FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 27, 2020

ASC 820, Fair Value Measurement, defines, establishes a consistent framework for measuring, and expands disclosure requirements about fair value. ASC 820 requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs and significant value drivers are observable.

Level 3 — Instruments that are valued using unobservable inputs.

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. The Company holds various financial instruments to manage these risks. These financial instruments are carried at fair value and are included within the scope of ASC 820. The Company determines the fair value of these financial instruments through the use of matrix or model pricing, which utilizes observable inputs such as market interest and currency rates. When determining fair value for which Level 1 evidence does not exist, the Company considers various factors including the following: exchange or market price quotations of similar instruments, time value and volatility factors, the Company’s own credit rating and the credit rating of the counterparty.

The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis for each of the hierarchy levels:


(Millions of Dollars)	Total Carrying Value		Level 1		Level 2		Level 3
June 27, 2020
Money market fund	$	2.5	$	2.5	$	—	$	—
Derivative assets	$	21.0	$	—	$	21.0	$	—
Derivative liabilities	$	126.8	$	—	$	126.8	$	—
Non-derivative hedging instrument	$	299.7	$	—	$	299.7	$	—
Contingent consideration liabilities	$	331.3	$	—	$	—	$	331.3
December 28, 2019
Money market fund	$	1.2	$	1.2	$	—	$	—
Derivative assets	$	29.3	$	—	$	29.3	$	—
Derivative liabilities	$	65.5	$	—	$	65.5	$	—
Non-derivative hedging instrument	$	335.5	$	—	$	335.5	$	—
Contingent consideration liability	$	196.1	$	—	$	—	$	196.1

The following table provides information about the Company's financial assets and liabilities not carried at fair value:


	June 27, 2020						December 28, 2019
(Millions of Dollars)	Carrying Value		Fair Value		Carrying Value		Fair Value
Other investments	$	13.3	$	13.8	$	14.4	$	14.8
Long-term debt, including current portion	$	4,661.8	$	5,329.5	$	3,179.5	$	3,601.0

The money market fund and other investments related to the West Coast Loading Corporation ("WCLC") trust are considered Level 1 instruments within the fair value hierarchy. The long-term debt instruments are considered Level 2 instruments and are measured using a discounted cash flow analysis based on the Company’s marginal borrowing rates. The differences between the carrying values and fair values of long-term debt are attributable to the stated interest rates differing from the Company's marginal borrowing rates. The fair values of the Company's variable rate short-term borrowings approximate their carrying values at June 27, 2020 and December 28, 2019. The fair values of the derivative financial instruments in the table above are based on current settlement values.

As part of the CAM acquisition in February 2020, the Company recorded a contingent consideration liability representing the Company’s obligation to make future payments up to $200.0 million to the former option holders of CAM if the Federal Aviation Administration authorizes the Boeing 737 MAX Airplanes to return to service by June 30, 2022 and Boeing achieves certain production levels by various milestone dates no later than June 30, 2022. The estimated fair value of the contingent consideration liability was $155.3 million as of June 27, 2020 and was determined using a discounted cash flow analysis taking into consideration the expected probability and timing of achieving the milestones, and production rate forecasts.

As part of the Craftsman® brand acquisition in March 2017, the Company recorded a contingent consideration liability representing the Company's obligation to make future payments to Transform Holdco, LLC, which operates Sears and Kmart retail locations, of between 2.5% and 3.5% on sales of Craftsman products in new Stanley Black & Decker channels through March 2032. In the second quarter of 2020, the Company made its first payment totaling approximately $33.0 million relating to royalties owed for the previous twelve quarters. The Company will continue making future payments quarterly through the second quarter of 2032. The estimated fair value of the contingent consideration liability is determined using a discounted cash flow analysis taking into consideration future sales projections, forecasted payments to Transform Holdco, LLC, based on contractual royalty rates, and the related tax impacts. The estimated fair value of the contingent consideration liability was $176.0 million and $196.1 million as of June 27, 2020 and December 28, 2019, respectively. Adjustments to the contingent consideration liability, with the exception of cash payments, are recorded in SG&A in the Consolidated Statements of Operations and Comprehensive Income. A 100 basis point reduction in the discount rate would result in an increase to the liability of approximately $8.6 million as of June 27, 2020.

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 contingent consideration liabilities discussed above, including the probability and timing of future events, estimated future production rates, and estimated future sales projections, can materially impact the Company’s results from operations.

The Company had no significant non-recurring fair value measurements, nor any other financial assets or liabilities measured using Level 3 inputs, during the first six months of 2020 or 2019.Refer to Note I, Financial Instruments, for more details regarding derivative financial instruments, Note R, Contingencies, for more details regarding the other investments related to the WCLC trust, and Note H, Long-Term Debt and Financing Arrangements, for more information regarding the carrying values of the long-term debt.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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