CAPITAL STOCK

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 fiscal years ended December 29, 2012, December 31, 2011, and January 1, 2011.

Earnings per Share Computation



	2012		2011		2010
Numerator (in millions):
Net earnings from continuing operations attributable to common shareowners	$	449.5	$	598.4	$	150.6
Net earnings from discontinued operations	434.3		76.2		47.6
Net earnings attributable to common shareowners	$	883.8	$	674.6	$	198.2
Less: Earnings attributable to participating restricted stock units (“RSU’s”)	1.2		1.4		0.5
Net Earnings — basic	$	882.6	$	673.2	$	197.7
Net Earnings — diluted	$	883.8	$	674.6	$	198.2



	2012	2011	2010
Denominator (in thousands):
Basic earnings per share –– weighted-average shares	163,067	165,832	147,224
Dilutive effect of stock options and awards	3,634	4,273	2,943
Diluted earnings per share –– weighted-average shares	166,701	170,105	150,167



	2012		2011		2010
Earnings per share of common stock:
Basic earnings per share of common stock:
Continuing operations	$	2.75	$	3.60	$	1.02
Discontinued operations	2.66		0.46		0.32
Total basic earnings per share of common stock	$	5.41	$	4.06	$	1.34
Diluted earnings per share of common stock:
Continuing operations	$	2.70	$	3.52	$	1.00
Discontinued operations	2.61		0.45		0.32
Total dilutive earnings per share of common stock	$	5.30	$	3.97	$	1.32

The following weighted-average stock options and warrants were not included in the computation of diluted shares outstanding because the effect would be anti-dilutive (in thousands):



	2012	2011	2010
Number of stock options	1,825	2,379	2,760
Number of stock warrants	3,419	4,939	4,939
Number of shares related to May 2010 equity purchase contracts	—	—	2,210
Number of shares related to the convertible preferred units	—	8,458	1,054

During August and September 2012, 4,938,624 stock warrants expired which were associated with the $320.0 million convertible notes that matured in May 2012. No shares were issued upon their expiration as the warrants were out of the money.

As of December 31, 2011 and January 1, 2011, there were no shares related to the Convertible Preferred Units included in the calculation of diluted earnings per share because the effect of the conversion option was not dilutive. These Convertible Preferred Units, as well as the equity purchase contracts and convertible note hedge, are discussed more fully in Note H, Long-Term Debt and Financing Arrangements.

COMMON STOCK SHARE ACTIVITY — Common stock share activity for 2012, 2011 and 2010 was as follows:



	2012		2011		2010
Outstanding, beginning of year	169,046,961		166,347,430		80,478,624
Shares issued as part of the merger	—		—		78,497,261
Shares issued from Equity Units Offering	—		—		5,180,776
Shares issued, other	814,693		—		—
Issued from treasury	3,344,163		2,864,564		2,298,603
Returned to treasury	(13,253,790	)	(165,033	)	(107,834	)
Outstanding, end of year	159,952,027		169,046,961		166,347,430
Shares subject to the forward share purchase contract	(5,581,400	)	(5,581,400	)	—
Outstanding, less shares subject to the forward share purchase contract	154,370,627		163,465,561		166,347,430

In December 2012, upon executing an accelerated share repurchase contract, the Company received 9,345,794 shares. For further detail on this transaction, see "Other Equity Arrangements" below. Additionally, the Company repurchased approximately three million shares of common stock during the second quarter of 2012.

In 2011 the Company entered into a forward share purchase contract on its common stock. This contract obligates the Company to pay $350.0 million, plus an additional amount related to the forward component of the contract, to the financial institution counterparty not later than August 2013, or earlier at the Company’s option, for the 5,581,400 shares purchased. The Company elected to prepay the forward share purchase contract for $362.7 million during January 2013. The reduction of common shares outstanding was recorded at the inception of the forward share purchase contract and factored into the calculation of weighted average shares outstanding.

COMMON STOCK RESERVED — Common stock shares reserved for issuance under various employee and director stock plans at December 29, 2012 and December 31, 2011 are as follows:



	2012	2011
Employee stock purchase plan	2,586,768	2,808,891
Other stock-based compensation plans	505,851	2,643,113
Total shares reserved	3,092,619	5,452,004

PREFERRED STOCK PURCHASE RIGHTS — Each outstanding share of common stock has a 1 share purchase right. Each purchase right may be exercised to purchase one two-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $220.00, subject to adjustment. The rights, which do not have voting rights, expire on March 10, 2016, and may be redeemed by the Company at a price of $0.01 per right at any time prior to the tenth day following the public announcement that a person has acquired beneficial ownership of 15% or more of the outstanding shares of common stock. In the event that the Company is acquired in a merger or other business combination transaction, provision shall be made so that each holder of a right (other than a holder who is a 14.9%-or-more shareowner) shall have the right to receive, upon exercise thereof, that number of shares of common stock of the surviving Company having a market value equal to two times the exercise price of the right. Similarly, if anyone becomes the beneficial owner of more than 15% of the then outstanding shares of common stock (except pursuant to an offer for all outstanding shares of common stock which the independent directors have deemed to be fair and in the best interest of the Company), provision will be made so that each holder of a right (other than a holder who is a 14.9%-or-more shareowner) shall thereafter have the right to receive, upon exercise thereof, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a market value equal to two times the exercise price of the right. At December 29, 2012, there were 154.370627 outstanding rights.

STOCK-BASED COMPENSATION PLANS — The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock units, and other stock-based awards.

The plans are generally administered by the Compensation and Organization Committee of the Board of Directors, consisting of non-employee directors.

Stock Option Valuation Assumptions: Stock options are granted at the fair market value of the Company’s stock on the date of grant and have a 10-year term. Generally, stock option grants vest ratably over 4 years from the date of grant.

The following describes how certain assumptions affecting the estimated fair value of stock options are determined: the dividend yield is computed as the annualized dividend rate at the date of grant divided by the strike price of the stock option; expected volatility is based on an average of the market implied volatility and historical volatility for the 5.25 year expected life; the risk-free interest rate is based on U.S. Treasury securities with maturities equal to the expected life of the option; and a seven percent forfeiture rate is assumed. The Company uses historical data in order to estimate forfeitures and holding period behavior for valuation purposes.

The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used to value grants made in 2012, 2011 and 2010. The 2010 weighted average assumptions include one million options that were granted as part of the Merger.



	2012			2011			2010
Average expected volatility	35.6		%	38.4		%	31.4		%
Dividend yield	2.8		%	2.5		%	2.2		%
Risk-free interest rate	0.8		%	1.1		%	2.7		%
Expected term	5.5 years			5.5 years			6.3 years
Fair value per option	$	17.47		$	18.29		$	16.68
Weighted average vesting period	2.3 years			2.7 years			3.0 years

As part of the Merger, the Company exchanged the pre-merger stock options of Black & Decker for 5.8 million Stanley Black & Decker stock options. The following assumptions were used in the valuation of pre-merger Black & Decker stock options:



	2010
Average expected volatility	32.0		%
Dividend yield	0.7		%
Risk-free interest rate	1.4		%
Expected term	2.9 years
Fair value per option	$	18.72

All options had fully vested as of the Merger date. The fair value of the 5.8 million options exchanged as part of the merger was $105.8 million, with $91.7 million recorded as consideration paid and $14.1 million recognized as future compensation cost. Under ASC 805, the fair value of vested options and the earned portion of unvested options are recognized as consideration paid. The remaining value relating to the unvested and unearned options are recognized as future stock based compensation.

Stock Options:

The number of stock options and weighted-average exercise prices are as follows:



	2012				2011				2010
	Options		Price		Options		Price		Options		Price
Outstanding, beginning of year	10,444,660		$	52.47	11,641,564		$	48.69	5,839,417		$	39.75
Granted	1,106,075		70.66		1,150,577		65.05		2,055,942		60.69
Options assumed from merger	—		—		—		—		5,843,623		44.41
Exercised	(2,258,598	)	43.07		(2,166,269	)	40.34		(1,720,507	)	34.81
Forfeited	(235,644	)	68.48		(181,212	)	52.19		(376,911	)	54.95
Outstanding, end of year	9,056,493		$	56.90	10,444,660		$	52.47	11,641,564		$	48.69
Exercisable, end of year	5,515,617		$	52.97	6,853,838		$	49.74	8,100,566		$	46.70

At December 29, 2012, the range of exercise prices on outstanding stock options was $15.06 to $75.20. Stock option expense was $26.6 million, $21.5 million, and $17.5 million for the years ended December 29, 2012, December 31, 2011 and January 1, 2011, respectively. At December 29, 2012, the Company had $31.6 million of unrecognized pre-tax compensation expense for stock options. This expense will be recognized over the remaining vesting periods which are 2.9 years on a weighted average basis.

During 2012, the Company received $97.3 million in cash from the exercise of stock options. The related tax benefit from the exercise of these options is $17.7 million. During 2012, 2011 and 2010, the total intrinsic value of options exercised was $69.1 million, $68.7 million and $46.5 million, respectively. When options are exercised, the related shares are issued from treasury stock.

ASC 718, “Compensation — Stock Compensation,” requires the benefit arising from tax deductions in excess of recognized compensation cost to be classified as a financing cash flow. To quantify the recognized compensation cost on which the excess tax benefit is computed, both actual compensation expense recorded and pro-forma compensation cost reported in disclosures are considered. An excess tax benefit is generated on the extent to which the actual gain, or spread, an optionee receives upon exercise of an option exceeds the fair value determined at the grant date; that excess spread over the fair value of the option times the applicable tax rate represents the excess tax benefit. In 2012, 2011 and 2010, the Company reported $15.1 million, $14.1 million and $10.8 million, respectively, of excess tax benefits as a financing cash flow within the proceeds from issuance of common stock caption.

Outstanding and exercisable stock option information at December 29, 2012 follows:



	Outstanding Stock Options				Exercisable Stock Options
Exercise Price Ranges	Options	Weighted- average Remaining Contractual Life	Weighted- average Exercise Price		Options	Weighted- average Remaining Contractual Life	Weighted- average Exercise Price
$35.00 and below	1,356,621	3.97	$	31.39	1,261,445	3.80	$	31.49
$35.01 — 50.00	1,167,090	3.65	46.41		1,055,715	3.34	46.18
$50.01 — higher	6,532,782	6.41	64.07		3,198,457	4.14	63.68
	9,056,493	5.69	$	56.90	5,515,617	1.55	$	52.97

Compensation cost for new grants is recognized on a straight-line basis over the vesting period. The expense for retirement eligible employees (those aged 55 and over and with 10 or more years of service) is recognized by the date they became retirement eligible, as such employees may retain their options for the 10 year contractual term in the event they retire prior to the end of the vesting period stipulated in the grant.

Employee Stock Purchase Plan: The Employee Stock Purchase Plan (“ESPP”) enables eligible employees in the United States and Canada to subscribe at any time to purchase shares of common stock on a monthly basis at the lower of 85.0% of the fair market value of the shares on the grant date ($48.94 per share for fiscal year 2012 purchases) or 85.0% of the fair market value of the shares on the last business day of each month. A maximum of 6,000,000 shares are authorized for subscription. During 2012, 2011 and 2010 shares totaling 222,123 shares, 147,776 shares and 143,624 shares respectively, were issued under the plan at average prices of $49.15, $49.63, and $37.53 per share, respectively and the intrinsic value of the ESPP purchases was $4.7 million, $2.6 million and $3.1 million, respectively. For 2012, the Company received $10.9 million in cash from ESPP purchases, and there is no related tax benefit. The fair value of ESPP shares was estimated using the Black-Scholes option pricing model. ESPP compensation cost is recognized ratably over the one-year term based on actual employee stock purchases under the plan. The fair value of the employees’ purchase rights under the ESPP was estimated using the following assumptions for 2012, 2011 and 2010, respectively: dividend yield of 2.4%, 2.1% and 2.5%; expected volatility of 34.0%, 30.0% and 38.0%; risk-free interest rates of 0.1%, 0.2% and 0.1%; and expected lives of one year. The weighted average fair value of those purchase rights granted in 2012, 2011 and 2010 was $25.2, $21.0 and $20.8, respectively. Total compensation expense recognized for ESPP amounted to $5.5 million, $2.6 million and $3.4 million for 2012, 2011 and 2010, respectively.

Restricted Share Units and Awards: Compensation cost for restricted share units and awards, including restricted shares granted to French employees in lieu of RSU’s, (collectively “RSU’s”) granted to employees is recognized ratably over the vesting term, which varies but is generally 4 years. RSU grants totaled 445,958 shares, 413,330 shares and 1,532,107 shares in 2012, 2011 and 2010, respectively. The weighted-average grant date fair value of RSU’s granted in 2012, 2011 and 2010 was $70.30, $65.20 and $59.32 per share, respectively. Additionally, the Company assumed 0.4 million restricted stock units and awards as part of the Merger in March of 2010. These restricted stock units and awards had a fair value of $57.86 per share or $25.0 million in total, with $12.2 million recorded as consideration paid and $12.8 million recognized as future compensation cost.

Total compensation expense recognized for RSU’s amounted to $34.8 million, $33.1 million and $52.7 million, in 2012, 2011 and 2010 respectively. The actual tax benefit received in the period the shares were delivered was $3.7 million, $3.8 million and $0.3 million in 2012, 2011 and 2010, respectively. As of December 29, 2012, unrecognized compensation expense for RSU’s amounted to $52.9 million and this cost will be recognized over a weighted-average period of 4.1 years.

A summary of non-vested restricted stock unit and award activity as of December 29, 2012, and changes during the twelve month period then ended is as follows:



	Restricted Share Units & Awards		Weighted Average Grant Date Fair Value
Non-vested at January 1, 2012	2,373,108		$	57.52
Granted	445,958		70.30
Vested	(523,902	)	72.20
Forfeited	(68,226	)	71.66
Non-vested at December 29, 2012	2,226,938		$	61.73

The total fair value of shares vested (market value on the date vested) during 2012, 2011 and 2010 was $37.8 million, $32.8 million and $14.9 million, respectively.

Non-employee members of the Board of Directors received restricted share-based grants which must be cash settled and accordingly mark-to-market accounting is applied. Additionally, the Board of Directors were granted restricted share units for which compensation expense of $1.1 million was recognized for 2012 and 2011, and $0.9 million was recognized for 2010.

Long-Term Performance Awards: The Company has granted Long Term Performance Awards (“LTIPs”) under its 1997, 2001 and 2009 Long Term Incentive Plans to senior management employees for achieving Company performance measures. Awards are payable in shares of common stock, which may be restricted if the employee has not achieved certain stock ownership levels, and generally no award is made if the employee terminates employment prior to the payout date.

Long-Term Performance Awards: LTIP grants were made in 2010, 2011 and 2012. Each grant has separate annual performance goals for each year within the respective three year performance period. Earnings per share and return on capital employed represent 75% of the share payout of each grant. There is a third market-based element, representing 25% of the total grant, which measures the Company’s common stock return relative to peers over the performance period. The ultimate delivery of shares will occur in 2013, 2014 and 2015 for the 2010, 2011 and 2012 grants, respectively. Total payouts are based on actual performance in relation to these goals.

Working capital incentive plan: In 2010, the Company initiated a bonus program under its 2009 Long Term Incentive Plan. The program provides executives the opportunity to receive stock in the event certain working capital turn objectives are achieved by June of 2013 and are sustained for a period of at least six months. The ultimate issuances of shares, if any, will be determined based on achievement of objectives during the performance period.

Expense recognized for the various performance-contingent grants amounted to $7.3 million in 2012, $9.2 million in 2011, and $10.1 million in 2010. With the exception of the market-based award, in the event performance goals are not met compensation cost is not recognized and any previously recognized compensation cost is reversed.

A summary of the activity pertaining to the maximum number of shares that may be issued is as follows:



	Share Units		Weighted Average Grant Date Fair Value
Non-vested at January 1, 2012	1,357,899		$	46.14
Granted	274,614		74.86
Vested	(411,329	)	30.37
Forfeited	(136,265	)	38.89
Non-vested at December 29, 2012	1,084,919		$	60.29

OTHER EQUITY ARRANGEMENTS

In December 2012, the Company entered into a forward starting accelerated share repurchase (“ASR”) contract with certain financial institutions to purchase $850 million of the Company's common stock. The Company paid 850 million to the financial institutions and received an initial delivery of 9,345,794 shares, which reduced the Company's shares outstanding at December 29, 2012. The value of the initial shares received on the date of purchase was $680 million, reflecting a $72.76 price per share which was recorded as a treasury share purchase for purposes of calculating earnings per share. In accordance with ASC 815-40, the Company recorded the remaining $170 million as a forward contract indexed to its own common stock in additional paid in capital. The total amount of shares to be ultimately delivered by the financial institutions will be determined by the average price per share paid by the financial institutions during the purchase period which ends in April 2013. The average price is calculated using the volume weighted average price ("VWAP") of the Company's stock (inclusive of a VWAP discount) during that period. In the unlikely event the Company is required to deliver value to the financial institutions at the end of the purchase period, the Company, at its option, may elect to settle in shares or cash.

In November 2012, the Company purchased from certain financial institutions over the counter “out-of-the-money” capped call options, subject to adjustments for standard anti-dilution provisions, on 10,094,144 shares of its common stock for an aggregate premium of $29.5 million, or an average of $2.92 per share. The purpose of the capped call options is to reduce share price volatility on potential future share repurchases. In accordance with ASC 815-40 the premium paid was recorded as a reduction of Shareowners’ equity. The contracts for the options provide that they may, at the Company’s election, be cash settled, physically settled, or net-share settled (the default settlement method). The capped call options have various expiration dates ranging from March 2013 through August 2013. The average lower strike price is $71.43 and the average upper strike price is $79.75, subject to customary market adjustments. The aggregate fair value of the options at December 29, 2012 was $31.1 million.

In May 2011, the Company purchased from a financial institution over the counter 3 month “in-the-money” capped call options, subject to adjustments for standard anti-dilution provisions, on 2,448,558 shares of its common stock for an aggregate premium of $19.6 million, or an average of $8.00 per option. The initial term of the capped call options was one month which was subsequently extended in an addendum to the agreement with the counterparty to a three month term. The purpose of the capped call options was to reduce share price volatility on potential future share repurchases by establishing the prices at which the Company could elect to repurchase 2,448,558 shares in the three month term. In accordance with ASC 815-40 the premium paid was recorded as a reduction of Shareowners’ equity. The contracts for this series of options generally provided that the options might, at the Company’s election, be cash settled, physically settled or net-share settled (the default settlement method). This series of options had various expiration dates within the month of August 2011. The applicable lower strike price was $70.16 and the applicable upper strike price was $80.35. The capped calls were terminated in July 2011. The Company elected to net share settle the transaction and received 3,052 shares valued at $0.2 million.

Convertible Preferred Units and Equity Option

As described more fully in Note H, Long-Term Debt and Financing Arrangements, in November 2010, the Company issued Convertible Preferred Units comprised of $632,500,000 of Notes due November 17, 2018 and Purchase Contracts. There have been no changes to the terms of the Convertible Preferred Units. The Purchase Contracts obligate the holders to purchase, on the earlier of (i) November 17, 2015 (the Purchase Contract Settlement date) or (ii) the triggered early settlement date, 6,325,000 shares, for $100.00 per share, of the Company’s 4.75% Series B Cumulative Convertible Preferred Stock (the “Convertible Preferred Stock”), resulting in cash proceeds to the Company of up to $632.5 million.

Following the issuance of Convertible Preferred Stock upon settlement of a holder’s Purchase Contracts, a holder of Convertible Preferred Stock may, at its option, at any time and from time to time, convert some or all of its outstanding shares of Convertible Preferred Stock at a conversion rate of 1.3333 shares of the Company’s common stock per share of Convertible Preferred Stock (subject to customary anti-dilution provisions), which is equivalent to an initial conversion price of approximately $75.00 per share of common stock. Assuming conversion of the 6,325,000 shares of Convertible Preferred Stock at the 1.3333 initial conversion rate a total of 8,433,123 shares of the Company’s common stock may be issued upon conversion. As of December 29, 2012, due to the customary anti-dilution provisions, the conversion rate on the Convertible Preferred Stock was 1.3475 (equivalent to a conversion price of approximately $74.21 per common share). In the event that holders elect to settle their Purchase Contracts prior to November 17, 2015, the Company will deliver a number of shares of Convertible Preferred Stock equal to 85% of the Purchase Contracts tendered, together with cash in lieu of fractional shares. Upon a conversion on or after November 15, 2017 the Company may elect to pay or deliver, as the case may be, solely shares of common stock, together with cash in lieu of fractional shares (“physical settlement”), solely cash (“cash settlement”), or a combination of cash and common stock (“combination settlement”). The Company may redeem some or all of the Convertible Preferred Stock on or after December 22, 2015 at a redemption price equal to 100% of the $100 liquidation preference per share plus accrued and unpaid dividends to the redemption date.

In November 2010, contemporaneously with the issuance of the Convertible Preferred Units described above, the Company paid $50.3 million, or an average of $5.97 per option, to enter into capped call transactions (equity options) on 8.43 million shares of common stock with certain major financial institutions. The purpose of the capped call transactions is to offset the common shares that may be deliverable upon conversion of shares of Convertible Preferred Stock. With respect to the impact

on the Company, the capped call transactions and the Convertible Preferred Stock, when taken together, result in the economic equivalent of having the conversion price on the Convertible Preferred Stock at $96.92, the upper strike price of the capped call (as of December 29, 2012). Refer to Note H, Long-Term Debt and Financing Arrangements. In accordance with ASC 815-40 the $50.3 million premium paid was recorded as a reduction to equity.

The capped call transactions cover, subject to customary anti-dilution adjustments, the number of shares of common stock equal to the number of shares of common stock underlying the maximum number of shares of Convertible Preferred Stock issuable upon settlement of the Purchase Contracts. Each of the capped call transactions has a term of approximately five years and initially had a lower strike price of $75.00, which corresponded to the initial conversion price of the Convertible Preferred Stock, and an upper strike price of $97.95, which was approximately 60% higher than the closing price of the common stock on November 1, 2010. 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 aggregate fair value of the options at December 29, 2012 was $60.9 million.