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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-18 · 332 added, 367 removed, 409 unchanged (63% of the section changed)

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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;

• 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 the Black & Decker merger), a 20 percent investment in MTD 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.

• Pursue acquisitive growth on multiple fronts by building upon its existing global tools platform and expanding the outdoor products category, expanding the Industrial platform in Engineered Fastening and Infrastructure, and pursuing adjacencies with sound industrial logic.

Execution of the above strategy has resulted in approximately $13.5 billion of acquisitions since 2002 (excluding the Black & Decker merger), 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.

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• Free cash flow equal to, or exceeding, net income;

• Sustain 10+ working capital turns;

• Deliver 10+ working capital turns;

• 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.

In terms of capital allocation, the Company remains committed, over time, to returning approximately 50% of excess capital to shareholders through a strong and growing dividend as well as opportunistically repurchasing shares.

The remaining capital (approximately 50%) will be deployed towards acquisitions.

Pending Sale of Convergent Security Solutions ("CSS")

In December 2021, the Company announced that it had reached a definitive agreement for the sale of most of its Security assets to Securitas AB for $3.2 billion in cash.

The proposed transaction includes the Company's CSS business comprising of commercial electronic security and healthcare businesses.

The transaction does not include the Company's automatic doors business.

The sale is subject to regulatory approvals and other customary closing conditions, and is expected to close in the first half of 2022.

Net proceeds from the sale are expected to be used to fund, in part, an approximately $4 billion share repurchase which is planned to be completed in 2022.

The use of net proceeds towards a planned share repurchase program is consistent with the Company's long-term capital allocation strategy focused on value maximization.

Acquisitions and Investments

On December 1, 2021, the Company acquired the remaining 80 percent ownership stake in MTD Holdings Inc.

("MTD"), a privately held global manufacturer of outdoor power equipment.

The Company previously acquired a 20 percent interest in MTD in January 2019.

With over $2.6 billion of revenue in 2021, MTD designs, manufactures and distributes lawn tractors, zero turn ride on mowers, walk behind mowers, snow blowers, residential robotic mowers, handheld outdoor power equipment and garden tools for both residential and professional consumers under well-known brands like Cub Cadet® and Troy-Bilt®.

On November 12, 2021, the Company acquired Excel Industries ("Excel").

Excel is a leading designer and manufacturer of premium commercial and residential turf-care equipment under the brands of Hustler Turf Equipment® and BigDog Mower Co®.

The Company believes this is a strategically important bolt-on acquisition that bolsters the presence in the independent dealer network.

The Company expects the combination of MTD, Excel and its existing outdoor strategic business unit in Tools & Storage will create a global leader in the $25 billion and growing outdoor category, with strong brands and growth opportunities.

As part of the integration of these businesses, the Company plans to design, develop and manufacture battery and electric-powered solutions for professional and residential users.

This will position the combined businesses to be a leader as preferences shift from gas powered equipment toward electrified solutions in outdoor power equipment.

On February 24, 2020, the Company acquired Consolidated Aerospace Manufacturing, LLC ("CAM"), an industry-leading manufacturer of specialty fasteners and components for the aerospace and defense markets.

The acquisition further diversified the Company's presence in the industrial markets and expanded its portfolio of specialty fasteners in the aerospace and defense markets.

On March 8, 2019, the Company acquired the International 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.

Refer to Note E, Acquisitions and Investments, for further discussion.

On May 30, 2019, the Company sold its Sargent and Greenleaf mechanical locks business within the Security segment.

The Company has also divested several smaller businesses in recent years that did not fit into its long-term strategic objectives.

These divestitures allow the Company to invest in other areas of the Company that fit into its long-term growth strategy.

Refer to Note T, Divestitures, for further discussion of the Company's divestitures.

COVID-19 Pandemic

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• 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.

To respond to the volatile and uncertain environment, the Company implemented a comprehensive cost reduction and efficiency program in 2020, which delivered approximately $625 million of net savings across 2021 and 2020.

Cost actions executed under the program included headcount reductions, furloughs, reduced employee work schedules, a voluntary retirement program, and footprint rationalizations.

The Company 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 for further discussion.

Share Repurchases

In April 2018, the Company repurchased 1,399,732 shares of common stock for approximately $200 million.

In July 2018, the Company repurchased 2,086,792 shares of common stock for approximately $300 million.

Acquisitions and Investments

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.

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.

On January 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 on July 1, 2021 and ending on January 2, 2029.

In the event the option is exercised, the companies have agreed to a valuation multiple based on MTD’s 2018 Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), with an equitable sharing arrangement for future EBITDA growth.

The 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.

On April 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.

On March 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.

On March 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 the U.S.

to support growth.

Refer to Note E, Acquisitions and Investments, for further discussion.

On May 30, 2019, the Company sold its Sargent and Greenleaf mechanical locks business within the Security segment.

On February 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 outlook and 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:

The Company reported $400 million in pre-tax charges during 2020, which were comprised of the following:

• $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;

• $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;

• $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 $1.27 per diluted share.

The Company reported $363 million in pre-tax charges during 2019, which were comprised of the following:

• $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 the Sargent & Greenleaf business;

• $153 million in Restructuring charges pertaining to severance and facility closures associated with a cost reduction program;

• $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 $2.05 per diluted share.

The Company reported $450 million in pre-tax charges during 2018, which were comprised of the following:

• $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 the Environmental Protection Agency ("EPA");

• $1 million related to a previously divested business;

• $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 $4.16 per diluted share.

Driving Further Profitable Growth by Fully Leveraging Our Core Franchises

The Company took steps in 2020 to make some of the cost actions permanent while certain employees were returned to full-time status.

This ensured the sustainability of the cost reduction program into 2021 while providing more employment stability for the Company's remaining associates.

Driving Further Profitable Growth by Fully Leveraging The Company's 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 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, outdoor products, 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 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.

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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®, D E WALT®, 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 D E WALT® 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, including NASCAR and NHRA racing, Major League Baseball (“MLB”) and global soccer with English Premier League (“EPL”) and FC Barcelona (“FCB”).

In March 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 like NASCAR, 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 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®, Powers®, LISTA®, Vidmar®, GQ® and through the 2021 acquisitions of MTD and Excel added Cub Cadet®, Troy-Bilt® and Hustler® in the Americas.

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 National Collegiate Athletic Association sponsorship delivered an estimated 308+ million views through TV-visible DEWALT® branding at 25 colleges and universities across five (Atlantic Coast Conference, Big Ten, Big 12, Pac-12 and Mountain West) Division 1 conferences.

During 2021, the Company also announced its “Official Tools” sponsorship with McLaren Racing in Formula 1 – a partnership well on track for 2022.

In 2021, the McLaren team sported the DEWALT® logo on the car for 16 races starting at the British Grand Prix in July.

The STANLEY®, DEWALT® and CRAFTSMAN® brands continue to have prominent signage in Major League Baseball ("MLB") stadiums appearing in many MLB games.

The Company has also maintained long-standing NASCAR and NHRA racing sponsorships, which provided brand exposure during nearly 60 events in 2021 with the STANLEY®, DEWALT®, CRAFTSMAN®, IRWIN® and MAC TOOLS® brands.

The Company also advertises in the English Premier League, which is the number one soccer league in the world, featuring STANLEY®, BLACK+DECKER® and DEWALT® brands to a global audience.

In 2014, the Company became a sponsor for one of the world’s most popular football clubs, FC Barcelona ("FCB"), including player image rights, hospitality assets and stadium signage.

In 2018, the Company was announced as the first ever shirt sponsor for the FCB Women's team in support of its commitment to global diversity and inclusion.

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 – an annual increase of 110% – from digital and traditional advertising and strong brand awareness.

Allocating brand and advertising spend judiciously will continue to be the Company’s focus.

Among the goals:

being front and center in an emerging digital landscape, evolving proven marketing programs that tie trusted global brands with societal purpose and tapping into technologies to build meaning 1:1 experiences with customers, consumers, employees and shareholders in line with the Company’s mission and vision.

The SBD Operating Model:

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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.

The latest evolution occurred in 2020, when the Company launched the SBD Operating Model:

Winning in the 2020s, which recognized 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.

At the center of the model is the concept of the interrelationship between people and technology.

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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.

The Company views performance resiliency as the agility, flexibility and adaptability to sustain strong performance in a variety of 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 D E WALT Flexvolt, Atomic and Xtreme.

The Company has a historically strong foundation in innovation, launching more than 1,000 products a year, including breakthroughs such as D E WALT Flexvolt, Atomic, Xtreme, and the launch of D E WALT PowerStack in December 2021.

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.

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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 in carbon footprint.

This “Make Where We Sell” strategy will improve customer responsiveness, lower lead times, reduce costs and mitigate geopolitical and currency risk while facilitating improvements in carbon footprint.

Extraordinary Customer Experience

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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.

Each of the Company's businesses evaluates and works to systematically improve its various customer journeys and acts on customer insights to continuously deliver an extraordinary customer experience.

As previously noted, the interaction between people and technology will define success in this area.

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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, the Stanley Ventures group, which invests capital in new and emerging start-ups in core focus areas, the Techstars 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, a Silicon Valley based team, which is building its own set of disruptive initiatives and exploring new business models.

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, the Stanley Ventures group, which invests capital in new and emerging start-ups in core focus areas, the Techstars 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, a Silicon 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.

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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.

Outlook for 2021

This outlook discussion is intended to provide broad insight into the Company’s near-term earnings and cash flow generation prospects.

The Company expects 2021 diluted earnings per share to approximate $9.15 to $9.85 ($9.70 to $10.30 excluding acquisition-related and other charges).

This range is $0.40 wider than the Company's traditional guide recognizing that while visibility has improved, the operating environment remains dynamic.

Free cash flow conversion, defined as free cash flow divided by net income, is expected to approximate 100%.

The difference between the 2021 diluted earnings per share outlook and the diluted earnings per share range, excluding charges, is $0.45 - $0.55, consisting of acquisition-related and other charges.

These forecasted charges primarily relate to facility moves, deal and integration costs and functional transformation initiatives.

The Company’s operations are classified into two reportable business segments:

Tools & Storage and Industrial.

The Company has one non-reportable business operating segment, Mechanical Access Solutions ("MAS").

Tools & Storage

The Tools & Storage segment is comprised of the Power Tools Group ("PTG"), Hand Tools, Accessories & Storage ("HTAS"), and Outdoor Power Equipment ("Outdoor") businesses.

The PTG business includes both professional and consumer products.

Professional products include professional grade corded and cordless electric power tools and equipment including drills, impact wrenches and drivers, grinders, saws, routers and sanders, as well as pneumatic tools and fasteners including nail guns, nails, staplers and staples, concrete and masonry anchors.

Consumer products include corded and cordless electric power tools sold primarily under the BLACK+DECKER® brand, and home products such as hand-held vacuums, paint tools and cleaning appliances.

The HTAS business sells hand tools, power tool accessories and storage products.

Hand tools include measuring, leveling and layout tools, planes, hammers, demolition tools, clamps, vises, knives, saws, chisels and industrial and automotive tools.

Power tool accessories include drill bits, screwdriver bits, router bits, abrasives, saw blades and threading products.

Storage products include tool boxes, sawhorses, medical cabinets and engineered storage solution products.

The Outdoor business primarily sells corded and cordless electric lawn and garden products, including hedge trimmers, string trimmers, lawn mowers, pressure washers and related accessories, and gas powered lawn and garden products, including lawn tractors, zero turn ride on mowers, walk behind mowers, snow blowers, residential robotic mowers, utility terrain vehicles (UTVs), handheld outdoor power equipment, garden tools, and parts and accessories to professionals and consumers under the DEWALT®, CUB CADET®, BLACK+DECKER®, CRAFTSMAN®, TROY-BILT®, and HUSTLER® brand names.

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.

RESULTS OF OPERATIONS

The Company’s results represent continuing operations and exclude the commercial electronic security and healthcare businesses following the aforementioned announced divestiture in December 2021, unless specifically noted.

The operating results of these businesses previously were included in the Security segment and have been classified as discontinued operations.

Certain Items Impacting Earnings

The Company has provided a discussion of its results both inclusive and exclusive of acquisition-related and other charges.

Organic growth is also utilized to describe results aside from the impacts of foreign currency fluctuations, acquisitions during their initial 12 months of ownership, and divestitures.

The results and measures, including gross profit, selling, general, and administrative ("SG&A"), Other, net, and segment profit, on a basis excluding acquisition-related and other charges, and organic growth are Non-GAAP financial measures.

The Company considers the use of Non-GAAP financial measures relevant to aid analysis and understanding of the Company’s results and business trends aside from the material impact of these items and ensures appropriate comparability to operating results of prior periods.

The Company’s operating results at the consolidated level as discussed below include and exclude acquisition-related and other charges impacting gross profit, SG&A, and Other, net.

The Company’s business segment results as discussed below include and exclude acquisition-related and other charges impacting gross profit and SG&A.

These amounts for the year-to-date periods of 2021, 2020 and 2019 are as follows:

GAAP Acquisition-

Related Charges & Other

Gross profit $ 5,194.2 $ 39.0 $ 5,233.2

Selling, general and administrative 1

3,240.4 (184.5) 3,055.9

Operating profit 1,953.8 223.5 2,177.3

Earnings from continuing operations before income taxes and equity interest 1,641.0 194.7 1,835.7

Income taxes on continuing operations 61.4 64.4 125.8

Share of net earnings of equity method investment 19.0 11.2 30.2

Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted 1,587.4 141.5 1,728.9

Diluted earnings per share of common stock - Continuing operations $ 9.62 $ 0.86 $ 10.48

1 Includes provision for credit losses

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

• Charges reducing Gross profit pertaining to inventory step-up charges and facility-related costs;

• Charges in SG&A primarily related to a non-cash fair-value adjustment and functional transformation initiatives;

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

◦ $24.1 million in Other, net primarily related to deal transactions costs;

◦ $0.6 million net loss pertaining to divested businesses;

◦ $14.5 million of restructuring charges pertaining to severance and facility closures;

◦ $68.0 million gain recognized on the MTD equity method investment upon acquisition;

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

• An after-tax, pre-acquisition charge related to the Company's share of MTD's net earnings related primarily to a one-time retroactive duty on imports of a specific component.

GAAP Acquisition-

Related Charges & Other

Gross profit $ 4,405.4 $ 61.7 $ 4,467.1

Selling, general and administrative 1

2,628.5 (123.2) 2,505.3

Operating profit 1,776.9 184.9 1,961.8

Earnings from continuing operations before income taxes and equity interest 1,219.8 325.9 1,545.7

Income taxes on continuing operations 43.0 192.5 235.5

Share of net earnings of equity method investment 9.1 9.8 18.9

Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted 1,162.6 143.2 1,305.8

Diluted earnings per share of common stock - Continuing operations $ 7.16 $ 0.88 $ 8.04

1 Includes provision for credit losses

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

• Charges reducing Gross profit pertaining to inventory step-up charges, a cost reduction program and facility-related costs;

• Charges in SG&A primarily for a cost reduction program and margin resiliency initiatives;

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

◦ $7.1 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;

◦ $13.5 million net loss pertaining to divested businesses;

◦ $73.5 million of restructuring charges pertaining to severance and facility closures;

◦ $46.9 million charge related to a loss on the extinguishment of debt;

• Income taxes on continuing operations include the tax effect on the above net charges, as well as a one-time tax benefit of $119 million associated with a supply chain reorganization;

• An after-tax, pre-acquisition charge related to the Company's share of MTD's net earnings related primarily to restructuring charges.

GAAP Acquisition-

Related Charges & Other

Gross profit $ 4,233.4 $ 28.0 $ 4,261.4

Selling, general and administrative 1

2,568.3 (71.2) 2,497.1

Operating profit 1,665.1 99.2 1,764.3

Earnings from continuing operations before income taxes and equity interest 1,094.4 262.4 1,356.8

Income taxes on continuing operations 126.8 54.4 181.2

Share of net losses of equity method investment (11.2) 24.3 13.1

Net Earnings from Continuing Operations Attributable to Common Shareowners - Diluted 954.1 232.3 1,186.4

Diluted earnings per share of common stock - Continuing operations $ 6.10 $ 1.49 $ 7.59

1 Includes provision for credit losses

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

• Charges reducing Gross profit pertaining to facility-related and inventory step-up charges;

• Charges in SG&A primarily for integration-related costs and margin resiliency initiatives;

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

◦ $27.6 million in Other, net primarily related to deal transaction costs;

◦ $17.0 million gain related to the sale of the Sargent & Greenleaf business;

◦ $134.7 million of restructuring charges pertaining to severance and facility closures associated with a cost reduction program;

◦ $17.9 million non-cash loss on the extinguishment of debt;

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

• An after-tax, pre-acquisition charge related to the Company's share of MTD's net earnings related primarily to an inventory step-up adjustment.

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

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 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%.

Consolidated Results

Net sales were $15.617 billion in 2021 compared to $13.058 billion in 2020, representing an increase of 20% with organic growth of 17%, driven by a 14% increase in volume and 3% increase in price, 2% increases from both acquisitions and foreign currency, partially offset by a 1% decrease from divestitures.

Tools & Storage net sales increased 24% compared to 2020 due to a 17% increase in volume, a 3% increase in price and 2% increases from both acquisitions and foreign currency.

Industrial net sales increased 5% compared to 2020 primarily due to a 2% increase in volume, a 1% increase in price, and 1% increases from both acquisitions and foreign currency.

Net sales were $13.058 billion in 2020 compared to $12.913 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 1% and foreign currency of 1%.

Organic growth of 12% in the second half of 2020 and acquisitions more than offset first half pandemic related market impacts.

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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 the Sargent & Greenleaf business and the commercial electronic security businesses in five countries in Europe 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 the Sargent & Greenleaf business.

Gross Profit:

The Company reported gross profit of $5.194 billion, or 33.3% of net sales, in 2021 compared to $4.405 billion, or 33.7% of net sales, in 2020.

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.

Acquisition-related and other charges, which reduced gross profit, were $39.0 million in 2021

and $61.7 million in 2020.

Excluding these charges, gross profit was 33.5% of net sales in 2021 compared to 34.2% in 2020, as higher volume, productivity, price realization, and mix benefits from innovation were more than offset primarily by commodity inflation and higher supply chain costs to serve demand.

The Company reported gross profit of $4.405 billion, or 33.7% of net sales, in 2020 compared to $4.233 billion, or 32.8% of net sales, in 2019.

Acquisition-related and other charges, which reduced gross profit, were $61.7 million in 2020 and $28.0 million in 2019.

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:

Excluding these charges, gross profit was 34.2% of net sales in 2020, compared to 33.0% in 2019, driven by productivity, margin resiliency initiatives and price realization.

SG&A Expenses:

Selling, general and administrative expenses, inclusive of the provision for credit losses (“SG&A”), were $3.240 billion, or 20.7% of net sales, in 2021 compared to $2.629 billion, or 20.1% of net sales, in 2020.

Within SG&A, acquisition-related and other charges totaled $184.5 million in 2021 and $123.2 million in 2020.

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.

Excluding these charges, SG&A was 19.6% of net sales in 2021 compared to 19.2% in 2020, reflecting growth investments deployed across the businesses.

SG&A expenses were $2.629 billion, or 20.1% of net sales, in 2020 compared to $2.568 billion, or 19.9% of net sales, in 2019.

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.

Within SG&A, acquisition-related and other charges totaled $123.2 million in 2020 and $71.2 million in 2019.

Excluding these charges, SG&A was 19.2% of net sales in 2020 compared to 19.3% 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 emerged during the pandemic.

Distribution center costs (i.e.

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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

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 totaled $262.8 million in 2020 compared to $249.1 million in 2019 and $287.0 million in 2018.

Such distribution costs classified in SG&A amounted to $416.5 million, $347.3 million and $326.5 million in in 2021, 2020 and 2019, respectively.

Other, net totaled $190.1 million, $217.8 million, and $201.1 million in 2021, 2020, and 2019, respectively.

Excluding acquisition-related and other charges, Other, net totaled $166.0 million, $210.7 million, and $173.5 million in 2021, 2020, and 2019, 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.

The year-over-year decrease in 2021 was primarily due to appreciation of Stanley Ventures' investments.

The year-over-year increase in 2020 driven by higher intangible asset amortization and negative impacts from foreign currency.

Loss (gain) on Sales of Businesses:

During 2021, the Company reported a $0.6 million net loss on divestitures.

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 the Sargent and Greenleaf business.

During 2018, the Company reported a $0.8 million loss relating to a previously divested business.

Gain on equity method investment:

Upon the acquisition of MTD in the fourth quarter of 2021, the Company recognized a $68.0 million gain on its previously held equity method investment.

Refer to Note E, Acquisitions and Investments , for further discussion.

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.

In 2019, the Company extinguished $750 million of its notes payable and recognized a $17.9 million pre-tax loss primarily related to the write-off of deferred financing fees.

Interest, net:

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The decrease in 2021 compared to 2020 was primarily driven by lower U.S.

interest rates on commercial paper borrowings and lower interest expense related to the extinguishment of notes payable in the fourth quarter of 2020, partially offset by lower interest income due to a decline in rates.

The decrease in net interest expense in 2020 versus 2019 was primarily driven by lower U.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 in November 2018 and lower interest income on deposits due to a decline in rates.

Income Taxes :

On March 11, 2021, the American Rescue Plan Act of 2021 (the “ARPA”) was enacted.

The ARPA, among other things, includes provisions to expand the IRC Section 162(m) disallowance for deduction of certain compensation paid by publicly held corporations, provide a 100% COBRA subsidy, temporarily increase the income exclusion for dependent care assistance, and to extend and modify the employee retention credit and the Families First Coronavirus Response Act paid leave credit.

On March 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%.

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 Company completed its evaluation of the ARPA and CARES Act, and concluded that they did not have a material impact on the Company’s consolidated financial statements.

The Company's effective tax rate on continuing operations was 3.7% in 2021, 3.5% in 2020, and 11.6% in 2019.

Excluding the impact of acquisition-related and other charges, the effective tax rate in 2021 on continuing operations was 6.9%.

This effective tax rate differs from the U.S.

statutory tax rate primarily due to a benefit associated with the Company's supply chain reorganization, tax on foreign earnings, the remeasurement of uncertain tax position reserves, the remeasurement of deferred tax assets and liabilities due to foreign corporate income tax rate changes, and the tax benefit of equity-based compensation.

Excluding the one-time tax benefit of $118.8 million recorded in the second quarter 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 acquisition-related and other charges, the effective tax rate on continuing operations in 2020 was 15.2%.

This effective tax rate differs from the U.S.

statutory tax rate primarily due to tax on foreign earnings at tax rates different than the U.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 the U.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%.

rate, the remeasurement 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 acquisition-related and other charges, the effective tax rate on continuing operations in 2019 was 13.3%.

This effective tax rate differed from the U.S.

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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.

The Company’s operations are classified into two reportable business segments:

Tools & Storage and Industrial.

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.

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) 2021 2020 2019

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% of Net sales 15.5 % 17.6 % 15.1 %

Tools & Storage net sales increased $2.488 billion, or 24%, in 2021 compared to 2020 due to a 17% increase in volume, a 3% increase in price and 2% increases from both acquisitions and favorable currency.

The 20% organic growth was driven by stronger volumes due to the consumer reconnection with the home and garden, eCommerce and strong professional demand as well as price.

Segment profit amounted to $1.985 billion, or 15.5% of net sales, in 2021 compared to $1.820 billion, or 17.6% of net sales, in 2020.

Excluding acquisition-related and other charges of $178.4 million and $46.4 million in 2021 and 2020, respectively, segment profit amounted to 16.9% of net sales in 2021 compared to 18.1% in 2020, as volume and price benefits were more than offset by inflation, higher pandemic-related supply chain costs and growth investments.

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%.

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Excluding acquisition-related and other charges of $46.4 million and $44.3 million in 2020 and 2019, respectively, segment profit amounted to 18.1% of net sales in 2020 compared to 15.5% 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 by North America and Europe, 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 in Canada 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 in Turkey, China and certain countries in Latin 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.

The Industrial segment is comprised of the Engineered Fastening and Infrastructure businesses.

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) 2021 2020 2019

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% of Net sales 10.4 % 9.4 % 13.6 %

Industrial net sales increased $110.4 million, or 5%, in 2021 compared to 2020, due to a 2% increase in volume, a 1% increase in price, and 1% increases from both acquisitions and foreign currency.

Engineered Fastening organic revenues increased 5% for the full year, as general industrial growth and a strong first half in automotive more than offset the market-driven aerospace declines.

Infrastructure organic revenues were down 1% as mid-teen growth in Attachment Tools was more than offset by lower pipeline activity in Oil & Gas.

Segment profit totaled $256.6 million, or 10.4% of net sales, in 2021 compared to $220.6 million, or 9.4% of net sales, in 2020.

Excluding acquisition-related and other charges of $13.1 million and $67.1 million in 2021 and 2020, respectively, segment profit amounted to 10.9% of net sales in 2021 compared to 12.2% in 2020, as volume, price and productivity was more than offset by commodity inflation, growth investments and unfavorable mix.

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%.

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Excluding acquisition-related and other charges of $67.1 million and $25.8 million in 2020 and 2019, respectively, segment profit amounted to 12.2% of net sales in 2020 compared to 14.6% 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.

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 for North America declined 3% driven by lower installations within commercial electronic security and automatic doors.

Europe declined 4% organically as growth in France and the Nordics was offset by lower volume in the UK 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.

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 the Sargent & Greenleaf business.

Organic sales for North 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 in France was offset by continued market weakness in the Nordics and the UK.

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 the Sargent & Greenleaf divestiture.

Corporate Overhead & Other

Corporate Overhead & Other includes the results of the commercial electronic security business in five countries in Europe and emerging markets through its disposition in the fourth quarter of 2020 and the Mechanical Access Solutions business, a non-reportable business operating segment, as well as the corporate overhead element of SG&A, which is not allocated to the business segments.

Corporate Overhead & Other amounted to $288.2 million, $264.0 million, and $181.9 million in 2021, 2020 and 2019, respectively, which includes $45.5 million, $33.7 million and $47.5 million of operating profit from the MAS business in 2021, 2020 and 2019, respectively.

Excluding acquisition-related charges, Corporate Overhead & Other is $256.2 million, $192.6 million and $152.9 million in 2021, 2020 and 2019, respectively.

The year-over-year increase in 2021 compared to 2020 was driven by functional investments.

The year-over-year increase in 2020 compared to 2019 was driven by higher employee-related costs.

RESTRUCTURING ACTIVITIES

A summary of the restructuring reserve activity from December 28, 2019 to January 2, 2021 is as follows:

(Millions of Dollars) December 28, 2019 Net Additions Usage Currency January 2, 2021

A summary of the restructuring reserve activity from January 2, 2021 to January 1, 2022 is as follows:

(Millions of Dollars) January 2, 2021 Net Additions Usage Currency January 1, 2022

Severance and related costs $ 77.8 $ (3.5) $ (47.9) $ 2.0 $ 28.4

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Total $ 79.8 $ 14.5 $ (64.4) $ 2.0 $ 31.9

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.

During 2021, the Company recognized net restructuring charges of $14.5 million, primarily related to facility closures and asset impairments.

The Company expects to achieve annual net cost savings of approximately $24 million by the end of 2022 related to restructuring costs incurred during 2021.

The majority of the $31.9 million of reserves remaining as of January 1, 2022 is expected to be utilized within the next twelve months.

During 2020, the Company recognized net restructuring charges of $73.8 million, primarily related to severance costs associated with a cost reduction program announced in the second quarter of 2020.

The 2020 actions resulted in net cost savings of approximately $125 million in 2021.

During 2019, the Company recognized net restructuring charges of $138.4 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.

The $15 million of net restructuring charges in 2021 includes:

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$2 million pertaining to the Industrial segment;

$9 million pertaining to the Security segment;

and $5 million pertaining to Corporate.

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$10 million in the Industrial segment;

$31 million in the Security segment;

and $1 million in Corporate.

This outlook discussion is intended to provide broad insight into the Company’s near-term earnings and cash flow generation prospects.

The Company expects 2022 diluted earnings per share to approximate $10.10 to $10.70 ($12.00 to $12.50 excluding acquisition-related and other charges) reflecting year-over-year adjusted EPS growth of 15% to 19%.

Free cash flow is expected to approximate $2.0 billion as the Company focuses on serving its customers while leveraging the SBD Operating Model to drive working capital efficiency.

The 2022 outlook for adjusted diluted earnings per share assumes approximately $1.20 to $1.30 of accretion related to 6% to 7% price increases to exceed carryover headwinds, approximately $0.20 of dilution related to carryover growth investments, net of cost containment, approximately $0.60 accretion from Outdoor acquisitions, and approximately $0.10 of accretion from the impact of the 2022 share repurchase program, offsetting tax rate impacts and other below the line items.

The difference between 2022 diluted earnings per share outlook and the diluted earnings per share range, excluding charges, is $1.80 to $1.90, consisting of acquisition-related and other charges.

These forecasted charges primarily relate to integration costs and cost reduction actions.

FINANCIAL CONDITION

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Operating Activities:

Cash flows provided by operations were $2.022 billion in 2020 compared to $1.506 billion in 2019.

Cash flows provided by operations were $663.1 million in 2021 compared to $2.022 billion in 2020.

The year-over-year decrease was mainly attributable to higher inventory levels to meet demand within the Tools and Storage segment, coupled with longer lead times related to the challenged global supply chain.

In 2020, cash flows provided by operations were $2.022 billion 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 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, as defined in the table below, was $144.0 million in 2021 compared to $1.674 billion in 2020 and $1.081 billion in 2019.

The decrease in free cash flow in 2021 was primarily due to a $1.8 billion increase in inventory,

excluding acquisitions, to support the strong demand outlook and longer lead times related to the challenged global supply chain.

This included a substantial increase in inventory in transit of $600 million as well as higher unit costs associated with inflation.

At least $500 million of this inventory increase is anticipated to reverse in 2022.

Management considers free cash flow an important indicator of its liquidity, as well as its ability to fund future growth and provide dividends to shareowners, and is useful information for investors.

Free cash flow does not include deductions for mandatory debt service, other borrowing activity, discretionary dividends on the Company’s common and preferred stock and business acquisitions, among other items.

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Free cash flow $ 144 $ 1,674 $ 1,081

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 of January 2, 2021 and has significant flexibility to navigate this volatile period as the Company:

(a) continues to maintain strong investment grade credit ratings;

(b) possesses approximately $1.4 billion of cash on-hand as of January 2, 2021;

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 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.

Cash flows used in investing activities totaled $2.624 billion in 2021, driven by business acquisitions of $2.044 billion, net of cash acquired, primarily related to the MTD and Excel acquisitions, and capital and software expenditures of $519 million.

Cash flows used in investing activities in 2020 totaled $1.577 billion, driven by business acquisitions of $1.324 billion, net of cash acquired, primarily 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, mainly 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.

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 and $897 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.

Cash flows provided by financing activities totaled $919 million in 2021 primarily driven by net short-term borrowings of $2.225 billion and $131 million of proceeds from issuances of common stock, partially offset by the redemption and conversion of preferred stock for $750 million, cash dividend payments on common stock of $475 million, and $75 million related to the termination of interest rate swaps.

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 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 in 2019 totaled $293 million primarily 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.

Fluctuations in foreign currency rates negatively impacted cash by $62 million in 2021 and $1 million in 2019 due to the strengthening of the U.S.

Dollar against other currencies.

Fluctuations in foreign currency rates positively impacted cash by $23 million in 2020 due to the weakening of the U.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 the U.S.

Dollar against the Company's other currencies.

dollar against other currencies.

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.

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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.

There were no changes to any of the Company's credit ratings during 2021, however, S&P and Fitch revised their outlooks to ‘stable’ from ‘negative’in the first half of 2021 as a result of the Company's strong performance during the COVID-19 pandemic.

Refer to Item 1A.

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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 $1.381 billion as of January 2, 2021, comprised of $1.119 billion in the U.S.

and $262 million in foreign jurisdictions.

As of December 28, 2019, cash and cash equivalents totaled $298 million, comprised of $57 million in the U.S.

and $241 million in foreign jurisdictions.

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 at January 2, 2021.

Cash and cash equivalents totaled $142 million and $1.242 billion as of January 1, 2022 and January 2, 2021, respectively, which was primarily held in the U.S.

As a result of the Tax Cuts and Jobs Act ("Act"), the Company's tax liability related to the one-time transition tax associated with unremitted foreign earnings and profits totaled $296 million at January 1, 2022.

The Act permits a U.S.

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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 to U.S.

As of January 2, 2021, the Company had no borrowings outstanding.

As of December 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”).

In October 2021, the Company increased its commercial paper program from $3.0 billion to $3.5 billion, which includes Euro denominated borrowings in addition to U.S.

As of January 1, 2022, the Company had $2.2 billion of borrowings outstanding.

As of January 2, 2021, the Company had no borrowings outstanding, Refer to Note I, Financial Instruments, for further discussion.

In September 2021, the Company amended and restated its existing a five-year $2.0 billion committed credit facilit y with the concurrent execution of a new five year $2.5 billion co mmitted credit facility (the "5-year Credit Agreement").

Borrowings under the 5-Year Credit Agreement may be made in U.S.

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Dollar and Euro commercial paper program.

As of January 2, 2021, and December 28, 2019, the Company had not drawn on its five-year committed credit facility.

In September 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").

As of January 1, 2022 and January 2, 2021, the Company had not drawn on its five-year committed credit facility.

In September 2021, the Company terminated its 364-day $1.0 billion credit facility and concurrently executed a new 364-Day $1.0 billion committed credit facility (the "364-Day Credit Agreement").

Borrowings under the 364-Day Credit Agreement may be made in U.S.

Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the 364-Day Credit Agreement.

The Company must repay all advances under the 364-Day Credit Agreement by the earlier of September 8, 2021 or upon termination.

The Company must repay all advances under the 364-Day Credit Agreement by the earlier of September 7, 2022 or u pon 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 of January 2, 2021 and December 28, 2019, the Company had not drawn on its 364-Day committed credit facility.

The 364-Day Credit Agreement serves as part of the liquidity back-stop for the Compan y’s $3.5 billion U .S.

Dollar and Euro commercial paper program.

As of January 1, 2022 and January 2, 2021, the Company had not drawn on this 364-Day committed credit facility.

In November 2021, the Company executed a second 364-Day $1.0 billion committed credit facility (the "Second 364-Day Credit Agreement").

Borrowings under the Second 364-Day Credit Agreement may be made in U.S.

Dollars and Euros and bear interest at a base rate plus an applicable margin determined at the time of the borrowing.

The Company must repay all advances under the Second 364-Day Credit Agreement by the earlier of November 15, 2022 or upon termination.

As of January 1, 2022, the Company had not drawn on this 364-Day committed credit facility.

In January 2022, the Company executed a third 364-Day $2.5 billion committed credit facility (the "Third 364-Day Credit Agreement").

Borrowings under the Third 364-Day Credit Agreement shall be made in U.S.

Dollars and bear interest at a base rate plus an applicable margin determined at the time of the borrowing.

The Company must repay all advances under the Third 364-Day Credit Agreement by the earlier of January 25, 2023 or upon termination.

The Company has not drawn on this 364-Day committed credit facility.

In addition, the Company has other short-term lines of credit that are primarily uncommitted, with numerous banks, aggregating $354 million, of which approximately $263 million was available at January 1, 2022.

Short-term arrangements are reviewed annually for renewal.

At January 2, 2021, the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was approximately $3.5 billion.

At January 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 repo rted debt balances.

The weighted-average interest rate on U.S.

At January 1, 2022, the aggregate amount of committed and uncommitted lines of credit, long-term and short-term, was approximat ely $4.9 billion.

A t January 1, 2022, $2.2 billion was recorded as short-term borrowings.

In addition, $91 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 rates on U.S.

dollar denominated short-term borrowings for 2021 and 2020 were 0.1% and 1.3%, respectively.

The weighted-average interest rate on Euro denominated short-term borrowings for 2021 and 2020 were negative 0.5% and 0.2%, respectively.

The Company has an interest coverage covenant that must be maintained to permit continued access to its committed credit facilities described above.

The interest coverage ratio tested for covenant compliance compares adjusted Earnings Before Interest, Taxes, Depreciation and Amortization to adjusted Interest Expense ("adjusted EBITDA"/"adjusted Interest Expense").

In April 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.

In the fourth quarter of 2021, the Company assumed $103.0 million and $4.3 million of debt in connection with the MTD and Excel acquisitions, respectively.

In November 2020, the Company issued $750.0 million of senior unsecured term notes maturing November 15, 2050 ("2050 Term Notes").

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The net proceeds from the offering were used for general corporate purposes, including acquisition funding.

In December 2019, the Company redeemed all of the outstanding 2052 Junior Subordinated Debentures for approximately $760 million, which represented 100% of the principal amount plus accrued and unpaid interest.

In March 2019, the Company issued $500 million of senior unsecured notes maturing on March 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 February 2019, the Company redeemed all of the outstanding 2053 Junior Subordinated Debentures for approximately $406 million, which represented 100% of the principal amount plus accrued and unpaid interest.

In November 2019, the Company issued 7,500,000 Equity Units with a total notional value of $750 million ("2019 Equity Units").

Each unit has a stated amount of $100 and initially consisted of a three-year forward stock purchase contract ("2022

Purchase Contracts") for the purchase of a variable number of shares of common stock, on November 15, 2022, for a price of $100, and a 10% beneficial ownership interest in one share of 0% Series D Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of $1,000 per share ("Series D Preferred Stock").

The Company received approximately $735 million in cash proceeds from the 2019 Equity Units, net of offering expense and underwriting costs and commissions, and issued 750,000 shares of Series D Preferred Stock, recording $750 million in preferred stock.

The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures in December 2019, as discussed above.

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, on November 15, 2022, for a price of $100, and a 10% beneficial ownership interest in one share of 0% Series D Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of $1,000 per share ("Series D Preferred Stock").

The Company received approximately $735 million in cash proceeds from the 2019 Equity Units, net of offering expenses and underwriting costs and commissions, and issued 750,000 shares of Series D Preferred Stock.

The proceeds were used, together with cash on hand, to redeem the 2052 Junior Subordinated Debentures in December 2019.

The Company also used $19 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution.

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If the Company calls the Series D Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date.

Upon settlement of the 2022 Purchase Contracts, the Company will receive additional cash proceeds of $750 million.

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 commenced February 15, 2020.

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On June 9, 2020, the Company amended the 2018 capped call options to align with and offset the potential economic dilution associated with the common shares issuable upon conversion of the Remarketed Series C Preferred Stock, as further discussed below.

Subsequent to the amendment, the capped call options had an initial lower strike price of $148.34 and an upper strike price of $165.00, which was approximately 30% higher than the closing price of the Company's common stock on June 9, 2020.

As of January 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 at January 2, 2021 was $53 million.

Subsequent to the amendment, the capped call options had an initial lower strike price of $148.34 and an upper strike price of $165.00,

which was approximately 30% higher than the closing price of the Company's common stock on June 9, 2020.

During the second quarter of 2021, the Company net share settled the remaining capped call options on its common stock and received 344,004 shares using an average reference price of $209.80 per common share.

In May 2017, the Company issued 7,500,000 Equity Units with a total notional value of $750 million ("2017 Equity Units").

Each unit 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, on May 15, 2020, for a price of $100, and a 10% beneficial ownership interest in one share of 0% Series C Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of $1,000 per share ("Series C Preferred Stock").

The Company received approximately $726 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, recording $750 million in preferred stock.

Each unit had a stated amount of $100 and initially consisted of a three-year forward stock purchase contract ("2020 Purchase Contracts") for the purchase of a variable number of shares of common stock, on May 15, 2020, for a price of $100, and a 10% beneficial ownership interest in one share of 0% Series C Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of $1,000 per share ("Series C Preferred Stock").

The Company received approximately $727 million in cash proceeds from the 2017 Equity Units, net of 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.

In May 2020, the Company successfully remarketed the Series C Preferred Stock, a described more fully in Note J, Capital Stock .

The remarketing generated cash proceeds of $750 million which were applied to settle the holders' stock purchase contract obligations, resulting in the Company issuing 5,463,750 common shares.

In May 2020, the Company generated cash proceeds of $750 million from the successful remarketing of the Series C Preferred Stock (the "Remarketed Series C Preferred Stock"), as described more fully in Note J, 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 of January 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 stoc k.

Beginning on May 15, 2020, the holders have the option to convert the Series C Preferred Stock into common stoc k.

In connection with the remarketing, the conversion rate was reset to 6.7352 shares of the Company's common stock, whic h was equivalent to a conversion price of approximately $148.47 per share.

Beginning on May 15, 2020, the holders have the option to convert the Remarketed Series C Preferred Stock into common stock.

At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof.

The Company does not have the right to redeem the Series C Preferred Stock prior to May 15, 2021.

At the election of the Compa ny, on or after May 15, 2021, the Company may redeem for cash, all or any portion of the outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends.

If the Company calls the Series C Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date.

The Company did not have the right to redeem the Remarketed Series C Preferred Stock prior to May 15, 2021.

On April 28, 2021, the Company informed holders that it would redeem all outstanding shares of the Remarketed Series C Preferred Stock on June 3, 2021 (the “ Redemption date ” ) at $1,002.50 per share in cash ( “ Redemption price ”) , which was equal to 100% of the liquidation preference of a share of Remarketed Series C Preferred Stock, plus accumulated and unpaid dividends to, but excluding, the Redemption Date.

If a holder elected to convert its shares of Remarketed Series C Preferred Stock prior to the Redemption Date, the Company elected a combination settlement with a specified cash amount of $1,000 per share.

In June 2021, the Company redeemed the Remarketed Series C Preferred Stock and settled all conversions, paying $750 million in cash and issuing 1,469,055 common shares.

In March 2015, the Company entered into a forward share purchase contract with a financial institution counterparty for 3,645,510 shares of common stock.

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Short-term borrowings 2,241 2,241 — — —

Lease obligations 599 141 192 118 148

Inventory purchase commitments (c) 545 545 — — —

Lease obligations (c) 577 146 198 120 113

Inventory purchase commitments (d) 802 799 3 — —

Deferred compensation 30 1 1 1 27

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 — —

income tax (h) 325 35 91 197 2

Marketing commitments (e) 77 54 23 — —

Forward stock purchase contract (f) 350 350 — — —

Pension funding obligations (g) 41 41 — — —

Contract adjustment fees (h) 39 39 — — —

income tax (i) 296 33 151 112 —

Supplier agreement (j) 78 78 — — —

Total contractual cash obligations $ 12,180 $ 3,948 $ 708 $ 1,118 $ 6,406

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(b) Future interest payments on long-term debt reflect the applicable interest rate in effect at January 1, 2022 .

(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 of January 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) In March 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.

(c) Future lease obligations in the table above include $81 million for discontinued operations, $25 million in 2022, $19 million in 2023, $14 million in 2024, $10 million in 2025, $6 million in 2026, and $7 million thereafter.

(d) Inventory purchase commitments primarily consist of open purchase orders to purchase raw materials, components, and sourced products.

(e) Future marketing commitments in the table above include $1.0 million in 2022 attributable to discontinued operations.

(f) In March 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.

In February 2020, the Company amended the settlement date to April 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.

(g) 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 2022 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.

(h) 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.

(i) Income tax liability for the one-time deemed repatriation tax on unremitted foreign earnings and profits.

(j) Prepayment to vendor to support dedicated production of key material.

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 $289 million and $548 million, respectively, at January 1, 2022, 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.

Refer to Note M, Fair Value Measurements, 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.

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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.

The Company’s predominant currency exposures are related to the Euro, Canadian Dollar, British Pound, Australian Dollar, Brazilian Real, 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:

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Management estimates the combined translational and transactional impact, on pre-tax earnings, of a 10% overall movement in exchange rates is approximately $209 million, or approximately $1.18 per diluted share.

In 2020, translational and transactional foreign currency fluctuations negatively impacted pre-tax earnings by approximately $73 million, or approximately $0.40 per diluted share.

In 2021, translational and transactional foreign currency fluctuations negatively impacted pre-tax earnings from continuing operations by approximately $17 million, or approximately $0.10 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.

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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.

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 of January 2, 2021 pertaining to unfunded defined contribution plans for certain U.S.

The Company has $136 million of liabilities as of January 1, 2022 pertaining to unfunded defined contribution plans for certain U.S.

employees for which there is mark-to-market exposure.

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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.

In 2021, 2020, and 2019, investment returns on pension plan assets resulted in increases of $81 million, $280 million, and $323 million , respectively.

The Company expects funding obligations on its defined benefit plans to be approximately $41 million in 2022.

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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.

defined contribution retirement plan expense will increase in the future as all remaining unallocated shares were released in the first quarter of 2020.

The Company’s net ESOP activity resulted in expense of $59.1 million and $4.4 million in 2021 and 2020, respectively, and income of $5.1 million in 2019 .

defined contribution retirement plan expense increased in 2021 as all remaining unallocated shares in the ESOP were released in the first quarter of 2020.

In addition, employer contributions to the plan were suspended for the last three quarters 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.

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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.

I NVENTORIES — Inventories in the U.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

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.

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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.

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 ended January 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%.

For its annual impairment testing performed in the third quarter of 2021, the Company applied the qualitative assessment for two of its reporting units, while performing the quantitative test for three of its reporting units.

Based on the results of the Company’s annual impairment testing, it was determined that the fair value of each of its reporting units is substantially in excess of its carrying amount.

In performing the qualitative assessments, the Company identified and considered the significance of relevant key factors, events, and circumstances that could affect the fair value of each reporting unit.

These factors include external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance.

The Company also assessed changes in each reporting unit's fair value and carrying value since the most recent date a fair value measurement was performed.

As a result of the qualitative assessments performed, the Company concluded that it is more likely than not that the fair value of each of these reporting units exceeded its respective carrying value and therefore, no additional quantitative impairment testing was performed.

With respect to the quantitative tests, the Company assessed the fair values of the three reporting units based on a discounted cash flow valuation model.

The key assumptions applied to the cash flow projections were discount rates, which ranged from 7.0% to 8.0%, near-term revenue growth rates over the next six years, which represented cumulative annual growth rates ranging from approximately 4% to 7%, 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.

Based on the results of this testing, the Company determined that the fair value for each of these reporting units exceeded its carrying amount by in excess of 50%.

Furthermore, management performed sensitivity analyses on the estimated fair values from the discounted cash flow valuation models 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.

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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.

The Company determined that the fair values of its indefinite-lived trade names exceeded their respective carrying amounts.

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.

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The Company’s weighted-average discount rates used to determine benefit obligations at January 1, 2022 for the United States and international pension plans were 2.80% and 1.78%, respectively.

The Company’s weighted-average discount rates used to determine benefit obligations at December 28, 2019 for the United States and international pension plans were 3.20% and 1.80%, respectively.

The Company’s weighted-average discount rates used to determine benefit obligations at January 2, 2021 for the United States and international pension plans were 2.39% and 1.31%, 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 for the United States and international pension plans were 4.75% and 3.25%, respectively, at January 1, 2022.

The Company will use a 3.16% w eighted-average expected rate of return assumption to determine the 2021 net periodic benefit cost.

The Company will us e a 4.07% we ighted-average expected rate of return assumption to determine the 2022 net periodic benefit cost.

A 25 basis point reduction in the expected rate of return assumption would increase 2022 net periodic benefit cost by approximately $6 million on a pre-tax basis.

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The primary Black & Decker U.S.

pension and post employment benefit plans were curtailed in late 2010, as well as the only material Black & Decker international plan, and in their place the Company implemented defined contribution benefit plans.

pension and post employment benefit plans were curtailed in late 2010, as well as the only material Black & 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.

The Company recognized approximately $8 million of defined benefit plan income in 2021, 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.

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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

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.

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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 certain U.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 these U.S.

risk insurance reserves, totaling $98 million and $87 million as of January 2, 2021, and December 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 of January 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 of January 2, 2021.

CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION

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(iv) the economic, political, cultural and legal environment of emerging markets, particularly Latin America, Russia, China and Turkey;

(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;

(v) realizing the anticipated benefits of mergers, acquisitions, joint ventures, strategic alliances or divestitures;

(vi) pricing pressure and other changes within competitive markets;

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(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.

(xxvii) the continued adverse effects of the COVID-19 pandemic and an indeterminate recovery period;

(xxviii) the possibility that the Company does not achieve the intended financial benefits from the acquisition of MTD;

(xxix) the failure to consummate, or a delay in the consummation of, the Security sale transaction for various reasons (including but not limited to failure to receive, or delay in receiving, required regulatory approvals and meet customary closing conditions);

(xxx) the failure to undertake or complete, or a delay in the timing of, the share repurchase program;

and (xxxi) failure to realize the expected benefits of the Company's capital allocation strategy and share repurchase program.

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, 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis