Company Quick10K Filing
Quick10K
Stanley Black & Decker
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$126.44 151 $19,100
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
8-K 2019-02-14 Officers
8-K 2019-01-22 Earnings, Exhibits
8-K 2018-11-06 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-11-05 Enter Agreement, Exhibits
8-K 2018-10-30 Other Events, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-09-12 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-20 Earnings, Exhibits
8-K 2018-07-17 Officers, Amend Bylaw, Exhibits
8-K 2018-07-09 Other Events
8-K 2018-04-20 Earnings, Exhibits
8-K 2018-02-27 Officers
8-K 2018-01-24 Regulation FD, Exhibits
RTN Raytheon
HRS Harris
TDY Teledyne Technologies
NDSN Nordson
FLIR FLIR Systems
MCRN Milacron Holdings
TNAV Telenav
CIX Compx
MNTX Manitex
CVV CVD Equipment
SWK 2018-09-29
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.A ex31a-q32018.htm
EX-31.B ex31b-q32018.htm
EX-32.I ex32i-q32018.htm
EX-32.II ex32ii-q32018.htm

Stanley Black & Decker Earnings 2018-09-29

SWK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 swk-q32018.htm 10-Q Document
stanleyimage.jpg
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from [            ] to [            ]
Commission File Number 001-05224 
STANLEY BLACK & DECKER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT
 
06-0548860
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
 
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
 
 
 
 
 
1000 STANLEY DRIVE
NEW BRITAIN, CONNECTICUT
 
06053
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
(ZIP CODE)
(860) 225-5111
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
151,060,094 shares of the registrant’s common stock were outstanding as of October 19, 2018.



TABLE OF CONTENTS
 




PART I — FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2018 AND SEPTEMBER 30, 2017
(Unaudited, Millions of Dollars, Except Per Share Amounts)
 
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Net Sales
$
3,494.8

 
$
3,359.4

 
$
10,347.7

 
$
9,502.4

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales
$
2,256.4

 
$
2,106.4

 
$
6,656.5

 
$
5,970.1

Selling, general and administrative
792.9

 
763.4

 
2,373.5

 
2,184.0

Provision for doubtful accounts
6.0

 
5.5

 
16.8

 
19.4

Other, net
59.4

 
60.5

 
236.7

 
216.3

Loss (gain) on sales of businesses

 
3.2

 
0.8

 
(265.1
)
Pension settlement

 

 

 
12.8

Restructuring charges
21.8

 
19.1

 
58.1

 
42.9

Interest expense
72.1

 
57.2

 
204.3

 
164.5

Interest income
(18.7
)
 
(10.3
)
 
(50.1
)
 
(28.6
)
 
$
3,189.9

 
$
3,005.0

 
$
9,496.6

 
$
8,316.3

Earnings before income taxes
304.9

 
354.4

 
851.1

 
1,186.1

Income taxes
56.6

 
79.9

 
139.3

 
240.3

Net earnings
$
248.3

 
$
274.5

 
$
711.8

 
$
945.8

Less: Net gain (loss) attributable to non-controlling interests
0.5

 

 
(0.2
)
 

Net Earnings Attributable to Common Shareowners
$
247.8

 
$
274.5

 
$
712.0

 
$
945.8

Total Comprehensive Income Attributable to Common Shareowners
$
269.0

 
$
378.1

 
$
549.9

 
$
1,245.4

Earnings per share of common stock:
 
 
 
 
 
 
 
Basic
$
1.67

 
$
1.83

 
$
4.77

 
$
6.33

Diluted
$
1.65

 
$
1.80

 
$
4.68

 
$
6.22

Dividends per share of common stock
$
0.66

 
$
0.63

 
$
1.92

 
$
1.79

Weighted-average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
147,964

 
149,689

 
149,311

 
149,464

Diluted
150,599

 
152,622

 
152,225

 
152,106

See Notes to (Unaudited) Condensed Consolidated Financial Statements.



3


STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2018 AND DECEMBER 30, 2017
(Unaudited, Millions of Dollars, Except Per Share Amounts) 
 
September 29,
2018
 
December 30,
2017
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
368.7

 
$
637.5

Accounts and notes receivable, net
2,236.2

 
1,628.7

Inventories, net
2,649.7

 
2,018.4

Other current assets
300.8

 
274.4

Total Current Assets
5,555.4

 
4,559.0

Property, plant and equipment, net
1,846.2

 
1,742.5

Goodwill
9,006.9

 
8,776.1

Intangibles, net
3,547.2

 
3,507.4

Other assets
492.0

 
512.7

Total Assets
$
20,447.7

 
$
19,097.7

LIABILITIES AND SHAREOWNERS' EQUITY
 
 
 
Current Liabilities
 
 
 
Short-term borrowings
$
1,408.1

 
$
5.3

Current maturities of long-term debt
979.6

 
977.5

Accounts payable
2,320.2

 
2,021.0

Accrued expenses
1,344.1

 
1,387.7

Total Current Liabilities
6,052.0

 
4,391.5

Long-term debt
2,830.6

 
2,828.2

Deferred taxes
423.6

 
436.1

Post-retirement benefits
588.4

 
629.9

Other liabilities
2,468.0

 
2,507.0

Commitments and Contingencies (Note R)


 


Shareowners’ Equity
 
 
 
Stanley Black & Decker, Inc. Shareowners’ Equity
 
 
 
Preferred stock, without par value:
Authorized 10,000,000 shares in 2018 and 2017
Issued and outstanding 750,000 shares in 2018 and 2017
750.0

 
750.0

Common stock, par value $2.50 per share:
Authorized 300,000,000 shares in 2018 and 2017
Issued 176,902,738 shares in 2018 and 2017
442.3

 
442.3

Retained earnings
6,424.3

 
5,998.7

Additional paid in capital
4,619.6

 
4,643.2

Accumulated other comprehensive loss
(1,751.2
)
 
(1,589.1
)
ESOP
(13.3
)
 
(18.8
)
 
10,471.7

 
10,226.3

Less: cost of common stock in treasury
(2,389.5
)
 
(1,924.1
)
Stanley Black & Decker, Inc. Shareowners’ Equity
8,082.2

 
8,302.2

Non-controlling interests
2.9

 
2.8

Total Shareowners’ Equity
8,085.1

 
8,305.0

Total Liabilities and Shareowners’ Equity
$
20,447.7

 
$
19,097.7

See Notes to (Unaudited) Condensed Consolidated Financial Statements.

4


STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2018 AND SEPTEMBER 30, 2017
(Unaudited, Millions of Dollars)
 
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
248.3

 
$
274.5

 
$
711.8

 
$
945.8

Adjustments to reconcile net earnings to cash provided by (used in) operating activities:

 

 
 
 
 
Depreciation and amortization of property, plant and equipment
85.2

 
76.6

 
249.7

 
218.1

Amortization of intangibles
44.5

 
44.1

 
131.3

 
119.9

Loss (gain) on sales of businesses

 
3.2

 
0.8

 
(265.1
)
Changes in working capital
(287.8
)
 
(456.9
)
 
(1,017.1
)
 
(1,253.9
)
Changes in other assets and liabilities
101.3

 
174.1

 
(36.4
)
 
188.5

Cash provided by (used in) operating activities
191.5

 
115.6

 
40.1

 
(46.7
)
INVESTING ACTIVITIES
 
 
 
 
 
 
 
Capital and software expenditures
(109.4
)
 
(91.0
)
 
(327.4
)
 
(277.9
)
Proceeds from sales of assets
11.3

 
5.5

 
19.2

 
28.0

(Payments) proceeds from sales of businesses, net of cash sold
(1.1
)
 

 
(3.0
)
 
745.3

Business acquisitions, net of cash acquired
(15.1
)
 
(152.0
)
 
(521.9
)
 
(2,582.1
)
(Payments) proceeds from net investment hedge settlements
(5.1
)
 
(27.9
)
 
15.2

 
(31.6
)
Proceeds from deferred purchase price receivable

 
241.3

 

 
469.1

Other
(15.0
)
 
(8.1
)
 
(30.3
)
 
(25.4
)
Cash used in investing activities
(134.4
)
 
(32.2
)
 
(848.2
)
 
(1,674.6
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
Stock purchase contract fees
(10.1
)
 
(9.9
)
 
(30.3
)
 
(9.9
)
Net short-term borrowings (repayments)
309.5

 
(64.4
)
 
1,445.1

 
499.2

Premium paid on equity option

 

 
(57.3
)
 
(25.1
)
Proceeds from issuances of common stock
10.2

 
14.6

 
32.8

 
47.5

Proceeds from issuance of preferred stock

 

 

 
727.5

Purchases of common stock for treasury
(301.8
)
 
(0.6
)
 
(514.5
)
 
(16.2
)
Cash dividends on common stock
(97.4
)
 
(94.7
)
 
(286.5
)
 
(267.9
)
Other
(8.0
)
 
(6.9
)
 
(13.5
)
 
(9.2
)
Cash (used in) provided by financing activities
(97.6
)
 
(161.9
)
 
575.8

 
945.9

Effect of exchange rate changes on cash, cash equivalents and restricted cash
5.8

 
22.3

 
(54.1
)
 
81.5

Change in cash, cash equivalents and restricted cash
(34.7
)
 
(56.2
)
 
(286.4
)
 
(693.9
)
Cash, cash equivalents and restricted cash, beginning of period
403.4

 
539.5

 
655.1

 
1,177.2

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
368.7

 
$
483.3

 
$
368.7

 
$
483.3

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances as of September 29, 2018 and December 30, 2017, as shown above:
 
September 29, 2018
 
December 30, 2017
Cash and cash equivalents
$
368.7

 
$
637.5

Restricted cash included in Other current assets

 
17.6

Cash, cash equivalents and restricted cash
$
368.7

 
$
655.1

See Notes to (Unaudited) Condensed Consolidated Financial Statements.

5


STANLEY BLACK & DECKER, INC. AND SUBSIDIARIES
NOTES TO (UNAUDITED) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 2018

A.
SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations for the interim periods have been included and are of a normal, recurring nature. Operating results for the three and nine months ended September 29, 2018 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes included in Stanley Black & Decker, Inc.’s (the “Company”) Form 10-K for the year ended December 30, 2017, and subsequent related filings with the Securities and Exchange Commission ("SEC").

In April 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson") from the Doncasters Group, which is being accounted for as a business combination. The results of this acquisition are being consolidated into the Company's Industrial segment. In March 2017, the Company acquired the Tools business of Newell Brands ("Newell Tools") and the Craftsman® brand, which were both accounted for as business combinations. The results of these acquisitions have been consolidated into the Company's Tools & Storage segment. Refer to Note F, Acquisitions, for further discussion on these acquisitions.

In February 2017, the Company sold the majority of its mechanical security businesses within the Security segment, which included the commercial hardware brands of Best Access, phi Precision and GMT. The Company also sold two small businesses within the Tools & Storage segment in the first and fourth quarters of 2017, and one small business in the Industrial segment in the third quarter of 2017. The operating results of these businesses have been reported within continuing operations in the Condensed Consolidated Financial Statements through their respective dates of sale in 2017. Refer to Note T, Divestitures, for further discussion.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ from these estimates. Certain amounts reported in the previous year have been recast as a result of the retrospective adoption of new accounting standards in the first quarter of 2018. Refer to Note B, New Accounting Standards, for further discussion.

Financial Instruments

Derivative financial instruments are employed to manage risks, including foreign currency, interest rate exposures and commodity prices and are not used for trading or speculative purposes. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure. The Company recognizes all derivative instruments in the balance sheet at fair value.

Changes in the fair value of derivatives are recognized periodically either in earnings or in shareowners’ equity as a component of other comprehensive income (loss) ("OCI"), depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Changes in the fair value of derivatives accounted for as fair value hedges are recorded in earnings in the same caption as the changes in the fair value of the hedged items. Gains and losses on derivatives designated as cash flow hedges, to the extent they are included in the assessment of effectiveness, are recorded in OCI and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in accumulated other comprehensive income (loss) would be recognized in earnings. Changes in the fair value of derivatives that are designated and qualify as a hedge of the net investment in foreign operations, to the extent they are included in the assessment of effectiveness, are reported in OCI and are deferred until disposal of the underlying assets. Gains and losses representing components excluded from the assessment of effectiveness for cash flow and fair value hedges are recognized in earnings on a straight-line basis in the same caption as the

6


hedged item over the term of the hedge. Gains and losses representing components excluded from the assessment of effectiveness for net investment hedges are recognized in earnings on a straight-line basis in Other, net over the term of the hedge.

The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to interest expense over the remaining period of the debt originally covered by the terminated swap.

Changes in the fair value of derivatives not designated as hedges are reported in Other, net in the Consolidated Statements of Operations and Comprehensive Income. Refer to Note I, Financial Instruments, for further discussion.

Revenue Recognition

The Company’s revenues result from the sale of goods or services and reflect the consideration to which the Company expects to be entitled. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). For its customer contracts, the Company identifies the performance obligations (goods or services), determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when (or as) the customer obtains control of that good or service. The majority of the Company’s revenues are recorded at a point in time from the sale of tangible products.

Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service and evidence of the fair value of the advertising, in which case the expense is classified as selling, general, and administrative expense.

The Company’s revenues can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration the Company expects to be entitled to in exchange for transferring the promised good or service to the customer.

Sales of security monitoring systems may have multiple performance obligations, including equipment, installation and monitoring or maintenance services. In most instances, the Company allocates the appropriate amount of consideration to each performance obligation based on the standalone selling price ("SSP") of the distinct goods or services performance obligation. In circumstances where SSP is not observable, the Company allocates the consideration for the performance obligations by utilizing one of the following methods: expected cost plus margin, the residual approach, or a mix of these estimation methods.

For performance obligations that the Company satisfies over time, revenue is recognized by consistently applying a method of measuring progress toward complete satisfaction of that performance obligation. The Company utilizes the method that most accurately depicts the progress toward completion of the performance obligation.

The Company’s contract sales for the installation of security intruder systems and other construction-related projects are generally recorded under the input method. The input method recognizes revenue on the basis of the Company’s efforts or inputs to the satisfaction of a performance obligation relative to the total inputs expected to satisfy that performance obligation. Revenue recognized on security contracts in process are based upon the allocated contract price and related total inputs of the project at completion. The extent of progress toward completion is generally measured using input methods based on labor metrics. Revisions to these estimates as contracts progress have the effect of increasing or decreasing profits each period. Provisions for anticipated losses are made in the period in which they become determinable. The revenues for monitoring and monitoring-related services are recognized as services are rendered over the contractual period.

The Company utilizes the output method for contract sales in the Oil & Gas business. The output method recognizes revenue based on direct measurements of the customer value of the goods or services transferred to date relative to the remaining goods or services promised under the contract. The output method includes methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered.

Contract assets or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, the Company records a contract asset. Conversely, if the

7


measure of the remaining performance obligations exceeds the measure of the remaining rights, the Company records a contract liability.

Incremental costs of obtaining or fulfilling a contract with a customer that are expected to be recovered are recognized and classified in Other current assets or Other assets in the Condensed Consolidated Balance Sheets and are typically amortized over the contract period. The Company recognizes the incremental costs of obtaining or fulfilling a contract as expense when incurred if the amortization period of the asset is one year or less.

Customer billings for services not yet rendered are deferred and recognized as revenue as the services are rendered. The associated deferred revenue is included in Accrued expenses or Other liabilities, as appropriate, in the Condensed Consolidated Balance Sheets.

Refer to Note D, Accounts and Notes Receivable, for further discussion.

B.    NEW ACCOUNTING STANDARDS

Adoption of New Accounting Standards
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-07, Compensation-Retirement Benefits (Topic 715) (“new pension standard”). The new pension standard improves the presentation of net periodic pension cost and net periodic postretirement benefit cost. The Company adopted this standard in the first quarter of 2018 utilizing the full retrospective method. As a result of the adoption, all components other than service cost were reclassified from Cost of sales and Selling, general and administrative to Other, net in the Consolidated Statements of Operations and Comprehensive Income.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update is to provide additional guidance and reduce diversity in practice when classifying certain transactions within the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This new standard requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted these standards in the first quarter of 2018 utilizing the retrospective transition method. The impacts of the new standards relate to the presentation of restricted cash as well as certain cash flows related to an accounts receivable sale program that was terminated in the first quarter of 2018. Refer to Note D, Accounts and Notes Receivable, for further discussion.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“new revenue standard”). The new revenue standard outlines a comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The new model provides a five-step analysis in determining when and how revenue is recognized. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard allows for initial application to be performed retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. During 2016, the FASB clarified the implementation guidance on principal versus agent, identifying performance obligations, licensing, and collectability, and made technical corrections on various topics.

The Company adopted the new revenue standard in the first quarter of 2018 using the full retrospective method. Accordingly, certain prior period amounts have been recast to reflect the financial results of the Company in accordance with the new revenue standard. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings for the earliest balance sheet period presented.

As a result of the adoption of the new revenue standard, outbound freight is recorded as a component of cost of sales as opposed to a reduction of net sales. The new revenue standard also requires companies to record an asset for anticipated customer return of inventory and a sales return reserve at the gross amount of the initial sale, rather than at the net margin amount. Additionally, certain sales to distributors subject to a guarantee with a third-party financier that were previously deferred are now recognized upon shipment in accordance with the new revenue standard and the associated short-term and long-term accounts receivable and short-term and long-term debt balances have been recast. Lastly, for certain product warranties provided to customers that meet the criteria of a service-type warranty, a portion of consideration paid by customers must now be deferred and recognized as revenue over the anticipated service warranty period.

8


As a result of the adoption of the new revenue and pension standards, certain amounts in the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2017 have been recast, as follows:
(Millions of Dollars, except per share amounts)
Three months ended September 30, 20171
 
Adoption of ASU 2014-09
 
Adoption of ASU 2017-07
 
Three months ended September 30, 2017
Net Sales
$
3,298.6

 
$
60.8

 
$

 
$
3,359.4

Cost of sales
$
2,046.5

 
$
59.9

 
$

 
$
2,106.4

Selling, general and administrative
$
758.4

 
$

 
$
5.0

 
$
763.4

Provision for doubtful accounts
$
5.0

 
$
0.5

 
$

 
$
5.5

Other, net
$
65.5

 
$

 
$
(5.0
)
 
$
60.5

Earnings before income taxes
$
354.0

 
$
0.4

 
$

 
$
354.4

Income taxes
$
79.8

 
$
0.1

 
$

 
$
79.9

Net earnings attributable to common shareowners
$
274.2

 
$
0.3

 
$

 
$
274.5

Diluted earnings per share of common stock
$
1.80

 
$

 
$

 
$
1.80

1As previously reported in the Company's Form 10-Q for the quarterly period ended September 30, 2017.
(Millions of Dollars, except per share amounts)
Nine months ended September 30, 20171
 
Adoption of ASU 2014-09
 
Adoption of ASU 2017-07
 
Nine months ended September 30, 2017
Net Sales
$
9,333.7

 
$
168.7

 
$

 
$
9,502.4

Cost of sales
$
5,804.1

 
$
165.5

 
$
0.5

 
$
5,970.1

Selling, general and administrative
$
2,168.8

 
$

 
$
15.2

 
$
2,184.0

Provision for doubtful accounts
$
18.0

 
$
1.4

 
$

 
$
19.4

Other, net
$
232.0

 
$

 
$
(15.7
)
 
$
216.3

Earnings before income taxes
$
1,184.3

 
$
1.8

 
$

 
$
1,186.1

Income taxes
$
239.8

 
$
0.5

 
$

 
$
240.3

Net earnings attributable to common shareowners
$
944.5

 
$
1.3

 
$

 
$
945.8

Diluted earnings per share of common stock
$
6.21

 
$
0.01

 
$

 
$
6.22

1As previously reported in the Company's Form 10-Q for the year-to-date period ended September 30, 2017.

As a result of the adoption of the new revenue standard, certain balances as of December 30, 2017 in the Condensed Consolidated Balance Sheets have been recast, as follows:
(Millions of Dollars)
Balance at December 30, 20171
 
Adoption of ASU 2014-09
 
Balance at December 30, 2017
ASSETS
 
 
 
 
 
Accounts and notes receivable, net
$
1,635.9

 
$
(7.2
)
 
$
1,628.7

Other assets
$
487.8

 
$
24.9

 
$
512.7

 
 
 
 
 
 
LIABILITIES AND SHAREOWNERS' EQUITY
 
 
 
 
 
Current maturities of long-term debt
$
983.4

 
$
(5.9
)
 
$
977.5

Accrued expenses
$
1,352.1

 
$
35.6

 
$
1,387.7

Long-term debt
$
2,843.0

 
$
(14.8
)
 
$
2,828.2

Deferred taxes
$
434.2

 
$
1.9

 
$
436.1

Other liabilities
$
2,511.1

 
$
(4.1
)
 
$
2,507.0

Retained earnings2
$
5,990.4

 
$
8.3

 
$
5,998.7

Accumulated other comprehensive loss
$
(1,585.9
)
 
$
(3.2
)
 
$
(1,589.1
)
1As previously reported in the Company's Form 10-K for the year ended December 30, 2017.
2Adjustment includes the cumulative effect of the adoption of $4.3 million for periods prior to fiscal year 2016.


9


As a result of the adoption of the new revenue and cash flows standards, certain amounts for the three and nine months ended September 30, 2017 in the Condensed Consolidated Statements of Cash Flows have been recast, as follows:

(Millions of Dollars)
Three months ended September 30, 20171
 
Adoption of ASU 2014-09
 
Adoption of ASU 2016-15 & 2016-18
 
Three months ended September 30, 2017
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
274.2

 
$
0.3

 
$

 
$
274.5

Changes in working capital
$
(214.9
)
 
$
(0.7
)
 
$
(241.3
)
 
$
(456.9
)
Changes in other assets and liabilities
$
173.7

 
$
0.4

 
$

 
$
174.1

Cash provided by (used in) operating activities
$
356.9

 
$

 
$
(241.3
)
 
$
115.6

INVESTING ACTIVITIES
 
 
 
 
 
 
 
Proceeds from deferred purchase price receivable
$

 
$

 
$
241.3

 
$
241.3

Cash used in investing activities
$
(273.5
)
 
$

 
$
241.3

 
$
(32.2
)
 
 
 
 
 
 
 
 
Change in cash, cash equivalents and restricted cash
$
(56.2
)
 
$

 
$

 
$
(56.2
)
Cash, cash equivalents and restricted cash, beginning of period
$
539.5

 
$

 
$

 
$
539.5

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
483.3

 
$

 
$

 
$
483.3

1As previously reported in the Company's Form 10-Q for the quarterly period ended September 30, 2017.

(Millions of Dollars)
Nine months ended September 30, 20171
 
Adoption of ASU 2014-09
 
Adoption of ASU 2016-15 & 2016-18
 
Nine months ended September 30, 2017
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net earnings
$
944.5

 
$
1.3

 
$

 
$
945.8

Changes in working capital
$
(784.2
)
 
$
(0.6
)
 
$
(469.1
)
 
$
(1,253.9
)
Changes in other assets and liabilities
$
234.6

 
$
(0.7
)
 
$
(45.4
)
 
$
188.5

Cash provided by (used in) operating activities
$
467.8

 
$

 
$
(514.5
)
 
$
(46.7
)
INVESTING ACTIVITIES
 
 
 
 
 
 
 
Proceeds from deferred purchase price receivable
$

 
$

 
$
469.1

 
$
469.1

Cash used in investing activities
$
(2,143.7
)
 
$

 
$
469.1

 
$
(1,674.6
)
 
 
 
 
 
 
 
 
Change in cash, cash equivalents and restricted cash
$
(648.5
)
 
$

 
$
(45.4
)
 
$
(693.9
)
Cash, cash equivalents and restricted cash, beginning of period
1,131.8

 
$

 
$
45.4

 
$
1,177.2

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
483.3

 
$

 
$

 
$
483.3

1As previously reported in the Company's Form 10-Q for the year-to-date period ended September 30, 2017.
In December 2017, the U.S. Securities and Exchange Commission ("SEC") staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the “Act”). SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete the accounting under ASC 740, Income Taxes, (the "measurement period"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Act is incomplete but it can determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 based on the provisions of the tax laws that were in effect immediately before the enactment of the Act. The measurement period for accounting for the Act begins in the period of enactment and ends when an entity has obtained, prepared and analyzed the information necessary to complete the accounting requirements under ASC 740, but in no event can the measurement period extend beyond one year. Any provisional amount or adjustment to a provisional amount included in a company’s financial statements during the measurement period should be included in income from continuing

10


operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined. Refer to Note P, Income Taxes, for further discussion.
In August 2017, the FASB issued ASU 2017-12, Derivatives And Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities. The new standard amends the hedge accounting recognition and presentation requirements in ASC 815. As permitted by ASU 2017-12, the Company early adopted this standard in the first quarter of 2018 on a prospective basis. Refer to Note A, Significant Accounting Policies, for the updated financial instruments policy related to the adoption of this standard.
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610). The new standard provides guidance for recognizing gains and losses of nonfinancial assets in contracts with non-customers. The Company adopted this standard in the first quarter of 2018 and it did not have an impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new standard narrows the definition of a business and provides a framework for evaluation. The Company adopted this standard prospectively in the first quarter of 2018.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new standard eliminates the exception to the principle in ASC 740, for all intra-entity sales of assets other than inventory, to be deferred, until the transferred asset is sold to a third party or otherwise recovered through use. The Company adopted this standard in the first quarter of 2018 and it did not have a material impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of this update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company adopted this standard in the first quarter of 2018 and it did not have a material impact on its consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted
In August 2018, the SEC issued Disclosure Update and Simplification Release (“DUSTR”) modifying various disclosure requirements. The amendments are effective for all filings made on or after November 5, 2018. However, the SEC staff has provided an extended transition period for companies to comply with the new interim disclosure requirement to provide a reconciliation of changes in shareholders’ equity (either in a separate statement or note to the financial statements). The extended transition period allows companies to first present the reconciliation of changes in shareholders' equity in its Form 10-Q for the first quarter that begins after the effective date of November 5, 2018. The Company is currently evaluating this guidance to determine the impact it may have on its disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The standard modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The standard modifies disclosure requirements of fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the timing of adopting the new guidance as well as the impact it may have on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The new guidance permits, but does not require, companies to reclassify the stranded tax effects of the Act on items within accumulated

11


other comprehensive income to retained earnings. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company does not plan to reclassify these stranded tax effects and therefore, does not expect this standard to have an impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. This ASU will be applied prospectively and is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the timing of its adoption of this standard.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("new lease standard"). The objective of the new lease standard is to increase transparency and comparability among organizations by requiring recognition of all lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Targeted Improvements, Leases (Topic 842), which provide clarification on how to apply certain aspects of the new lease standard and allow entities to initially apply the standards from the adoption date. All three standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company expects to utilize the new transition method to apply the standards from the adoption date effective the first quarter of 2019. The Company will record lease liabilities and right-of-use assets on its consolidated balance sheets upon adoption, but does not expect the standards to impact its consolidated statements of operations or retained earnings.

C.
EARNINGS PER SHARE
The following table reconciles net earnings attributable to common shareowners and the weighted-average shares outstanding used to calculate basic and diluted earnings per share for the three and nine months ended September 29, 2018 and September 30, 2017:
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Numerator (in millions):
 
 
 
 
 
 
 
Net earnings attributable to common shareowners1
$
247.8

 
$
274.5

 
$
712.0

 
$
945.8

 
 
 
 
 
 
 
 
Denominator (in thousands):
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
147,964

 
149,689

 
149,311

 
149,464

Dilutive effect of stock contracts and awards
2,635

 
2,933

 
2,914

 
2,642

Diluted weighted-average shares outstanding
150,599

 
152,622

 
152,225

 
152,106

Earnings per share of common stock1:
 
 
 
 
 
 
 
Basic
$
1.67

 
$
1.83

 
$
4.77

 
$
6.33

Diluted
$
1.65

 
$
1.80

 
$
4.68

 
$
6.22

1Prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.
The following weighted-average stock options were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive (in thousands):
 
Third Quarter
 
Year-to-Date
 
2018
 
2017
 
2018
 
2017
Number of stock options
1,139

 
2

 
1,155

 
388


As described in detail in Note J, Equity Arrangements, the Company issued 7,500,000 Equity Units in May 2017 with a total notional value of $750.0 million. Each unit initially consists of 750,000 shares of convertible preferred stock and forward stock

12


purchase contracts. On and after May 15, 2020, the convertible preferred stock may be converted into common stock at the option of the holder. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof. The conversion rate was initially 6.1627 shares of common stock per one share of convertible preferred stock, which is equivalent to an initial conversion price of approximately $162.27 per share of common stock. As of September 29, 2018, due to the customary anti-dilution provisions, the conversion rate was 6.1744, equivalent to a conversion price of approximately $161.96 per share of common stock. The convertible preferred stock is excluded from the denominator of the diluted earnings per share calculation on the basis that the convertible preferred stock will be settled in cash except to the extent that the conversion value of the convertible preferred stock exceeds its liquidation preference. Therefore, before any redemption or conversion, the common shares that would be required to settle the applicable conversion value in excess of the liquidation preference, if the Company elects to settle such excess in common shares, are included in the denominator of diluted earnings per share in periods in which they are dilutive. The shares related to the convertible preferred stock have been anti-dilutive during most of 2018.

D.    ACCOUNTS AND NOTES RECEIVABLE
(Millions of Dollars)
September 29, 2018
 
December 30, 20171
Trade accounts receivable
$
2,035.1

 
$
1,388.1

Trade notes receivable
141.2

 
158.7

Other accounts receivable
156.5

 
162.3

Gross accounts and notes receivable
$
2,332.8

 
$
1,709.1

Allowance for doubtful accounts
(96.6
)
 
(80.4
)
Accounts and notes receivable, net
$
2,236.2

 
$
1,628.7

Long-term receivables, net
$
160.0

 
$
176.9

1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.

Trade receivables are dispersed among a large number of retailers, distributors and industrial accounts in many countries. Adequate reserves have been established to cover anticipated credit losses. Long-term receivables, net, of $160.0 million and $176.9 million at September 29, 2018 and December 30, 2017, respectively, are reported within Other assets in the Condensed Consolidated Balance Sheets. The Company's financing receivables are predominantly related to certain security equipment leases with commercial businesses. Generally, the Company retains legal title to any equipment under lease and bears the right to repossess such equipment in an event of default. All financing receivables are interest-bearing and the Company has not classified any financing receivables as held-for-sale. Interest income earned from financing receivables that are not delinquent is recorded on the effective interest method.

The Company considers any financing receivable that has not been collected within 90 days of original billing date as past-due or delinquent. The Company’s payment terms are generally consistent with the industries in which their businesses operate and typically range from 30-90 days globally. Additionally, the Company considers the credit quality of all past-due or delinquent financing receivables as nonperforming. The Company does not adjust the promised amount of consideration for the effects of a significant financing component when the period between transfer of the product and receipt of payment is less than one year. Any significant financing components for contracts greater than one year are included in revenue over time.

Prior to January 2018, the Company had an accounts receivable sale program. According to the terms of that program, the Company was required to sell certain of its trade accounts receivables at fair value to a wholly-owned, consolidated, bankruptcy-remote special purpose subsidiary (“BRS”). The BRS, in turn, was required to sell such receivables to a third-party financial institution (“Purchaser”) for cash and a deferred purchase price receivable. The Purchaser’s maximum cash investment in the receivables at any time was $100.0 million. The purpose of the program was to provide liquidity to the Company. The Company accounted for these transfers as sales under ASC 860, Transfers and Servicing. Receivables were derecognized from the Company’s consolidated balance sheet when the BRS sold those receivables to the Purchaser. The Company had no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred purchase price receivable. In January 2018, the Company signed an amendment that changed the structure of this program which eliminated the deferred purchase price receivable from the Purchaser and resulted in the BRS retaining ownership of the trade accounts receivables. This program was then terminated on February 1, 2018.

At December 30, 2017, $100.8 million of net receivables were derecognized. Gross receivables sold amounted to $546.1 million ($460.0 million, net) and $1,549.3 million ($1,312.9 million, net) for the three and nine months ended September 30, 2017, respectively. These sales resulted in a pre-tax loss of $2.0 million and $5.3 million, respectively, and included servicing

13


fees of $0.4 million and $1.0 million, respectively, for the three and nine months ended September 30, 2017. Proceeds from transfers of receivables to the Purchaser totaled $432.1 million and $1,213.0 million for the three and nine months ended September 30, 2017, respectively. Collections of previously sold receivables, including deferred purchase price receivables, and all fees, which were settled one month in arrears, resulted in payments to the Purchaser of $471.9 million and $1,252.9 million for the three and nine months ended September 30, 2017, respectively.

The Company’s risk of loss following the sale of the receivables was limited to the deferred purchase price receivable, which was $106.9 million at December 30, 2017. The deferred purchase price receivable settled in full in January 2018, and historically was repaid in cash as receivables were collected, generally within 30 days. As such the carrying value of the receivable recorded at December 30, 2017 approximated fair value. There were $0.1 million of delinquencies or credit losses for the three and nine months ended September 30, 2017. Cash inflows related to the deferred purchase price receivable totaled $241.3 million and $469.1 million for the three and nine months ended September 30, 2017, respectively. In accordance with the adoption of the new cash flows standards described in Note B, New Accounting Standards, the proceeds related to the deferred purchase price receivable are classified as investing activities.

As of September 29, 2018 and December 30, 2017, the Company's deferred revenue totaled $189.7 million and $117.0 million, respectively, of which $97.9 million and $95.6 million, respectively, was classified as current.

Revenue recognized for the three months ended September 29, 2018 and September 30, 2017 that was previously deferred as of December 30, 2017 and December 31, 2016 totaled $10.3 million and $11.8 million, respectively. Revenue recognized for the nine months ended September 29, 2018 and September 30, 2017 that was previously deferred as of December 30, 2017 and December 31, 2016 totaled $76.3 million and $68.9 million, respectively.

As of September 29, 2018, approximately $1.140 billion of revenue from long-term contracts primarily in the Security segment was unearned related to customer contracts which were not completely fulfilled and will be recognized on a decelerating basis over the next 5 years. This amount excludes any of the Company's contracts with an original expected duration of one year or less.

E.
INVENTORIES
The components of Inventories, net at September 29, 2018 and December 30, 2017 are as follows:
(Millions of Dollars)
September 29, 2018
 
December 30, 2017
Finished products
$
1,924.0

 
$
1,461.4

Work in process
196.8

 
155.5

Raw materials
528.9

 
401.5

Total
$
2,649.7

 
$
2,018.4


F.    ACQUISITIONS
PENDING TRANSACTIONS

On August 6, 2018, the Company reached an agreement to acquire International Equipment Solutions Attachments Group ("IES Attachments") for $690 million in cash. IES Attachments is a manufacturer of high quality, performance-driven heavy equipment attachment tools for off-highway applications. The acquisition will further diversify the Company's presence in the industrial markets, expand its portfolio of attachment solutions and provide a meaningful platform for continued growth. The acquisition, which will be accounted for as a business combination and consolidated into the Company's Industrial segment, is subject to customary closing conditions, including regulatory approvals.

On September 12, 2018, the Company entered into a definitive agreement to acquire a 20 percent interest in MTD Products Inc. ("MTD"), a privately held global manufacturer of outdoor power equipment, for $234 million in cash. Under the terms of the agreement, the Company has the option to acquire the remaining 80 percent of MTD beginning on July 1, 2021. The investment in MTD increases the Company's presence in the $20 billion global lawn and garden market and will allow 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, leveraging each company's respective portfolios of strong brands. The transaction, which is subject to regulatory approvals and customary closing conditions, is expected to close in early 2019.

14


2018 ACQUISITIONS

Nelson Fasteners Systems
On April 2, 2018, the Company acquired the industrial business of Nelson Fastener Systems ("Nelson") from the Doncasters Group, for $430.1 million, net of cash acquired and an estimated working capital adjustment. Nelson is complementary to the Company's product offerings, enhances its presence in the general industrial end markets, expands its portfolio of highly-engineered fastening solutions, and will deliver cost synergies. The results of Nelson are being consolidated into the Industrial segment.
The Nelson acquisition is being accounted for as a business combination, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date. The estimated fair value of identifiable net assets acquired, which includes $65.1 million of working capital and $170.0 million of intangible assets, is $216.6 million. The related goodwill is $213.5 million. The amount allocated to intangible assets includes $146.0 million for customer relationships. The useful lives assigned to the intangible assets range from 12 to 15 years.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected cost synergies of the combined business, assembled workforce, and the going concern nature of Nelson. Goodwill is not expected to be deductible for tax purposes.
The purchase price allocation for Nelson is preliminary in certain respects. During the measurement period, the Company expects to record adjustments relating to working capital accounts, pension liabilities, various opening balance sheet contingencies, including environmental remediation, and various income tax matters, amongst others.
A single estimate of fair value results from a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company’s results from operations. The Company will complete its purchase price allocation as soon as reasonably possible within the measurement period.
Other 2018 Acquisitions
During 2018, the Company completed five smaller acquisitions for a total purchase price of $102.1 million, net of cash acquired. The estimated fair value of the identifiable net assets acquired, which includes $13.8 million of working capital and $34.1 million of intangible assets, is $37.4 million. The related goodwill is $64.7 million. The amount allocated to intangible assets includes $30.6 million for customer relationships. The useful lives assigned to intangible assets ranges from 10 to 14 years.
The purchase price allocation for these acquisitions is preliminary in certain respects. During the measurement period, the Company expects to record adjustments relating to working capital accounts, various opening balance sheet contingencies and various income tax matters, amongst others. These adjustments are not expected to have a material impact on the Company’s consolidated financial statements.
2017 ACQUISITIONS

Newell Tools

On March 9, 2017, the Company acquired Newell Tools for approximately $1.86 billion, net of cash acquired. The Newell Tools results have been consolidated into the Company's Tools & Storage segment.
The Newell Tools acquisition was accounted for as a business combination. The purchase price allocation for Newell Tools is complete. The measurement period adjustments recorded in 2018 did not have a material impact to the Company's condensed consolidated financial statements. The following table summarizes the estimated fair values of major assets acquired and liabilities assumed:

15


(Millions of Dollars)
 
Cash and cash equivalents
$
20.0

Accounts and notes receivable, net
19.7

Inventories, net
195.5

Prepaid expenses and other current assets
27.1

Property, plant and equipment, net
112.4

Trade names
283.0

Customer relationships
548.0

Other assets
8.8

Accounts payable
(70.3
)
Accrued expenses
(40.7
)
Deferred taxes
(269.4
)
Other liabilities
(7.9
)
Total identifiable net assets
$
826.2

Goodwill
1,031.8

Total consideration paid
$
1,858.0

The trade names were determined to have indefinite lives. The weighted-average useful life assigned to the customer relationships is 15 years.
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business, assembled workforce, and the going concern nature of Newell Tools. It is estimated that $15.7 million of goodwill, relating to the pre-acquisition historical tax basis of goodwill, will be deductible for tax purposes.
Refer to Note E, Acquisitions, of the Company's Form 10-K for the year ended December 30, 2017 for further discussion.
Craftsman Brand

On March 8, 2017, the Company purchased the Craftsman® brand from Sears Holdings Corporation ("Sears Holdings") for a total estimated cash purchase price of $936.7 million on a discounted basis, which consists of an initial cash payment of $568.2 million, a cash payment due in March 2020 with an estimated present value at acquisition date of $234.0 million, and future payments to Sears Holdings of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032, which was valued at $134.5 million at the acquisition date based on estimated future sales projections. Refer to Note M, Fair Value Measurements, for additional details. In addition, as part of the acquisition the Company also granted a perpetual license to Sears Holdings to continue selling Craftsman®-branded products in Sears Holdings-related channels. The perpetual license will be royalty-free until March 2032, which represents an estimated value of approximately $293.0 million, and 3% thereafter. The Craftsman results have been consolidated into the Company's Tools & Storage segment.
The Craftsman® brand acquisition was accounted for as a business combination. The purchase price allocation for Craftsman is complete. The measurement period adjustments recorded in 2018 did not have a material impact on the Company's condensed consolidated financial statements. The estimated fair value of identifiable net assets acquired, which includes $40.2 million of working capital and $418.0 million of intangible assets, is $482.6 million. The related goodwill is $747.1 million. The amount allocated to intangible assets includes $396.0 million of an indefinite-lived trade name. The useful life assigned to the customer relationships is 17 years.
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined business and the going concern nature of the Craftsman® brand. It is estimated that $442.7 million of goodwill will be deductible for tax purposes.

Refer to Note E, Acquisitions, of the Company's Form 10-K for the year ended December 30, 2017 for further discussion.
Other 2017 Acquisitions
During 2017, the Company completed four smaller acquisitions for a total purchase price of $182.9 million, net of cash acquired, which have been consolidated into the Company's Tools & Storage and Security segments. The purchase price

16


allocation for these acquisitions is complete. The estimated fair value of the identifiable net assets acquired, which includes $35.3 million of working capital and $54.4 million of intangible assets, is $88.1 million. The related goodwill is $94.8 million. The amount allocated to intangible assets includes $51.4 million for customer relationships. The useful lives assigned to the customer relationships range between 10 and 15 years.

ACTUAL AND PRO-FORMA IMPACT OF THE ACQUISTIONS

Actual Impact from Acquisitions
The net sales and net earnings (loss) from the 2018 acquisitions included in the Company's Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 29, 2018 are shown in the table below. These amounts include amortization relating to inventory step-up and intangible assets recorded upon acquisition, transaction costs, and other integration-related costs.
(Millions of Dollars)
Third Quarter 2018
 
Year-to-Date 2018
Net sales
$
76.2

 
$
142.3

Net earnings (loss) attributable to common shareowners
$
3.3

 
$
(8.0
)
Pro-forma Impact from Acquisitions

The following table presents supplemental pro-forma information as if the 2017 and 2018 acquisitions had occurred on January 1, 2017. The pro-forma consolidated results are not necessarily indicative of what the Company’s consolidated net sales and net earnings would have been had the Company completed the acquisitions on January 1, 2017. In addition, the pro-forma consolidated results do not purport to project the future results of the Company.

 
 
Third Quarter
 
Year-to-Date
(Millions of Dollars, except per share amounts)
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
3,494.8

 
$
3,440.9

 
$
10,430.6

 
$
9,951.2

Net earnings attributable to common shareowners
 
$
254.2

 
$
278.2

 
$
734.9

 
$
946.4

Diluted earnings per share
 
$
1.69

 
$
1.82

 
$
4.83

 
$
6.22


2018 Pro-forma Results

The 2018 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2018 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made:

Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the purchase price allocation that would have been incurred from December 31, 2017 to the acquisition dates.

Depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from December 31, 2017 to the acquisition date of Nelson.

Because the 2018 acquisitions were assumed to occur on January 1, 2017, there were no deal costs or inventory step-up amortization factored into the 2018 pro-forma year, as such expenses would have occurred in the first year following the acquisition.

2017 Pro-forma Results

The 2017 pro-forma results were calculated by combining the results of Stanley Black & Decker with the stand-alone results of the 2017 and 2018 acquisitions for their respective pre-acquisition periods. Accordingly the following adjustments were made:

Elimination of the historical pre-acquisition intangible asset amortization expense and the addition of intangible asset amortization expense related to intangibles valued as part of the purchase price allocation that would have been

17


incurred from January 1, 2017 to the acquisition dates of the 2017 acquisitions and from January 1, 2017 to September 30, 2017 for the 2018 acquisitions.

Depreciation expense for the property, plant, and equipment fair value adjustments that would have been incurred from January 1, 2017 to the acquisition date of Newell Tools and from January 1, 2017 to September 30, 2017 for Nelson.

Additional expense for deal costs and inventory step-up, which would have been amortized as the corresponding inventory was sold.

G.    GOODWILL
Changes in the carrying amount of goodwill by segment are as follows:
(Millions of Dollars)
Tools & Storage
 
Industrial
 
Security
 
Total
Balance December 30, 2017
$
5,189.7

 
$
1,454.4

 
$
2,132.0

 
$
8,776.1

Acquisition adjustments
59.3

 
219.5

 
52.7

 
331.5

Foreign currency translation
(58.4
)
 
(1.8
)
 
(40.5
)
 
(100.7
)
Balance September 29, 2018
$
5,190.6

 
$
1,672.1

 
$
2,144.2

 
$
9,006.9


H.    LONG-TERM DEBT AND FINANCING ARRANGEMENTS

Long-term debt and financing arrangements at September 29, 2018 and December 30, 2017 are as follows:
 
 
September 29, 2018
 
December 30, 2017
(Millions of Dollars)
Interest Rate
Original Notional
Unamortized Discount
Unamortized Gain/(Loss) Terminated Swaps 1
Purchase Accounting FV Adjustment
Deferred Financing Fees
Carrying Value
 
Carrying Value 2
Notes payable due 2018
2.45%
$
632.5

$

$

$

$
(0.2
)
$
632.3

 
$
630.9

Notes payable due 2018
1.62%
345.0




(0.1
)
344.9

 
344.1

Notes payable due 2021
3.40%
400.0

(0.1
)
11.0


(1.1
)
409.8

 
412.1

Notes payable due 2022
2.90%
754.3

(0.3
)


(2.6
)
751.4

 
750.9

Notes payable due 2028
7.05%
150.0


10.7

10.3


171.0

 
172.6

Notes payable due 2040
5.20%
400.0

(0.2
)
(32.2
)

(3.1
)
364.5

 
363.3

Notes payable due 2052 (junior subordinated)
5.75%
750.0




(18.6
)
731.4

 
731.0

Notes payable due 2053 (junior subordinated)
5.75%
400.0


4.6


(7.9
)
396.7

 
396.6

Other, payable in varying amounts through 2022
0.00% - 4.50%
8.2





8.2

 
4.2

Total long-term debt, including current maturities
 
$
3,840.0

$
(0.6
)
$
(5.9
)
$
10.3

$
(33.6
)
$
3,810.2

 
$
3,805.7

Less: Current maturities of long-term debt
 
 
 
 
 
 
(979.6
)
 
(977.5
)
Long-term debt
 
 
 
 
 
 
$
2,830.6

 
$
2,828.2

1Unamortized gain/(loss) associated with interest rate swaps are more fully discussed in Note I, Financial Instruments.
2Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.

In January 2017, the Company amended its existing $2.0 billion commercial paper program to increase the maximum amount of notes authorized to be issued to $3.0 billion and to include Euro denominated borrowings in addition to U.S. Dollars. As of September 29, 2018, the Company had $1.4 billion of borrowings outstanding against the Company’s $3.0 billion commercial paper program, of which approximately $932.3 million in Euro denominated commercial paper was designated as a Net Investment Hedge as described in more detail in Note I, Financial Instruments. As of December 30, 2017, the Company had no commercial paper borrowings outstanding.

In September 2018, the Company amended and restated its existing five-year $1.75 billion committed credit facility with the concurrent execution of a new five-year $2.0 billion committed credit facility (the “5 Year Credit Agreement”). Borrowings

18


under the 5 Year Credit Agreement may be made in U.S. Dollars, Euros or Pounds Sterling. A sub-limit amount of $653.3 million is designated for swing line advances which may be drawn in Euros pursuant to the terms of the 5 Year Credit Agreement. Borrowings bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and specific terms of the 5 Year Credit Agreement. The Company must repay all advances under the 5 Year Credit Agreement by the earlier of September 12, 2023 or upon termination. The 5 Year Credit Agreement is designated to be a liquidity back-stop for the Company's $3.0 billion U.S. Dollar and Euro commercial paper program. This amends and restates the five-year $1.75 billion committed credit facility dated as of December 2015. As of September 29, 2018, and December 30, 2017, the Company had not drawn on its five-year committed credit facility.

In September 2018, the Company terminated the 364-Day $1.25 billion committed credit facility and concurrently executed a new 364-Day $1.0 billion committed credit facility (the “364 Day Credit Agreement”). Borrowings under the 364 Day Credit Agreement may be made in U.S. Dollars or Euros and bear interest at a floating rate plus an applicable margin dependent upon the denomination of the borrowing and pursuant to the terms of the 364 Day Credit Agreement. The Company must repay all advances under the 364 Day Credit Agreement by the earlier of September 11, 2019 or upon termination. The Company may, however, convert all advances outstanding upon termination, into a term loan that shall be repaid in full no later than the first anniversary of the termination date, provided that the Company, among other things, pays a fee to the administrative agent for the account of each lender. The 364 Day Credit Agreement serves as a liquidity back-stop for the Company’s $3.0 billion U.S. Dollar and Euro commercial paper program. The 364 Day Credit Agreement supersedes all prior 364-Day committed credit facilities. As of September 29, 2018, and December 30, 2017, the Company had not drawn on its 364-Day committed credit facility.

I.    FINANCIAL INSTRUMENTS

In the first quarter of 2018, the Company elected to early adopt ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities, which amends the hedge accounting recognition and presentation requirements of ASC 815. ASU 2017-12 requires the presentation and disclosure requirements to be applied prospectively and as a result, certain disclosures for the three and nine month periods ending September 30, 2017 conform to the presentation and disclosure requirements prior to the adoption.

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure.

If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. Financial instruments are not utilized for speculative purposes.

A summary of the fair values of the Company’s derivatives recorded in the Condensed Consolidated Balance Sheets at September 29, 2018 and December 30, 2017 is as follows: 

19


(Millions of Dollars)
Balance Sheet
Classification
 
September 29, 2018
 
December 30, 2017
 
Balance Sheet
Classification
 
September 29, 2018
 
December 30, 2017
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts Cash Flow
Other current assets
 
$
1.2

 
$

 
Accrued expenses
 
$
24.7

 
$
55.7

Foreign Exchange Contracts Cash Flow
Other current assets
 
7.4

 
4.1

 
Accrued expenses
 
4.0

 
33.4

 
LT other assets
 
0.5

 

 
LT other liabilities
 
0.6

 
5.2

Net Investment Hedge
Other current assets
 
10.1

 
6.6

 
Accrued expenses
 
3.5

 
7.0

 
LT other assets
 

 

 
LT other liabilities
 
12.6

 
5.8

Non-derivative designated as hedging instrument:
 
 
 
 
 
 
 
 
 
 
 
Net Investment Hedge
 
 

 

 
Short-term borrowings
 
932.3

 

Total designated as hedging
 
 
$
19.2

 
$
10.7

 
 
 
$
977.7

 
$
107.1

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
Other current assets
 
$
9.4

 
$
7.3

 
Accrued expenses
 
$
12.5

 
$
6.9

Total
 
 
$
28.6

 
$
18.0

 
 
 
$
990.2

 
$
114.0

The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.

During the nine months ended September 29, 2018 and September 30, 2017, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash received of $16.6 million and net cash paid of $4.2 million, respectively.

CASH FLOW HEDGES
There were after-tax mark-to-market losses of $44.6 million and $112.6 million as of September 29, 2018 and December 30, 2017, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive loss. An after-tax loss of $23.8 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates.

The tables below detail pre-tax amounts of derivatives designated as cash flow hedges in Accumulated other comprehensive loss for active derivatives during the periods in which the underlying hedged transactions affected earnings for the three and nine months ended September 29, 2018 and September 30, 2017

 
 
Third Quarter 2018
(Millions of dollars)
 
Gain (Loss)
Recorded in  OCI
 
Classification of
Gain (Loss)
Reclassified from
OCI to Income
 
Gain (Loss)
Reclassified from
OCI to Income
 
Gain (Loss)
Recognized in
Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts
 
$
10.4

 
Interest expense
 
$

 
$

Foreign Exchange Contracts
 
$
(2.0
)
 
Cost of sales
 
$
(4.6
)
 
$


20



 
 
Year-to-Date 2018
(Millions of dollars)
 
Gain (Loss)
Recorded in OCI
 
Classification of
Gain (Loss)
Reclassified from
OCI to Income
 
Gain (Loss)
Reclassified from
OCI to Income
 
Gain (Loss)
Recognized in
Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts
 
$
32.2

 
Interest expense
 
$

 
$

Foreign Exchange Contracts
 
$
21.0

 
Cost of sales
 
$
(16.6
)
 
$


 
 
Third Quarter 2017
(Millions of dollars)
 
Gain (Loss)
Recorded in OCI
 
Classification of
Gain (Loss)
Reclassified from
OCI to Income
 
Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion)
 
Gain (Loss)
Recognized in
Income
(Ineffective Portion*)
Interest Rate Contracts
 
$
(1.6
)
 
Interest expense
 
$

 
$

Foreign Exchange Contracts
 
$
(26.5
)
 
Cost of sales
 
$
3.6

 
$


 
 
Year-to-Date 2017
(Millions of dollars)
 
Gain (Loss)
Recorded in OCI
 
Classification of
Gain (Loss)
Reclassified from
OCI to Income
 
Gain (Loss)
Reclassified from
OCI to Income
(Effective Portion)
 
Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts
 
$
(8.8
)
 
Interest expense
 
$

 
$

Foreign Exchange Contracts
 
$
(65.1
)
 
Cost of sales
 
$
13.3

 
$

 * Includes ineffective portion and amount excluded from effectiveness testing on derivatives.
A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 29, 2018 is as follows:
 
 
Third Quarter 2018
 
Year-to-Date 2018
(Millions of dollars)
 
Cost of Sales
 
Interest Expense
 
Cost of Sales
 
Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded
 
$
2,256.4

 
$
72.1

 
$
6,656.5

 
$
204.3

Gain (loss) on cash flow hedging relationships:
 

 
 
 

 

Foreign Exchange Contracts:
 

 
 
 

 

Hedged Items
 
$
4.6

 
$

 
$
16.6

 
$

Gain (loss) reclassified from OCI into Income
 
$
(4.6
)
 
$

 
$
(16.6
)
 
$

Interest Rate Swap Agreements:
 
 
 
 
 
 
 
 
Gain (loss) reclassified from OCI into Income 1
 
$

 
$
(3.8
)
 
$

 
$
(11.3
)
1 Inclusive of the gain/loss amortization on terminated derivative financial instruments.

For the three and nine months ended September 30, 2017, the hedged items’ impact to the Consolidated Statements of Operations and Comprehensive Income was a loss of $3.6 million and $13.3 million, respectively in Cost of sales. There was no impact related to the interest rate contracts' hedged items for all periods presented.

An after-tax loss of $4.1 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the three months ended September 29, 2018. For the three months ended September 30, 2017 there was no net impact for hedged items. An after-tax loss of $15.8 million and an after-tax gain of $1.4 million was reclassified from Accumulated other comprehensive loss into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the nine months ended September 29, 2018 and September 30, 2017, respectively, during the periods in which the underlying hedged transactions affected earnings.

Interest Rate Contracts: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-debt proportions. At September 29, 2018 and December 30, 2017, the Company had forward starting interest rate swaps on $400 million of future debt issuances which were executed in 2014. The objective of the hedges is to offset the expected variability on future payments associated with the interest rate on debt instruments expected to be

21


issued in 2018. Gains or losses on the swaps are recorded in Accumulated other comprehensive loss and will be subsequently reclassified into earnings as interest expense as the future interest expense on debt is recognized in earnings.

Foreign Currency Contracts

Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with functional currencies different than their own, which creates currency-related volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases and sales of inventory. Gains and losses reclassified from Accumulated other comprehensive loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At September 29, 2018 and December 30, 2017, the notional value of forward currency contracts outstanding was $223.7 million and $559.9 million, respectively, maturing on various dates through 2019.

Purchased Option Contracts: The Company and its subsidiaries have entered into various intercompany transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its intercompany obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from Accumulated other comprehensive loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. As of September 29, 2018 and December 30, 2017, the notional value of purchased option contracts was $430.0 million and $400.0 million, respectively, maturing on various dates through 2019.
FAIR VALUE HEDGES

Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In prior years, the Company entered into interest rate swaps related to certain of its notes payable which were subsequently terminated. Amortization of the gain/loss on previously terminated swaps is reported as a reduction of interest expense. Prior to termination, the changes in the fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. As of September 29, 2018 and December 30, 2017, the Company did not have any active fair value interest rate swaps.

A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 29, 2018 is as follows:
 (Millions of dollars)
Third Quarter 2018 Interest Expense
 
Year-to-Date 2018
Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the fair value hedges are recorded
$
72.1

 
$
204.3

Amortization of gain on terminated swaps
$
(0.8
)
 
$
(2.4
)
Amortization of the gain on terminated swaps of $0.8 million and $2.4 million is reported as a reduction of interest expense for the three and nine months ended September 30, 2017, respectively.

A summary of the amounts recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges for the nine months ended September 29, 2018 is as follows:
 (Millions of dollars)
 
Carrying Amount of Hedged Liability (1)
 
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
Current Maturities of Long-Term Debt
 
$

 
Terminated Swaps
 
$
3.2

Long-Term Debt
 
$
1,342.0

 
Terminated Swaps
 
$
(9.2
)
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships.  
NET INVESTMENT HEDGES

The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive loss were gains of $45.1 million and $3.4 million at September 29, 2018 and December 30, 2017, respectively.


22


As of September 29, 2018, the Company had foreign exchange forward contracts maturing on various dates in 2018 with notional values totaling $705.7 million outstanding hedging a portion of its British pound sterling, Swedish krona, Euro and Canadian dollar denominated net investments; a cross currency swap with a notional value totaling $250.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investment; an option contract with a notional value totaling $36.2 million maturing in 2018 hedging a portion of its Mexican peso denominated net investment; and Euro denominated commercial paper with a value of $932.3 million maturing in 2018 hedging a portion of its Euro denominated net investments. As of December 30, 2017, the Company had foreign exchange contracts maturing on various dates through 2018 with notional values totaling $751.2 million outstanding hedging a portion of its British pound sterling, Mexican peso, Swedish krona, Euro and Canadian dollar denominated net investments, and a cross currency swap with a notional value totaling $250.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investment.

Maturing foreign exchange contracts resulted in net cash received of $15.2 million and net cash paid of $31.6 million for the nine months ended September 29, 2018 and September 30, 2017, respectively.

Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets. Upon adoption of ASU 2017-12, gains and losses representing components excluded from the assessment of effectiveness are recognized in earnings in Other, net on a straight-line basis over the term of the hedge. Prior to the adoption of ASU 2017-12, no components were excluded from the assessment of effectiveness. Refer to Note B, New Accounting Standards, for further discussion.

The pre-tax gain or loss from fair value changes for the three and nine ended September 29, 2018 and September 30, 2017 was as follows:
 
 
Third Quarter 2018
(Millions of Dollars)
 
Total Gain (Loss) Recorded in OCI
 
Excluded Component Recorded in OCI
 
Income Statement Classification
 
Total Gain (Loss) Reclassified from OCI to Income
 
Excluded Component Amortized from OCI to Income
Forward Contracts
 
$
(2.6
)
 
$
1.1

 
Other, net
 
$
2.3

 
$
2.3

Cross Currency Swap
 
$
6.0

 
$
1.4

 
Other, net
 
$
1.7

 
$
1.7

Option Contracts
 
$
(2.4
)
 
$

 
Other, net
 
$

 
$

Non-derivative designated as Net Investment Hedge
 
$
2.9

 
$

 
Other, net
 
$

 
$

 
 
Year-to-Date 2018
(Millions of Dollars)
 
Total Gain (Loss) Recorded in OCI
 
Excluded Component Recorded in OCI
 
Income Statement Classification
 
Total Gain (Loss) Reclassified from OCI to Income
 
Excluded Component Amortized from OCI to Income
Forward Contracts
 
$
29.6

 
$
7.3

 
Other, net
 
$
6.4

 
$
6.4

Cross Currency Swap
 
$
(1.1
)
 
$
9.7

 
Other, net
 
$
5.1

 
$
5.1

Option Contracts
 
$
(3.3
)
 
$

 
Other, net
 
$

 
$

Non-derivative designated as Net Investment Hedge
 
$
41.8

 
$

 
Other, net
 
$

 
$


 
 
Third Quarter 2017
 
Year-to-Date 2017
(Millions of Dollars)
 
Amount
Recorded in  OCI
Gain (Loss)
 
Effective Portion
Recorded in 
Income
Statement
 
Ineffective
Portion*
Recorded in Income
Statement
 
Amount
Recorded in  OCI
Gain (Loss)
 
Effective Portion
Recorded in 
Income
Statement
 
Ineffective
Portion*
Recorded in Income
Statement
Other, net
 
$
(42.3
)
 
$

 
$

 
$
(131.3
)
 
$

 
$

*Includes ineffective portion and amount excluded from effectiveness testing.

UNDESIGNATED HEDGES
Foreign Exchange Contracts: Foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding at September 29, 2018 was $1.4 billion, maturing on various dates through 2019. The total notional amount of the

23


forward contracts outstanding at December 30, 2017 was $1.0 billion, maturing on various dates through 2018. The impacts of changes in the fair value related to derivatives not designated as hedging instruments under ASC 815 for the three and nine months ended September 29, 2018 and September 30, 2017 are as follows: 
(Millions of Dollars)
Income Statement
Classification
 
Third Quarter 2018
Amount of Gain (Loss)
Recorded in Income on
Derivative
 
Year-to-Date 2018
Amount of Gain (Loss)
Recorded in Income on
Derivative
Foreign Exchange Contracts
Other, net
 
$
(5.9
)
 
$
9.0


(Millions of Dollars)
Income Statement
Classification
 
Third Quarter 2017
Amount of Gain (Loss)
Recorded in Income on
Derivative
 
Year-to-Date 2017
Amount of Gain (Loss)
Recorded in Income on
Derivative
Foreign Exchange Contracts
Other, net
 
$
13.9

 
$
43.6



J.    EQUITY ARRANGEMENTS

In April 2018, the Company repurchased 1,399,732 shares of common stock for approximately $200.0 million. In July 2018, the Company repurchased 2,086,792 shares of common stock for approximately $300.0 million.

In March 2018, the Company purchased from a financial institution “at-the-money” capped call options with an approximate term of three years, on 3.2 million shares of its common stock (subject to customary anti-dilution adjustments) for an aggregate premium of $57.3 million, or an average of $17.96 per share. The premium paid was recorded as a reduction of Shareowners’ equity. The purpose of the capped call options is to hedge the risk of stock price appreciation between the lower and upper strike prices of the capped call options for a future share repurchase.

The capped call has an initial lower strike price of $156.86 and an upper strike price of $203.92, which is approximately 30% higher than the closing price of the Company's common stock on March 13, 2018. As of September 29, 2018, due to the customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of $156.83 and an adjusted upper strike price of $203.88. The aggregate fair value of the options at September 29, 2018 was $46.2 million.

The capped call transactions may be settled by net share settlement (the default settlement method) or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement. The number of shares the Company will receive will be determined by the terms of the contracts using a volume-weighted-average price calculation for the market value of the Company's common stock, over an averaging period. The market value determined will then be measured against the applicable strike price of the capped call transactions.

In March 2015, the Company entered into a forward share purchase contract with a financial counterparty for 3,645,510 shares of common stock. The contract obligates the Company to pay $350.0 million, plus an additional amount related to the forward component of the contract. In June 2018, the Company amended the settlement date to April 2021, or earlier at the Company's option. The reduction of common shares outstanding was recorded at the inception of the forward share purchase contract in March 2015 and factored into the calculation of weighted-average shares outstanding at that time.

$750 Million Equity Units and Capped Call Transactions

In May 2017, the Company issued 7,500,000 Equity Units with a total notional value of $750.0 million (“$750 million Equity Units”). Each unit has a stated amount of $100 and initially consists of a three-year forward stock purchase contract (“2020 Purchase Contracts”) for the purchase of a variable number of shares of common stock, on May 15, 2020, for a price of $100, and a 10% beneficial ownership interest in one share of 0% Series C Cumulative Perpetual Convertible Preferred Stock, without par, with a liquidation preference of $1,000 per share (“Series C Preferred Stock”). The Company received approximately $727.5 million in cash proceeds from the $750 million Equity Units, net of underwriting costs and commissions, before offering expenses, and issued 750,000 shares of Series C Preferred Stock, recording $750.0 million in preferred stock. The proceeds were used for general corporate purposes, including repayment of short-term borrowings. The Company also used $25.1 million of the proceeds to enter into capped call transactions utilized to hedge potential economic dilution as described in more detail below.


24


Convertible Preferred Stock

In May 2017, the Company issued 750,000 shares of Series C Preferred Stock, without par, with a liquidation preference of $1,000 per share. The convertible preferred stock will initially not bear any dividends and the liquidation preference of the convertible preferred stock will not accrete. The convertible preferred stock has no maturity date, and will remain outstanding unless converted by holders or redeemed by the Company. Holders of shares of the convertible preferred stock will generally have no voting rights. The Series C Preferred Stock is pledged as collateral to support holders’ purchase obligations under the 2020 Purchase Contracts and can be remarketed. In connection with any successful remarketing, the Company may (but is not required to) modify certain terms of the convertible preferred stock, including the dividend rate, the conversion rate, and the earliest redemption date. After any successful remarketing in connection with which the dividend rate on the convertible preferred stock is increased, the Company will pay cumulative dividends on the convertible preferred stock, if declared by the board of directors, quarterly in arrears from the applicable remarketing settlement date.

On and after May 15, 2020, the Series C Preferred Stock may be converted into common stock at the option of the holder. The initial conversion rate was 6.1627 shares of common stock per one share of Series C Preferred Stock, which is equivalent to an initial conversion price of approximately $162.27 per share of common stock. As of September 29, 2018, due to the customary anti-dilution provisions, the conversion rate was 6.1744, equivalent to a conversion price of approximately $161.96 per share of common stock. At the election of the Company, upon conversion, the Company may deliver cash, common stock, or a combination thereof.

The Company may not redeem the Series C Preferred Stock prior to June 22, 2020. At the election of the Company, on or after June 22, 2020, the Company may redeem for cash, all or any portion of the outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference, plus any accumulated and unpaid dividends. If the Company calls the Series C Preferred Stock for redemption, holders may convert their shares immediately preceding the redemption date.

2020 Purchase Contracts

The 2020 Purchase Contracts obligate the holders to purchase, on May 15, 2020, for a price of $100 in cash, a maximum number of 5.4 million shares of the Company’s common stock (subject to customary anti-dilution adjustments). The 2020 Purchase Contract holders may elect to settle their obligation early, in cash. The Series C Preferred Stock is pledged as collateral to guarantee the holders’ obligations to purchase common stock under the terms of the 2020 Purchase Contracts. The initial settlement rate determining the number of shares that each holder must purchase will not exceed the maximum settlement rate, and is determined over a market value averaging period immediately preceding May 15, 2020.

The initial maximum settlement rate of 0.7241 was calculated using an initial reference price of $138.10, equal to the last reported sale price of the Company's common stock on May 11, 2017. As of September 29, 2018, due to the customary anti-dilution provisions, the maximum settlement rate was 0.7255, equivalent to a reference price of $137.84. If the applicable market value of the Company's common stock is less than or equal to the reference price, the settlement rate will be the maximum settlement rate; and if the applicable market value of common stock is greater than the reference price, the settlement rate will be a number of shares of the Company's common stock equal to $100 divided by the applicable market value. Upon settlement of the 2020 Purchase Contracts, the Company will receive additional cash proceeds of $750 million.

The Company will make quarterly payments ("Contracts Adjustment Payments") to the holders of the 2020 Purchase Contracts at a rate of 5.375% per annum, payable quarterly in arrears on February 15, May 15, August 15 and November 15, commencing August 15, 2017. The $117.1 million present value of the Contract Adjustment Payments reduced Shareowners’ Equity at inception. As each quarterly Contract Adjustment Payment is made, the related liability is reduced and the difference between the cash payments and the present value will accrete to interest expense, approximately $1.3 million per year over the three-year term. As of September 29, 2018, the present value of the Contract Adjustment Payments was $68.5 million.

The holders can settle the purchase contracts early, for cash, subject to certain exceptions and conditions in the prospectus supplement. Upon early settlement of any purchase contracts, the Company will deliver the number of shares of its common stock equal to 85% of the number of shares of common stock that would have otherwise been deliverable.

2017 Capped Call Transactions

In order to offset the potential economic dilution associated with the common shares issuable upon conversion of the Series C Preferred Stock, to the extent that the conversion value of the convertible preferred stock exceeds its liquidation preference, the Company entered into capped call transactions with three major financial institutions.


25


The capped call transactions have a term of approximately three years and are intended to cover the number of shares issuable upon conversion of the Series C Preferred Stock. Subject to customary anti-dilution adjustments, the capped call had an initial lower strike price of $162.27, which corresponds to the minimum 6.1627 settlement rate of the Series C Preferred Stock, and an upper strike price of $179.53, which is approximately 30% higher than the closing price of the Company's common stock on May 11, 2017. As of September 29, 2018, due to the customary anti-dilution provisions, the capped call transactions had an adjusted lower strike price of $161.96 and an adjusted upper strike price of $179.19.

The capped call transactions may be settled by net share settlement (the default settlement method) or, at the Company’s option and subject to certain conditions, cash settlement, physical settlement or modified physical settlement. The number of shares the Company will receive will be determined by the terms of the contracts using a volume-weighted-average price calculation for the market value of the Company's common stock, over an averaging period. The market value determined will then be measured against the applicable strike price of the capped call transactions. The Company expects the capped call transactions to offset the potential dilution upon conversion of the Series C Preferred Stock if the calculated market value is greater than the lower strike price but less than or equal to the upper strike price of the capped call transactions. Should the calculated market value exceed the upper strike price of the capped call transactions, the dilution mitigation will be limited based on such capped value as determined under the terms of the contracts.

With respect to the impact on the Company, the 2017 capped call transactions and $750 million Equity Units, when taken together, result in the economic equivalent of having the conversion price on $750 million Equity Units at $179.19, the upper strike of the capped call as of September 29, 2018.

In May 2017, the Company paid $25.1 million, or an average of $5.43 per option, to enter into capped call transactions on 4.6 million shares of common stock. The $25.1 million premium paid was a reduction of Shareowners’ Equity. The aggregate fair value of the options at September 29, 2018 was $24.4 million.

K.    ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables summarize the changes in the balances for each component of Accumulated other comprehensive loss:
(Millions of Dollars)
 
Currency translation adjustment and other1
 
Unrealized gains (losses) on cash flow hedges, net of tax
 
Unrealized gains (losses) on net investment hedges, net of tax
 
Pension gains (losses), net of tax
 
Total
Balance - December 30, 2017
 
$
(1,108.2
)
 
$
(112.6
)
 
$
3.4

 
$
(371.7
)
 
$
(1,589.1
)
Other comprehensive (loss) income before reclassifications
 
(286.7
)
 
52.2

 
50.5

 
6.5

 
(177.5
)
Reclassification adjustments to earnings
 

 
15.8

 
(8.8
)
 
8.4

 
15.4

Net other comprehensive (loss) income
 
(286.7
)
 
68.0

 
41.7

 
14.9

 
(162.1
)
Balance - September 29, 2018
 
$
(1,394.9
)
 
$
(44.6
)
 
$
45.1

 
$
(356.8
)
 
$
(1,751.2
)
1Certain prior year amounts have been recast as a result of the adoption of the new revenue standard. Refer to Note B, New Accounting Standards, for further discussion.

(Millions of Dollars)
 
Currency translation adjustment and other1
 
Unrealized gains (losses) on cash flow hedges, net of tax
 
Unrealized gains (losses) on net investment hedges, net of tax
 
Pension gains (losses), net of tax
 
Total
Balance - December 31, 2016
 
$
(1,586.7
)
 
$
(46.3
)
 
$
88.6

 
$
(377.2
)
 
$
(1,921.6
)
Other comprehensive income (loss) before reclassifications
 
449.7

 
(69.4
)
 
(85.3
)
 
(19.0
)
 
276.0

Adjustments related to sales of businesses
 
4.7

 

 

 
2.6

 
7.3

Reclassification adjustments to earnings
 

 
(1.4
)