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(Exact name of registrant as specified in its charter)
iDelaware
i39-0622040
(State
of incorporation)
(I.R.S. Employer Identification No.)
i2801 80th Street
iKenosha
iWisconsin
i53143
(Address
of principal executive offices)
(Zip code)
(i262) i656-5200
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $1.00 par value
iSNA
iNew
York Stock Exchange
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. iYes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically 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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 i☐ No ☒
Indicate
the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: iSummary
of Accounting Policies
i
Principles of consolidation and presentation
The Condensed Consolidated Financial Statements include the accounts of Snap-on Incorporated and its wholly-owned and majority-owned subsidiaries (collectively, “Snap-on” or the “company”). These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related
notes included in Snap-on’s 2018 Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (“2018 year end”). The company’s 2019 fiscal third quarter ended on September 28, 2019; the 2018 fiscal third quarter ended on September 29, 2018. Each of the company’s 2019 and 2018 fiscal first, second and third quarters contained 13 weeks of operating results. Snap-on’s Condensed Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”).
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the Condensed Consolidated Financial Statements for the three and nine month periods ended September 28, 2019, and September 29, 2018, have been made. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.
i
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
i
Financial Instruments
The fair value of the company’s derivative financial instruments is generally determined using quoted prices in active markets for similar assets and liabilities. The carrying value
of the company’s non-derivative financial instruments either approximates fair value, due to their short-term nature, or the amount disclosed for fair value is based upon a discounted cash flow analysis or quoted market values. See Note 9 for further information on financial instruments.
i
New Accounting Standards
The following new accounting pronouncements were adopted
in fiscal year 2019:
On December 30, 2018, the beginning of Snap-on’s 2019 fiscal year, Snap-on adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815) –Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also made certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The adoption of this ASU did not have a significant impact on the company’s Condensed Consolidated Financial Statements.
On December
30, 2018, the beginning of Snap-on’s 2019 fiscal year, Snap-on adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220), which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “Tax Act”). The adoption of this ASU resulted in an increase of $i45.9
million to retained earnings on the company’s Condensed Consolidated Statements of Equity with an offsetting decrease in Accumulated Other Comprehensive Income (Loss).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On
December 30, 2018, the beginning of Snap-on’s 2019 fiscal year, Snap-on adopted ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 is intended to represent an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. Topic 842, which supersedes most current lease guidance, affects any entity that enters into a lease with some specified scope exemptions. Snap-on adopted Topic 842 using the modified retrospective approach, using a date of initial application of December 30, 2018. Snap-on elected the package of practical expedients permitted under the standard, which also
allowed the company to carry forward historical lease classifications. The company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all equipment leases as well as electing a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the Right-of-Use (“ROU”) assets and lease liabilities. The adoption of this ASU did not have a significant impact on the company’s Condensed Consolidated Financial Statements. See note 15 for further information on leases.
The following new accounting pronouncements, and related impacts on adoption, are being evaluated by the
company:
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this ASU is not expected to have a significant impact on the company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General Subtopic 715-20 - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,which is designed to improve the effectiveness of disclosures by removing and adding disclosures related to defined benefit plans. ASU No. 2018-14 is effective for fiscal years ending after December 15, 2020; the ASU allows for early adoption in any year end after issuance of the update. The adoption of this ASU is not expected to have a significant impact on the company’s consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments
– Credit Losses (Topic 326), to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, is to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The adoption of Topic 326 will require the company to record an estimate
of all expected credit losses based on historical experience, current conditions, and a reasonable and supportable forecast. This guidance will replace the company's current incurred loss model, which uses current expected credit losses to estimate credit loss reserves. Topic 326 is expected to increase the company’s allowance for doubtful accounts as a result of recording reserves for expected losses, as well as extending the loss estimate period over the entire life of the receivable, in addition to losses deemed to be already incurred. Snap-on commenced its assessment of Topic 326 during the second half of 2018 and developed a comprehensive project plan that included representatives from the company’s business segments. The
project plan includes analyzing the standard’s potential change on the company’s allowance for doubtful accounts reserves, identifying reporting requirements of the new standard, and identifying changes to the company’s business processes, systems and controls, including model development and validation, to support the accounting and disclosures under Topic 326. Upon adoption, the allowance for doubtful accounts is expected to increase with an offsetting adjustment, net of taxes, to retained earnings. Updates to the estimate each period after initial adoption will be recorded through provision expense. The extent of the impact upon adoption will depend on the composition of the company’s receivable portfolio and economic
conditions at that date, as well as forecasted conditions thereafter. The credit risk of the portfolio and associated losses will not change upon adoption. The company continues to assess the impact this ASU will have on its consolidated financial statements.
Note 2: iRevenue Recognition
Snap-on
recognizes revenue from the sale of tools, diagnostic and equipment products and related services based on when control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.
Snap-on
evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for both intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.
The following table represents external net sales disaggregated by geography, based on the customers’ billing addresses:
Snap-on derives net sales from a broad line of products and complementary services that are grouped into three categories: (i) tools; (ii) diagnostics, information and management systems; and (iii) equipment. The tools product category includes Snap-on’s hand tools, power tools, tool storage products and other similar products. The diagnostics, information and management systems product category includes handheld and PC-based diagnostic products, service and repair information products, diagnostic software solutions, electronic parts catalogs, business management systems and services, point-of-sale systems, integrated systems for vehicle service shops, original equipment manufacturer (“OEM”) purchasing facilitation services, and warranty management systems and analytics to help OEM dealerships manage and track performance. The equipment product category
includes solutions for the service of vehicles and industrial equipment. Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs as well as after-sales support to its customers. Through its financial services businesses, Snap-on also derives revenue from various financing programs designed to facilitate the sales of its products and support its franchise business.
Approximately i90% of Snap-on’s net sales are products sold at a point in time through ship-and-bill
performance obligations that also includes service repair services. The remaining sales revenue is earned over time primarily on a subscription basis including software, extended warranty and other subscription service agreements.
Snap-on enters into contracts related to the selling of tools, diagnostic and repair information and equipment products and related services. At contract inception, an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified for each distinct promise to transfer to the customer a good or service (or bundle of goods
or services). To identify the performance obligations, Snap-on considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. Contracts with customers are comprised of customer purchase orders, invoices and written contracts.
For certain performance obligations related to software subscriptions, extended warranty and other subscription agreements that are settled over time, Snap-on has elected not to disclose the value of unsatisfied performance obligations for: (i) contracts
that have an original expected length of one year or less; (ii) contracts where revenue is recognized as invoiced; and (iii) contracts with variable consideration related to unsatisfied performance obligations. iThe remaining duration of these unsatisfied performance obligations range from one month up to 60 months. Snap-on had approximately $i230.0
million of long-term contracts that have fixed consideration that extends beyond one year as of September 28, 2019. Snap-on expects to recognize approximately i50% of these contracts as revenue by the end of fiscal 2020, an additional i40%
by the end of fiscal 2022 and the balance thereafter.
Contract
liabilities are recorded when cash payments are received in advance of Snap-on’s performance. The timing of payment is typically on a monthly, quarterly or annual basis. The balance of total contract liabilities at September 28, 2019, and at December 29, 2018, was $i67.2 million and $i63.8
million, respectively. The current portion of contract liabilities and the non-current portion are included in “Other accrued liabilities” and “Other long-term liabilities”, respectively, on the accompanying Condensed Consolidated Balance Sheets. During the three and nine months ended September 28, 2019, Snap-on recognized revenue of $i8.0 million and $i43.2
million, respectively, that was included in the $i63.8 million contract liability balance at December 29, 2018, which was primarily from the amortization of software subscriptions, extended warranties and other subscription agreements.
Note 3: iAcquisitions
On
August 7, 2019, Snap-on acquired Cognitran Limited ("Cognitran") for a preliminary cash purchase price of $i30.7 million (or $i29.7 million,
net of cash acquired). The preliminary purchase price is subject to change based upon finalization of a working capital adjustment that is expected to be completed in the fourth quarter of 2019. Cognitran, based in Chelmsford, United Kingdom, specializes in flexible, modular and highly scalable "Software as a Service" (SaaS) products for OEM customers and their dealers, focused on the creation and delivery of service, diagnostics, parts and repair information to OEM dealers and connected vehicle platforms.
As of September 28, 2019, the company recorded, on a preliminary basis, the $i27.7 million
excess of the purchase price over the fair value of the net assets acquired in "Goodwill" on the accompanying Condensed Consolidated Balance Sheets. The company anticipates completing the purchase accounting for the acquired net assets of Cognitran, including the potential identification and quantification of other intangible assets, in the first half of 2020.
On April 2, 2019, Snap-on acquired Power Hawk Technologies, Inc. (“Power Hawk”) for a cash purchase price of $i7.9
million. Power Hawk, based in Rockaway, New Jersey, designs, manufactures and distributes rescue tools and related equipment for a variety of military, governmental and fire, rescue and emergency operations. As of the third quarter of 2019, the company has completed the purchase accounting valuations for the acquired net assets of Power Hawk, including intangible assets. The $i6.4 million excess of the purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Condensed Consolidated
Balance Sheets.
On January 25, 2019, Snap-on acquired substantially all of the assets of TMB GeoMarketing Limited (“TMB”) for a cash purchase price of $i1.3 million. TMB, based in Dorking, United Kingdom, designs planning software used by OEMs to optimize dealer locations and manage the performance of dealer outlets. The company completed the purchase accounting valuations
for the acquired net assets of TMB during the first quarter of 2019. Substantially all of the purchase price was recorded in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets.
On January 31, 2018, Snap-on acquired substantially all of the assets of George A. Sturdevant, Inc. (d/b/a Fastorq) for a cash purchase price of $i3.0 million. Fastorq, based in New Caney, Texas, designs, assembles and distributes
hydraulic torque and hydraulic tensioning products for use in critical industries. As of the second quarter of 2018, the company completed the purchase accounting valuations for the acquired net assets of Fastorq. The $i2.6 million excess of the purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets.
For segment reporting purposes, the results of operations and assets of Cognitran and TMB
have been included in the Repair Systems and Information Group since each respective acquisition date, and the results of operations and assets of Power Hawk and Fastorq have been included in the Commercial & Industrial Group since each respective acquisition date.
Pro forma financial information has not been presented for these acquisitions as the net effects were neither significant nor material to Snap-on’s results of operations or financial position. See Note 6 for further information on goodwill and other intangible assets.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 4: iReceivables
Trade and Other Accounts Receivable
Snap-on’s trade and other accounts receivable primarily arise from the sale of tools and diagnostic and equipment products to a broad range of industrial and commercial customers and to
Snap-on’s independent franchise van channel on a non-extended-term basis with payment terms generally ranging from i30 to i120 days.
Snap-on Credit LLC (“SOC”), the company’s financial services operation in the United States, originates extended-term finance and contract receivables on sales of Snap-on’s products sold through the U.S. franchisee and customer network and to certain other customers of Snap-on; Snap-on’s foreign finance subsidiaries provide similar financing internationally. Interest income on finance and contract receivables is included in “Financial services revenue”
on the accompanying Condensed Consolidated Statements of Earnings.
Snap-on’s finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees’ customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with average payment terms of approximately ifour years. Finance receivables are generally secured by
the underlying tools and/or diagnostic or equipment products financed.
Snap-on’s contract receivables, with payment terms of up to i10 years, are comprised of extended-term installment payment contracts to a broad base of customers worldwide, including shop owners, both independents and national chains, for their purchase of tools and diagnostic and equipment products.
Contract receivables also include extended-term installment loans to franchisees to meet a number of financing needs, including working capital loans, loans to enable new franchisees to fund the purchase of the franchise and van leases, or the expansion of an existing franchise. Contract receivables are generally secured by the underlying tools and/or diagnostic or equipment products financed and, for installment loans to franchisees, other franchisee assets.
Total
long-term finance and contract receivables – net
$
i1,433.3
$
i1,419.3
/
Delinquency
is the primary indicator of credit quality for finance and contract receivables. The entire receivable balance of a contract is considered delinquent when contractual payments become i30 days past due. Depending on the contract, payments for finance and contract
receivables are due on a monthly or weekly basis. Weekly payments are converted into a monthly equivalent for purposes of calculating delinquency. Delinquencies are assessed at the end of each month following the monthly equivalent due date. Removal from delinquent status occurs when the cumulative number of monthly payments due has been received by the company.
Finance receivables are generally placed on nonaccrual status (nonaccrual of interest and other fees): (i) when a customer is placed on repossession status; (ii) upon receipt of notification of bankruptcy; (iii) upon notification of the death of a customer; or (iv) in other instances in which management concludes collectability is not reasonably assured. Finance receivables that are considered nonperforming include receivables that are on nonaccrual status and receivables that are
generally more than i90 days past due.
Contract receivables are generally placed on nonaccrual status: (i) when a receivable is more than i90
days past due or at the point a customer’s account is placed on terminated status regardless of its delinquency status; (ii) upon notification of the death of a customer; or (iii) in other instances in which management concludes collectability is not reasonably assured. Contract receivables that are considered nonperforming include receivables that are on nonaccrual status and receivables that are generally more than 90 days past due.
The accrual of interest and other fees is resumed when the finance or contract receivable becomes contractually current and collection of all remaining contractual amounts due is reasonably assured. Finance and contract receivables
are evaluated for impairment on a collective basis. A receivable is impaired when it is probable that all amounts related to the receivable will not be collected according to the contractual terms of the applicable agreement. Impaired finance and contract receivables are covered by the company’s respective allowances for doubtful accounts and are charged-off against the allowances when appropriate. As of September 28, 2019, and December 29, 2018, there were $i28.2
million and $i27.9 million, respectively, of impaired finance receivables, and there were $i2.9 million and $i6.0
million, respectively, of impaired contract receivables.
It is the general practice of Snap-on’s financial services business to not engage in contract or loan modifications. In limited instances, Snap-on’s financial services business may modify certain impaired receivables in troubled debt restructurings. The amount and number of restructured finance and contract receivables as of September 28, 2019, and December 29, 2018, were immaterial to both the financial services portfolio and the
company’s results of operations and financial position.
The
following is a rollforward of the allowances for doubtful accounts for finance and contract receivables for the three and nine months ended September 28, 2019, and September 29, 2018:
Inventories
accounted for using the first-in, first-out (“FIFO”) method approximated i58% and i61% of total inventories as of September 28, 2019, and December
29, 2018, respectively. The company accounts for its non-U.S. inventory on the FIFO method. As of September 28, 2019, approximately i32% of the company’s U.S. inventory was accounted for using the FIFO method and i68%
was accounted for using the last-in, first-out (“LIFO”) method. There were iiiino///
LIFO inventory liquidations in the three and nine months ended September 28, 2019, or September 29, 2018.
Note 6: iGoodwill and Other Intangible Assets
i
The
changes in the carrying amount of goodwill by segment for the nine months ended September 28, 2019, are as follows:
Goodwill
of $i920.1 million as of September 28, 2019, includes $i27.7 million, on a preliminary basis, from the acquisition of Cognitran, $i6.4
million from the acquisition of Power Hawk, which reflects the final purchase accounting that was completed in the third quarter of 2019, and $i1.3 million from the acquisition of TMB. The goodwill from Power Hawk is included in the Commercial & Industrial Group and the goodwill from Cognitran and TMB is included in the Repair Systems and Information Group. The company anticipates completing the purchase accounting for the Cognitran acquisition, including the potential identification and quantification of other intangible assets,
in the first half of 2020. See Note 3 for additional information on acquisitions.
As
of September 28, 2019, the $i171.3 million gross carrying value of customer relationships includes $i0.9
million related to the Power Hawk acquisition.
Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2019; the evaluation of the testing did not result in any impairment. Significant and unanticipated changes in circumstances, such as declines in profitability and cash flow due to significant and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including effects from the sale or disposal of a reporting unit, could require a provision for impairment of goodwill and/or other intangible assets in a future period. As of September 28, 2019, the
company had ino accumulated impairment losses.
i
The weighted-average amortization
periods related to other intangible assets are as follows:
In Years
Customer relationships
i15
Developed technology
i3
Internally
developed software
i6
Patents
i7
Trademarks
i5
Other
i39
/
Snap-on
is amortizing its customer relationships on both an accelerated and straight-line basis over a i15-year weighted-average life; the remaining intangibles are amortized on a straight-line basis. The weighted-average amortization period for all amortizable intangibles on a combined basis is i12
years.
The company’s customer relationships generally have contractual terms of three to ifive years and are typically renewed without significant cost to the company. The weighted-average 15-year life for customer relationships is based on the company’s historical renewal experience. Intangible
asset renewal costs are expensed as incurred.
The aggregate amortization expense was $i5.5 million and $i16.3
million for the respective three and nine months ended September 28, 2019, and $i6.2 million and $i19.2
million for the respective three and nine months ended September 29, 2018. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated annual amortization expense is expected to be $i21.6 million in 2019, $i19.2
million in 2020, $i17.1 million in 2021, $i14.0
million in 2022, $i12.4 million in 2023, and $i10.2
million in 2024.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 7: iIncome
Taxes
Snap-on’s effective income tax rate on earnings attributable to Snap-on was i23.8% and i24.6% in the first nine months of 2019 and 2018, respectively. During
the first nine months of 2018, the Internal Revenue Service issued new guidance affecting the computation of the company’s 2017 federal income tax liability. As a result of this new guidance and additional analysis of the impacts of the Tax Act, the company revised its prior estimates and recorded $i1.8
million and $i3.9 million of net tax expense during the three and nine months ended September 29, 2018. The additional $i3.9
million tax provision during the first nine months of 2018 increased the company’s effective tax rate for the period by i50 basis points.
Snap-on and its subsidiaries file income tax returns in the United States and in various
state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of izero to $i2.5
million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of izero to $i0.9
million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.
Includes
the net effects of debt amortization costs and fair value adjustments of interest rate swaps.
/
Notes payable of $i232.3 million as of September 28, 2019, included $i218.8
million of commercial paper borrowings and $i13.5 million of other notes. As of 2018 year end, notes payable of $i186.3 million included $i177.1
million of commercial paper borrowings and $i9.2 million of other notes.
On February 20, 2018, Snap-on commenced a tender offer to repurchase $i200
million in principal amount of its unsecured i6.70% notes that were scheduled to mature on March 1, 2019 (the “2019 Notes”), with $i26.1 million
of the 2019 Notes tendered and repaid on February 27, 2018. On February 20, 2018, Snap-on also issued a notice of redemption for any remaining outstanding 2019 Notes not tendered, with the redemption completed on March 22, 2018. The total cash cost for this tender and redemption was $i209.1 million, including accrued interest of $i1.5
million. Snap-on recorded $i7.8 million for the loss on the early extinguishment of debt related to the 2019 Notes, which included the redemption premium and other issuance costs associated with this debt in “Other income (expense) - net” on the accompanying Condensed Consolidated Statement of Earnings. See Note 16 for additional information on Other income (expense) - net.
On February 20, 2018, Snap-on sold, at a discount, $i400
million of unsecured i4.10% long-term notes that mature on March 1, 2048 (the “2048 Notes”). Interest on the 2048 Notes accrues at a rate of i4.10% per year
and is paid semi-annually. Snap-on used a portion of the $i395.4 million of net proceeds from the sale of the 2048 Notes, reflecting $i3.5 million of transaction costs, to repay the 2019 Notes. The remaining net proceeds
were used to repay a portion of its then-outstanding commercial paper borrowings and for general corporate purposes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On September 16, 2019, Snap-on entered into a five-year, $i800
million multi-currency revolving credit facility that terminates on September 16, 2024 (the “Credit Facility”); ino amounts were outstanding under the Credit Facility as of September 28, 2019. The Credit Facility amended and restated in its entirety Snap-on's previous $i700
million multi-currency revolving credit facility that was set to terminate on December 15, 2020. Borrowings under the Credit Facility bear interest at varying rates based on either: (i) Snap-on’s then-current, long-term debt ratings; or (ii) Snap-on’s then-current ratio of consolidated debt net of certain cash adjustments (“Consolidated Net Debt”) to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the “Consolidated Net Debt to EBITDA Ratio”). The Credit Facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio not greater than i0.60
to 1.00 of Consolidated Net Debt to the sum of Consolidated Net Debt plus total equity and less accumulated other comprehensive income or loss (the “Leverage Ratio”); or (ii) a Consolidated Net Debt to EBITDA Ratio not greater than i3.50 to 1.00. Snap-on may, up to itwo
times during any five-year period during the term of the Credit Facility (including any extensions thereof), elect to increase the maximum Leverage Ratio to i0.65 to 1.00 and/or increase the maximum Consolidated Net Debt to EBITDA Ratio to i4.00
to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of September 28, 2019, the company’s actual ratios of i0.21 and i0.96
respectively, were both within the permitted ranges set forth in this financial covenant. Snap-on generally issues commercial paper to fund its financing needs on a short-term basis and uses the Credit Facility as back-up liquidity to support such commercial paper issuances.
Note 9: iFinancial Instruments
Derivatives: All derivative instruments are reported in the Condensed Consolidated Financial
Statements at fair value. Changes in the fair value of derivatives are recorded each period in earnings or on the accompanying Condensed Consolidated Balance Sheets, depending on whether the derivative is designated as part of a hedged transaction. Gains or losses on derivative instruments recorded in earnings are presented in the same Condensed Consolidated Statement of Earnings line that is used to present the earnings effect of the hedged item. Gains or losses on derivative instruments in accumulated other comprehensive income (loss) (“Accumulated OCI”) are reclassified to earnings in the period in which earnings are affected by the underlying hedged item.
The criteria used to determine if hedge accounting treatment is appropriate are: (i) the designation of the hedge to an underlying exposure; (ii) whether or not overall risk is being reduced; and (iii) if there is a correlation between the value of the derivative
instrument and the underlying hedged item. Once a derivative contract is entered into, Snap-on designates the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a natural hedging instrument whose change in fair value is recognized as an economic hedge against changes in the value of the hedged item. Snap-on does not use derivative instruments for speculative or trading purposes.
The company is exposed to global market risks, including the effects of changes in foreign currency exchange rates, interest rates, and the company’s stock price, and therefore uses derivatives to manage financial exposures that occur in the
normal course of business. The primary risks managed by using derivative instruments are foreign currency risk, interest rate risk and stock-based deferred compensation risk.
Foreign Currency Risk Management: Snap-on has significant international operations and is subject to certain risks inherent with foreign operations that include currency fluctuations. Foreign currency exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency, including intercompany loans denominated in foreign currencies. To manage these exposures, Snap-on identifies naturally offsetting positions and then purchases hedging instruments to protect the residual net exposures. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets. Foreign currency forward
contracts (“foreign currency forwards”) are used to hedge the net exposures. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. Snap-on’s foreign currency forwards are typically not designated as hedges. The fair value changes of these contracts are reported in earnings as foreign exchange gain or loss, which is included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings.
Interest Rate Risk Management: Snap-on aims to control funding costs by managing the exposure created by the differing maturities
and interest rate structures of Snap-on’s borrowings through the use of interest rate swap agreements (“interest rate swaps”) and treasury lock agreements (“treasury locks”).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Interest Rate Swaps: Snap-on enters into interest rate swaps to manage risks associated with changing interest rates related to the
company’s fixed rate borrowings. Interest rate swaps are accounted for as fair value hedges. The differentials paid or received on interest rate swaps are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The change in fair value of the designated and qualifying derivative is recorded in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets. The notional amount of interest rate swaps outstanding and designated as fair value hedges was $ii100/
million as of both September 28, 2019, and December 29, 2018.
Treasury locks: Snap-on uses treasury locks to manage the potential change in interest rates in anticipation of the issuance of fixed rate debt. Treasury locks are accounted for as cash flow hedges. The differentials to be paid or received on treasury locks related to the anticipated issuance of fixed rate debt are initially recorded in Accumulated OCI for derivative instruments that are designated and qualify as cash flow hedges. Upon the issuance of debt, the related amount in Accumulated OCI is released over the term of the debt and recognized as an adjustment to interest expense on the Condensed Consolidated Statements of Earnings.
Snap-on entered into a $i300
million treasury lock in the fourth quarter of 2017 to manage changes in interest rates in anticipation of the issuance of fixed rate debt in the first quarter of 2018. In the first quarter of 2018, Snap-on settled the outstanding $i300 million treasury lock after it was deemed to be an ineffective hedge related to the 2048 Notes, which were issued in February 2018. The $i13.3
million gain on the settlement of the treasury lock was recorded in “Other income (expense) - net” on the accompanying Condensed Consolidated Statements of Earnings. There were iino/
treasury locks outstanding as of both September 28, 2019, and December 29, 2018. See Note 16 for additional information on Other income (expense) - net.
Stock-based Deferred Compensation Risk Management: Snap-on aims to manage market risk associated with the stock-based portion of its deferred compensation plans through the use of prepaid equity forward agreements (“equity forwards”). Equity forwards are used to aid in offsetting the potential mark-to-market effect on stock-based deferred compensation from changes in Snap-on’s stock price. Since stock-based deferred compensation liabilities increase as the company’s stock price rises and decrease as the
company’s stock price declines, the equity forwards are intended to mitigate the potential impact on deferred compensation expense that may result from such mark-to-market changes. As of September 28, 2019, Snap-on had equity forwards in place intended to manage market risk with respect to i108,000 shares of Snap-on common stock associated with its deferred compensation plans.
Counterparty
Risk: Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its various financial agreements, including its foreign currency forward contracts, interest rate swap agreements, treasury lock agreements and prepaid equity forward agreements. Snap-on does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of the counterparties and generally enters into agreements with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its counterparties, but cannot provide assurances.
i
Fair
Value of Financial Instruments: The fair values of financial instruments that do not approximate the carrying values in the financial statements are as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following methods and assumptions were used in estimating the fair value of financial instruments:
•Finance and contract receivables include both short-term and long-term receivables. The fair value estimates of finance and contract receivables are derived utilizing discounted cash flow analyses performed on groupings of receivables that are similar in terms
of loan type and characteristics. The cash flow analyses consider recent prepayment trends where applicable. The cash flows are discounted over the average life of the receivables using a current market discount rate of a similar term adjusted for credit quality. Significant inputs to the fair value measurements of the receivables are unobservable and, as such, are classified as Level 3.
•Fair value of long-term debt was estimated, using Level 2 fair value measurements, based on quoted market values of Snap-on’s publicly traded senior debt. The carrying value of long-term debt includes adjustments related to fair value hedges. The fair value of notes payable approximates such instruments’ carrying value due to their short-term nature.
•The fair value of all
other financial instruments, including trade and other accounts receivable, accounts payable and other financial instruments, approximates such instruments’ carrying value due to their short-term nature.
Note 10: iPension Plans
i
Snap-on’s
net periodic pension cost included the following components:
The
components of net periodic pension cost, other than the service cost component, are included in “Other income (expense) - net” on the accompanying Condensed Consolidated Statements of Earnings. See Note 16 for additional information on other income (expense) - net.
Snap-on intends to make contributions of $i9.4 million to its foreign pension plans and $i2.0
million to its domestic pension plans in 2019, as required by law. In the first nine months of 2019, Snap-on made $i40.0 million of discretionary cash contributions to its domestic pension plans. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in the remainder of 2019.
Note 11: iPostretirement
Health Care Plans
i
Snap-on’s net periodic postretirement health care cost included the following components:
The
components of net periodic postretirement health care cost, other than the service cost component, are included in “Other income (expense) - net” on the accompanying Condensed Consolidated Statements of Earnings. See Note 16 for additional information on other income (expense) - net.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 12: iStock-based
Compensation and Other Stock Plans
The 2011 Incentive Stock and Awards Plan (the “2011 Plan”) provides for the grant of stock options, performance awards, stock appreciation rights (“SARs”) and restricted stock awards (which may be designated as “restricted stock units” or “RSUs”). No further grants are being made under its predecessor, the 2001 Incentive Stock and Awards Plan (the “2001 Plan”), although outstanding awards under the 2001 Plan will continue in accordance with their terms. As of September 28, 2019, the 2011 Plan had i2,007,654
shares available for future grants. The company uses treasury stock to deliver shares under both the 2001 and 2011 Plans.
Net stock-based compensation expense was $i4.6 million and $i18.7
million for the respective three and nine months ended September 28, 2019, and $i8.0 million and $i22.6 million for the respective
three and nine months ended September 29, 2018. Cash received from stock purchase and option plan exercises during the respective three and nine months ended September 28, 2019, totaled $i1.6 million and $i26.2
million. Cash received from stock purchase and option plan exercises during the respective three and nine months ended September 29, 2018, totaled $i25.8 million and $i54.1
million. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $i1.0 million and $i5.6
million for the respective three and nine months ended September 28, 2019, and $i4.5 million and $i12.1
million for the respective three and nine months ended September 29, 2018.
Stock Options
Stock options are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant and have a contractual term of iten years.
Stock option grants vest ratably on the first, second and third anniversaries of the date of grant.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding stock option exercise and forfeiture behaviors for different participating groups to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate
is based on the U.S. treasury yield curve on the grant date for the expected term of the option.
i
The following weighted-average assumptions were used in calculating the fair value of stock options granted during the nine months ended September 28, 2019, and September 29, 2018, using the Black-Scholes valuation model:
The
weighted-average grant date fair value of options granted during the nine months ended September 28, 2019, and September 29, 2018, was $i29.98 and $i30.21,
respectively. The intrinsic value of options exercised was $i3.9 million and $i16.2
million during the respective three and nine months ended September 28, 2019, and $i18.1 million and $i39.3
million during the respective three and nine months ended September 29, 2018. The fair value of stock options vested was $i15.7 million and $i16.0
million during the respective nine months ended September 28, 2019, and September 29, 2018.
As of September 28, 2019, there was $i19.4 million of unrecognized compensation cost related to non-vested stock
options that is expected to be recognized as a charge to earnings over a weighted-average period of i1.7 years.
Performance Awards
Performance awards, which are granted as performance share units (“PSUs”) and performance-based RSUs, are earned and expensed using the fair value of the award over a contractual term of ithree
years based on the company’s performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the applicable performance period. For performance achieved above specified levels, the recipient may earn additional shares of stock, not to exceed i100% of the number of performance awards initially granted.
The
PSUs have a three-year performance period based on the results of the consolidated financial metrics of the company. The performance-based RSUs have a one-year performance period based on the results of the consolidated financial metrics of the company followed by a two-year cliff vesting schedule, assuming continued employment.
The fair value of performance awards is calculated using the market value of a share of Snap-on’s common stock on the date of grant and assumed forfeitures based on recent historical experience; in recent years, forfeitures have not been significant. The weighted-average grant date fair value of performance awards granted during the nine months ended September
28, 2019, and September 29, 2018, was $i155.92 and $i161.18,
respectively. PSUs related to i32,114 shares and i50,182 shares were paid out during the respective nine months ended September
28, 2019, and September 29, 2018. Earned PSUs are generally paid out following the conclusion of the applicable performance period upon approval by the Organization and Executive Compensation Committee of the company’s Board of Directors (the “Board”).
Based on the company’s 2018 performance, i33,170
RSUs granted in 2018 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2020. Based on the company’s 2017 performance, i13,648 RSUs granted in 2017 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2019. Based on the
company’s 2016 performance, i45,502 RSUs granted in 2016 were earned; these RSUs vested as of fiscal 2018 year end and were paid out shortly thereafter.
As
of September 28, 2019, there was $i12.0 million of unrecognized compensation cost related to non-vested performance awards that is expected to be recognized as a charge to earnings over a weighted-average period of i1.8
years.
Stock Appreciation Rights (“SARs”)
The company also issues stock-settled and cash-settled SARs to certain key non-U.S. employees. SARs have a contractual term of iten years and vest ratably on the first, second and
third anniversaries of the date of grant. SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant.
Stock-settled SARs are accounted for as equity instruments and provide for the issuance of Snap-on common stock equal to the amount by which the company’s stock has appreciated over the exercise price. Stock-settled SARs have an effect on dilutive shares and shares outstanding as any appreciation of Snap-on’s common stock value over the exercise price will be settled in shares of common stock. Cash-settled SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price. Cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock over the
grant price is paid in cash and not in common stock.
The fair value of stock-settled SARs is estimated on the date of grant using the Black-Scholes valuation model. The fair value of cash-settled SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on Snap-on’s period-end stock price. The company uses historical data regarding SARs exercise and forfeiture behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield
is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date (for stock-settled SARs) or reporting date (for cash-settled SARs) for the length of time corresponding to the expected term of the SARs.
i
The following weighted-average assumptions were used in calculating the fair value of stock-settled
SARs granted during the nine months ended September 28, 2019, and September 29, 2018, using the Black-Scholes valuation model:
The
weighted-average grant date fair value of stock-settled SARs granted during the nine months ended September 28, 2019, and September 29, 2018, was $i26.45 and $i24.71,
respectively. The intrinsic value of stock-settled SARs exercised was $ii0.1/
million during both the three and nine months ended September 28, 2019, and $i1.2 million and $i1.8
million during the respective three and nine months ended September 29, 2018. The fair value of stock-settled SARs vested was $i2.1 million and $i2.2
million during the respective nine months ended September 28, 2019, and September 29, 2018.
As of September 28, 2019, there was $i3.2 million of unrecognized compensation cost related to non-vested stock-settled SARs that is expected to be
recognized as a charge to earnings over a weighted-average period of i1.7 years.
i
The
following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the nine months ended September 28, 2019, and September 29, 2018, using the Black-Scholes valuation model:
The
intrinsic value of cash-settled SARs exercised was izero and $i0.5
million during the respective three and nine months ended September 28, 2019, and $i1.1 million and $i3.2
million during the respective three and nine months ended September 29, 2018. The fair value of cash-settled SARs vested was $ii0.1/
million during both the nine months ended September 28, 2019, and September 29, 2018.
i
Changes to the company’s non-vested cash-settled SARs during the nine months ended September 28, 2019, are as follows:
As
of September 28, 2019, there was $i0.1 million of unrecognized compensation cost related to non-vested cash-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of i1.7
years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Restricted Stock Awards – Non-employee Directors
The company awarded i7,605
shares and i6,975 shares of restricted stock to non-employee directors for the respective nine months ended September 28, 2019, and September 29, 2018. The fair value of the restricted stock awards is expensed over a one-year vesting period based on the fair value on the date of grant.
All restrictions generally lapse upon the earlier of the first anniversary of the grant date, the recipient’s death or disability or in the event of a change in control, as defined in the 2011 Plan. If termination of the recipient’s service occurs prior to the first anniversary of the grant date for any reason other than death or disability, the shares of restricted stock would be forfeited, unless otherwise determined by the Board.
Note 13: iEarnings Per Share
i
The
shares used in the computation of the company’s basic and diluted earnings per common share are as follows:
Weighted-average common shares outstanding, assuming dilution
55,656,942
57,333,933
56,000,862
57,480,408
The
dilutive effect of the potential exercise of outstanding options and stock-settled SARs to purchase common shares is calculated using the treasury stock method. As of September 28, 2019, there were i1,223,983 awards outstanding that were anti-dilutive; as of September 29, 2018, there were i689,665
awards outstanding that were anti-dilutive. Performance-based equity awards are included in the diluted earnings per share calculation based on the attainment of the applicable performance metrics to date.
Note 14: iCommitments and Contingencies
Snap-on provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the
sale is recorded. Snap-on calculates its accrual requirements based on historic warranty loss experience that is periodically adjusted for recent actual experience, including the timing of claims during the warranty period and actual costs incurred.
The
Condensed Consolidated Balance Sheet as of December 29, 2018, included an accrual of $i30.9 million related to a judgment from the fourth quarter of 2017 for a patent-related litigation matter that was being appealed. During the first nine months of 2019, that matter was settled and the company recognized an $i11.6
million benefit in “Operating expenses” on the Condensed Consolidated Statements of Earnings for the nine months ended September 28, 2019, as a result of the settlement.
Snap-on is involved in various legal matters that are being litigated and/or settled in the ordinary course of business. Although it is not possible to predict the outcome of these legal matters, management believes that the results of all legal matters will not have a material impact on Snap-on’s consolidated financial position, results of operations or cash flows.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 15: iiiLeases//
At
the beginning of fiscal 2019, Snap-on adopted ASU No. 2016-02, Leases (Topic 842). The adoption of Topic 842 did not have a significant impact on the company’s consolidated financial statements. Finance leases and lessor accounting remained substantially unchanged. iThe adoption of Topic 842 impacted the
company’s previously reported results as follows:
Snap-on determines if an arrangement is a lease at inception. Snap-on has operating and finance leases for manufacturing plants, distribution centers, software development facilities, financial services offices, data centers, company store vans and certain equipment. Snap-on’s leases have lease terms of ione year to i20
years and some include options to extend and/or terminate the lease. The exercise of lease renewal options is at the company’s sole discretion. Certain leases also include options to purchase the leased property. When deemed reasonably certain of exercise, the renewal and purchase options are included in the determination of the lease term and lease payment obligation, respectively. The depreciable life of assets and leasehold improvements are limited to the expected term, unless there is a transfer of title or purchase option reasonably certain of exercise. The company’s lease agreements do not contain any material variable lease payments, material residual value guarantees or any material restrictive covenants.
ROU assets represent Snap-on’s right to use an
underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, Snap-on uses the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, Snap-on uses its country specific incremental borrowing rate based on the information available at the lease commencement date, including the lease term. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Snap-on has lease agreements with lease and non-lease components, which are generally accounted for separately. For all equipment leases, including
vehicles, Snap-on accounts for the lease and non-lease components as a single lease component.
As
of September 28, 2019, Snap-on does not have any significant additional operating or finance leases that have not yet commenced.
ii
Snap-on’s
future minimum lease commitments, net of sub-lease rental income, as of December 29, 2018, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows:
(Amounts in millions)
Operating Leases
Capital Leases
Year:
2019
$
i25.6
$
i3.3
2020
i18.4
i3.2
2021
i13.9
i2.9
2022
i9.8
i2.5
2023
i4.9
i2.2
2024
and thereafter
i4.4
i1.9
Total
minimum lease payments
$
i77.0
i16.0
Less:
amount representing interest
(i0.9)
Total present value of minimum capital lease payments
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
i
Amounts included in the accompanying Condensed Consolidated Balance Sheets for the present value of minimum capital lease payments as of 2018 year end are as follows:
Total
present value of minimum capital lease payments
$
i15.1
/
Rent expense for worldwide facilities,
office equipment and vehicles, net of sub-lease rental income, was $i33.0 million in 2018.
Lessor Accounting
Snap-on’s Financial Services business offers its customers lease financing for the lease of tools, diagnostics and equipment products and to franchisees who require financing for vehicle leases. Snap-on accounts for its financial services leases as sales-type leases. In certain circumstances, the lessee has the option to terminate the lease. In the event of the lessee’s
deteriorated financial condition or default, Snap-on has the right to terminate the lease. The leases contain an end-of-term purchase option that is generally insignificant and is reasonably certain to be exercised by the lessee.
The company recognizes the net investment in the lease as the sum of the lease receivable and the unguaranteed residual value, both of which are measured at the present value using the interest rate implicit in the lease. The difference between the undiscounted lease payments received over the lease term and the related net investment in the lease is reported as unearned finance charges. Unearned finance charges are amortized to income over the life of the contract and are included as a component of “Financial services revenue”
on the accompanying Condensed Consolidated Statements of Earnings.
Sales-type leases included in both “Finance receivables - net” and “Long-term finance receivables - net” on the accompanying Condensed Consolidated Balance Sheets as of September 28, 2019, have future minimum lease payments, including unguaranteed residual value, of $i91.4 million and unearned finance charges
of $i17.8 million, with lease terms of up to ifive years.
Sales-type
leases included in both “Contract receivables - net” and “Long-term contract receivables - net” on the accompanying Condensed Consolidated Balance Sheets as of September 28, 2019, have future minimum lease payments, including unguaranteed residual value, of $i256.9
million and unearned finance charges of $i46.1 million, with lease terms of up to iseven years.
i
Future
minimum lease payments as of September 28, 2019, consisted of the following:
Amortization
of net unrecognized losses and prior service credits
(i5.9)
(i7.8)
(i17.6)
(i23.4)
See
footnote below*
Income tax benefit
i1.4
i1.8
i4.2
i5.6
Income
tax expense
Net of tax
(i4.5)
(i6.0)
(i13.4)
(i17.8)
Total
reclassifications for the period, net of tax
$
(i4.1)
$
(i5.6)
$
(i12.3)
$
(i16.6)
*
These
Accumulated OCI components are included in the computation of net periodic pension and postretirement health care costs; see Note 10 and Note 11 for further information.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note
18: iSegments
Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers
in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealership service and repair shops (“OEM dealerships”), through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.
Snap-on
evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution Regarding Forward-Looking Statements:
Statements in this document that are not historical facts, including statements that: (i) are in the future tense; (ii) include the words “expects,”“plans,”“targets,”“estimates,”“believes,”“anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”)
or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-on’s or management’s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on
cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in its Annual Report on Form 10-K for the fiscal year ended December 29, 2018, which are incorporated herein by reference, could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.
These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain value through its Snap-on Value Creation Processes, including its ability to realize efficiencies and savings from
its rapid continuous improvement and other cost reduction initiatives, improve workforce productivity, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and/or lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby help improve their sales and profitability, introduce successful new products, successfully pursue, complete and integrate acquisitions, as well as its ability to withstand disruption arising
from natural disasters, planned facility closures or other labor interruptions, the effects of external negative factors, including adverse developments in world financial markets, developments related to tariffs and other trade issues or disputes, weakness in certain areas of the global economy (including as a result of the United Kingdom’s pending exit from the European Union), and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, changes in tax rates, laws and regulations, and the impact of energy and raw material supply and pricing, including steel (as a result of U.S. tariffs imposed on certain steel imports or otherwise) and gasoline, the amount, rate and growth of Snap-on’s general and administrative expenses, including health care and postretirement costs (resulting from, among other matters, U.S. health care legislation and its ongoing implementation or reform), continuing and potentially
increasing required contributions to pension and postretirement plans, the impacts of non-strategic business and/or product line rationalizations, and the effects on business as a result of new legislation, regulations or government-related developments or issues, risks associated with data security and technological systems and protections, potential reputational damages and costs related to litigation as well as an inability to assure that costs will be reduced or eliminated on appeal, and other world or local events outside Snap-on’s control, including terrorist disruptions. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law.
In addition, investors should be aware that generally accepted accounting principles in the United States of America (“GAAP”) prescribe when a company should reserve for particular risks, including litigation exposures.
Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Non-GAAP Measures
References in this report to “organic sales” refer
to sales from continuing operations calculated in accordance with GAAP, excluding acquisition-related sales and the impact of foreign currency translation. Management evaluates the company’s sales performance based on organic sales growth, which primarily reflects growth from the company’s existing businesses as a result of increased output, customer base and geographic expansion, new product development and/or pricing, and excludes sales contributions from acquired operations the company did not own as of the comparable prior-year reporting period. The company’s organic sales disclosures also exclude the effects of foreign currency translation
as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying growth trends in our businesses and facilitates comparisons of our sales performance with prior periods.
Recent Acquisitions
On August 7, 2019, Snap-on acquired Cognitran Limited ("Cognitran") for a preliminary cash purchase price of $i30.7 million
(or $i29.7 million, net of cash acquired). The preliminary purchase price is subject to change based upon finalization of a working capital adjustment that is expected to be completed in the fourth quarter of 2019. Cognitran, based in Chelmsford, United Kingdom, specializes in flexible, modular and highly scalable "Software as a Service" (SaaS) products for original equipment manufacturer ("OEM") customers and their dealers, focused on the creation and delivery of service, diagnostics, parts and repair information
to OEM dealers and connected vehicle platforms. The acquisition enhances and expands Snap-on’s capabilities in providing shop efficiency solutions through integrated upstream services to OEM customers in automotive, heavy duty, agricultural and recreational applications.
On April 2, 2019, Snap-on acquired Power Hawk Technologies, Inc. (“Power Hawk”) for a cash purchase price of $i7.9 million. Power Hawk, based in Rockaway, New Jersey, designs, manufactures
and distributes rescue tools and related equipment for a variety of military, governmental, and fire, rescue and emergency operations. The acquisition of the Power Hawk product line complemented and increased Snap-on’s existing product offering and broadened its established capabilities in serving critical industries.
On January 25, 2019, Snap-on acquired substantially all of the assets of TMB GeoMarketing Limited (“TMB”) for a cash purchase price of $i1.3
million. TMB, based in Dorking, United Kingdom, designs planning software used by OEMs to optimize dealer locations and manage the performance of dealer outlets. The acquisition of TMB extended Snap-on’s product line in its core dealer network solutions business.
On January 31, 2018, Snap-on acquired substantially all of the assets of George A. Sturdevant, Inc. (d/b/a Fastorq) for a cash purchase price of $i3.0 million. Fastorq, based in New Caney, Texas,
designs, assembles and distributes hydraulic torque and hydraulic tensioning products for use in critical industries. The acquisition of the Fastorq product line complemented and increased Snap-on’s existing torque product offering and broadened its established capabilities in serving critical industries.
For segment reporting purposes, the results of operations and assets of Cognitran and TMB have been included in the Repair Systems and Information Group since the acquisition date and the results of operations and assets of Power Hawk and Fastorq have been included in the Commercial & Industrial Group since the acquisition date.
Pro forma financial information has not been presented for these acquisitions as the net effects were neither significant nor material to Snap-on’s results of operations or financial position.
Net
earnings attributable to noncontrolling interests
(4.6)
(0.5)
%
(4.2)
(0.4)
%
(0.4)
(9.5)
%
Net earnings attributable to Snap-on Inc.
$
164.6
16.7
%
$
163.2
16.7
%
$
1.4
0.9
%
NM:
Not meaningful
Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.
Net sales in the third quarter of 2019 increased $3.7 million, or 0.4%, from 2018 levels, reflecting a $12.5 million, or 1.4%, increase in organic sales and $2.9 million of acquisition-related sales, partially offset by $11.7 million of unfavorable foreign currency translation. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.
Gross
profit in the third quarter of 2019 decreased $5.8 million, or 1.3%, from 2018, including $7.5 million of unfavorable foreign currency effects. Gross margin (gross profit as a percentage of net sales) of 49.7% in the quarter declined 80 basis points (100 basis points (“bps”) equals 1.0 percent) from 50.5% last year primarily due to increased sales in lower gross margin businesses, 20 bps of unfavorable foreign currency effects, and higher material and other costs. These decreases in gross margin were partially offset by benefits from the company’s “Rapid Continuous Improvement” or “RCI” initiatives.
Snap-on’s RCI initiatives employ a structured set of tools and processes across multiple businesses and geographies intended to eliminate waste and improve operations. Savings from Snap-on’s RCI initiatives reflect benefits
from a wide variety of ongoing efficiency, productivity and process improvements, including savings generated from product design cost reductions, improved manufacturing line set-up and change-over practices, lower-cost sourcing initiatives and facility optimization. Unless individually significant, it is not practicable to disclose each RCI activity that generated savings and/or segregate RCI savings embedded in sales volume increases.
Operating expenses in the third quarter of 2019 decreased $0.4 million, or 0.1%, from 2018. The operating expense margin (operating expenses as a percentage of net sales) of 31.1% improved 10 bps from 31.2% last year.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Operating earnings before financial services in the third quarter, including $4.4 million of unfavorable foreign currency effects, decreased $5.4 million, or 3.1%, as compared to last year. As a percentage of net sales, operating earnings before financial services of 18.6% compared to 19.3% last year.
Financial services revenue in the third quarter of 2019 increased $2.1 million, or 2.6%, compared to last year. Financial services operating earnings in the period, including $0.3 million of unfavorable foreign currency effects, increased $1.7 million,
or 2.9%, as compared to last year. The year-over-year increase in revenue primarily reflects the growth of the company’s financial services portfolio.
Operating earnings in the third quarter of 2019, including $4.7 million of unfavorable foreign currency effects, decreased $3.7 million, or 1.6%, from last year. As a percentage of revenues (net sales plus financial services revenue), operating earnings of 23.2% in the quarter compared to 23.7% last year.
Interest expense in the third quarter of 2019 decreased $0.4 million, or 3.2%, compared to last year. See Note 8 to the Condensed Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.
Other income (expense) – net includes net gains and losses associated with hedging and
currency exchange rate transactions, non-service components of net periodic benefit costs, and interest income. See Note 16 to the Condensed Consolidated Financial Statements for information on Other income (expense) – net.
Snap-on’s 2019 third quarter effective income tax rate on earnings attributable to Snap-on was 23.5%. The 2018 effective income tax rate was 24.0%, which included a 90 bps charge associated with the implementation of U.S. tax legislation (“tax charge”). See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes.
Net earnings attributable to Snap-on of $164.6 million, or $2.96 per diluted share, in the third quarter of 2019, increased $1.4 million, or $0.11 per diluted share, from 2018 levels. Net earnings attributable to Snap-on in the third quarter of 2018 were $163.2 million, or $2.85 per diluted share, which included
$1.8 million, or $0.03 per diluted share, for the tax charge.
Net
earnings attributable to noncontrolling interests
(13.3)
(0.4)
%
(12.0)
(0.4)
%
(1.3)
(10.8)
%
Net earnings attributable to Snap-on Inc.
$
522.9
17.3
%
$
504.9
16.6
%
$
18.0
3.6
%
NM:
Not meaningful
Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.
Net sales in the first nine months of 2019 decreased $13.4 million, or 0.5%, from 2018 levels, reflecting a $39.9 million, or 1.5%, increase in organic sales and $4.0 million of acquisition-related sales, more than offset by $57.3 million of unfavorable foreign currency translation.
Gross profit for the period decreased $19.1 million, or 1.4%, from 2018. Gross margin of 50.2% in the first nine months declined 50 basis points
from 50.7% last year primarily due to increased sales in lower gross margin businesses, 10 bps of unfavorable foreign currency effects, and higher material and other costs, partially offset by benefits from the company’s RCI initiatives.
Operating expenses in the first nine months of 2019, including an $11.6 million first quarter benefit from the settlement of a patent-related litigation matter that was being appealed (the “legal settlement”), improved $20.2 million, or 2.3%, from last year. The operating expense margin of 30.6% improved 60 bps from 31.2% last year primarily due to a 40 bps benefit from the legal settlement.
Operating earnings before financial services in the first nine months of 2019, including the benefit from the legal settlement and $16.0 million
of unfavorable foreign currency effects, increased $1.1 million, or 0.2%, as compared to last year. As a percentage of net sales, operating earnings before financial services of 19.6%, including 40 bps of benefit from the legal settlement, partially offset by 20 bps of unfavorable foreign currency effects, compared to 19.5% last year.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Financial
services revenue in the first nine months of 2019 increased $6.8 million, or 2.8%, compared to last year. Financial services operating earnings for the period, including $1.2 million of unfavorable foreign currency effects, increased $9.7 million, or 5.6%, as compared to last year. The year-over-year increase in revenue primarily reflects the growth of the company’s financial services portfolio.
Operating earnings in the first nine months of 2019, including the benefit from the legal settlement and $17.2 million of unfavorable foreign currency effects, increased $10.8 million, or 1.5%, from last year. As a percentage of revenues, operating earnings of 24.1% for the first nine months of 2019 compared to 23.7% last year.
Interest expense in the first nine months of 2019 decreased $1.1 million, or 2.9%,
compared to last year. See Note 8 to the Condensed Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.
Other income (expense) – net includes net gains and losses associated with hedging and currency exchange rate transactions, non-service components of net periodic benefit costs, and interest income. Other income (expense) – net in 2018 included a net gain of $5.5 million associated with a treasury lock settlement gain of $13.3 million related to the issuance of debt, partially offset by $7.8 million of expense related to the early extinguishment of debt (collectively, the “net debt items”). See Note 16 to the Condensed Consolidated Financial Statements for information on Other income (expense) – net.
In the first nine months of 2019, Snap-on’s effective income tax rate on earnings attributable to Snap-on was 23.8%. The 2018 effective
income tax rate was 24.6%, which included a 50 bps charge associated with the implementation of U.S. tax legislation. See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes.
Net earnings attributable to Snap-on of $522.9 million, or $9.34 per diluted share, in the first nine months of 2019, including an $8.7 million, or $0.15 per diluted share, benefit from the after-tax legal settlement, increased $18.0 million, or $0.56 per diluted share, from 2018 levels. Net earnings attributable to Snap-on in the first nine months of 2018 were $504.9 million, or $8.78 per diluted share, including a $4.1 million, or $0.07 per diluted share, benefit from the after-tax net debt items, and $3.9 million, or $0.07 per diluted share, for the tax charge.
Segment Results
Snap-on’s business segments are
based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. The Repair
Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealership service and repair shops (“OEM dealerships”), through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.
Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate
assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. Intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.
Segment
net sales in the third quarter of 2019 increased $5.1 million, or 1.5%, from 2018 levels, reflecting a $9.5 million, or 2.9%, organic sales gain and $1.1 million of acquisition-related sales, partially offset by $5.5 million of unfavorable foreign currency translation. The organic sales increase primarily includes a mid single-digit gain in the specialty tools business and low single-digit gains in sales to both the segment’s European-based hand tools business and to customers in critical industries.
Segment gross margin in the third quarter of 37.9% in 2019 declined 170 bps from 39.6% in 2018, primarily due to increased sales in lower gross margin businesses and higher material and other costs, partially offset by savings from the company’s RCI initiatives.
Segment operating expense margin in the
third quarter of 23.5% in 2019 was unchanged from the prior year.
Segment operating earnings in the third quarter of 2019, including $0.7 million of unfavorable foreign currency effects, decreased $4.7 million from 2018. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group of 14.4% in 2019 compared to 16.1% in 2018.
Segment
net sales in the first nine months of 2019 decreased $6.8 million, or 0.7%, from 2018 levels, reflecting a $20.4 million, or 2.1%, organic sales gain and $2.2 million of acquisition-related sales, more than offset by $29.4 million of unfavorable foreign currency translation. The organic sales increase primarily includes a high single-digit gain in the specialty tools business and low single-digit gains in sales to both customers in critical industries and in the segment’s European-based hand tools business.
Segment gross margin of 38.9% for the first nine months of 2019 decreased 40 bps from 39.3% in 2018, primarily due to increased sales in lower gross margin businesses and higher material and other costs, partially offset by benefits from the company’s RCI initiatives.
Segment operating expense margin
for the first nine months of 24.4% in 2019 was unchanged from 2018.
Segment operating earnings in the first nine months of 2019, including $2.7 million of unfavorable foreign currency effects, decreased $4.8 million from 2018 levels. Operating margin for the Commercial & Industrial Group of 14.5% in 2019 compared to 14.9% in 2018.
Segment
net sales in the third quarter of 2019 decreased $4.6 million, or 1.2%, from 2018 levels, reflecting a $1.3 million, or 0.3%, organic sales decline and $3.3 million of unfavorable foreign currency translation. Theorganic sales decrease includes a mid single-digit decline in the segment’s international operations, partially offset by a low single-digit gain in the segment’s U.S. franchise operations.
Segment gross margin in the third quarter of 43.4%, including 60 bps of unfavorable foreign currency effects, declined 20 bps from 43.6% last year.
Segment operating expense margin in the third quarter of 29.6% increased 120 bps from 28.4% last year primarily due to higher field support investments.
Segment operating earnings in the third quarter of 2019, including $2.7 million of unfavorable foreign
currency effects, decreased $6.3 million from 2018 levels. Operating margin for the Snap-on Tools Group of 13.8% in the third quarter of 2019 compared to 15.2% last year.
Segment
net sales in the first nine months of 2019 decreased $5.2 million, or 0.4%, from 2018 levels, reflecting a $9.4 million, or 0.8%, organic sales increase, which was more than offset by $14.6 million of unfavorable foreign currency translation. Theorganic sales increase includes a low single-digit gain in the company’s U.S. franchise operations, partially offset by a mid single-digit decline in the segment’s international operations.
Segment gross margin in the first nine months of 2019 of 44.4% declined 30 bps from 44.7% last year primarily due to 50 bps of unfavorable foreign currency effects.
The segment’s operating expense margin in the first nine months of 2019 of 28.5% increased 100 bps from 27.5% last year primarily due to higher field support investments.
Segment
operating earnings in the first nine months of 2019, including $9.6 million of unfavorable foreign currency effects, decreased $15.7 million from 2018 levels. Operating margin for the Snap-on Tools Group of 15.9% in the first nine months of 2019 compared to 17.2% last year.
Segment
net sales in the third quarter of 2019 increased $8.3 million, or 2.6%, from 2018 levels, reflecting a $10.1 million, or 3.2%, organic sales gain and $1.8 million from acquisition-related sales, partially offset by $3.6 million of unfavorable foreign currency translation. The organic sales increase includes mid single-digit gains in sales to OEM dealerships and in sales of diagnostic and repair information products to independent repair shop owners and managers, partially offset by a low single-digit decrease in sales of undercar equipment.
Segment gross margin in the third quarter of 47.7% declined 100 bps from 48.7% last year primarily due to increased sales in lower gross margin businesses.
Segment operating expense margin in the third quarter of 21.9% improved 110 bps from 23.0% last year primarily due to the benefits from sales volume leverage, including higher volumes in lower
expense businesses, and savings from RCI initiatives.
Segment operating earnings in the third quarter of 2019, including $1.0 million of unfavorable foreign currency effects, increased $2.6 million from 2018. Operating margin for the Repair Systems & Information Group of 25.8% in the third quarter of 2019 compared to 25.7% last year.
Segment
net sales in the first nine months of 2019 increased $5.0 million, or 0.5%, from 2018 levels, reflecting a $20.3 million, or 2.1%, organic sales increase and $1.8 million of acquisition-related sales, partially offset by $17.1 million of unfavorable foreign currency translation. The organic sales increase includes a mid single-digit gain in sales to OEM dealerships and a low single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, partially offset by a low single-digit decline in sales of undercar equipment.
Segment gross margin in the first nine months of 47.4% declined 90 bps from 48.3% last year. The decrease is primarily due to increased sales in lower gross margin businesses and higher material and other costs, partially offset by savings from RCI initiatives.
The segment’s operating expense margin in the first
nine months of 21.8% improved 80 bps from 22.6% last year primarily due to sales volume leverage, including higher volumes in lower expense businesses, and savings from RCI initiatives.
Segment operating earnings in the first nine months of 2019, including $3.7 million of unfavorable foreign currency effects, increased $0.3 million from 2018. The operating margin for the Repair Systems & Information Group of 25.6% in the first nine months of 2019 compared to 25.7% last year.
Financial
services revenue in the third quarter of 2019 increased $2.1 million, or 2.6%, from last year, primarily due to $2.1 million of higher revenue as a result of growth of the company’s financial services portfolio. In both of the third quarters of 2019 and 2018, the average yield on finance receivables was 17.7%. The average yield on contract receivables was 9.2% in both periods. Originations of $253.5 million in the third quarter of 2019 decreased $13.5 million, or 5.1%, from 2018 levels.
Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the size of the financial services
portfolio than they are on the revenue of the segment. Financial services expenses in the third quarter of 2019 increased $0.4 million from last year. As a percentage of the average financial services portfolio, financial services expenses were 1.1% in both of the third quarters of 2019 and 2018.
Financial services operating earnings in the third quarter of 2019, including $0.3 million of unfavorable foreign currency effects, increased $1.7 million, or 2.9%, from 2018 levels.
Financial
services revenue in the first nine months of 2019 increased $6.8 million, or 2.8%, from last year, primarily due to $7.8 million of higher revenue as a result of growth of the company’s financial services portfolio, partially offset by $1.0 million of decreased revenue from lower average yields on finance and contract receivables. In the first nine months of 2019 and 2018, the average yield on finance receivables was 17.7% and 17.8%, respectively. The average yield on contract receivables for 2019 and 2018 was 9.1% and 9.2%, respectively. Originations of $769.4 million in the first nine months of 2019 decreased $21.0 million, or 2.7%, from 2018 levels.
Financial
services expenses in the first nine months of 2019 decreased $2.9 million from last year primarily due to lower provisions for credit losses, partially offset by the impact of growth in the size of the portfolio. As a percentage of the average financial services portfolio, financial services expenses were 3.3% in the first nine months of 2019 and 3.6% in the first nine months of 2018.
Financial services operating earnings in the first nine months of 2019, including $1.2 million of unfavorable foreign currency effects, increased $9.7 million, or 5.6%, from 2018 levels.
See Note 4 to the Condensed Consolidated Financial Statements for further information on financial services.
Corporate
Snap-on’s third quarter 2019 general corporate expenses of $16.9 million decreased $3.0 million
from $19.9 million last year. The year-over-year decrease in general corporate expenses primarily reflects lower stock-based and performance-based compensation, and other costs.
Snap-on’s general corporate expenses in the first nine months of 2019 of $45.7 million decreased $21.3 million from $67.0 million last year. The year-over-year decrease in general corporate expenses primarily reflects the $11.6 million benefit in 2019 from the legal settlement and lower performance-based compensation and other costs.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Non-GAAP Supplemental Data
The following non-GAAP supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing the operating performance of Snap-on Incorporated’s (“Snap-on”) non-financial services (“Operations”) and “Financial Services” businesses.
The supplemental Operations data reflects the results of operations and financial position of Snap-on’s tools, diagnostic and equipment products, software and other non-financial services operations with Financial Services on the equity method. The supplemental
Financial Services data reflects the results of operations and financial position of Snap-on’s U.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings and cash generated from Operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Income taxes are charged to Financial Services on the basis of the specific tax attributes generated by the U.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the Condensed Consolidated Financial Statements.
Non-GAAP Supplemental Consolidating Data – Supplemental Condensed Statements of Earnings information for the three months ended September 28, 2019, and September 29, 2018,
is as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Non-GAAP Supplemental Consolidating Data – Supplemental Condensed Statements of Earnings information for the nine months ended September 28, 2019, and September 29, 2018, is as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Non-GAAP Supplemental Consolidating Data – Supplemental Condensed Balance Sheet information as of September 28, 2019, and December 29, 2018, is as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Liquidity and Capital Resources
Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt
financing. Snap-on believes that its cash from operations and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for scheduled debt repayments, payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise.
Due to Snap-on’s credit rating over the years, external funds have been available at an acceptable cost. As of the close of business on October 11, 2019, Snap-on’s long-term debt and commercial paper were rated, respectively, A2 and P-1 by Moody’s Investors Service; A- and A-2 by Standard & Poor’s; and A and F1 by Fitch Ratings. Snap-on believes that its current credit arrangements
are sound and that the strength of its balance sheet affords the company the financial flexibility, including through access to financial markets for potential new financing, to respond to both internal growth opportunities and those available through acquisitions. However, Snap-on cannot provide any assurances of the availability of future financing or the terms on which it might be available, or that its debt ratings may not decrease.
The following discussion focuses on information included in the accompanying Condensed Consolidated Balance Sheets.
As of September 28, 2019, working capital (current assets less current liabilities) of $1,357.8 million increased $92.9 million from $1,264.9 million as of December
29, 2018 (fiscal 2018 year end) primarily as a result of the net changes discussed below.
Cash
and cash equivalents of $167.5 million as of September 28, 2019, increased $26.6 million from 2018 year-end levels primarily due to: (i) $565.1 million of cash from collections of finance receivables; (ii) $477.9 million of cash generated from operations; (iii) $46.9 million of net proceeds from other short-term borrowings; and (iv) $26.2 million of cash proceeds from stock purchase and option plan exercises. These increases in cash and cash equivalents were partially offset by: (i) the funding of $628.1 million of new finance receivables; (ii) the repurchase of 1,060,000 shares of the company’s common stock for $167.2 million; (iii) dividend payments to shareholders of $157.6 million; (iv) the funding of $77.8 million of capital expenditures; and (v) the funding of $38.9 million for acquisitions.
Of
the $167.5 million of cash and cash equivalents as of September 28, 2019, $146.3 million was held outside of the United States. Snap-on maintains non-U.S. funds in its foreign operations to: (i) provide adequate working capital; (ii) satisfy various regulatory requirements; and/or (iii) take advantage of business expansion opportunities as they arise. Although the Tax Act generally eliminated U.S. federal taxation of dividends from foreign subsidiaries, such dividends may still be subject to state income taxation and foreign withholding taxes. Snap-on periodically evaluates its cash held outside the United States and may pursue opportunities to repatriate certain foreign cash amounts to the extent that it does not incur unfavorable net tax consequences.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Trade and other accounts receivable – net of $684.8 million as of September 28, 2019, decreased $7.8 million from 2018 year-end levels primarily due to improved collections and $6.5 million of foreign currency translation, partially offset by $3.2 million of receivables related to the Power Hawk and Cognitran acquisitions. Days sales outstanding (trade and other accounts receivable – net as of the respective period end, divided by the respective trailing 12 months sales, times 360 days) was 66 days at September
28, 2019, and 67 days at December 29, 2018.
The current portions of net finance and contract receivables of $636.2 million as of September 28, 2019, compared to $616.8 million at 2018 year end. The long-term portions of net finance and contract receivables of $1,433.3 million as of September 28, 2019, compared to $1,419.3 million at 2018 year end. The combined $33.4 million increase in net current and long-term finance and contract receivables over 2018 year-end levels is primarily due to growth of the
company’s financial services portfolio, partially offset by $2.6 million of foreign currency translation.
Inventories – net of $753.5 million as of September 28, 2019, increased $79.7 million from 2018 year-end levels primarily due to continued support for higher customer demand and new product introductions, as well as $0.5 million of inventories related to the Power Hawk acquisition, partially offset by $10.3 million of foreign currency translation. Inventory turns (trailing 12 months of cost of goods sold, divided by the average of the beginning and ending inventory balance for the trailing 12 months) were 2.6 turns and 2.9 turns as of September 28, 2019, and December 29, 2018, respectively. Inventories accounted for using the first-in, first-out (“FIFO”)
method approximated 58% and 61% of total inventories as of September 28, 2019, and December 29, 2018, respectively. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve was $82.5 million and $78.4 million as of September 28, 2019, and December 29, 2018, respectively.
Notes payable of $232.3 million as of September 28, 2019, included $218.8 million of commercial paper borrowings and $13.5 million of other notes. As of 2018 year end, notes payable of $186.3 million included $177.1 million of commercial paper borrowings and $9.2 million
of other notes.
Accounts payable of $205.8 million as of September 28, 2019, increased $4.7 million from 2018 year-end levels primarily due to the timing of payments, partially offset by $2.2 million of foreign currency translation.
Other accrued liabilities of $362.3 million as of September 28, 2019, decreased $11.3 million from 2018 year-end levels primarily due to semi-annual interest payments on long-term debt and $2.9 million of foreign currency translation.
Long-term debt of $947.5 million as of September 28, 2019, consisted of: (i) $250 million of unsecured 6.125% notes that mature in 2021 (the “2021 Notes”); (ii) $300 million of unsecured
3.25% notes that mature in 2027 (the “2027 Notes”); and (iii) $400 million of unsecured 4.10% notes that mature in 2048 (the “2048 Notes”), partially offset by $2.5 million from the net effects of debt amortization costs and fair value adjustments of interest rate swaps. Long-term debt of $946.0 million as of 2018 year end consisted of: (i) $250 million of the 2021 Notes; (ii) $300 million of the 2027 Notes; and (iii) $400 million of the 2048 Notes, partially offset by $4.0 million from the net effects of debt amortization costs and fair value adjustments of interest rate swaps.
On September 16, 2019, Snap-on entered into a five-year, $800 million multi-currency revolving credit facility that terminates on September 16, 2024 (the “Credit Facility”); no amounts were
outstanding under the Credit Facility as of September 28, 2019. The Credit Facility amended and restated in its entirety Snap-on's previous $700 million multi-currency revolving credit facility that was set to terminate on December 15, 2020. Borrowings under the Credit Facility bear interest at varying rates based on either: (i) Snap-on’s then-current, long-term debt ratings; or (ii) Snap-on’s then-current ratio of consolidated debt net of certain cash adjustments (“Consolidated Net Debt”) to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the “Consolidated Net Debt to EBITDA Ratio”). The Credit Facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio not greater than 0.60 to 1.00 of Consolidated Net Debt to
the sum of Consolidated Net Debt plus total equity and less accumulated other comprehensive income or loss (the “Leverage Ratio”); or (ii) a Consolidated Net Debt to EBITDA Ratio not greater than 3.50 to 1.00. Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), elect to increase the maximum Leverage Ratio to 0.65 to 1.00 and/or increase the maximum Consolidated Net Debt to EBITDA Ratio to 4.00 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of September 28, 2019, the company’s actual ratios of 0.21 and 0.96 respectively, were both within the permitted ranges set forth in this financial covenant. Snap-on generally issues commercial paper to fund its financing
needs on a short-term basis and uses the Credit Facility as back-up liquidity to support such commercial paper issuances.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Snap-on believes it has sufficient available cash and access to both committed and uncommitted credit facilities to cover its expected funding needs on both a short-term and long-term basis. Snap-on manages its aggregate short-term
borrowings so as not to exceed its availability under the Credit Facility. Snap-on believes that it can access short-term debt markets, predominantly through commercial paper issuances and existing lines of credit, to fund its short-term requirements and to ensure near-term liquidity. Snap-on regularly monitors the credit and financial markets and may take advantage of what it believes are favorable market conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include scheduled debt payments, payments of interest and dividends, funding to support new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise. Snap-on intends to make contributions of $9.4 million to its foreign pension plans and $2.0 million to its domestic pension plans in 2019,
as required by law. In the first nine months of 2019, Snap-on made $40.0 million of discretionary cash contributions to its domestic pension plans; depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in the balance of 2019.
Snap-on’s long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs, including the potential use of commercial paper, additional fixed-term debt and/or securitizations.
The following discussion focuses on information included in the accompanying Condensed Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided by operating activities was $477.9 million and $548.6 million in the first nine months of 2019 and 2018, respectively.
The $70.7 million year-over-year decrease in net cash provided by operating activities primarily reflects a decrease of $92.6 million from net changes in operating assets and liabilities, partially offset by $19.3 million of higher net earnings.
Investing Activities
Net cash used by investing activities of $180.7 million in the first nine months of 2019 included additions to finance receivables of $628.1 million, partially offset by collections of $565.1 million. Net cash used by investing activities of $149.4 million in the first nine months of 2018 included additions to finance receivables of $643.5 million, partially offset by collections of $564.0 million. Finance receivables are comprised of extended-term installment payment contracts to both technicians and independent
shop owners (i.e., franchisees’ customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with average payment terms of approximately four years.
Net cash used by investing activities in the respective first nine months of 2019 and 2018 also included $38.9 million and $3.0 million for acquisitions. See Note 3 to the Consolidated Financial Statements for information about acquisitions.
Capital expenditures were $77.8 million and $68.5 million in the first nine months of 2019 and 2018, respectively. Capital expenditures in both years included continued investments related to the company’s execution of its strategic Value Creation Processes around safety, quality, customer connection, innovation and RCI.
Financing
Activities
Net cash used by financing activities of $270.2 million in the first nine months of 2019 included net proceeds from other short-term borrowings of $46.9 million. Net cash used by financing activities of $367.1 million in the first nine months of 2018 included repayments of long-term debt and notes payable and other short-term borrowings, offset by the proceeds from the issuance of the 2048 Notes.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Proceeds
from stock purchase and option plan exercises totaled $26.2 million and $54.1 million in the first nine months of 2019 and 2018, respectively. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, as well as stock options, and for other corporate purposes. In the first nine months of 2019, Snap-on repurchased 1,060,000 shares of its common stock for $167.2 million under its previously announced share repurchase programs. In the first nine months of 2018, Snap-on repurchased 1,139,000 shares of its common stock for $184.4 million under its previously announced share repurchase programs. As of September 28, 2019, Snap-on had remaining availability to repurchase up to an additional $390.6 million in common stock pursuant to its Board’s authorizations. The purchase of Snap-on common stock is at the
company’s discretion, subject to prevailing financial and market conditions. Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities, will be sufficient to fund the company’s additional share repurchases, if any.
Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends totaled $157.6 million and $138.9 million in the first nine months of 2019 and 2018, respectively. On November 8, 2018, the Board increased the quarterly cash dividend by 15.9% to $0.95 per share ($3.80 per share annualized). Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities, will be sufficient to pay dividends.
Snap-on’s disclosures of its critical accounting policies, which are contained in its Annual Report on Form 10-K for the fiscal year ended December 29, 2018, have not materially changed since that report was filed.
Outlook
Snap-on expects to make continued progress through the remainder of 2019 along its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive repair arena and developing and expanding
its professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including extending in critical industries, where the cost and penalties for failure can be high. In pursuit of these initiatives, Snap-on expects that capital expenditures in 2019 will be in a range of $95 million to $105 million, of which $77.8 million was expended in the first nine months of the year. Snap-on also anticipates that its full year 2019 effective income tax rate will be comparable to its full year 2018 rate of 24.0%.
Item 3: Quantitative and Qualitative
Disclosures About Market Risk
Market, Credit and Economic Risks
Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. Snap-on is exposed to market risk from changes in interest rates and foreign currency exchange rates. Snap-on is also exposed to market risk associated with the stock-based portion of its deferred compensation plans. Snap-on monitors its exposure to these risks and attempts to manage the underlying economic exposures through the use of financial instruments such as foreign currency forward contracts, interest rate swap agreements, treasury lock agreements and prepaid equity forward agreements (“equity forwards”). Snap-on does not use derivative instruments for speculative or trading purposes. Snap-on’s
broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating earnings as a whole. Snap-on’s management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks.
Foreign Currency Risk Management
Snap-on has significant international operations and is subject to certain risks inherent with foreign operations that include currency fluctuations. Foreign currency exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency, including intercompany loans denominated in foreign currencies. To manage these exposures, Snap-on identifies naturally offsetting positions
and then purchases hedging instruments to protect the residual net exposures. See Note 9 to the Condensed Consolidated Financial Statements for information on foreign currency risk management.
Interest Rate Risk Management
Snap-on aims to control funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s borrowings through the use of interest rate swap agreements. Treasury lock agreements are used from time to time to manage the potential change in interest rates in anticipation of the possible issuance of fixed rate debt. See Note 9 to the Condensed Consolidated Financial Statements for information on interest rate risk management.
Snap-on utilizes a Value-at-Risk (“VAR”) model to determine the potential one-day loss in the fair value of its interest rate and foreign exchange-sensitive
financial instruments from adverse changes in market factors. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. Snap-on’s computations are based on the inter-relationships among movements in various currencies and interest rates (variance/co-variance technique). These inter-relationships were determined by observing interest rate and foreign currency market changes over the preceding quarter.
The estimated maximum potential one-day loss in fair value, calculated using the VAR model, as of September 28, 2019, was $14.6 million on interest rate-sensitive financial instruments and $0.1 million on foreign currency-sensitive financial instruments. The VAR model is a risk management tool and does not purport to represent actual losses in fair value that will be incurred by Snap-on, nor does it consider the potential effect of favorable
changes in market factors.
Stock-based Deferred Compensation Risk Management
Snap-on aims to manage market risk associated with the stock-based portion of its deferred compensation plans through the use of equity forwards. Equity forwards are used to aid in offsetting the potential mark-to-market effect on stock-based deferred compensation from changes in Snap-on’s stock price. Since stock-based deferred compensation liabilities increase as the company’s stock price rises and decrease as the company’s stock price declines, the equity forwards are intended to mitigate the potential impact on deferred compensation expense that may result from such mark-to-market changes. See Note 9 to the Condensed Consolidated Financial
Statements for additional information on stock-based deferred compensation risk management.
Credit risk is the possibility of loss from a customer’s failure to make payments according to contract terms. Prior to extending credit, each customer is evaluated, taking into consideration various factors, including the customer’s financial condition, debt-servicing ability, past payment experience, credit bureau information, and other financial and qualitative factors that may affect the customer’s ability to repay,
as well as the value of the underlying collateral. Finance receivable credit risk is also monitored regularly through the use of internal proprietary custom scoring models to evaluate each transaction at the time of the application for credit. Snap-on evaluates credit quality through the use of an internal proprietary measuring system that provides a framework to analyze finance receivables on the basis of risk factors of the individual obligor as well as transaction specific risk. The finance receivables are typically monitored through an asset quality review process that closely monitors past due accounts and initiates a progressive collection action process when appropriate.
Counterparty Risk
Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its various financial agreements, including its foreign currency forward contracts,
interest rate swap agreements, treasury lock agreements and prepaid equity forward agreements. Snap-on does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of the counterparties and generally enters into agreements with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its counterparties, but cannot provide assurances.
Economic Risk
Economic risk is the possibility of loss resulting from economic instability in certain areas of the world. Snap-on continually monitors its exposure in these markets; for example, the company is monitoring the potential effects of the United Kingdom’s pending exit from the European Union, although it is too soon to know
what effects this might have on the world economy or the company. Inflation has not had a significant impact on the company.
As a result of the above market, credit and economic risks, net earnings and revenues in any particular period may not be representative of full-year results and may vary significantly from year to year.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Snap-on maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that material information relating to the
company and its consolidated subsidiaries is timely communicated to the officers who certify Snap-on’s financial reports and to other members of senior management and the Board, as appropriate.
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 28, 2019. Based upon their evaluation
of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 28, 2019, to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive
and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control
During the quarter ended September 28, 2019, the company continued designing new controls as part of its efforts to adopt ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which is effective for the company's 2020 fiscal year. As the implementation process continues, the company expects that there will be additional changes in internal
controls over financial reporting. However, there were no changes to internal controls over financial reporting during the quarter ended September 28, 2019, that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following chart discloses information regarding the shares of Snap-on’s common stock repurchased by the company during the third quarter of fiscal 2019, all of which were purchased pursuant to the Board’s authorizations that the company has publicly announced. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans and equity plans, and for other corporate purposes, as well as when the company believes market conditions are favorable. The repurchase
of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions.
Period
Shares purchased
Average price per share
Shares purchased as part
of publicly announced plans or programs
Approximate
value of shares
that may yet be
purchased under
publicly
announced plans
or programs*
06/30/19 to 07/27/19
64,000
$152.26
64,000
$435.0
million
07/28/19 to 08/24/19
200,000
$149.49
200,000
$405.0 million
08/25/19 to 09/28/19
136,000
$147.60
136,000
$390.6
million
Total/Average
400,000
$149.29
400,000
N/A
N/A: Not applicable
*
Subject to further adjustment pursuant to the 1996 Authorization described below, as of September 28, 2019, the approximate value of shares that may yet be
purchased pursuant to the outstanding Board authorizations discussed below is $390.6 million.
•In 1996, the Board authorized the company to repurchase shares of the company’s common stock from time to time in the open market or in privately negotiated transactions (the “1996 Authorization”). The 1996 Authorization allows the repurchase of up to the number of shares issued or delivered from treasury from time to time under the various plans the
company has in place that call for the issuance of the company’s common stock. Because the number of shares that are purchased pursuant to the 1996 Authorization will change from time to time as (i) the company issues shares under its various plans; and (ii) shares are repurchased pursuant to this authorization, the number of shares authorized to be repurchased will vary from time to time. The 1996 Authorization will expire when terminated by the Board. When calculating the approximate value of shares that the company may yet purchase under the 1996 Authorization, the company assumed a price of $155.33, $145.07 and $155.34 per share of common
stock as of the end of the respective fiscal 2019 months ended July 27, 2019, August 24, 2019, and September 28, 2019.
•On February 14, 2019, the Board authorized the repurchase of an aggregate of up to $500 million of the company’s common stock (the “2019 Authorization”). The 2019 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board.
Other Purchases or Sales of Equity Securities
The following chart
discloses information regarding transactions in shares of Snap-on’s common stock by Citibank, N.A. (“Citibank”) during the third quarter of 2019 pursuant to a prepaid equity forward agreement (the “Agreement”) with Citibank that is intended to reduce the impact of market risk associated with the stock-based portion of the company’s deferred compensation plans. The company’s stock-based deferred compensation liabilities, which are impacted by changes in the company’s stock price, increase as the company’s stock price rises and decrease as the company’s
stock price declines. Pursuant to the Agreement, Citibank may purchase or sell shares of the company’s common stock (for Citibank’s account) in the market or in privately negotiated transactions. The Agreement has no stated expiration date and does not provide for Snap-on to purchase or repurchase its shares.
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act of 1934, Snap-on Incorporated has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
