$85.7 million in 2020 and 2019, respectively, segment profit amounted to 9.8% of net sales in 2020 compared to 10.9% in 2019, as price and cost control were more than offset by lower volume from pandemic disruptions and growth investments. Security net sales increased$35.2 million , or 2%, in 2019 compared to 2018, as 1% increases in both price and small bolt-on commercial electronic security acquisitions were more than offset by a 3% decrease due to foreign currency and a 1% decrease from the sale of theSargent & Greenleaf business. Organic sales forNorth America increased 3% driven by increased installations within commercial electronic security and higher volumes in healthcare and automatic doors.Europe declined 1% organically as growth inFrance was offset by continued market weakness in the Nordics and theUK . Segment profit amounted to$126.6 million , or 6.5% of net sales, in 2019 compared to$169.3 million , or 8.5% of net sales, in 2018. Excluding acquisition-related and other charges of$85.7 million and$42.2 million in 2019 and 2018, respectively, segment profit amounted to 10.9% of net sales in 2019 compared to 10.7% in 2018, as the benefits of organic growth and a focus on cost containment were partially offset by investments to support the business transformation in commercial electronic security and the dilutive impact from theSargent & Greenleaf divestiture.
RESTRUCTURING ACTIVITIES
A summary of the restructuring reserve activity from
December 28, January 2, (Millions of Dollars) 2019 Net Additions Usage Currency 2021 Severance and related costs$ 140.3 $ 63.9$ (111.0) $ (5.7) $ 87.5 Facility closures and asset impairments 7.5 19.1 (23.9) - 2.7 Total$ 147.8 $ 83.0$ (134.9) $ (5.7) $ 90.2 During 2020, the Company recognized net restructuring charges of$83.0 million , primarily related to severance costs associated with a cost reduction program announced in the second quarter of 2020. The Company expects to achieve annual net cost savings of approximately$175 million by the end of 2021 related to restructuring costs incurred during 2020. The majority of the$90.2 million of reserves remaining as ofJanuary 2, 2021 is expected to be utilized within the next twelve months. During 2019, the Company recognized net restructuring charges of$154.1 million , primarily related to severance costs associated with a cost reduction program announced in the third quarter of 2019. The 2019 actions resulted in annual net cost savings of approximately$185 million , primarily in the Tools & Storage segment. During 2018, the Company recognized net restructuring charges of$160.3 million , which primarily related to a cost reduction program executed in the fourth quarter of 2018. This amount reflected$151.0 million of net severance charges associated with the reduction of 4,184 employees and$9.3 million of facility closure and other restructuring costs. The 2018 actions resulted in annual net cost savings of approximately$230 million , primarily in the Tools & Storage and Security segments. Segments: The$83 million of net restructuring charges in 2020 includes:$40 million pertaining to the Tools & Storage segment;$29 million pertaining to the Industrial segment;$9 million pertaining to the Security segment; and$5 million pertaining to Corporate. The anticipated annual net cost savings of approximately$175 million related to the 2020 restructuring actions include:$71 million in the Tools & Storage segment;$61 million in the Industrial segment;$31 million in the Security segment; and$12 million in Corporate. FINANCIAL CONDITION Liquidity, Sources and Uses of Capital: The Company's primary sources of liquidity are cash flows generated from operations and available lines of credit under various credit facilities. Operating Activities: Cash flows provided by operations were$2.022 billion in 2020 compared to$1.506 billion in 2019. The year-over-year increase was mainly attributable to higher earnings driven by increased demand in the Tools & Storage segment and strong cost control. In 2019, cash flows from operations were$1.506 billion compared to$1.261 billion in 2018. The year-over-year increase was mainly attributable to improved working capital (accounts receivable, inventory, accounts payable, and deferred revenue) as a 41 --------------------------------------------------------------------------------
result of an intense focus on working capital management and lower inventory investment associated with Tools & Storage brand roll-outs.
Free Cash Flow: Free cash flow, as defined in the table below, was$1.674 billion in 2020 compared to$1.081 billion in 2019 and$769 million in 2018. The improvement in free cash flow in 2020 was driven by higher operating cash flows as discussed above and lower capital expenditures due to cash preservation initiatives implemented during the year in response to COVID-19 driven market volatility. Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners. Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company's common and preferred stock and business acquisitions, among other items. (Millions of Dollars) 2020 2019
2018
Net cash provided by operating activities$ 2,022 $ 1,506 $ 1,261 Less: capital and software expenditures (348) (425) (492) Free cash flow$ 1,674 $ 1,081 $ 769 As previously discussed, the COVID-19 pandemic has adversely affected the Company's operations, as well as the operations of its customers, distributors, suppliers and contractors, and has resulted in significant volatility and uncertainty in the markets in which the Company operates. Although the Company experienced a strong demand improvement in the second half of 2020, primarily in its Tools & Storage segment, the long-term impact of the COVID-19 pandemic on the Company's business, results of operations, and liquidity remains uncertain. However, the Company continues to believe it is in a strong financial position as ofJanuary 2, 2021 and has significant flexibility to navigate this volatile period as theCompany: (a) continues to maintain strong investment grade credit ratings; (b) possesses approximately$1.4 billion of cash on-hand as ofJanuary 2, 2021 ; (c) manages a robust and highly-rated$3.0 billion commercial paper program; and (d) carries$3.0 billion of revolving credit facilities backed by a well-capitalized and diverse bank group. Refer to Item 1A. Risk Factors in Part I of this Form 10-K/A for further discussion of the COVID-19 pandemic. Investing Activities: Cash flows used in investing activities totaled$1.577 billion in 2020, driven by business acquisitions of$1.324 billion , net of cash acquired, mainly related to the CAM acquisition, and capital and software expenditures of$348 million . Cash flows used in investing activities in 2019 totaled$1.209 billion , driven by business acquisitions of$685 million , primarily related to IES Attachments, capital and software expenditures of$425 million and purchases of investments of$261 million , which mainly related to the 20 percent investment in MTD. Cash flows used in investing activities in 2018 totaled$989 million , primarily due to business acquisitions of$525 million , mainly related to the Nelson acquisition, and capital and software expenditures of$492 million . The increase in capital and software expenditures in 2018 was primarily due to technology-related and capacity investments to support the Company's strong organic growth and its SFS 2.0 initiatives. Financing Activities: Cash flows provided by financing activities totaled$616 million in 2020 primarily driven by net proceeds from debt issuances of$2.223 billion , proceeds generated from the remarketing of the Series C Preferred Stock of$750 million and$147 million of proceeds from issuances of common stock, partially offset by payments on long-term debt of$1.154 billion , cash dividend payments on common stock of$432 million , net repayments of short-term borrowings of$343 million under the Company's commercial paper program, and a$250 million Craftsman deferred purchase price payment. Cash flows used in financing activities totaled$293 million in 2019 driven by payments on long-term debt of$1.150 billion and cash dividend payments of$402 million , partially offset by$735 million in net proceeds from the issuance of equity units and net proceeds from debt issuances of$496 million . Cash flows used in financing activities in 2018 totaled$562 million primarily related to the repurchase of common shares for$527 million and cash dividend payments of$385 million , partially offset by$433 million of net proceeds from short-term borrowings under the Company's commercial paper program. Fluctuations in foreign currency rates positively impacted cash by$23 million in 2020 due to the weakening of theU.S. Dollar against other currencies, while negatively impacting cash by$1 million and$54 million in 2019 and 2018, respectively, due to the strengthening of theU.S. Dollar against the Company's other currencies. 42 -------------------------------------------------------------------------------- Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Capital Stock, for further discussion regarding the Company's debt and equity arrangements. Credit Ratings and Liquidity: The Company maintains strong investment grade credit ratings from the majorU.S. rating agencies on its senior unsecured debt (S&P A, Fitch A-, Moody's Baa1), as well as its commercial paper program (S&P A-1, Fitch F1, Moody's P-2). In the second quarter of 2020, S&P and Fitch revised their outlooks to 'negative' from 'stable' in response to the potential negative economic effects stemming from the COVID-19 pandemic. Refer to Item 1A. Risk Factors in Part I of this Form 10-K/A for further discussion of the risks associated with the ongoing COVID-19 pandemic. Failure to maintain strong investment grade rating levels could adversely affect the Company's cost of funds, liquidity and access to capital markets, but would not have an adverse effect on the Company's ability to access its existing committed credit facilities.
Cash and cash equivalents totaled
As a result of the Act, the Company's tax liability related to the one-time transition tax associated with unremitted foreign earnings and profits totaled$325 million atJanuary 2, 2021 . The Act permits aU.S. company to elect to pay the net tax liability interest-free over a period of up to eight years. See the Contractual Obligations table below for the estimated amounts due by period. The Company has considered the implications of paying the required one-time transition tax, and believes it will not have a material impact on its liquidity. The Company has a$3.0 billion commercial paper program which includes Euro denominated borrowings in addition toU.S. Dollars. As ofJanuary 2, 2021 , the Company had no borrowings outstanding. As ofDecember 28, 2019 , the Company had approximately$336 million of borrowings outstanding representing Euro denominated commercial paper, which 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 inU.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 ofSeptember 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 ofJanuary 2, 2021 , andDecember 28, 2019 , the Company had not drawn on its five-year committed credit facility. InSeptember 2020 , the Company terminated its 364-day$1.0 billion committed credit facility and concurrently executed a new 364-Day$1.0 billion committed credit facility (the "364-Day Credit Agreement"). Borrowings under the 364-Day Credit Agreement may be made inU.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 ofSeptember 8, 2021 or upon termination. The Company may, however, convert all advances outstanding upon termination into a term loan that shall be repaid in full no later than the first anniversary of the termination date provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. The 364-Day Credit Agreement serves as part of the liquidity back-stop for the Company's$3.0 billion U.S. Dollar and Euro commercial paper program previously discussed. As ofJanuary 2, 2021 andDecember 28, 2019 , the Company had not drawn on its 364-Day committed credit facility.
In addition, the Company has other short-term lines of credit that are primarily
uncommitted, with numerous banks, aggregating
AtJanuary 2, 2021 , the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was approximately$3.5 billion . AtJanuary 2, 2021 ,$2 million was recorded as short-term borrowings relating to amounts outstanding against uncommitted lines. In addition,$96 million of the short-term credit lines was utilized primarily pertaining to outstanding letters of credit for which there are no required or reported debt balances. The weighted-average interest rate onU.S. dollar denominated short-term borrowings for 2020 and 2019 were 1.3% and 2.3%, respectively. The weighted-average interest rate on Euro denominated short-term borrowings for 2020 and 2019 were negative 0.2% and 0.3%, respectively. 43 -------------------------------------------------------------------------------- The Company has an interest coverage covenant that must be maintained to permit continued access to its committed credit facilities described above. The interest coverage ratio tested for covenant compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted Interest Expense ("adjusted EBITDA"/"adjusted Interest Expense"). InApril 2020 , the Company entered into an amendment to its 5-Year Credit Agreement to: (a) amend the definition of Adjusted EBITDA to allow for additional adjustment addbacks, which primarily relate to anticipated incremental charges related to the COVID-19 pandemic, for amounts incurred beginning in the second quarter of 2020 through the second quarter of 2021, and (b) lower the minimum interest coverage ratio from 3.5 to 2.5 times for the period from and including the second quarter of 2020 through the end of fiscal year 2021. These amendments are also applicable to the new 364-Day Credit Agreement described above. InNovember 2020 , the Company issued$750.0 million of senior unsecured term notes maturingNovember 15, 2050 ("2050 Term Notes"). The 2050 Term Notes will accrue interest at a fixed rate of 2.75% per annum, with interest payable semi-annually in arrears, and rank equally in right of payment with all of the Company's existing and future unsecured unsubordinated debt. The Company received total net proceeds from this offering of approximately$740 million , net of underwriting expenses and other fees associated with the transaction. The Company used the net proceeds from the offering for general corporate purposes, including repayment of other borrowings. Contemporaneously with the issuance of the 2050 Term Notes, the Company redeemed the 3.4% senior unsecured term notes due 2021 ("2021 Term Notes") and the 2.9% senior unsecured term notes due 2022 ("2022 Term Notes") for approximately$1.2 billion representing the outstanding principal amounts, accrued and unpaid interest, and a make-whole premium. The Company recognized a net pre-tax loss of$47 million from the extinguishment, which was comprised of the$49 million make-whole premium payment and a$2 million loss related to the write-off of deferred financing fees, partially offset by a$4 million gain relating to the write-off of unamortized fair value swap terminations. The Company also recognized a pre-tax loss of$20 million relating to the unamortized loss on cash flow swap terminations related to the 2022 Term Notes. Refer to Note I, Financial Instruments, for further discussion. InFebruary 2020 , the Company issued$750 million of senior unsecured term notes maturingMarch 15, 2030 ("2030 Term Notes") and$750.0 million of fixed-to-fixed reset rate junior subordinated debentures maturingMarch 15, 2060 ("2060 Junior Subordinated Debentures"). The 2030 Term Notes accrue interest at a fixed rate of 2.3% per annum, with interest payable semi-annually in arrears, and rank equally in right of payment with all of the Company's existing and future unsecured and unsubordinated debt. The 2060 Junior Subordinated Debentures bear interest at a fixed rate of 4.0% per annum, payable semi-annually in arrears, up to but excludingMarch 15, 2025 . From and includingMarch 15, 2025 , the interest rate will be reset for each subsequent five-year reset period equal to the Five-Year Treasury Rate plus 2.657%. The Five-Year Treasury Rate is based on the average yields on actively tradedU.S. treasury securities adjusted to constant maturity, for five-year maturities. On each five-year reset date, the 2060 Junior Subordinated Debentures can be called at par value. The 2060 Junior Subordinated Debentures are unsecured and rank subordinate and junior in right of payment to all of the Company's existing and future senior debt. The Company received total net proceeds from these offerings of approximately$1.483 billion , net of underwriting expenses and other fees associated with the transactions. The net proceeds from the offering were used for general corporate purposes, including acquisition funding.
In
InMarch 2019 , the Company issued$500 million of senior unsecured notes maturing onMarch 1, 2026 ("2026 Term Notes"). The 2026 Term Notes 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 million which reflected 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
InNovember 2019 , the Company issued 7,500,000 Equity Units with a total notional value of$750 million ("2019 Equity Units"). Each unit has a stated amount of$100 and initially consists of a three-year forward stock purchase contract ("2022 Purchase Contracts") for the purchase of a variable number of shares of common stock, onNovember 15, 2022 , for a price of$100 , and a 10% beneficial ownership interest in one share of 0% Series D Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of$1,000 per share ("Series D Preferred Stock"). The Company received approximately$735 million in cash proceeds from the 2019 Equity Units, net of offering expenses and underwriting costs and 44 -------------------------------------------------------------------------------- commissions, and issued 750,000 shares of Series D Preferred Stock. The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures inDecember 2019 , as discussed above. The Company also used$19 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. On and afterNovember 15, 2022 , the Series D Preferred Stock may be converted into common stock at the option of the holder. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. On or afterDecember 22, 2022 , the Company may elect to redeem for cash, all or any portion of the outstanding shares of the Series D Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series D Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date. Upon a successful remarketing of the Series D Preferred Stock (the "Remarketed Series D Preferred Stock"), the Company will receive additional cash proceeds of$750 million and issue shares of Remarketed Series D Preferred Stock. The Company pays the holders of the 2022 Purchase Contracts quarterly contract adjustment payments, which commencedFebruary 15, 2020 . As ofJanuary 2, 2021 , the present value of the contract adjustment payments was approximately$76 million . InMarch 2018 , the Company purchased from a financial institution "at-the-money" capped call options with an approximate term of three years, on 3.2 million shares of its common stock (subject to customary anti-dilution adjustments) for an aggregate premium of$57 million . InFebruary 2020 , the Company net-share settled 0.6 million of the 3.2 million capped options on its common stock and received 61,767 shares using an average reference price of$162.26 per common share. OnJune 9, 2020 , the Company amended the 2018 capped call options to align with and offset the potential economic dilution associated with the common shares issuable upon conversion of the Remarketed Series C Preferred Stock, as further discussed below. Subsequent to the amendment, the capped call options had an initial lower strike price of$148.34 and an upper strike price of$165.00 , which was approximately 30% higher than the closing price of the Company's common stock onJune 9, 2020 . As ofJanuary 2, 2021 , due to the customary anti-dilution provisions, the lower and upper strike prices were$148.14 and$164.77 , respectively. The aggregate fair value of the options atJanuary 2, 2021 was$53 million . InMay 2017 , the Company issued 7,500,000 Equity Units with a total notional value of$750 million ("2017 Equity Units"). Each unit has a stated amount of$100 and initially consisted of a three-year forward stock purchase contract ("2020 Purchase Contracts") for the purchase of a variable number of shares of common stock, onMay 15, 2020 , for a price of$100 , and a 10% beneficial ownership interest in one share of 0% Series C Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of$1,000 per share ("Series C Preferred Stock"). The Company received approximately$727 million in cash proceeds from the 2017 Equity Units, net of underwriting costs and commissions, before offering expenses, and issued 750,000 shares of Series C Preferred Stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used$25 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution. InMay 2020 , the Company generated cash proceeds of$750 million from the successful remarketing of the Series C Preferred Stock (the "Remarketed Series C Preferred Stock"), a described more fully in Note J, Capital Stock. Upon completion of the remarketing, the holders of the 2017 Equity Units received 5,463,750 common shares and the Company issued 750,000 shares of Remarketed Series C Preferred Stock. Holders of the Remarketed Series C Preferred Stock are entitled to receive cumulative dividends, if declared by the Board of Directors, at an initial fixed rate equal to 5.0% per annum of the$1,000 per share liquidation preference (equivalent to$50.00 per annum per share). In connection with the remarketing, the conversion rate was reset to 6.7352 shares of the Company's common stock, which is equivalent to a conversion price of approximately$148.47 per share. As ofJanuary 2, 2021 , due to the customary anti-dilution provisions, the conversion rate was 6.7504, equivalent to a conversion price of approximately$148.14 per share of common stock. Beginning onMay 15, 2020 , the holders have the option to convert the Remarketed Series C Preferred Stock into common stock. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. The Company does not have the right to redeem the Remarketed Series C Preferred Stock prior toMay 15, 2021 . At the election of the Company, on or afterMay 15, 2021 , the Company may redeem for cash, all or any portion of the outstanding shares of the Remarketed 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 Remarketed Series C Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date. InMarch 2015 , the Company entered into a forward share purchase contract with a financial institution counterparty for 3,645,510 shares of common stock. The contract obligates the Company to pay$350 million , plus an additional amount related to the forward component of the contract. InFebruary 2020 , the Company amended the settlement date toApril 2022 , or earlier at the Company's option.
Refer to Note H, Long-Term Debt and Financing Arrangements, and Note J, Capital Stock, for further discussion regarding the Company's debt and equity arrangements.
45 --------------------------------------------------------------------------------
Contractual Obligations: The following table summarizes the Company's significant contractual obligations and commitments that impact its liquidity:
Payments Due by Period (Millions of Dollars) Total 2021 2022-2023 2024-2025 Thereafter Long-term debt (a)$ 4,300 $ - $ - $ -$ 4,300 Interest payments on long-term debt (b) 3,363 161 324 324 2,554 Short-term borrowings 2 2 - - - Lease obligations 599 141 192 118 148 Inventory purchase commitments (c) 545 545 - - - Deferred compensation 28 1 1 1 25 Marketing commitments 39 27 12 - - Derivatives (d) 177 174 3 - - Forward stock purchase contract (e) 350 - 350 - - Pension funding obligations (f) 41 41 - - - Contract adjustment fees (g) 78 39 39 - - U.S. income tax (h) 325 35 91 197 2
Total contractual cash obligations
1,012
(a)Future payments on long-term debt encompass all payments related to aggregate debt maturities, excluding certain fair value adjustments included in long-term debt, as discussed further in Note H, Long-Term Debt and Financing Arrangements. (b)Future interest payments on long-term debt reflect the applicable interest rate in effect atJanuary 2, 2021 . (c)Inventory purchase commitments primarily consist of open purchase orders to purchase raw materials, components, and sourced products. (d)Future cash flows on derivative instruments reflect the fair value and accrued interest as ofJanuary 2, 2021 . The ultimate cash flows on these instruments will differ, perhaps significantly, based on applicable market interest and foreign currency rates at their maturity. (e)InMarch 2015 , the Company entered into a forward share purchase contract with a financial institution counterparty which obligates the Company to pay$350 million , plus an additional amount related to the forward component of the contract. InFebruary 2020 , the Company amended the settlement date toApril 2022 , or earlier at the Company's option. See Note J, Capital Stock, for further discussion. (f)This amount principally represents contributions either required by regulations or laws or, with respect to unfunded plans, necessary to fund current benefits. The Company has not presented estimated pension and post-retirement funding beyond 2021 as funding can vary significantly from year to year based upon changes in the fair value of the plan assets, actuarial assumptions, and curtailment/settlement actions. (g)These amounts represent future contract adjustment payments to holders of the Company's 2022 Purchase Contracts. See Note J, Capital Stock, for further discussion. (h)Income tax liability for the one-time deemed repatriation tax on unremitted foreign earnings and profits. See Note Q, Income Taxes, for further discussion. To the extent the Company can reliably determine when payments will occur, the related amounts will be included in the table above. However, due to the high degree of uncertainty regarding the timing of potential future cash flows associated with the contingent consideration liability related to the Craftsman acquisition and the unrecognized tax liabilities of$187 million and$494 million , respectively, atJanuary 2, 2021 , the Company is unable to make a reliable estimate of when (if at all) these amounts may be paid. Refer to Note E, Acquisitions and Investments, Note M, Fair Value Measurements, and Note Q, Income Taxes, for further discussion. Payments of the above contractual obligations (with the exception of payments related to debt principal, the forward stock purchase contract, contract adjustment fees, and tax obligations) will typically generate a cash tax benefit such that the net cash outflow will be lower than the gross amounts summarized above. 46 --------------------------------------------------------------------------------
Other Significant Commercial Commitments:
Amount of Commitment Expirations Per Period (Millions of Dollars) Total 2021 2022-2023 2024-2025 Thereafter U.S. lines of credit$ 3,000 $ 1,000 $ 2,000 $ - $ - Short-term borrowings, long-term debt and lines of credit are explained in detail within Note H, Long-Term Debt and Financing Arrangements. MARKET RISK Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments, currencies, commodities and other items traded in global markets. The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices, bond prices and commodity prices, amongst others. Exposure to foreign currency risk results because the Company, through its global businesses, enters into transactions and makes investments denominated in multiple currencies. The Company's predominant currency exposures are related to the Euro, Canadian Dollar, British Pound, Australian Dollar, Brazilian Real, Argentine Peso, Chinese Renminbi and the Taiwan Dollar. Certain cross-currency trade flows arising from both trade and affiliate sales and purchases are consolidated and netted prior to obtaining risk protection through the use of various derivative financial instruments which may include: purchased basket options, purchased options, collars, cross-currency swaps and currency forwards. The Company is thus able to capitalize on its global positioning by taking advantage of naturally offsetting exposures and portfolio efficiencies to reduce the cost of purchasing derivative protection. At times, the Company also enters into foreign exchange derivative contracts to reduce the earnings and cash flow impacts of non-functional currency denominated receivables and payables, primarily for affiliate transactions. Gains and losses from these hedging instruments offset the gains or losses on the underlying net exposures. Management determines the nature and extent of currency hedging activities, and in certain cases, may elect to allow certain currency exposures to remainun -hedged. The Company may also enter into cross-currency swaps and forward contracts to hedge the net investments in certain subsidiaries and better match the cash flows of operations to debt service requirements. Management estimates the foreign currency impact from its derivative financial instruments outstanding at the end of 2020 would have been an incremental pre-tax loss of approximately$43 million based on a hypothetical 10% adverse movement in all net derivative currency positions. The Company follows risk management policies in executing derivative financial instrument transactions, and does not use such instruments for speculative purposes. The Company generally does not hedge the translation of its non-U.S. dollar earnings in foreign subsidiaries, but may choose to do so in certain instances in future periods. As mentioned above, the Company routinely has cross-border trade and affiliate flows that cause an impact on earnings from foreign exchange rate movements. The Company is also exposed to currency fluctuation volatility from the translation of foreign earnings intoU.S. dollars and the economic impact of foreign currency volatility on monetary assets held in foreign currencies. It is more difficult to quantify the transactional effects from currency fluctuations than the translational effects. Aside from the use of derivative instruments, which may be used to mitigate some of the exposure, transactional effects can potentially be influenced by actions the Company may take. For example, if an exposure occurs from a European entity sourcing product from aU.S. supplier it may be possible to change to a European supplier. Management estimates the combined translational and transactional impact, on pre-tax earnings, of a 10% overall movement in exchange rates is approximately$157 million , or approximately$0.81 per diluted share. In 2020, translational and transactional foreign currency fluctuations negatively impacted pre-tax earnings by approximately$73 million , or approximately$0.38 per diluted share. The Company's exposure to interest rate risk results from its outstanding debt and derivative obligations, short-term investments, and derivative financial instruments employed in the management of its debt portfolio. The debt portfolio including both trade and affiliate debt, is managed to achieve capital structure targets and reduce the overall cost of borrowing by using a combination of fixed and floating rate debt as well as interest rate swaps, and cross-currency swaps. The Company's primary exposure to interest rate risk comes from its commercial paper program in which the pricing is partially based on short-termU.S. interest rates. AtJanuary 2, 2021 , the impact of a hypothetical 10% increase in the interest rates associated with the Company's commercial paper borrowings would have an immaterial effect on the Company's financial position and results of operations. The Company has exposure to commodity prices in many businesses, particularly brass, nickel, resin, aluminum, copper, zinc, steel, and energy used in the production of finished goods. Generally, commodity price exposures are not hedged with derivative financial instruments, but instead are actively managed through customer product and service pricing actions, procurement-driven cost reduction initiatives and other productivity improvement projects. 47 -------------------------------------------------------------------------------- Fluctuations in the fair value of the Company's common stock affect domestic retirement plan expense as discussed below in the Employee Stock Ownership Plan ("ESOP") section of MD&A. Additionally, the Company has$120 million of liabilities as ofJanuary 2, 2021 pertaining to unfunded defined contribution plans for certainU.S. employees for which there is mark-to-market exposure. The assets held by the Company's defined benefit plans are exposed to fluctuations in the market value of securities, primarily global stocks and fixed-income securities. The funding obligations for these plans would increase in the event of adverse changes in the plan asset values, although such funding would occur over a period of many years. In 2020, 2019, and 2018, investment returns on pension plan assets resulted in a$280 million increase, a$323 million increase, and a$72 million decrease, respectively. The Company expects funding obligations on its defined benefit plans to be approximately$41 million in 2021. The Company employs diversified asset allocations to help mitigate this risk. Management has worked to minimize this exposure by freezing and terminating defined benefit plans where appropriate. The Company has access to financial resources and borrowing capabilities around the world. There are no instruments within the debt structure that would accelerate payment requirements solely due to a change in credit rating. The Company's existing credit facilities and sources of liquidity, including operating cash flows, are considered more than adequate to conduct business as normal. Accordingly, based on present conditions and past history, management believes it is unlikely that operations will be materially affected by any potential deterioration of the general credit markets that may occur. The Company believes that its strong financial position, operating cash flows, committed long-term credit facilities and borrowing capacity, and ability to access equity markets, provide the financial flexibility necessary to continue its record of annual dividend payments, to invest in the routine needs of its businesses, to make strategic acquisitions and to fund other initiatives encompassed by its growth strategy and maintain its strong investment grade credit ratings. OTHER MATTERS Employee Stock Ownership Plan ("ESOP") - As detailed in Note L, Employee Benefit Plans, the Company has an ESOP under which the ongoingU.S. Core and 401(k) defined contribution plans have been funded. Overall ESOP expense was affected by the market value of the Company's stock on the monthly dates when shares were released, among other factors. The Company's net ESOP activity resulted in expense of$6.3 million in 2020, income of$0.5 million in 2019 and expense of$0.4 million in 2018.U.S. defined contribution retirement plan expense will increase in the future as all remaining unallocated shares were released in the first quarter of 2020. CRITICAL ACCOUNTING ESTIMATES - Preparation of the Company's Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant accounting policies used in the preparation of the Consolidated Financial Statements are described in Note A, Significant Accounting Policies. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters with inherent uncertainty. The most significant areas involving management estimates are described below. Actual results in these areas could differ from management's estimates. ALLOWANCE FOR CREDIT LOSSES - The Company maintains an allowance for credit losses, which represents an estimate of expected losses over the remaining contractual life of its receivables. The allowance is determined using two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, a specific reserve is established for individual accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, management uses its judgment, based on the surrounding facts and circumstances, to record a specific reserve for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received. Second, a reserve is determined for all customers based on a range of percentages applied to receivable aging categories. These percentages are based on historical collection rates, write-off experience, and forecasts of future economic conditions. If circumstances change, for example, due to the occurrence of higher-than-expected defaults, a significant adverse change in a major customer's ability to meet its financial obligation to the Company, or adverse changes in forecasts of future economic conditions, then the Company's estimates of the recoverability of receivable amounts due could be reduced. INVENTORIES - Inventories in theU.S. are primarily valued at the lower of Last-In First-Out ("LIFO") cost or market, while non-U.S. inventories are primarily valued at the lower of First-In, First-Out ("FIFO") cost and net realizable value. The calculation of LIFO reserves, and therefore the net inventory valuation, is affected by inflation and deflation in inventory components. The Company continually reviews the carrying value of discontinued product lines and stock-keeping-units ("SKUs") to determine that these items are properly valued. The Company also continually evaluates the composition of its 48 -------------------------------------------------------------------------------- inventory and identifies obsolete and/or slow-moving inventories. Inventory items identified as obsolete and/or slow-moving are evaluated to determine if write-downs are required. The Company assesses the ability to dispose of these inventories at a price greater than cost. If it is determined that cost is less than market or net realizable value, as applicable, cost is used for inventory valuation. If market value or net realizable value, as applicable, is less than cost, the Company writes down the related inventory to that value. GOODWILL AND INTANGIBLE ASSETS - The Company acquires businesses in purchase transactions that result in the recognition of goodwill and intangible assets. The determination of the value of intangible assets requires management to make estimates and assumptions. In accordance with Accounting Standards Codification ("ASC") 350-20,Goodwill , acquired goodwill and indefinite-lived intangible assets are not amortized but are subject to impairment testing at least annually or when an event occurs or circumstances change that indicate it is more likely than not an impairment exists. Definite-lived intangible assets are amortized and are tested for impairment when an event occurs or circumstances change that indicate it is more likely than not that an impairment exists.Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. AtJanuary 2, 2021 , the Company reported$10.038 billion of goodwill,$2.198 billion of indefinite-lived trade names and$1.858 billion of net definite-lived intangibles. Management tests goodwill for impairment at the reporting unit level. A reporting unit is an operating segment as defined in ASC 280, Segment Reporting, or one level below an operating segment (component level) as determined by the availability of discrete financial information that is regularly reviewed by operating segment management or an aggregate of component levels of an operating segment having similar economic characteristics. If the carrying value of a reporting unit (including the value of goodwill) is greater than its estimated fair value, an impairment charge would be recorded for the amount that the carrying amount of the reporting unit exceeded its fair value. As required by the Company's policy, goodwill was tested for impairment in the third quarter of 2020. In accordance with Accounting Standards Update ("ASU") 2011-08, Intangibles -Goodwill and Other (Topic 350): Testing Goodwill for Impairment, companies are permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. Impairment tests are completed separately with respect to the goodwill of each of the Company's reporting units. For its annual impairment testing performed in the third quarter of 2020, the Company applied a quantitative test for all of its reporting units using a discounted cash flow valuation model. Based on the results of this testing, it was determined that the fair value of each of the reporting units substantially exceeded its respective carrying amount by in excess of 40%, with the exception of the Infrastructure reporting unit as discussed below. As previously disclosed in the Company's Form 10-Q for the third quarter of 2020, the fair value of the Infrastructure reporting unit exceeded its carrying amount by 16%. In connection with the preparation of the Consolidated Financial Statements for the year endedJanuary 2, 2021 , the Company performed an updated impairment analysis with respect to the Infrastructure reporting unit, which included approximately$585 million of goodwill at year-end. The key assumptions applied to the updated cash flow projections for the Infrastructure reporting unit included a 9.5% discount rate, near-term revenue growth rates over the next six years, which represented a compound annual growth rate of approximately 4%, and a 3% perpetual growth rate. Based on this analysis, it was determined that the fair value of the Infrastructure reporting unit exceeded its carrying amount by 23%. The increase in excess fair value is reflective of an improved near-term outlook based on results and trends in the fourth quarter of 2020. Management remains confident in the long-term viability and success of the Infrastructure reporting unit based on its leading market position in its respective industries and the Company's continued commitment to, and investments in, organic growth and margin resiliency initiatives. For the Company's remaining reporting units, the key assumptions applied to the cash flow projections were discount rates, which ranged from 7.5% to 9.5%, near-term revenue growth rates over the next six years, which represented cumulative annual growth rates ranging from approximately 3% to 5%, and perpetual growth rates of 3%. These assumptions contemplated business, market and overall economic conditions. Furthermore, management performed sensitivity analyses on the estimated fair values from the discounted cash flow valuation models for these reporting units utilizing more conservative assumptions that reflect reasonably likely future changes in the discount rate and perpetual growth rate. The discount rate was increased by 100 basis points with no impairment indicated. The perpetual growth rate was decreased by 150 basis points with no impairment indicated. The Company also tested its indefinite-lived trade names for impairment during the third quarter of 2020 utilizing a discounted cash flow model. The key assumptions used included discount rates, royalty rates, and perpetual growth rates applied to the projected sales. With the exception of an immaterial trade name, the Company determined that the fair values of its indefinite-lived trade names exceeded their respective carrying amounts. 49 -------------------------------------------------------------------------------- In the event that future operating results of any of the Company's reporting units or indefinite-lived trade names do not meet current expectations, management, based upon conditions at the time, would consider taking restructuring or other strategic actions, as necessary, to maximize revenue growth and profitability. A thorough analysis of all the facts and circumstances existing at that time would need to be performed to determine if recording an impairment loss would be appropriate. DEFINED BENEFIT OBLIGATIONS - The valuation of pension and other postretirement benefits costs and obligations is dependent on various assumptions. These assumptions, which are updated annually, include discount rates, expected return on plan assets, future salary increase rates, and health care cost trend rates. The Company considers current market conditions, including interest rates, to establish these assumptions. Discount rates are developed considering the yields available on high-quality fixed income investments with maturities corresponding to the duration of the related benefit obligations. The Company's weighted-average discount rates used to determine benefit obligations atJanuary 2, 2021 forthe United States and international pension plans were 2.39% and 1.31%, respectively. The Company's weighted-average discount rates used to determine benefit obligations atDecember 28, 2019 forthe United States and international pension plans were 3.20% and 1.80%, respectively. As discussed further in Note L, Employee Benefit Plans, the Company develops the expected return on plan assets considering various factors, which include its targeted asset allocation percentages, historic returns, and expected future returns. The Company's expected rate of return assumptions forthe United States and international pension plans were 5.25% and 3.90%, respectively, atJanuary 2, 2021 . The Company will use a 3.16% weighted-average expected rate of return assumption to determine the 2021 net periodic benefit cost. A 25 basis point reduction in the expected rate of return assumption would increase 2021 net periodic benefit cost by approximately$6 million on a pre-tax basis. The Company believes that the assumptions used are appropriate; however, differences in actual experience or changes in the assumptions may materially affect the Company's financial position or results of operations. To the extent that actual (newly measured) results differ from the actuarial assumptions, the difference is recognized in accumulated other comprehensive loss, and, if in excess of a specified corridor, amortized over future periods. The expected return on plan assets is determined using the expected rate of return and the fair value of plan assets. Accordingly, market fluctuations in the fair value of plan assets can affect the net periodic benefit cost in the following year. The projected benefit obligation for defined benefit plans exceeded the fair value of plan assets by$667 million atJanuary 2, 2021 . A 25 basis point reduction in the discount rate would have increased the projected benefit obligation by approximately$108 million atJanuary 2, 2021 . The primary Black & DeckerU.S. pension and post employment benefit plans were curtailed in late 2010, as well as the only materialBlack & Decker international plan, and in their place the Company implemented defined contribution benefit plans. The vast majority of the projected benefit obligation pertains to plans that have been frozen; the remaining defined benefit plans that are not frozen are predominantly small domestic union plans and those that are statutorily mandated in certain international jurisdictions. The Company recognized approximately$19 million of defined benefit plan expense in 2020, which may fluctuate in future years depending upon various factors including future discount rates and actual returns on plan assets. ENVIRONMENTAL - The Company incurs costs related to environmental issues as a result of various laws and regulations governing current operations as well as the remediation of previously contaminated sites. The Company's policy is to accrue environmental investigatory and remediation costs for identified sites when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The amount of liability recorded is based on an evaluation of currently available facts with respect to each individual site and includes such factors as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. The liabilities recorded do not take into account any claims for recoveries from insurance or third parties. As assessments and remediation progress at individual sites, the amounts recorded are reviewed periodically and adjusted to reflect additional technical and legal information that becomes available. As ofJanuary 2, 2021 , the Company had reserves of$174 million for remediation activities associated with Company-owned properties as well as for Superfund sites, for losses that are probable and estimable. The range of environmental remediation costs that is reasonably possible is$103 million to$245 million which is subject to change in the near term. The Company may be liable for environmental remediation of sites it no longer owns. Liabilities have been recorded on those sites in accordance with this policy. INCOME TAXES - The Company accounts for income taxes under the asset and liability method in accordance with ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. Any changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date. The Company records net deferred tax assets to the extent that it is more likely than not that these assets will be realized. In making this determination, management considers all available positive and negative evidence, including future reversals of existing temporary differences, estimates of future taxable income, tax-planning strategies, and the realizability of net operating 50 -------------------------------------------------------------------------------- loss carryforwards. In the event that it is determined that an asset is not more likely that not to be realized, a valuation allowance is recorded against the asset. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the unrealizable amount would be charged to earnings in the period in which that determination is made. Conversely, if the Company were to determine that it would be able to realize deferred tax assets in the future in excess of the net carrying amounts, it would decrease the recorded valuation allowance through a favorable adjustment to earnings in the period that the determination was made. The Company records uncertain tax positions in accordance with ASC 740, which requires a two-step process. First, management determines whether it is more likely than not that a tax position will be sustained based on the technical merits of the position and second, for those tax positions that meet the more likely than not threshold, management recognizes the largest amount of the tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related taxing authority. The Company maintains an accounting policy of recording interest and penalties on uncertain tax positions as a component of Income taxes in the Consolidated Statements of Operations. The Company is subject to income tax in a number of locations, including many state and foreign jurisdictions. Significant judgment is required when calculating the worldwide provision for income taxes. Many factors are considered when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments, and which may not accurately anticipate actual outcomes. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company's unrecognized tax positions will significantly increase or decrease within the next twelve months. These changes may be the result of settlements of ongoing audits, litigation, or other proceedings with taxing authorities. The Company periodically assesses its liabilities and contingencies for all tax years still subject to audit based on the most current available information, which involves inherent uncertainty. Additional information regarding income taxes is available in Note Q, Income Taxes.RISK INSURANCE - To manage its insurance costs efficiently, the Company self insures for certainU.S. business exposures and generally has low deductible plans internationally. For domestic workers' compensation, automobile and product liability (liability for alleged injuries associated with the Company's products), the Company generally purchases insurance coverage only for severe losses that are unlikely, and these lines of insurance involve the most significant accounting estimates. While different self insured retentions, in the form of deductibles and self insurance through its captive insurance company, exist for each of these lines of insurance, the maximum self insured retention is set at no more than$5 million per occurrence. The process of establishing risk insurance reserves includes consideration of actuarial valuations that reflect the Company's specific loss history, actual claims reported, and industry trends among statistical and other factors to estimate the range of reserves required. Risk insurance reserves are comprised of specific reserves for individual claims and additional amounts expected for development of these claims, as well as for incurred but not yet reported claims discounted to present value. The cash outflows related to risk insurance claims are expected to occur over a period of approximately 15 years. The Company believes the liabilities recorded for theseU.S. risk insurance reserves, totaling$98 million and$87 million as ofJanuary 2, 2021 , andDecember 28, 2019 , respectively, are adequate. Due to judgments inherent in the reserve estimation process, it is possible the ultimate costs will differ from this estimate. WARRANTY - The Company provides product and service warranties which vary across its businesses. The types of warranties offered generally range from one year to limited lifetime, and certain branded products carry a lifetime warranty. There are also certain products with no warranty. Further, the Company sometimes incurs discretionary costs to service its products in connection with product performance issues. Historical warranty and service claim experience forms the basis for warranty obligations recognized. Adjustments are recorded to the warranty liability as new information becomes available. The Company believes the$114 million reserve for expected product warranty claims as ofJanuary 2, 2021 is adequate, but due to judgments inherent in the reserve estimation process, including forecasting future product reliability levels and costs of repair as well as the estimated age of certain products submitted for claims, the ultimate claim costs may differ from the recorded warranty liability. The Company also establishes a reserve for product recalls on a product-specific basis during the period in which the circumstances giving rise to the recall become known and estimable for both company-initiated actions and those required by regulatory bodies. OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements as ofJanuary 2, 2021 . 51 -------------------------------------------------------------------------------- CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Amendment to the Company's Annual Report on Form 10-K (the "Amendment" or "Form 10-K/A") for the fiscal year endedJanuary 2, 2021 contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including any projections or guidance of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include, among others, the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "anticipate" or any other similar words. Except with respect to statements in this Form 10-K/A revised or provided to reflect the effects of the Restatement, forward-looking statements herein are as of the Original Form 10-K, filed with theSEC onFebruary 18, 2021 , unless specifically stated to be made as of a different date, and the Company has not updated forward-looking statements or information to reflect events occurring after the Original Form 10-K. Although the Company believes that the expectations reflected in any of its forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of its forward-looking statements. The Company's future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in the Company's filings with theSecurities and Exchange Commission . Important factors that could cause the Company's actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in its forward-looking statements include, among others, the following: (i) successfully developing, marketing and achieving sales from new products and services and the continued acceptance of current products and services; (ii) macroeconomic factors, including global and regional business conditions (such as Brexit), commodity prices, inflation and deflation, and currency exchange rates; (iii) laws, regulations and governmental policies affecting the Company's activities in the countries where it does business, including those related to tariffs, taxation, data privacy, anti-bribery, anti-corruption, government contracts and trade controls such as section 301 tariffs and section 232 steel and aluminum tariffs; (iv) the economic, political, cultural and legal environment of emerging markets, particularlyLatin America ,Russia ,China andTurkey ; (v) realizing the anticipated benefits of mergers, acquisitions, joint ventures, strategic alliances or divestitures, including the successful integration of the CAM acquisition into the Company; (vi) pricing pressure and other changes within competitive markets; (vii) availability and price of raw materials, component parts, freight, energy, labor and sourced finished goods; (viii) the impact the tightened credit markets and change to LIBOR and other benchmark rates may have on the Company or its customers or suppliers; (ix) the extent to which the Company has to write off accounts receivable or assets or experiences supply chain disruptions in connection with bankruptcy filings by customers or suppliers; (x) the Company's ability to identify and effectively execute productivity improvements and cost reductions; (xi) potential business and distribution disruptions, including those related to physical security threats, information technology or cyber-attacks, epidemics, pandemics, sanctions, political unrest, war, terrorism or natural disasters; (xii) the continued consolidation of customers, particularly in consumer channels and the Company's continued reliance on significant customers; (xiii) managing franchisee relationships; (xiv) the impact of poor weather conditions and climate change; (xv) maintaining or improving production rates in the Company's manufacturing facilities, responding to significant changes in customer preferences, product demand and fulfilling demand for new and existing products, and learning, adapting and integrating new technologies into products, services and processes; (xvi) changes in the competitive landscape in the Company's markets; (xvii) the Company's non-U.S. operations, including sales to non-U.S. customers; (xviii) the impact from demand changes within world-wide markets associated with homebuilding and remodeling; (xix) potential adverse developments in new or pending litigation and/or government investigations; (xx) the incurrence of debt and changes in the Company's ability to obtain debt on commercially reasonable terms and at competitive rates; (xxi) substantial pension and other postretirement benefit obligations; (xxii) potential regulatory liabilities, including environmental, privacy, data breach, workers compensation and product liabilities; (xxiii) attracting and retaining key employees, managing a workforce in many jurisdictions, work stoppages or other labor disruptions; (xxiv) the Company's ability to keep abreast with the pace of technological change; (xxv) changes in accounting estimates; (xxvi) the Company's ability to protect its intellectual property rights and associated reputational impacts; and (xxvii) the continued adverse effects of the COVID-19 pandemic and an indeterminate recovery period. 52 -------------------------------------------------------------------------------- Additional factors that could cause actual results to differ materially from forward-looking statements are set forth in this Annual Report on Form 10-K/A, including under the heading "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in the Consolidated Financial Statements and the related Notes. Forward-looking statements in this Annual Report on Form 10-K/A speak only as of the date hereof, and forward-looking statements in documents attached that are incorporated by reference speak only as of the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law. 53 --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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