filings.toolsItem 16. Form 10-K Summary
219K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
None.
| 66 | SNAP-ON INCORPORATED |
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders and of Snap-on Incorporated:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Snap-on Incorporated and subsidiaries (the “Company”) as of December 30, 2017, and December 31, 2016, and the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the three years in the period ended December 30, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017, and December 31, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 30, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 15, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ DELOITTE & TOUCHE LLP | ||
| Milwaukee, Wisconsin February 15, 2018 |
We have served as the Company’s auditor since 2002.
| 2017 ANNUAL REPORT | 67 |
Table of Contents
Snap-on Incorporated – Consolidated Statements of Earnings
| (Amounts in millions, except per share data) | 2017 | 2016 | 2015 | |||||||||
| Net sales | $ | 3,686.9 | $ | 3,430.4 | $ | 3,352.8 | ||||||
| Cost of goods sold | (1,862.0) | (1,720.8) | (1,704.5) | |||||||||
| Gross profit | 1,824.9 | 1,709.6 | 1,648.3 | |||||||||
| Operating expenses | (1,160.9) | (1,054.1) | (1,053.7) | |||||||||
| Operating earnings before financial services | 664.0 | 655.5 | 594.6 | |||||||||
| Financial services revenue | 313.4 | 281.4 | 240.3 | |||||||||
| Financial services expenses | (95.9) | (82.7) | (70.1) | |||||||||
| Operating earnings from financial services | 217.5 | 198.7 | 170.2 | |||||||||
| Operating earnings | 881.5 | 854.2 | 764.8 | |||||||||
| Interest expense | (52.4) | (52.2) | (51.9) | |||||||||
| Other income (expense) – net | (7.2) | (0.6) | (2.4) | |||||||||
| Earnings before income taxes and equity earnings | 821.9 | 801.4 | 710.5 | |||||||||
| Income tax expense | (250.9) | (244.3) | (221.2) | |||||||||
| Earnings before equity earnings | 571.0 | 557.1 | 489.3 | |||||||||
| Equity earnings, net of tax | 1.2 | 2.5 | 1.3 | |||||||||
| Net earnings | 572.2 | 559.6 | 490.6 | |||||||||
| Net earnings attributable to noncontrolling interests | (14.5) | (13.2) | (11.9) | |||||||||
| Net earnings attributable to Snap-on Incorporated | $ | 557.7 | $ | 546.4 | $ | 478.7 | ||||||
| Net earnings per share attributable to Snap-on Incorporated: | ||||||||||||
| Basic | $ | 9.72 | $ | 9.40 | $ | 8.24 | ||||||
| Diluted | 9.52 | 9.20 | 8.10 | |||||||||
| Weighted-average shares outstanding: | ||||||||||||
| Basic | 57.4 | 58.1 | 58.1 | |||||||||
| Effect of dilutive securities | 1.2 | 1.3 | 1.0 | |||||||||
| Diluted | 58.6 | 59.4 | 59.1 | |||||||||
See Notes to Consolidated Financial Statements.
| 68 | SNAP-ON INCORPORATED |
Table of Contents
Snap-on Incorporated – Consolidated Statements of Comprehensive Income
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Comprehensive income (loss): | ||||||||||||
| Net earnings | $ | 572.2 | $ | 559.6 | $ | 490.6 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation* | 135.2 | (99.2) | (110.8) | |||||||||
| Unrealized cash flow hedges, net of tax: | ||||||||||||
| Other comprehensive income before reclassifications | 6.9 | 8.8 | – | |||||||||
| Reclassification of cash flow hedges to net earnings | (1.6) | (0.3) | (0.3) | |||||||||
| Defined benefit pension and postretirement plans: | ||||||||||||
| Net prior service costs and credits and unrecognized gain (loss) | 15.9 | (93.3) | (48.3) | |||||||||
| Income tax benefit (expense) | (4.1) | 30.7 | 19.4 | |||||||||
| Net of tax | 11.8 | (62.6) | (28.9) | |||||||||
| Amortization of net prior service costs and credits and unrecognized loss included in net periodic benefit cost | 26.6 | 30.1 | 38.0 | |||||||||
| Income tax benefit | (9.4) | (11.1) | (14.0) | |||||||||
| Net of tax | 17.2 | 19.0 | 24.0 | |||||||||
| Total comprehensive income | 741.7 | 425.3 | 374.6 | |||||||||
| Comprehensive income attributable to noncontrolling interests | (14.5) | (13.2) | (11.9) | |||||||||
| Comprehensive income attributable to Snap-on Incorporated | $ | 727.2 | $ | 412.1 | $ | 362.7 | ||||||
| * | There is no reclassification adjustment as there was no sale or liquidation of any foreign entity during any period presented. |
|---|
See Notes to Consolidated Financial Statements.
| 2017 ANNUAL REPORT | 69 |
Table of Contents
Snap-on Incorporated – Consolidated Balance Sheets
| Fiscal Year End | ||||||||
| (Amounts in millions, except share data) | 2017 | 2016 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 92.0 | $ | 77.6 | ||||
| Trade and other accounts receivable – net | 675.6 | 598.8 | ||||||
| Finance receivables – net | 505.4 | 472.5 | ||||||
| Contract receivables – net | 96.8 | 88.1 | ||||||
| Inventories – net | 638.8 | 530.5 | ||||||
| Prepaid expenses and other assets | 110.7 | 116.5 | ||||||
| Total current assets | 2,119.3 | 1,884.0 | ||||||
| Property and equipment – net | 484.4 | 425.2 | ||||||
| Deferred income tax assets | 52.0 | 72.8 | ||||||
| Long-term finance receivables – net | 1,039.2 | 934.5 | ||||||
| Long-term contract receivables – net | 322.6 | 286.7 | ||||||
| Goodwill | 924.1 | 895.5 | ||||||
| Other intangibles – net | 253.7 | 184.6 | ||||||
| Other assets | 53.8 | 39.9 | ||||||
| Total assets | $ | 5,249.1 | $ | 4,723.2 | ||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Notes payable and current maturities of long-term debt | $ | 433.2 | $ | 301.4 | ||||
| Accounts payable | 178.2 | 170.9 | ||||||
| Accrued benefits | 55.8 | 52.8 | ||||||
| Accrued compensation | 71.5 | 89.8 | ||||||
| Franchisee deposits | 66.5 | 66.7 | ||||||
| Other accrued liabilities | 388.1 | 307.9 | ||||||
| Total current liabilities | 1,193.3 | 989.5 | ||||||
| Long-term debt | 753.6 | 708.8 | ||||||
| Deferred income tax liabilities | 28.4 | 13.1 | ||||||
| Retiree health care benefits | 36.0 | 36.7 | ||||||
| Pension liabilities | 158.9 | 246.5 | ||||||
| Other long-term liabilities | 106.6 | 93.4 | ||||||
| Total liabilities | 2,276.8 | 2,088.0 | ||||||
| Commitments and contingencies (Note 15) | ||||||||
| Equity | ||||||||
| Shareholders’ equity attributable to Snap-on Incorporated: | ||||||||
| Preferred stock (authorized 15,000,000 shares of $1 par value; none outstanding) | – | – | ||||||
| Common stock (authorized 250,000,000 shares of $1 par value; issued 67,407,704 and 67,400,250 shares, respectively) | 67.4 | 67.4 | ||||||
| Additional paid-in capital | 343.2 | 317.3 | ||||||
| Retained earnings | 3,772.3 | 3,384.9 | ||||||
| Accumulated other comprehensive loss | (329.0) | (498.5) | ||||||
| Treasury stock at cost (10,717,455 and 9,450,393 shares, respectively) | (900.0) | (653.9) | ||||||
| Total shareholders’ equity attributable to Snap-on Incorporated | 2,953.9 | 2,617.2 | ||||||
| Noncontrolling interests | 18.4 | 18.0 | ||||||
| Total equity | 2,972.3 | 2,635.2 | ||||||
| Total liabilities and equity | $ | 5,249.1 | $ | 4,723.2 | ||||
See Notes to Consolidated Financial Statements.
| 70 | SNAP-ON INCORPORATED |
Table of Contents
Snap-on Incorporated – Consolidated Statements of Equity
| Shareholders’ Equity Attributable to Snap-on Incorporated | ||||||||||||||||||||||||||||
| (Amounts in millions, except share data) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Noncontrolling Interests | Total Equity | |||||||||||||||||||||
| Balance at January 3, 2015 | $ | 67.4 | $ | 254.7 | $ | 2,637.2 | $ | (248.2) | $ | (503.3) | $ | 17.5 | $ | 2,225.3 | ||||||||||||||
| Net earnings for 2015 | – | – | 478.7 | – | – | 11.9 | 490.6 | |||||||||||||||||||||
| Other comprehensive loss | – | – | – | (116.0) | – | – | (116.0) | |||||||||||||||||||||
| Cash dividends – $2.20 per share | – | – | (127.9) | – | – | – | (127.9) | |||||||||||||||||||||
| Stock compensation plans | – | 23.3 | – | – | 40.0 | – | 63.3 | |||||||||||||||||||||
| Share repurchases – 723,000 shares | – | – | – | – | (110.4) | – | (110.4) | |||||||||||||||||||||
| Tax benefit from certain stock options | – | 18.3 | – | – | – | – | 18.3 | |||||||||||||||||||||
| Dividend reinvestment plan and other | – | – | (1.1) | – | – | (11.4) | (12.5) | |||||||||||||||||||||
| Balance at January 2, 2016 | 67.4 | 296.3 | 2,986.9 | (364.2) | (573.7) | 18.0 | 2,430.7 | |||||||||||||||||||||
| Net earnings for 2016 | – | – | 546.4 | – | – | 13.2 | 559.6 | |||||||||||||||||||||
| Other comprehensive loss | – | – | – | (134.3) | – | – | (134.3) | |||||||||||||||||||||
| Cash dividends – $2.54 per share | – | – | (147.5) | – | – | – | (147.5) | |||||||||||||||||||||
| Stock compensation plans | – | 21.0 | – | – | 40.2 | – | 61.2 | |||||||||||||||||||||
| Share repurchases – 758,000 shares | – | – | – | – | (120.4) | – | (120.4) | |||||||||||||||||||||
| Other | – | – | (0.9) | – | – | (13.2) | (14.1) | |||||||||||||||||||||
| Balance at December 31, 2016 | 67.4 | 317.3 | 3,384.9 | (498.5) | (653.9) | 18.0 | 2,635.2 | |||||||||||||||||||||
| Net earnings for 2017 | – | – | 557.7 | – | – | 14.5 | 572.2 | |||||||||||||||||||||
| Other comprehensive income | – | – | – | 169.5 | – | – | 169.5 | |||||||||||||||||||||
| Cash dividends – $2.95 per share | – | – | (169.4) | – | – | – | (169.4) | |||||||||||||||||||||
| Stock compensation plans | – | 25.9 | – | – | 41.8 | – | 67.7 | |||||||||||||||||||||
| Share repurchases – 1,820,000 shares | – | – | – | – | (287.9) | – | (287.9) | |||||||||||||||||||||
| Other | – | – | (0.9) | – | – | (14.1) | (15.0) | |||||||||||||||||||||
| Balance at December 30, 2017 | $ | 67.4 | $ | 343.2 | $ | 3,772.3 | $ | (329.0) | $ | (900.0) | $ | 18.4 | $ | 2,972.3 | ||||||||||||||
See Notes to Consolidated Financial Statements.
| 2017 ANNUAL REPORT | 71 |
Table of Contents
Snap-on Incorporated – Consolidated Statements of Cash Flows
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Operating activities: | ||||||||||||
| Net earnings | $ | 572.2 | $ | 559.6 | $ | 490.6 | ||||||
| Adjustments to reconcile net earnings to net cash provided (used) by operating activities: | ||||||||||||
| Depreciation | 65.6 | 61.4 | 57.8 | |||||||||
| Amortization of other intangibles | 27.6 | 24.2 | 24.7 | |||||||||
| Provision for losses on finance receivables | 54.6 | 44.0 | 31.6 | |||||||||
| Provision for losses on non-finance receivables | 10.5 | 7.5 | 13.6 | |||||||||
| Stock-based compensation expense | 30.3 | 31.0 | 39.8 | |||||||||
| Excess tax benefits from stock-based compensation | – | – | (18.3) | |||||||||
| Deferred income tax provision (benefit) | 12.3 | 1.3 | (5.1) | |||||||||
| Loss (gain) on sales of assets | (0.2) | 0.2 | (2.1) | |||||||||
| Settlement of treasury lock | 14.9 | – | – | |||||||||
| Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||
| Increase in trade and other accounts receivable | (55.5) | (41.0) | (44.7) | |||||||||
| Increase in contract receivables | (41.8) | (31.9) | (34.6) | |||||||||
| Increase in inventories | (76.0) | (32.7) | (43.3) | |||||||||
| Increase in prepaid and other assets | (10.0) | (11.9) | (28.2) | |||||||||
| Increase (decrease) in accounts payable | (2.2) | 16.3 | 4.7 | |||||||||
| Increase (decrease) in accruals and other liabilities | 6.2 | (51.9) | 20.7 | |||||||||
| Net cash provided by operating activities | 608.5 | 576.1 | 507.2 | |||||||||
| Investing activities: | ||||||||||||
| Additions to finance receivables | (892.0) | (915.0) | (844.2) | |||||||||
| Collections of finance receivables | 712.7 | 671.7 | 624.8 | |||||||||
| Capital expenditures | (82.0) | (74.3) | (80.4) | |||||||||
| Acquisitions of businesses, net of cash acquired | (82.9) | (160.4) | (11.8) | |||||||||
| Disposals of property and equipment | 1.5 | 2.2 | 3.5 | |||||||||
| Other | 1.3 | 2.4 | 1.7 | |||||||||
| Net cash used by investing activities | (341.4) | (473.4) | (306.4) | |||||||||
| Financing activities: | ||||||||||||
| Proceeds from issuance of long-term debt | 297.8 | – | – | |||||||||
| Repayment of long-term debt | (150.0) | – | – | |||||||||
| Proceeds from notes payable | 16.8 | 4.5 | 7.1 | |||||||||
| Repayments of notes payable | (4.5) | (5.3) | (6.3) | |||||||||
| Net increase (decrease) in other short-term borrowings | 18.3 | 135.0 | (34.8) | |||||||||
| Cash dividends paid | (169.4) | (147.5) | (127.9) | |||||||||
| Purchases of treasury stock | (287.9) | (120.4) | (110.4) | |||||||||
| Proceeds from stock purchase and option plans | 46.2 | 41.8 | 41.6 | |||||||||
| Excess tax benefits from stock-based compensation | – | – | 18.3 | |||||||||
| Other | (23.4) | (24.1) | (24.3) | |||||||||
| Net cash used by financing activities | (256.1) | (116.0) | (236.7) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3.4 | (1.9) | (4.2) | |||||||||
| Increase (decrease) in cash and cash equivalents | 14.4 | (15.2) | (40.1) | |||||||||
| Cash and cash equivalents at beginning of year | 77.6 | 92.8 | 132.9 | |||||||||
| Cash and cash equivalents at end of year | $ | 92.0 | $ | 77.6 | $ | 92.8 | ||||||
| Supplemental cash flow disclosures: | ||||||||||||
| Cash paid for interest | $ | (51.2) | $ | (51.0) | $ | (50.8) | ||||||
| Net cash paid for income taxes | (228.1) | (247.3) | (191.9) |
See Notes to Consolidated Financial Statements.
| 72 | SNAP-ON INCORPORATED |
Table of Contents
Notes to Consolidated Financial Statements
Note 1: Summary of Accounting Policies
Principles of consolidation and presentation: The Consolidated Financial Statements include the accounts of Snap-on Incorporated and its wholly-owned and majority-owned subsidiaries (collectively, “Snap-on” or “the company”).
Snap-on accounts for investments in unconsolidated affiliates where Snap-on has a greater than 20% but less than 50% ownership interest under the equity method of accounting. Investments in unconsolidated affiliates of $18.6 million as of December 30, 2017, and $15.2 million as of December 31, 2016, are included in “Other assets” on the accompanying Consolidated Balance Sheets; no equity investment dividends were received in any period presented. In the normal course of business, the company may purchase products or services from, or sell products or services to, unconsolidated affiliates. Purchases from unconsolidated affiliates were $11.6 million, $12.9 million and $13.4 million in 2017, 2016 and 2015, respectively, and sales to unconsolidated affiliates were $0.5 million in 2017, $0.2 million in 2016 and zero in 2015. The Consolidated Financial Statements do not include the accounts of the company’s independent franchisees. Snap-on’s Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). All intercompany accounts and transactions have been eliminated.
Fiscal year accounting period: Snap-on’s fiscal year ends on the Saturday that is on or nearest to December 31. The 2017 fiscal year ended on December 30, 2017 (“2017”). The 2016 fiscal year ended on December 31, 2016 (“2016”). The 2015 fiscal year ended on January 2, 2016 (“2015”). The 2017, 2016, and 2015 fiscal years each contained 52 weeks of operating results.
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.
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 10 for further information on financial instruments.
Revenue recognition: Snap-on recognizes revenue from the sale of tools and diagnostic and equipment products when contract terms are met, the price is fixed or determinable, collectability is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. For sales contingent upon customer acceptance, revenue recognition is deferred until such obligations are fulfilled. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and gross profit margin adjusted for known trends. Provisions for customer volume rebates, discounts and allowances are also recorded as a reduction of reported revenues at the time of sale based on historical experience and known trends. Revenue related to extended warranty and subscription agreements is recognized over the terms of the respective agreements.
Snap-on also recognizes revenue related to multiple element arrangements, including sales of hardware, software and software-related services. When a sales arrangement contains multiple elements, such as hardware and software products and/or services, Snap-on uses the relative selling price method to allocate revenues between hardware and software elements. For software elements that are not essential to the hardware’s functionality and related software post-contract customer support, vendor specific objective evidence (“VSOE”) of fair value is used to further allocate revenue to each element based on its relative fair value and, when necessary, the residual method is used to assign value to the delivered elements when VSOE only exists for the undelivered elements. The amount assigned to the products or services is recognized when the product is delivered and/or when the services are performed. In instances where the product and/or services are performed over an extended period, as is the case with subscription agreements or the providing of ongoing support, revenue is generally recognized on a straight-line basis over the term of the agreement, which generally ranges from 12 to 60 months.
| 2017 ANNUAL REPORT | 73 |
Table of Contents
Notes to Consolidated Financial Statements (continued)
Franchise fee revenue, including nominal, non-refundable initial fees, is recognized upon the granting of a franchise, which is when the company has performed substantially all initial services required by the franchise agreement. Franchise fee revenue also includes ongoing monthly fees (primarily for sales and business training as well as marketing and product promotion programs) that are recognized as the fees are earned. Franchise fee revenue totaled $15.2 million, $13.9 million and $12.7 million in 2017, 2016 and 2015, respectively.
Financial services revenue: Snap-on also generates revenue from various financing programs that include: (i) installment sales and lease contracts arising from franchisees’ customers and Snap-on customers who require financing for the purchase or lease of tools and diagnostic and equipment products on an extended-term payment plan; and (ii) business loans and vehicle leases to franchisees. These financing programs are offered through Snap-on’s wholly owned finance subsidiaries. Financial services revenue consists primarily of interest income on finance and contract receivables and is recognized over the life of the underlying contracts, with interest computed primarily on the average daily balances of the underlying contracts.
The decision to finance through Snap-on or another financing source is solely at the election of the customer. When assessing customers for potential financing, Snap-on considers various factors regarding ability to pay, including the customers’ financial condition, debt-servicing ability, past payment experience, and credit bureau and proprietary Snap-on credit model information, as well as the value of the underlying collateral. For finance and contract receivables, Snap-on assesses these factors through the use of credit quality indicators consisting primarily of customer credit risk scores combined with internal credit risk grades, collection experience and other internal metrics.
Financial services lease arrangements: Snap-on accounts for its financial services leases as direct financing or sales-type leases. The company determines the gross investment in the lease as the present value of the minimum lease payments using the interest rate implicit in the lease, net of amounts, if any, included therein for executor costs to be paid by Snap-on, together with any profit thereon. The difference between the gross investment in the lease and the related undiscounted minimum lease payments for the leased property is reported as unearned finance charges. Unearned finance charges are amortized to income over the life of the contract. The default covenants included in the lease arrangements are usual and customary, consistent with industry practice, and do not impact the lease classification. Except in circumstances where the company has concluded that a lessee’s financial condition has deteriorated, the other default covenants under Snap-on’s lease arrangements are objectively determinable.
Research and engineering: Snap-on incurred research and engineering costs of $60.9 million, $53.4 million and $49.3 million in 2017, 2016 and 2015, respectively. Research and engineering costs are included in “Operating expenses” on the accompanying Consolidated Statements of Earnings.
Internally developed software: Costs incurred in the development of software that will ultimately be sold are capitalized from the time technological feasibility has been attained and capitalization ceases when the related product is ready for general release. During 2017, 2016 and 2015, Snap-on capitalized $11.3 million, $10.8 million and $14.9 million, respectively, of such costs. Amortization of capitalized software development costs, which is included in “Cost of goods sold” on the accompanying Consolidated Statements of Earnings, was $14.7 million in 2017, $13.8 million in 2016 and $14.0 million in 2015. Unamortized capitalized software development costs of $43.6 million as of 2017 year end and $47.4 million as of 2016 year end are included in “Other intangibles – net” on the accompanying Consolidated Balance Sheets.
Internal-use software: Costs that are incurred in creating software solutions and enhancements to those solutions are capitalized only for the application development stage of the project.
Shipping and handling: Amounts billed to customers for shipping and handling are included as a component of sales. Costs incurred by Snap-on for shipping and handling are included as a component of cost of goods sold when the costs relate to manufacturing activities. In 2017, 2016 and 2015, Snap-on incurred shipping and handling charges of $49.7 million, $43.1 million and $39.0 million, respectively, that were recorded in “Cost of goods sold” on the accompanying Consolidated Statements of Earnings. Shipping and handling costs incurred in conjunction with selling or distribution activities are included as a component of operating expenses. Shipping and handling charges were $82.3 million in 2017, $81.2 million in 2016 and $78.5 million in 2015; these charges were recorded in “Operating expenses” on the accompanying Consolidated Statements of Earnings.
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Advertising and promotion: Production costs of future media advertising are deferred until the advertising occurs. All other advertising and promotion costs are expensed when incurred. For 2017, 2016 and 2015, advertising and promotion expenses totaled $55.7 million, $52.6 million and $54.9 million, respectively. Advertising and promotion costs are included in “Operating expenses” on the accompanying Consolidated Statements of Earnings.
Warranties: Snap-on provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. See Note 15 for information on warranties.
Foreign currency: The financial statements of Snap-on’s foreign subsidiaries are translated into U.S. dollars. Assets and liabilities of foreign subsidiaries are translated at current rates of exchange, and income and expense items are translated at the average exchange rates for the period. The resulting translation adjustments are recorded directly into “Accumulated other comprehensive loss” on the accompanying Consolidated Balance Sheets. Foreign exchange transactions, net of foreign currency hedges, resulted in pretax losses of $7.0 million, $1.3 million and $2.7 million in 2017, 2016 and 2015, respectively. Foreign exchange transaction gains and losses are reported in “Other income (expense) – net” on the accompanying Consolidated Statements of Earnings.
Income taxes: Current tax assets and liabilities are based upon an estimate of taxes refundable or payable for each of the jurisdictions in which the company is subject to tax. In the ordinary course of business, there is inherent uncertainty in quantifying income tax positions. Snap-on assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, Snap-on records the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements. When applicable, associated interest and penalties are recognized as a component of income tax expense. Accrued interest and penalties are included within the related tax asset or liability on the accompanying Consolidated Balance Sheets.
Deferred income taxes are provided for temporary differences arising from differences in bases of assets and liabilities for tax and financial reporting purposes. Deferred income taxes are recorded on temporary differences using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. See Note 8 for further information on income taxes.
Per share data: Basic earnings per share calculations were computed by dividing net earnings attributable to Snap-on Incorporated by the corresponding weighted-average number of common shares outstanding for the period. The dilutive effect of the potential exercise of outstanding options and stock-settled stock appreciation rights (“SARs”) to purchase common shares is calculated using the treasury stock method. As of December 30, 2017, there were 722,715 awards outstanding that were anti-dilutive; as of both December 31, 2016, and January 2, 2016, there were 1,600 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. Snap-on had dilutive securities totaling 1,207,285 shares, 1,307,914 shares and 1,016,969 shares, as of the end of 2017, 2016 and 2015, respectively. See Note 13 for further information on equity awards.
Stock-based compensation: Snap-on recognizes the cost of employee services in exchange for awards of equity instruments based on the grant date fair value of those awards. That cost, based on the estimated number of awards that are expected to vest, is recognized on a straight-line basis over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for awards for which employees do not render the requisite service. The grant date fair value of employee stock options and similar instruments is estimated using the Black-Scholes valuation model.
The Black-Scholes valuation model requires the input of subjective assumptions, including the expected life of the stock-based award and stock price volatility. The assumptions used are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that depicted in the financial statements. See Note 13 for further information on stock-based compensation.
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Notes to Consolidated Financial Statements (continued)
Derivatives: Snap-on utilizes derivative financial instruments, including foreign currency forward contracts, interest rate swap agreements, treasury lock agreements and prepaid equity forward agreements to manage its exposures to foreign currency exchange rate risks, interest rate risks, and market risk associated with the stock-based portion of its deferred compensation plans. Snap-on accounts for its derivative instruments at fair value. Snap-on does not hold or issue financial instruments for speculative or trading purposes. See Note 10 for further information on derivatives.
Cash equivalents: Snap-on considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of 2017 and 2016 year ends.
Receivables and allowances for doubtful accounts: All trade, finance and contract receivables are reported on the Consolidated Balance Sheets at their outstanding principal balance adjusted for any charge-offs and net of allowances for doubtful accounts. Finance and contract receivables also include accrued interest and contract acquisition costs, net of contract acquisition fees.
Snap-on maintains allowances for doubtful accounts to absorb probable losses inherent in its portfolio of receivables. The allowances for doubtful accounts represent management’s estimate of the losses inherent in the company’s receivables portfolio based on ongoing assessments and evaluations of collectability and historical loss experience. In estimating losses inherent in each of its receivable portfolios (trade, finance and contract receivables), Snap-on uses historical loss experience rates by portfolio and applies them to a related aging analysis. Determination of the proper level of allowances by portfolio requires management to exercise significant judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowances take into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, loss migration, delinquency trends, collection experience, current economic conditions and credit risk characteristics as follows:
| • | Snap-on evaluates the collectability of receivables based on a combination of various financial and qualitative factors that may affect its customers’ ability to pay. These factors may include customers’ financial condition, debt-servicing ability, past payment experience, and credit bureau and proprietary Snap-on credit model information, as well as the value of the underlying collateral. |
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| • | For finance and contract receivables, Snap-on assesses quantitative and qualitative factors through the use of credit quality indicators consisting primarily of collection experience and other internal metrics as follows: |
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| • | Collection experience – Snap-on conducts monthly reviews of credit and collection performance for each of its finance and contract receivable portfolios focusing on data such as delinquency trends, non-performing assets, and charge-off and recovery activity. These reviews allow for the formulation of collection strategies and potential collection policy modifications in response to changing risk profiles in the finance and contract receivable portfolios. |
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| • | Other internal metrics – Snap-on maintains a system that aggregates credit exposure by customer, risk classification and geographical area, among other factors, to further monitor changing risk profiles. |
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Management performs detailed reviews of its receivables on a monthly and/or quarterly basis to assess the adequacy of the allowances based on historical and current trends and other factors affecting credit losses and to determine if any impairment has occurred. 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 agreement. Additions to the allowances for doubtful accounts are maintained through adjustments to the provision for credit losses, which are charged to current period earnings; amounts determined to be uncollectable are charged directly against the allowances, while amounts recovered on previously charged-off accounts increase the allowances. Net charge-offs include the principal amount of losses charged-off as well as charged-off interest and fees. Recovered interest and fees previously charged-off are recorded through the allowances for doubtful accounts and increase the allowances. Finance receivables are assessed for charge-off when an account becomes 120 days past due and are charged-off typically within 60 days of asset repossession. Contract receivables related to equipment leases are generally charged-off when an account becomes 150 days past due, while contract receivables related to franchise finance and van leases are generally charged-off up to 180 days past the asset return date. For finance and contract receivables, customer bankruptcies are generally charged-off upon notification that the associated debt is not being reaffirmed or, in any event, no later than 180 days past due.
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Snap-on does not believe that its trade accounts, finance or contract receivables represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographical areas. See Note 3 for further information on receivables and allowances for doubtful accounts.
Other accrued liabilities: Supplemental balance sheet information for “Other accrued liabilities” as of 2017 and 2016 year end is as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Income taxes | $ | 41.6 | $ | 21.4 | ||||
| Accrued restructuring | 0.6 | 2.8 | ||||||
| Accrued warranty | 17.2 | 16.0 | ||||||
| Deferred subscription revenue | 38.9 | 43.0 | ||||||
| Accrued property, payroll and other taxes | 45.4 | 36.1 | ||||||
| Accrued selling and promotion expense | 28.6 | 24.7 | ||||||
| Accrued legal matters | 45.9 | – | ||||||
| Other | 169.9 | 163.9 | ||||||
| Total other accrued liabilities | $ | 388.1 | $ | 307.9 | ||||
Inventories: Snap-on values its inventory at the lower of cost or market and adjusts for the value of inventory that is estimated to be excess, obsolete or otherwise unmarketable. Snap-on records allowances for excess and obsolete inventory based on historical and estimated future demand and market conditions. Allowances for raw materials are largely based on an analysis of raw material age and actual physical inspection of raw material for fitness for use. As part of evaluating the adequacy of allowances for work-in-progress and finished goods, management reviews individual product stock-keeping units (SKUs) by product category and product life cycle. Cost adjustments for each product category/product life-cycle state are generally established and maintained based on a combination of historical experience, forecasted sales and promotions, technological obsolescence, inventory age and other actual known conditions and circumstances. Should actual product marketability and raw material fitness for use be affected by conditions that are different from management estimates, further adjustments to inventory allowances may be required.
Snap-on adopted the “last-in, first-out” (“LIFO”) inventory valuation method in 1973 for its U.S. locations. Snap-on’s U.S. inventories accounted for on a LIFO basis consist of purchased product and inventory manufactured at the company’s heritage U.S. manufacturing facilities (primarily hand tools and tool storage). Since Snap-on began acquiring businesses in the 1990’s, the company has used the “first-in, first-out” (“FIFO”) inventory valuation methodology for acquisitions; the company does not adopt the LIFO inventory valuation methodology for new acquisitions. See Note 4 for further information on inventories.
Property and equipment: Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over estimated useful lives. Major repairs that extend the useful life of an asset are capitalized, while routine maintenance and repairs are expensed as incurred. Capitalized software included in property and equipment reflects costs related to internally developed or purchased software for internal use and is amortized on a straight-line basis over their estimated useful lives. Long-lived assets are evaluated for impairment when events or circumstances indicate that the carrying amount of the long-lived asset may not be recoverable. See Note 5 for further information on property and equipment.
Goodwill and other intangible assets: Goodwill and other indefinite-lived assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the company in the second quarter of each year using information available as of fiscal April month end. Snap-on evaluates the existence of goodwill and indefinite-lived intangible asset impairment on the basis of whether the assets are fully recoverable from projected, discounted cash flows of the related reportable unit or asset. Intangible assets with finite lives are amortized over their estimated useful lives using straight-line and accelerated methods depending on the nature of the particular asset. See Note 6 for further information on goodwill and other intangible assets.
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Notes to Consolidated Financial Statements (continued)
New accounting standards
The following new accounting pronouncement was adopted in fiscal year 2017:
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. Snap-on early adopted this ASU in the second quarter of 2017 in conjunction with its annual impairment test. The amendments in this ASU are being applied on a prospective basis and the adoption did not have a significant impact on the company’s consolidated financial statements.
The following new accounting pronouncements, and related impacts on adoption, are being evaluated by the company:
In August 2017, the FASB issued 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 make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The company is currently assessing the impact this ASU will have on its consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The non-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset).
The ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The company will adopt this ASU at the beginning of its 2018 fiscal year, with the changes applied retrospectively. The adoption of this ASU is not expected to have a significant impact on the company’s consolidated income statement.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory. The ASU eliminates the requirement to defer the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The company will adopt this ASU at the beginning of its 2018 fiscal year. The adoption of this ASU will not have a significant impact on the company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The company will adopt this ASU at the beginning of its 2018 fiscal year. The adoption of the ASU is not expected to have a significant impact to the designations of operating, investing and financing activities on the company’s consolidated statement of cash flows.
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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 is to provide financial statement users with more decision-useful 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 ASU allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. The company is currently assessing the impact this ASU will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is intended to represent an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU, which supersedes most current lease guidance, affects any entity that enters into a lease (as that term is defined in the ASU), with some specified scope exemptions. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption as of the beginning of an interim or annual reporting period. The company is currently assessing the impact this ASU will have on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), that, together with several subsequent updates, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Topic 606 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.
Entities have the option of adopting this standard using either a full retrospective approach or a modified retrospective approach (i.e., through a cumulative-effect adjustment directly to retained earnings at the time of adoption).
Snap-on commenced its assessment of Topic 606 during the second half of 2014 and developed a comprehensive project plan that included representatives from across the company’s business segments. The project plan included analyzing the standard’s impact on the company’s various revenue streams, comparing its historical accounting policies and practices to the requirements of the new standard, identifying potential differences from applying the requirements of the new standard to its contracts, and providing updates on implementation progress. The company is in the process of implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under Topic 606.
As of December 30, 2017, and subject to the company’s ongoing evaluation of new transactions and contracts, the company has substantially completed its evaluation of the expected impact of adopting Topic 606 and anticipates that the adoption of this standard will not have a significant impact on the company’s consolidated financial statements. The company believes that the adoption will result in the recognition of an inventory asset related to certain product returns by increasing the returns liability and inventory for the anticipated value of the returns; the corresponding increase in the inventory asset and returns liability is expected to be approximately $24 million at the date of adoption. The adoption is also expected to result in the recognition of an increase in the inventory obsolescence reserve related to the anticipated value on returns of approximately $3 million and a $1 million increase in deferred income tax assets, with a corresponding adjustment to fiscal 2018 beginning retained earnings.
The company will adopt Topic 606 at the beginning of its 2018 fiscal year using the modified retrospective approach.
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Notes to Consolidated Financial Statements (continued)
Note 2: Acquisitions
On July 28, 2017, Snap-on acquired Torque Control Specialists Pty Ltd (“TCS”) for a cash purchase price of $3.6 million (or $3.5 million, net of cash acquired). TCS, based in Adelaide, Australia, distributes a full range of torque products, including wrenches, multipliers and calibrators, for use in critical industries.
In fiscal 2017, the company substantially completed the purchase accounting valuations for the acquired net assets of TCS. The $1.9 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Consolidated Balance Sheets. For segment reporting purposes, the results of operations and assets of TCS have been included in the Commercial & Industrial Group since the acquisition date.
On May 4, 2017, Snap-on acquired Norbar Torque Tools Holdings Limited, along with its U.S. and Chinese joint ventures (“Norbar”), for a cash purchase price of $71.6 million (or $69.9 million, net of cash acquired). Norbar, based in Banbury, U.K., designs and manufactures a full range of torque products, including wrenches, multipliers and calibrators for use in critical industries.
In fiscal 2017, the company substantially completed the purchase accounting valuations for the acquired net assets of Norbar, including intangible assets. The $23.7 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Consolidated Balance Sheets. For segment reporting purposes, the results of operations and assets of Norbar have been included in the Commercial & Industrial Group since the acquisition date.
On January 30, 2017, Snap-on acquired BTC Global Limited (“BTC”) for a cash purchase price of $9.2 million. BTC, based in Crewe, U.K., designs and implements automotive vehicle inspection and management software for original equipment manufacturer (“OEM”) franchise repair shops.
In fiscal 2017, the company completed the purchase accounting valuations for the acquired net assets of BTC, including intangible assets. The $5.9 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Consolidated Balance Sheets. For segment reporting purposes, the results of operations and assets of BTC have been included in the Repair Systems and Information Group since the acquisition date.
On November 16, 2016, Snap-on acquired Ryeson Corporation (d/b/a Sturtevant Richmont) for a cash purchase price of $13.0 million (or $12.6 million, net of cash acquired). Sturtevant Richmont, based in Carol Stream, Illinois, designs, manufactures and distributes mechanical and electronic torque wrenches as well as wireless torque error proofing systems for a variety of industrial applications.
In fiscal 2017, the company completed the purchase accounting valuations for the acquired net assets of Sturtevant Richmont, including intangible assets. The $5.0 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Consolidated Balance Sheets. For segment reporting purposes, the results of operations and assets of Sturtevant Richmont have been included in the Commercial & Industrial Group since the acquisition date.
On October 31, 2016, Snap-on acquired Car-O-Liner Holding AB (“Car-O-Liner”) for a cash purchase price of $152.0 million (or $148.1 million, net of cash acquired). Car-O-Liner, based in Gothenburg, Sweden, designs and manufactures collision repair equipment, and information and truck alignment systems.
In fiscal 2017, the company completed the purchase accounting valuations for the acquired net assets of Car-O-Liner, including intangible assets. The $77.3 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Consolidated Balance Sheets. For segment reporting purposes, substantially all of Car-O-Liner’s results of operations and assets have been included in the Repair Systems & Information Group since the acquisition date, with the remaining portions included in the Commercial & Industrial Group.
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The following is a summary of the values of the assets acquired and liabilities assumed of Car-O-Liner, including adjustments recorded as of December 30, 2017, as a result of new information obtained about facts and circumstances that existed as of the October 31, 2016 acquisition date:
| (Amounts in millions) | Amounts as of October 31, 2016 (As Adjusted) | |||
| Assets acquired: | ||||
| Cash | $ | 3.9 | ||
| Trade and other accounts receivable | 17.0 | |||
| Inventories | 18.3 | |||
| Property and equipment | 17.5 | |||
| Goodwill | 77.3 | |||
| Other intangibles: | ||||
| Customer relationships | 27.2 | |||
| Non-amortized trademarks | 27.7 | |||
| Other assets | 5.8 | |||
| Total assets acquired | 194.7 | |||
| Liabilities assumed: | ||||
| Accounts payable | 9.8 | |||
| Deferred income tax liabilities | 14.8 | |||
| Accrued expenses | 13.8 | |||
| Pension liabilities | 4.3 | |||
| Total liabilities assumed | 42.7 | |||
| Net assets acquired | $ | 152.0 | ||
In fiscal 2017, Snap-on recognized expense of $0.5 million (of which $0.2 million was in “Cost of goods sold” and $0.3 million was in “Operating expenses”) in the accompanying Consolidated Statements of Earnings related to Car-O-Liner that would have been recognized in 2016 if the provisional adjustments identified in the current reporting period had been recognized as of the October 31, 2016 acquisition date.
On July 27, 2015, Snap-on acquired the assets of Ecotechnics S.p.A. (“Ecotechnics”) for a cash purchase price of $11.8 million. Ecotechnics designs and manufactures vehicle air conditioning service equipment for original equipment manufacturer (“OEM”) dealerships and the automotive aftermarket worldwide. For segment reporting purposes, the results of operations and assets of Ecotechnics have been included in the Repair Systems & Information Group since the acquisition date.
Pro forma financial information has not been presented for any of these acquisitions as the net effects, individually and collectively, 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.
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Notes to Consolidated Financial Statements (continued)
Note 3: Receivables
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 30 to 120 days.
The components of Snap-on’s trade and other accounts receivable as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Trade and other accounts receivable | $ | 690.2 | $ | 612.8 | ||||
| Allowances for doubtful accounts | (14.6) | (14.0) | ||||||
| Total trade and other accounts receivable – net | $ | 675.6 | $ | 598.8 | ||||
Finance and Contract Receivables
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 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 approaching four years. Contract receivables, with payment terms of up to 10 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. Finance and 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.
The components of Snap-on’s current finance and contract receivables as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Finance receivables, net of unearned finance charges of $21.0 million and $17.0 million, respectively | $ | 523.1 | $ | 488.1 | ||||
| Contract receivables, net of unearned finance charges of $17.6 million and $15.6 million, respectively | 98.1 | 89.3 | ||||||
| Total | 621.2 | 577.4 | ||||||
| Allowances for doubtful accounts: | ||||||||
| Finance receivables | (17.7) | (15.6) | ||||||
| Contract receivables | (1.3) | (1.2) | ||||||
| Total | (19.0) | (16.8) | ||||||
| Total current finance and contract receivables – net | $ | 602.2 | $ | 560.6 | ||||
| Finance receivables – net | $ | 505.4 | $ | 472.5 | ||||
| Contract receivables – net | 96.8 | 88.1 | ||||||
| Total current finance and contract receivables – net | $ | 602.2 | $ | 560.6 | ||||
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The components of Snap-on’s finance and contract receivables with payment terms beyond one year as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Finance receivables, net of unearned finance charges of $16.7 million and $13.0 million, respectively | $ | 1,078.0 | $ | 967.5 | ||||
| Contract receivables, net of unearned finance charges of $25.5 million and $21.5 million, respectively | 325.9 | 289.4 | ||||||
| Total | 1,403.9 | 1,256.9 | ||||||
| Allowances for doubtful accounts: | ||||||||
| Finance receivables | (38.8) | (33.0) | ||||||
| Contract receivables | (3.3) | (2.7) | ||||||
| Total | (42.1) | (35.7) | ||||||
| Total long-term finance and contract receivables – net | $ | 1,361.8 | $ | 1,221.2 | ||||
| Finance receivables – net | $ | 1,039.2 | $ | 934.5 | ||||
| Contract receivables – net | 322.6 | 286.7 | ||||||
| Total long-term finance and contract receivables – net | $ | 1,361.8 | $ | 1,221.2 | ||||
Long-term finance and contract receivables installments, net of unearned finance charges, as of 2017 and 2016 year end are scheduled as follows:
| 2017 | 2016 | |||||||||||||||
| (Amounts in millions) | Finance Receivables | Contract Receivables | Finance Receivables | Contract Receivables | ||||||||||||
| Due in Months: | ||||||||||||||||
| 13 – 24 | $ | 415.1 | $ | 77.6 | $ | 380.9 | $ | 69.5 | ||||||||
| 25 – 36 | 333.3 | 67.6 | 296.9 | 60.2 | ||||||||||||
| 37 – 48 | 225.5 | 56.5 | 196.8 | 49.7 | ||||||||||||
| 49 – 60 | 104.1 | 42.8 | 92.9 | 37.7 | ||||||||||||
| Thereafter | – | 81.4 | – | 72.3 | ||||||||||||
| Total | $ | 1,078.0 | $ | 325.9 | $ | 967.5 | $ | 289.4 | ||||||||
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 30 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 90 days past due.
Contract receivables are generally placed on nonaccrual status (i) when a receivable is more than 90 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.
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Notes to Consolidated Financial Statements (continued)
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 2017 and 2016 year end, there were $28.0 million and $24.9 million, respectively, of impaired finance receivables, and there were $2.3 million and $2.0 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 2017 and 2016 year end were immaterial to both the financial services portfolio and the company’s results of operations and financial position.
The aging of finance and contract receivables as of 2017 and 2016 year end is as follows:
| (Amounts in millions) | 30-59 Days Past Due | 60-90 Days Past Due | Greater Than 90 Days Past Due | Total Past Due | Total Not Past Due | Total | Greater Than 90 Days Past Due and Accruing | |||||||||||||||||||||
| 2017 year end: | ||||||||||||||||||||||||||||
| Finance receivables | $ | 19.3 | $ | 13.9 | $ | 20.1 | $ | 53.3 | $ | 1,547.8 | $ | 1,601.1 | $ | 15.4 | ||||||||||||||
| Contract receivables | 1.2 | 0.6 | 1.9 | 3.7 | 420.3 | 424.0 | 0.6 | |||||||||||||||||||||
| 2016 year end: | ||||||||||||||||||||||||||||
| Finance receivables | $ | 15.1 | $ | 9.8 | $ | 17.0 | $ | 41.9 | $ | 1,413.7 | $ | 1,455.6 | $ | 13.2 | ||||||||||||||
| Contract receivables | 1.4 | 0.9 | 1.4 | 3.7 | 375.0 | 378.7 | 0.5 |
The amount of performing and nonperforming finance and contract receivables based on payment activity as of 2017 and 2016 year end is as follows:
| 2017 | 2016 | |||||||||||||||
| (Amounts in millions) | Finance Receivables | Contract Receivables | Finance Receivables | Contract Receivables | ||||||||||||
| Performing | $ | 1,573.1 | $ | 421.7 | $ | 1,430.7 | $ | 376.7 | ||||||||
| Nonperforming | 28.0 | 2.3 | 24.9 | 2.0 | ||||||||||||
| Total | $ | 1,601.1 | $ | 424.0 | $ | 1,455.6 | $ | 378.7 | ||||||||
The amount of finance and contract receivables on nonaccrual status as of 2017 and 2016 year end is as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Finance receivables | $ | 12.6 | $ | 11.7 | ||||
| Contract receivables | 1.7 | 1.5 |
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The following is a rollforward of the allowances for doubtful accounts for finance and contract receivables for 2017 and 2016:
| 2017 | 2016 | |||||||||||||||
| (Amounts in millions) | Finance Receivables | Contract Receivables | Finance Receivables | Contract Receivables | ||||||||||||
| Allowances for doubtful accounts: | ||||||||||||||||
| Beginning of year | $ | 48.6 | $ | 3.9 | $ | 38.2 | $ | 4.4 | ||||||||
| Provision | 54.6 | 2.7 | 44.0 | 1.0 | ||||||||||||
| Charge-offs | (53.3) | (2.5) | (39.8) | (1.8) | ||||||||||||
| Recoveries | 6.6 | 0.4 | 6.2 | 0.4 | ||||||||||||
| Currency translation | – | 0.1 | – | (0.1) | ||||||||||||
| End of year | $ | 56.5 | $ | 4.6 | $ | 48.6 | $ | 3.9 | ||||||||
The following is a rollforward of the combined allowances for doubtful accounts related to trade and other accounts receivable, as well as finance and contract receivables, for 2017, 2016 and 2015:
| (Amounts in millions) | Balance at Beginning of Year | Expenses | Deductions (1) | Balance at End of Year | ||||||||||||
| Allowances for doubtful accounts: | ||||||||||||||||
| 2017 | $ | 66.5 | $ | 65.1 | $ | (55.9) | $ | 75.7 | ||||||||
| 2016 | 59.3 | 51.5 | (44.3) | 66.5 | ||||||||||||
| 2015 | 52.4 | 45.1 | (38.2) | 59.3 |
| (1) | Represents write-offs of bad debts, net of recoveries, and the net impact of currency translation. |
|---|
Note 4: Inventories
Inventories by major classification as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Finished goods | $ | 541.9 | $ | 467.4 | ||||
| Work in progress | 49.3 | 42.7 | ||||||
| Raw materials | 122.7 | 93.6 | ||||||
| Total FIFO value | 713.9 | 603.7 | ||||||
| Excess of current cost over LIFO cost | (75.1) | (73.2) | ||||||
| Total inventories – net | $ | 638.8 | $ | 530.5 | ||||
Inventories accounted for using the FIFO method approximated 61% and 59% of total inventories as of 2017 and 2016 year end, respectively. The company accounts for its non-U.S. inventory on the FIFO method. As of 2017 year end, approximately 33% of the company’s U.S. inventory was accounted for using the FIFO method and 67% was accounted for using the LIFO method. There were no LIFO inventory liquidations in 2017, 2016 or 2015.
| 2017 ANNUAL REPORT | 85 |
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Notes to Consolidated Financial Statements (continued)
Note 5: Property and Equipment
Property and equipment (which are carried at cost) as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Land | $ | 24.5 | $ | 19.1 | ||||
| Buildings and improvements | 357.4 | 309.4 | ||||||
| Machinery, equipment and computer software | 889.2 | 809.6 | ||||||
| Property and equipment – gross | 1,271.1 | 1,138.1 | ||||||
| Accumulated depreciation and amortization | (786.7) | (712.9) | ||||||
| Property and equipment – net | $ | 484.4 | $ | 425.2 | ||||
The estimated service lives of property and equipment are principally as follows:
| Buildings and improvements | 3 to 50 years | |
| Machinery, equipment and computer software | 2 to 15 years |
The cost and accumulated depreciation of property and equipment under capital leases as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Buildings and improvements | $ | 21.4 | $ | 20.5 | ||||
| Accumulated depreciation | (14.0) | (12.3) | ||||||
| Net book value | $ | 7.4 | $ | 8.2 | ||||
Depreciation expense was $65.6 million, $61.4 million and $57.8 million in 2017, 2016 and 2015, respectively.
Note 6: Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment for 2017 and 2016 are as follows:
| (Amounts in millions) | Commercial & Industrial Group | Snap-on Tools Group | Repair Systems & Information Group | Total | ||||||||||||
| Balance as of 2015 year end | $ | 253.1 | $ | 12.5 | $ | 524.5 | $ | 790.1 | ||||||||
| Currency translation | (16.4) | – | (9.5) | (25.9) | ||||||||||||
| Acquisitions | 5.7 | – | 125.6 | 131.3 | ||||||||||||
| Balance as of 2016 year end | $ | 242.4 | $ | 12.5 | $ | 640.6 | $ | 895.5 | ||||||||
| Currency translation | 30.3 | – | 15.8 | 46.1 | ||||||||||||
| Acquisitions | 25.7 | – | (43.2) | (17.5) | ||||||||||||
| Balance as of 2017 year end | $ | 298.4 | $ | 12.5 | $ | 613.2 | $ | 924.1 | ||||||||
Goodwill of $924.1 million as of 2017 year end includes the following from 2017 acquisitions: (i) $23.7 million, on a preliminary basis, from the acquisition of Norbar, (ii) $5.9 million from the acquisition of BTC, and (iii) $1.9 million, on a preliminary basis, from the acquisition of TCS. As of 2017 year end goodwill also includes, from 2016 acquisitions: (i) $77.3 million from the acquisition of Car-O-Liner, and (ii) $5.0 million from the acquisition of Sturtevant Richmont.
| 86 | SNAP-ON INCORPORATED |
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During 2017, the purchase accounting valuations for the acquired net assets, including intangible assets, of Car-O-Liner were completed, resulting in a reduction of goodwill of $50.8 million from 2016 year end, with a $49.1 million reduction in the Repair Systems & Information Group and $1.7 million in the Commercial & Industrial Group. Additionally, purchase accounting for Sturtevant Richmont was also completed in 2017, resulting in a $1.8 million increase in goodwill from 2016 year end.
The goodwill from the Car-O-Liner acquisition is distributed as follows: $76.5 million in the Repair Systems & Information Group and $0.8 million in the Commercial & Industrial Group. The goodwill from Norbar, TCS and Sturtevant Richmont is included in the Commercial & Industrial Group and the goodwill from the BTC acquisition is included in the Repair Systems & Information Group. See Note 2 for additional information on acquisitions.
As the purchase accounting for deferred taxes for the acquired net assets of Norbar and TCS were not complete as of 2017 year end, the allocation of the respective purchase prices and resulting goodwill has been prepared on a preliminary basis and changes to the allocations will occur as the deferred taxes are determined. The company is expected to complete the purchase accounting within one year of their respective acquisition dates.
Additional disclosures related to other intangible assets as of 2017 and 2016 year end are as follows:
| 2017 | 2016 | |||||||||||||||
| (Amounts in millions) | Gross Carrying Value | Accumulated Amortization | Gross Carrying Value | Accumulated Amortization | ||||||||||||
| Amortized other intangible assets: | ||||||||||||||||
| Customer relationships | $ | 175.2 | $ | (98.2) | $ | 142.6 | $ | (86.0) | ||||||||
| Developed technology | 18.9 | (18.4) | 17.7 | (17.7) | ||||||||||||
| Internally developed software | 177.0 | (133.4) | 165.7 | (118.3) | ||||||||||||
| Patents | 34.1 | (22.7) | 31.9 | (21.5) | ||||||||||||
| Trademarks | 3.0 | (2.0) | 2.8 | (1.8) | ||||||||||||
| Other | 7.7 | (2.7) | 7.2 | (2.2) | ||||||||||||
| Total | 415.9 | (277.4) | 367.9 | (247.5) | ||||||||||||
| Non-amortized trademarks | 115.2 | – | 64.2 | – | ||||||||||||
| Total other intangible assets | $ | 531.1 | $ | (277.4) | $ | 432.1 | $ | (247.5) | ||||||||
The gross carrying value of customer relationships as of 2017 year end includes $28.8 million related to the Car-O-Liner acquisition, $1.2 million related to the BTC acquisition and $1.1 million related to the Norbar acquisition. The gross carrying value of non-amortized trademarks as of 2017 year end includes $29.8 million related to the Car-O-Liner acquisition, $2.1 million related to the BTC acquisition and $16.9 million related to the Norbar acquisition.
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 2017 year end, the company had no accumulated impairment losses.
The weighted-average amortization periods related to other intangible assets are as follows:
| In Years | ||
| Customer relationships | 15 | |
| Developed technology | 3 | |
| Internally developed software | 4 | |
| Patents | 8 | |
| Trademarks | 6 | |
| Other | 39 |
| 2017 ANNUAL REPORT | 87 |
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Notes to Consolidated Financial Statements (continued)
Snap-on is amortizing its customer relationships on both an accelerated and straight-line basis over a 15 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 11 years.
The company’s customer relationships generally have contractual terms of three to five 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 $27.6 million in 2017, $24.2 million in 2016 and $24.7 million in 2015. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated annual amortization expense is expected to be $25.4 million in 2018, $21.8 million in 2019, $16.8 million in 2020, $14.4 million in 2021, and $13.4 million in 2022.
Note 7: Exit and Disposal Activities
In 2017, Snap-on did not record any costs for exit and disposal activities. In 2016, the company’s Repair Systems & Information Group recorded $0.9 million of severance costs for exit and disposal activities, all of which qualified for accrual treatment; no costs for exit and disposal activities were recorded in 2015. The exit and disposal accrual of $0.6 million as of 2017 year end is expected to be fully utilized in 2018. Snap-on anticipates funding the remaining cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the company’s existing credit facilities. The estimated costs for the exit and disposal activities were based on management’s best business judgment under prevailing circumstances.
Note 8: Income Taxes
The source of earnings before income taxes and equity earnings consisted of the following:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| United States | $ | 645.5 | $ | 644.0 | $ | 578.4 | ||||||
| Foreign | 176.4 | 157.4 | 132.1 | |||||||||
| Total | $ | 821.9 | $ | 801.4 | $ | 710.5 | ||||||
The provision (benefit) for income taxes consisted of the following:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 166.9 | $ | 175.9 | $ | 165.8 | ||||||
| Foreign | 41.1 | 39.9 | 40.8 | |||||||||
| State | 30.6 | 27.2 | 19.7 | |||||||||
| Total current | 238.6 | 243.0 | 226.3 | |||||||||
| Deferred: | ||||||||||||
| Federal | 8.7 | 6.3 | (8.7) | |||||||||
| Foreign | 2.9 | (6.7) | 3.9 | |||||||||
| State | 0.7 | 1.7 | (0.3) | |||||||||
| Total deferred | 12.3 | 1.3 | (5.1) | |||||||||
| Total income tax provision | $ | 250.9 | $ | 244.3 | $ | 221.2 | ||||||
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The following is a reconciliation of the statutory federal income tax rate to Snap-on’s effective tax rate:
| 2017 | 2016 | 2015 | ||||||||||
| Statutory federal income tax rate | 35.0% | 35.0% | 35.0% | |||||||||
| Increase (decrease) in tax rate resulting from: | ||||||||||||
| State income taxes, net of federal benefit | 2.4 | 2.4 | 2.3 | |||||||||
| Noncontrolling interests | (0.6) | (0.6) | (0.6) | |||||||||
| Repatriation of foreign earnings | (1.2) | (0.1) | (3.0) | |||||||||
| Change in valuation allowance for deferred tax assets | 0.1 | (1.0) | 0.1 | |||||||||
| Adjustments to tax accruals and reserves | (0.3) | 0.3 | 0.8 | |||||||||
| Foreign rate differences | (2.4) | (2.1) | (1.9) | |||||||||
| Domestic production activities deduction | (2.1) | (1.9) | (1.9) | |||||||||
| Excess tax benefits related to equity compensation | (1.4) | (1.8) | – | |||||||||
| U.S. tax reform, net impact | 0.9 | – | – | |||||||||
| Other | 0.1 | 0.3 | 0.3 | |||||||||
| Effective tax rate | 30.5% | 30.5% | 31.1% | |||||||||
Snap-on’s effective income tax rate on earnings attributable to Snap-on Incorporated was 31.1% in 2017, 31.0% in 2016, and 31.7% in 2015. The effective tax rate for 2017 included the one-time net tax costs associated with the newly enacted “H.R.1”, formerly known as the Tax Cuts and Jobs Act (the “Tax Act”), which was signed into law in the fourth quarter of 2017, as well as tax benefits associated with certain legal matters. The effective tax rate for 2016 included tax benefits from the reversal of deferred tax asset valuation allowances that are now expected to be realized in future years, as well as tax benefits associated with the January 3, 2016 adoption of ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting; these tax benefits were partially offset by tax contingency reserves established for certain non-U.S. tax audits.
On December 22, 2017, the U.S. government passed the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (i) reducing the future U.S. federal corporate tax rate from 35 percent to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also established new tax laws that will affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).
The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
| 2017 ANNUAL REPORT | 89 |
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Notes to Consolidated Financial Statements (continued)
The company’s accounting for certain elements of the Tax Act is incomplete. However, the company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax Act, the company has recorded a provisional discrete net tax expense of $7.0 million in the period ended December 30, 2017. This provisional estimate consists of a net expense of $13.7 million for the one-time transition tax and a net benefit of $6.7 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the company must determine the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the company was able to make a reasonable estimate of the transition tax, it is continuing to gather additional information to more precisely compute the final amount. Likewise, while the company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. Due to the complexity of the new GILTI tax rules, the company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under GAAP, the company is allowed to make an accounting policy choice to either: (1) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”); or (2) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The company’s selection of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis and potential future modifications to existing structure, which are not currently known. Accordingly, the company has not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI. The company will continue to analyze the full effects of the Tax Act on its financial statements. The impact of the Tax Act may differ from the current estimate, possibly materially, due to changes in interpretations and assumptions the company has made, future guidance that may be issued and actions the company may take as a result of the law.
Temporary differences that give rise to the net deferred income tax asset (liability) as of 2017, 2016 and 2015 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Long-term deferred income tax assets (liabilities): | ||||||||||||
| Inventories | $ 28.8 | $ 33.3 | $ 29.4 | |||||||||
| Accruals not currently deductible | 61.7 | 77.7 | 71.1 | |||||||||
| Tax credit carryforward | 2.1 | 15.1 | 10.2 | |||||||||
| Employee benefits | 56.8 | 108.1 | 101.2 | |||||||||
| Net operating losses | 44.0 | 42.8 | 44.4 | |||||||||
| Depreciation and amortization | (161.3) | (209.8) | (199.3) | |||||||||
| Valuation allowance | (25.2) | (21.7) | (32.0) | |||||||||
| Equity-based compensation | 17.1 | 24.3 | 22.7 | |||||||||
| Cash flow hedge | (0.3) | (5.5) | – | |||||||||
| Other | (0.1) | (4.6) | (1.6) | |||||||||
| Net deferred income tax asset | $ 23.6 | $ 59.7 | $ 46.1 | |||||||||
As of 2017 year end, Snap-on had tax net operating loss carryforwards totaling $240.3 million as follows:
| (Amounts in millions) | State | Federal | Foreign | Total | ||||||||||||
| Year of expiration: | ||||||||||||||||
| 2018-2022 | $ 0.1 | $ – | $ 45.8 | $ 45.9 | ||||||||||||
| 2023-2027 | 0.2 | – | 8.0 | 8.2 | ||||||||||||
| 2028-2032 | 107.1 | – | 38.1 | 145.2 | ||||||||||||
| 2033-2037 | – | – | – | – | ||||||||||||
| Indefinite | – | – | 41.0 | 41.0 | ||||||||||||
| Total net operating loss carryforwards | $ 107.4 | $ – | $ 132.9 | $ 240.3 | ||||||||||||
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A valuation allowance totaling $25.2 million, $21.7 million and $32.0 million as of 2017, 2016 and 2015 year end, respectively, has been established for deferred income tax assets primarily related to certain subsidiary loss carryforwards that may not be realized. For the year ended December 31, 2016, the net valuation allowance decreased by $10.3 million primarily due to a non-U.S. subsidiary having, in part, attained three years of cumulative pretax income and, as a result, management concluded there is sufficient positive evidence that it is more-likely-than-not that additional deferred taxes are realizable. Realization of the net deferred income tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more-likely-than-not that the net deferred income tax assets will be realized. The amount of the net deferred income tax assets considered realizable, however, could change in the near term if estimates of future taxable income during the carryforward period fluctuate.
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2017, 2016 and 2015:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Unrecognized tax benefits at beginning of year | $ 9.4 | $ 7.2 | $ 6.4 | |||||||||
| Gross increases – tax positions in prior periods | 1.4 | 2.5 | 1.7 | |||||||||
| Gross decreases – tax positions in prior periods | – | (0.3) | (0.5) | |||||||||
| Gross increases – tax positions in the current period | 1.0 | 0.5 | 0.5 | |||||||||
| Settlements with taxing authorities | (3.6) | – | – | |||||||||
| Lapsing of statutes of limitations | (0.5) | (0.5) | (0.9) | |||||||||
| Unrecognized tax benefits at end of year | $ 7.7 | $ 9.4 | $ 7.2 | |||||||||
The unrecognized tax benefits of $7.7 million, $9.4 million and $7.2 million as of 2017, 2016 and 2015 year end, respectively, would impact the effective income tax rate if recognized. As of December 30, 2017, unrecognized tax benefits of $1.8 million, $2.4 million and $3.5 million were included in “Deferred income tax assets,” “Other accrued liabilities” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheet. Interest and penalties related to unrecognized tax benefits are recorded in income tax expense. As of 2017, 2016 and 2015 year end, the company had provided for $0.6 million, $0.9 million and $0.5 million, respectively, of accrued interest and penalties related to unrecognized tax benefits. During 2017, the company decreased the reserve attributable to interest and penalties associated with unrecognized tax benefits by a net $0.3 million. As of December 30, 2017, $0.1 million and $0.5 million of accrued interest and penalties were included in “Other accrued liabilities” and “Other long-term liabilities,” respectively, on the accompanying Consolidated Balance Sheet.
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 zero to $3.2 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 zero to $1.3 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.
With few exceptions, Snap-on is no longer subject to U.S. federal and state/local income tax examinations by tax authorities for years prior to 2012, and Snap-on is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to 2012.
The undistributed earnings of all non-U.S. subsidiaries totaled $876.7 million, $800.6 million and $624.1 million as of 2017, 2016 and 2015 year end, respectively. As a result of the Tax Act, the company is currently analyzing its global working capital and cash requirements and the potential tax liabilities attributable to any future repatriation, but the company has yet to determine whether it plans to change its prior assertion and repatriate earnings. Accordingly, the company has not recorded any deferred taxes attributable to its investments in foreign subsidiaries. The company will record the tax effects of any change in its prior assertion in the period that it has completed the analysis and is able to make a reasonable estimate, and disclose any unrecognized deferred tax liability for temporary differences related to its foreign investments, if practicable.
| 2017 ANNUAL REPORT | 91 |
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Notes to Consolidated Financial Statements (continued)
Note 9: Short-term and Long-term Debt
Short-term and long-term debt as of 2017 and 2016 year end consisted of the following:
| (Amounts in millions) | 2017 | 2016 | ||||||
| 5.50% unsecured notes due 2017 | $ | – | $ | 150.0 | ||||
| 4.25% unsecured notes due 2018 | 250.0 | 250.0 | ||||||
| 6.70% unsecured notes due 2019 | 200.0 | 200.0 | ||||||
| 6.125% unsecured notes due 2021 | 250.0 | 250.0 | ||||||
| 3.25% unsecured notes due 2027 | 300.0 | – | ||||||
| Other debt* | 186.8 | 160.2 | ||||||
| 1,186.8 | 1,010.2 | |||||||
| Less: notes payable and current maturities of long-term debt: | ||||||||
| Current maturities of long-term debt | $ | (250.0) | $ | (150.0) | ||||
| Commercial paper borrowings | (151.0) | (130.0) | ||||||
| Other notes | (32.2) | (21.4) | ||||||
| (433.2) | (301.4) | |||||||
| Total long-term debt | $ | 753.6 | $ | 708.8 | ||||
- Includes fair value adjustments related to interest rate swaps.
The annual maturities of Snap-on’s long-term debt and notes payable over the next five years are $433.2 million in 2018, (including $250 million of unsecured 4.25% notes due January 16, 2018 (the “2018 Notes”), that were repaid upon maturity), $200 million in 2019, no maturities in 2020, $250 million in 2021, and no maturities in 2022. See Note 20 regarding the January 2018 repayment of the 2018 Notes.
Average notes payable outstanding, including commercial paper borrowings, were $126.8 million and $49.3 million in 2017 and 2016, respectively. The weighted-average interest rate of 2.45% in 2017 decreased from 7.09% last year. This reflects the impact of the higher commercial paper borrowings which generally have lower interest rates than other notes payable outstanding. Average commercial paper borrowings were $103.3 million and $26.6 million in 2017 and 2016, respectively, and the weighted-average interest rate of 1.14% in 2017 increased from 0.73% last year. At 2017 year end, the weighted-average interest rate on outstanding notes payable of 2.34% compared with 2.85% at 2016 year end. The 2017 year-end rate benefited from lower interest rates on international borrowings. The 2016 year-end rate benefited from lower interest rates on commercial paper borrowings.
On February 15, 2017, Snap-on sold, at a discount, $300 million of unsecured 3.25% long-term notes that mature on March 1, 2027 (the”2027 Notes”). Interest on the 2027 Notes accrues at a rate of 3.25% per year and is payable semi-annually beginning September 1, 2017. Snap-on used the $297.8 million of net proceeds from the sale of the 2027 Notes, reflecting $1.9 million of transaction costs, to repay a portion of its then-outstanding commercial paper borrowings and the remainder is being used for general corporate purposes, which may include working capital, capital expenditures and possible acquisitions.
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Snap-on has a five-year, $700 million multi-currency revolving credit facility that terminates on December 15, 2020 (the “Credit Facility”); no amounts were outstanding under the Credit Facility as of December 30, 2017. Borrowings under the Credit Facility bear interest at varying rates based on Snap-on’s then-current, long-term debt ratings. 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 (consolidated debt net of certain cash adjustments) to the sum of such consolidated net debt plus total equity and less accumulated other comprehensive income or loss (the “Debt Ratio”); or (ii) a ratio not greater than 3.50 to 1.00 of such consolidated net debt to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the “Debt to EBITDA Ratio”). Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), increase the maximum Debt Ratio to 0.65 to 1.00 and/or increase the maximum Debt to EBITDA Ratio to 3.75 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of 2017 year end, the company’s actual ratios of 0.26 and 1.16, 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 10: Financial Instruments
Derivatives: All derivative instruments are reported in the Consolidated Financial Statements at fair value. Changes in the fair value of derivatives are recorded each period in earnings or on the accompanying Consolidated Balance Sheets, depending on whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments recorded in Accumulated other comprehensive income (loss) (“Accumulated OCI”) must be reclassified to earnings in the period in which earnings are affected by the underlying hedged item and the ineffective portion of all hedges must be recognized in earnings in the period that such portion is determined to be ineffective.
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. On the date 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 Consolidated Statements of Earnings.
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Notes to Consolidated Financial Statements (continued)
As of 2017 year end, Snap-on had $53.8 million of net foreign currency forward buy contracts outstanding comprised of buy contracts including $64.9 million in euros, $15.4 million in Swedish kronor, $13.1 million in Hong Kong dollars, $11.3 million in Singapore dollars, $6.8 million in South Korean won, $5.7 million in Norwegian kroner, and $8.0 million in other currencies, and sell contracts comprised of $29.7 million in British pounds, $13.8 million in Canadian dollars, $11.8 million in Australian dollars, $6.0 million in Indian rupees, $3.4 million in Thai baht, and $6.7 million in other currencies. As of 2016 year end, Snap-on had $144.4 million of net foreign currency forward buy contracts outstanding comprised of buy contracts including $55.0 million in euros, $53.6 million in British pounds, $47.0 million in Swedish kronor, $9.0 million in Hong Kong dollars, $7.0 million in South Korean won, $5.5 million in Singapore dollars, $4.9 million in Mexican pesos, $4.6 million in Norwegian kroner, and $6.4 million in other currencies, and sell contracts comprised of $16.6 million in Japanese yen, $11.8 million in Canadian dollars, $4.4 million in Australian dollars, $4.0 million in Brazilian real, and $11.8 million in other currencies.
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”).
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 Consolidated Statements of Earnings. The effective portion of the change in fair value of the derivative is recorded in “Long-term debt” on the accompanying Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to “Interest expense” on the accompanying Consolidated Statements of Earnings. The notional amount of interest rate swaps outstanding and designated as fair value hedges was $100 million as of both 2017 and 2016 year end.
Treasury locks: Snap-on entered into a $300 million treasury lock in November 2017 to manage the potential change in interest rates in anticipation of the possible issuance of fixed rate debt; the treasury lock expires on February 28, 2018. Treasury locks are accounted for as cash flow hedges. The effective differentials to be paid or received on treasury locks related to the anticipated issuance of fixed rate debt are initially recorded in Accumulated OCI. As of 2017 year end, an unrecognized gain of $0.8 million has been recorded in Accumulated OCI on the accompanying Consolidated Balance Sheet. Upon the issuance of debt, the related amount in Accumulated OCI will be released over the term of the debt and recognized as an adjustment to interest expense on the consolidated statements of earnings.
The notional amount of treasury locks outstanding and designated as cash flow hedges was $300 million as of December 30, 2017, and $250 million as of December 31, 2016. In fiscal 2017, Snap-on settled the $250 million treasury lock in conjunction with the February 2017 issuance of the 2027 Notes. The $14.9 million gain on the settlement of the treasury lock was recorded in Accumulated OCI and is being amortized over the term of the 2027 Notes and recognized as an adjustment to interest expense on the consolidated statement of earnings. There were no treasury locks settled in 2016 or 2015.
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 2017 and 2016 year end, Snap-on had equity forwards in place intended to manage market risk with respect to 102,300 shares and 104,400 shares, respectively, of Snap-on common stock associated with its deferred compensation plans.
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Fair value measurements: Snap-on has derivative assets and liabilities related to interest rate swaps, treasury locks, foreign currency forwards and equity forwards that are measured at Level 2 fair value on a recurring basis. The fair values of derivative instruments included within the accompanying Consolidated Balance Sheets as of 2017 and 2016 year end are as follows:
| 2017 | 2016 | |||||||||||||||||
| (Amounts in millions) | Balance Sheet Presentation | Asset Derivatives Fair Value | Liability Derivatives Fair Value | Asset Derivatives Fair Value | Liability Derivatives Fair Value | |||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||
| Interest rate swaps | Other assets | $ | 7.3 | $ | – | $ | 9.8 | $ | – | |||||||||
| Treasury locks | Other assets | 1.4 | – | 14.3 | – | |||||||||||||
| 8.7 | – | 24.1 | – | |||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||
| Foreign currency forwards | Prepaid expenses and other assets | $ | 4.1 | $ | – | $ | 4.4 | $ | – | |||||||||
| Foreign currency forwards | Other accrued liabilities | – | 6.5 | – | 13.5 | |||||||||||||
| Equity forwards | Prepaid expenses and other assets | 17.8 | – | 17.9 | – | |||||||||||||
| 21.9 | 6.5 | 22.3 | 13.5 | |||||||||||||||
| Total derivative instruments | $ | 30.6 | $ | 6.5 | $ | 46.4 | $ | 13.5 | ||||||||||
As of 2017 and 2016 year end, the fair value adjustment to long-term debt related to the interest rate swaps was $7.3 million and $9.8 million, respectively.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the six-month LIBOR swap rate for similar instruments. Treasury locks are valued based on the 10-year U.S. treasury interest rate. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Equity forwards are valued using a market approach based primarily on the company’s stock price at the reporting date. The company did not have any derivative assets or liabilities measured at Level 1 or Level 3, nor did it implement any changes in its valuation techniques as of and for its 2017 and 2016 years ended.
The effect of derivative instruments designated as fair value hedges as included in the Consolidated Statements of Earnings is as follows:
| Statement of Earnings Presentation | Effective Portion of Gain Recognized in Income | |||||||||||||||||
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||||||||
| Derivatives designated as fair value hedges: | ||||||||||||||||||
| Interest rate swaps | Interest expense | $ | 2.8 | $ | 2.9 | $ | 3.7 |
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Notes to Consolidated Financial Statements (continued)
The effect of derivative instruments designated as cash flow hedges as included in Accumulated OCI on the Consolidated Balance Sheets and the Consolidated Statements of Earnings is as follows:
| (Amounts in millions) | Effective Portion of Gain Recognized in Accumulated OCI | Statement of Earnings Presentation | Effective Portion of Gain Reclassified from Accumulated OCI into Income | |||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||||
| Treasury locks | $ | 6.9 | $ | 8.8 | $ | – | Interest expense | $ | 1.6 | $ | 0.3 | $ | 0.3 |
The effects of derivative instruments not designated as hedging instruments as included in the Consolidated Statements of Earnings are as follows:
| Statement of Earnings Presentation | Gain (Loss) Recognized in Income | |||||||||||||||
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||
| Foreign currency forwards | Other income (expense) – net | $ | (25.8) | $ | (7.4) | $ | (15.5) | |||||||||
| Equity forwards | Operating expenses | 0.9 | 0.8 | 4.7 |
Snap-on’s foreign currency forwards are typically not designated as hedges for financial reporting purposes. The fair value changes of foreign currency forwards not designated as hedging instruments are reported in earnings as foreign exchange gain or loss in “Other income (expense) – net” on the accompanying Consolidated Statements of Earnings. In 2017, the $25.8 million derivative loss was partially offset by transaction gains on net exposures of $18.8 million, resulting in a net foreign exchange loss of $7.0 million. In 2016, the $7.4 million derivative loss was partially offset by transaction gains on net exposures of $6.1 million, resulting in a net foreign exchange loss of $1.3 million. In 2015, the $15.5 million derivative loss was partially offset by transaction gains on net exposures of $12.8 million, resulting in a net foreign exchange loss of $2.7 million. The resulting net foreign exchange losses are included in “Other income (expense) – net” on the accompanying Consolidated Statements of Earnings. See Note 16 for additional information on “Other income (expense) – net.”
Snap-on’s equity forwards are not designated as hedges for financial reporting purposes. Fair value changes of both the equity forwards and related stock-based (mark-to-market) deferred compensation liabilities are reported in “Operating expenses” on the accompanying Consolidated Statements of Earnings. The $0.9 million derivative gain recognized in 2017 was primarily offset by $0.8 million of mark-to-market deferred compensation expense. The $0.8 million derivative gain recognized in 2016 was partially offset by $0.3 million of mark-to-market deferred compensation expense. The $4.7 million derivative gain recognized in 2015 was largely offset by $4.6 million of mark-to-market deferred compensation expense.
As of 2017 year end, the maximum maturity date of any fair value hedge was four years. During the next 12 months, Snap-on expects to reclassify into earnings net gains from Accumulated OCI of approximately $1.0 million after tax at the time the underlying hedge transactions are realized.
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.
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Fair value of financial instruments: The fair values of financial instruments that do not approximate the carrying values in the financial statements as of 2017 and 2016 year end are as follows:
| 2017 | 2016 | |||||||||||||||
| (Amounts in millions) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
| Finance receivables – net | $ | 1,544.6 | $ | 1,791.5 | $ | 1,407.0 | $ | 1,631.2 | ||||||||
| Contract receivables – net | 419.4 | 459.1 | 374.8 | 409.7 | ||||||||||||
| Long-term debt, notes payable and current maturities of long-term debt | 1,186.8 | 1,235.6 | 1,010.2 | 1,076.7 |
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 and current maturities of long-term debt were 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 11: Pension Plans
Snap-on has several non-contributory defined benefit pension plans covering most U.S. employees and certain employees in foreign countries. Snap-on also has foreign contributory defined benefit pension plans covering certain foreign employees. Retirement benefits are generally provided based on employees’ years of service and average earnings or stated amounts for years of service. Normal retirement age is 65, with provisions for earlier retirement.
The status of Snap-on’s pension plans as of 2017 and 2016 year end is as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Change in projected benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 1,361.4 | $ | 1,279.4 | ||||
| Service cost | 22.7 | 19.3 | ||||||
| Interest cost | 56.1 | 56.5 | ||||||
| Plan participant contributions | 0.6 | 1.0 | ||||||
| Plan settlements | (0.3) | – | ||||||
| Benefits paid | (66.6) | (63.2) | ||||||
| Actuarial loss | 69.5 | 94.7 | ||||||
| Foreign currency impact | 24.2 | (26.3) | ||||||
| Benefit obligation at end of year | $ | 1,467.6 | $ | 1,361.4 | ||||
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Notes to Consolidated Financial Statements (continued)
| (Amounts in millions) | 2017 | 2016 | ||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ | 1,110.8 | $ | 1,049.2 | ||||
| Actual return on plan assets | 175.7 | 73.5 | ||||||
| Employer contributions | 69.6 | 68.7 | ||||||
| Plan participant contributions | 0.6 | 1.0 | ||||||
| Plan settlements | (0.3) | – | ||||||
| Benefits paid | (66.6) | (63.2) | ||||||
| Foreign currency impact | 15.2 | (18.4) | ||||||
| Fair value of plan assets at end of year | $ | 1,305.0 | $ | 1,110.8 | ||||
| Unfunded status at end of year | $ | (162.6) | $ | (250.6) | ||||
Amounts recognized in the Consolidated Balance Sheets as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Other assets | $ | 1.5 | $ | 0.6 | ||||
| Accrued benefits | (5.2) | (4.7) | ||||||
| Pension liabilities | (158.9) | (246.5) | ||||||
| Net liability | $ | (162.6) | $ | (250.6) | ||||
Amounts included in Accumulated OCI on the accompanying Consolidated Balance Sheets as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Net loss, net of tax of $146.4 million and $160.6 million, respectively | $ | (266.7) | $ | (297.0) | ||||
| Prior service credit, net of tax of $0.9 million and $1.3 million, respectively | 1.5 | 2.2 | ||||||
| $ | (265.2) | $ | (294.8) | |||||
The accumulated benefit obligation for Snap-on’s pension plans as of 2017 and 2016 year end was $1,385.0 million and $1,283.1 million, respectively.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for Snap-on’s pension plans in which the accumulated benefit obligation exceeds the fair value of plan assets as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Projected benefit obligation | $ | 398.7 | $ | 1,312.1 | ||||
| Accumulated benefit obligation | 378.1 | 1,238.7 | ||||||
| Fair value of plan assets | 275.6 | 1,061.0 |
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The components of net periodic benefit cost and changes recognized in “Other comprehensive income (loss)” (“OCI”) are as follows:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Net periodic benefit cost: | ||||||||||||
| Service cost | $ | 22.7 | $ | 19.3 | $ | 20.0 | ||||||
| Interest cost | 56.1 | 56.5 | 53.2 | |||||||||
| Expected return on plan assets | (83.4) | (81.0) | (79.0) | |||||||||
| Amortization of unrecognized loss | 27.9 | 31.3 | 38.6 | |||||||||
| Amortization of prior service credit | (1.1) | (1.1) | (0.9) | |||||||||
| Settlement loss | 0.1 | – | – | |||||||||
| Net periodic benefit cost | $ | 22.3 | $ | 25.0 | $ | 31.9 | ||||||
| Changes in benefit obligations recognized in OCI, net of tax: | ||||||||||||
| Net (gain) loss | $ | (30.3) | $ | 43.3 | $ | 6.3 | ||||||
| Prior service cost | 0.7 | 0.6 | 0.7 | |||||||||
| Total recognized in OCI | $ | (29.6) | $ | 43.9 | $ | 7.0 | ||||||
Amounts in Accumulated OCI that are expected to be amortized as net expense into net periodic benefit cost during 2018 are as follows:
| (Amounts in millions) | Amount | |||
| Amortization of unrecognized loss | $ | 32.0 | ||
| Amortization of prior service credit | (1.2) | |||
| Total to be recognized in net periodic benefit cost | $ | 30.8 | ||
The worldwide weighted-average assumptions used to determine Snap-on’s full-year pension costs are as follows:
| 2017 | 2016 | 2015 | ||||||||||
| Discount rate | 4.2% | 4.5% | 4.1% | |||||||||
| Expected return on plan assets | 7.2% | 7.4% | 7.4% | |||||||||
| Rate of compensation increase | 3.4% | 3.6% | 3.6% |
The worldwide weighted-average assumptions used to determine Snap-on’s projected benefit obligation as of 2017 and 2016 year end are as follows:
| 2017 | 2016 | |||||||
| Discount rate | 3.7% | 4.2% | ||||||
| Rate of compensation increase | 3.4% | 3.4% |
The objective of Snap-on’s discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The domestic discount rate as of 2017 and 2016 year end was selected based on a cash flow matching methodology developed by the company’s outside actuaries and which incorporates a review of current economic conditions. This methodology matches the plans’ yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans’ projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate.
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Notes to Consolidated Financial Statements (continued)
The weighted-average discount rate for Snap-on’s domestic pension plans of 3.9% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s domestic discount rate assumption by 50 basis points (100 basis points (“bps”) equals 1.0 percent) would have increased Snap-on’s 2017 domestic pension expense and projected benefit obligation by approximately $4.3 million and $71.3 million, respectively. As of 2017 year end, Snap-on’s domestic projected benefit obligation comprised approximately 83% of Snap-on’s worldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 2.7% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s foreign discount rate assumption by 50 bps would have increased Snap-on’s 2017 foreign pension expense and projected benefit obligation by approximately $1.8 million and $24.4 million, respectively.
Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. Prior service costs and credits resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants.
As a practical expedient, Snap-on uses the calendar year end as the measurement date for its plans. Snap-on funds its pension plans as required by governmental regulation and may consider discretionary contributions as conditions warrant. Snap-on intends to make contributions of $9.7 million to its foreign pension plans and $2.4 million to its domestic pension plans in 2018, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2018.
The following benefit payments, which reflect expected future service, are expected to be paid as follows:
| (Amounts in millions) | Amount | |||
| Year: | ||||
| 2018 | $ | 73.6 | ||
| 2019 | 75.2 | |||
| 2020 | 78.9 | |||
| 2021 | 81.5 | |||
| 2022 | 91.4 | |||
| 2023-2027 | 462.3 |
Snap-on’s domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. The long-term investment performance objective for Snap-on’s domestic plans’ assets is to achieve net of expense returns that meet or exceed the 7.45% domestic long-term return on plan assets assumption used for reporting purposes. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its domestic plans’ assets. As of 2017 year end, Snap-on’s domestic pension plans’ assets comprised approximately 86% of the company’s worldwide pension plan assets.
The basis for determining the overall expected long-term return on plan assets assumption is a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums, which are calculated using the geometric mean, are then adjusted based on current relative valuation levels, macro-economic conditions, and the expected alpha related to active investment management. The asset return assumption is also adjusted by an implicit expense load for estimated administrative and investment-related expenses.
For risk and correlation assumptions, the actual experience for each asset class is reviewed for the longest time period available. Expected relationships for a 10 to 20 year time horizon are determined based upon historical results, with adjustments made for material changes.
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Investments are diversified to attempt to minimize the risk of large losses. Since asset allocation is a key determinant of expected investment returns, assets are periodically rebalanced to the targeted allocation to correct significant deviations from the asset allocation policy that are caused by market fluctuations and cash flow. Asset/liability studies are conducted periodically to determine if any revisions to the strategic asset allocation policy are necessary.
Snap-on’s domestic pension plans’ target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2017 and 2016 year end are as follows:
| Target | 2017 | 2016 | ||||||||||
| Asset category: | ||||||||||||
| Equity securities | 51% | 51% | 51% | |||||||||
| Debt securities and cash and cash equivalents | 37% | 38% | 39% | |||||||||
| Real estate and other real assets | 2% | 1% | 1% | |||||||||
| Hedge funds | 10% | 10% | 9% | |||||||||
| Total | 100% | 100% | 100% | |||||||||
| Fair value of plan assets (Amounts in millions) | $ | 1,122.7 | $ | 957.1 | ||||||||
The fair value measurement hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority (“Level 1”) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (“Level 3”) to unobservable inputs. Fair value measurements primarily based on observable market information are given a “Level 2” priority.
Certain equity and debt securities are valued at quoted per share or unit market prices for which an official close or last trade pricing on an active exchange is available and are categorized as Level 1 in the fair value hierarchy. If quoted market prices are not readily available for specific securities, values are estimated using quoted prices of securities with similar characteristics and are categorized as Level 2 in the fair value hierarchy. Insurance contracts are valued at the present value of the estimated future cash flows promised under the terms of the insurance contracts and are categorized as Level 2 in the fair value hierarchy.
Commingled equity securities and commingled multi-strategy funds are valued at the NAV per share or unit multiplied by the number of shares or units held as of the measurement date, as reported by the fund managers. The share or unit price is quoted on a private market and is based on the value of the underlying investments, which are primarily based on observable inputs; such investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
Private equity partnership funds, hedge funds, and real estate and other real assets are valued at the NAV as reported by the fund managers. Private equity partnership funds, certain hedge funds, and certain real estate and other real assets are valued based on the proportionate interest or share of net assets held by the pension plan, which is based on the estimated fair market value of the underlying investments. Certain other hedge funds and real estate and other real assets are valued at the NAV per share or unit multiplied by the number of shares or units held as of the measurement date, based on the estimated value of the underlying investments as reported by the fund managers. These investments are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy.
The company regularly reviews fund performance directly with its investment advisor and the fund managers, and performs qualitative analysis to corroborate the reasonableness of the reported NAVs. For funds for which the company did not receive a year-end NAV, the company recorded an estimate of the change in fair value for the latest period based on return estimates and other fund activity obtained from the fund managers.
The columns labeled “Investments Measured at NAV” in the following tables reflect certain investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit a reconciliation of the fair value hierarchy to the pension plan assets.
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Notes to Consolidated Financial Statements (continued)
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s domestic pension plans’ assets as of 2017 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Investments Measured at NAV | Total | ||||||||||||
| Asset category: | ||||||||||||||||
| Cash and cash equivalents | $ | 20.6 | $ | – | $ | – | $ | 20.6 | ||||||||
| Equity securities: | ||||||||||||||||
| Domestic | 73.4 | – | – | 73.4 | ||||||||||||
| Foreign | 100.1 | – | – | 100.1 | ||||||||||||
| Commingled funds – domestic | – | – | 225.0 | 225.0 | ||||||||||||
| Commingled funds – foreign | – | – | 148.8 | 148.8 | ||||||||||||
| Private equity partnerships | – | – | 27.5 | 27.5 | ||||||||||||
| Debt securities: | ||||||||||||||||
| Government | 152.8 | 2.2 | – | 155.0 | ||||||||||||
| Corporate bonds | – | 253.0 | – | 253.0 | ||||||||||||
| Real estate and other real assets | – | – | 13.2 | 13.2 | ||||||||||||
| Hedge funds | – | – | 106.1 | 106.1 | ||||||||||||
| Total | $ | 346.9 | $ | 255.2 | $ | 520.6 | $ | 1,122.7 | ||||||||
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s domestic pension plans’ assets as of 2016 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Investments Measured at NAV | Total | ||||||||||||
| Asset category: | ||||||||||||||||
| Cash and cash equivalents | $ | 20.4 | $ | – | $ | – | $ | 20.4 | ||||||||
| Equity securities: | ||||||||||||||||
| Domestic | 66.0 | – | – | 66.0 | ||||||||||||
| Foreign | 74.7 | – | – | 74.7 | ||||||||||||
| Commingled funds – domestic | – | – | 191.3 | 191.3 | ||||||||||||
| Commingled funds – foreign | – | – | 117.7 | 117.7 | ||||||||||||
| Private equity partnerships | – | – | 34.2 | 34.2 | ||||||||||||
| Debt securities: | ||||||||||||||||
| Government | 139.2 | 0.9 | – | 140.1 | ||||||||||||
| Corporate bonds | – | 214.6 | – | 214.6 | ||||||||||||
| Real estate and other real assets | – | – | 10.4 | 10.4 | ||||||||||||
| Hedge funds | – | – | 87.7 | 87.7 | ||||||||||||
| Total | $ | 300.3 | $ | 215.5 | $ | 441.3 | $ | 957.1 | ||||||||
Snap-on’s primary investment objective for its foreign pension plans’ assets is to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s risk tolerance. The foreign asset allocation policies consider the company’s financial strength and long-term asset class risk/return expectations, since the obligations are long term in nature. The company believes the foreign pension plans’ assets, which are managed locally by professional investment firms, are well diversified.
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The expected long-term rates of return on foreign plans’ assets, which ranged from 1.9% to 6.1% as of 2017 year end, reflect management’s expectations of long-term average rates of return on funds invested to provide benefits included in the plans’ projected benefit obligation. The expected returns are based on outlooks for inflation, fixed income returns and equity returns, asset allocations and investment strategies. Differences between actual and expected returns on foreign pension plans’ assets are recorded as an actuarial gain or loss and amortized accordingly.
Snap-on’s foreign pension plans’ target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2017 and 2016 year end are as follows:
| Target | 2017 | 2016 | ||||||||||
| Asset category: | ||||||||||||
| Equity securities* | 35% | 36% | 41% | |||||||||
| Debt securities* and cash and cash equivalents | 40% | 42% | 36% | |||||||||
| Insurance contracts and hedge funds | 25% | 22% | 23% | |||||||||
| Total | 100% | 100% | 100% | |||||||||
| Fair value of plan assets (Amounts in millions) | $ | 182.3 | $ | 153.7 | ||||||||
| * | Includes commingled funds – multi-strategy |
|---|
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s foreign pension plans’ assets as of 2017 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Investments Measured at NAV | Total | ||||||||||||
| Asset category: | ||||||||||||||||
| Cash and cash equivalents | $ | 0.7 | $ | – | $ | – | $ | 0.7 | ||||||||
| Commingled funds – multi-strategy | – | – | 114.2 | 114.2 | ||||||||||||
| Debt securities: | ||||||||||||||||
| Government | 8.8 | – | – | 8.8 | ||||||||||||
| Corporate bonds | – | 18.3 | – | 18.3 | ||||||||||||
| Insurance contracts | – | 24.2 | – | 24.2 | ||||||||||||
| Hedge fund | – | – | 16.1 | 16.1 | ||||||||||||
| Total | $ | 9.5 | $ | 42.5 | $ | 130.3 | $ | 182.3 | ||||||||
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of Snap-on’s foreign pension plans’ assets as of 2016 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Investments Measured at NAV | Total | ||||||||||||
| Asset category: | ||||||||||||||||
| Cash and cash equivalents | $ | 0.7 | $ | – | $ | – | $ | 0.7 | ||||||||
| Commingled funds – multi-strategy | – | – | 117.4 | 117.4 | ||||||||||||
| Insurance contracts | – | 21.3 | – | 21.3 | ||||||||||||
| Hedge fund | – | – | 14.3 | 14.3 | ||||||||||||
| Total | $ | 0.7 | $ | 21.3 | $ | 131.7 | $ | 153.7 | ||||||||
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Notes to Consolidated Financial Statements (continued)
Snap-on has several 401(k) plans covering certain U.S. employees. Snap-on’s employer match to the 401(k) plans is made with cash contributions. For 2017, 2016 and 2015, Snap-on recognized $8.9 million, $8.2 million and $7.0 million, respectively, of expense related to its 401(k) plans.
Note 12: Postretirement Plans
Snap-on provides health care benefits for certain retired U.S. employees. Employees retiring prior to 1989 were eligible for retiree medical coverage upon reaching early retirement age, with no retiree contributions required. Benefits are paid based on deductibles and percentages of covered expenses and take into consideration payments made by Medicare and other insurance coverage.
Since 1989, U.S. retirees have been eligible for comprehensive major medical plans. Benefits are paid based on deductibles and percentages of covered expenses, and plan provisions allow for benefit and coverage changes. Most retirees are required to pay the entire cost of the coverage, but Snap-on may elect to subsidize the cost of coverage under certain circumstances.
Snap-on has a Voluntary Employees Beneficiary Association (“VEBA”) trust for the funding of existing postretirement health care benefits for certain non-salaried retirees in the United States; all other retiree health care plans are unfunded.
The status of Snap-on’s U.S. postretirement health care plans as of 2017 and 2016 year end is as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Change in accumulated postretirement benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ 53.2 | $ 55.6 | ||||||
| Service cost | – | 0.1 | ||||||
| Interest cost | 2.1 | 2.2 | ||||||
| Plan participant contributions | 0.4 | 0.5 | ||||||
| Benefits paid | (4.3) | (4.4) | ||||||
| Actuarial loss (gain) | 1.1 | (0.8) | ||||||
| Benefit obligation at end of year | $ 52.5 | $ 53.2 | ||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | $ 13.2 | $ 13.7 | ||||||
| Actual return on plan assets | 1.3 | 0.5 | ||||||
| Employer contributions | 2.8 | 2.9 | ||||||
| Plan participant contributions | 0.4 | 0.5 | ||||||
| Benefits paid | (4.3) | (4.4) | ||||||
| Fair value of plan assets at end of year | $ 13.4 | $ 13.2 | ||||||
| Unfunded status at end of year | $ (39.1) | $ (40.0) | ||||||
Amounts recognized in the Consolidated Balance Sheets as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Accrued benefits | $ (3.1) | $ (3.3) | ||||||
| Retiree health care benefits | (36.0) | (36.7) | ||||||
| Net liability | $ (39.1) | $ (40.0) | ||||||
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Amounts included in Accumulated OCI on the accompanying Consolidated Balance Sheets as of 2017 and 2016 year end are as follows:
| (Amounts in millions) | 2017 | 2016 | ||||||
| Net gain, net of tax of $2.6 million and $2.9 million, respectively | $ 4.2 | $ 4.8 |
The components of net periodic benefit cost and changes recognized in OCI are as follows:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Net periodic benefit cost: | ||||||||||||
| Service cost | $ – | $ 0.1 | $ 0.1 | |||||||||
| Interest cost | 2.1 | 2.2 | 2.2 | |||||||||
| Expected return on plan assets | (0.8) | (0.9) | (1.0) | |||||||||
| Amortization of unrecognized (gain) loss | (0.3) | (0.1) | 0.3 | |||||||||
| Net periodic benefit cost | $ 1.0 | $ 1.3 | $ 1.6 | |||||||||
| Changes in benefit obligations recognized in OCI, net of tax: | ||||||||||||
| Net (gain) loss | $ 0.6 | $ (0.3) | $ (2.1) |
Snap-on expects to recognize $0.3 million of prior unrecognized gains, included in Accumulated OCI on the accompanying 2017 Consolidated Balance Sheet, in net periodic benefit cost during 2018.
The weighted-average discount rate used to determine Snap-on’s postretirement health care expense is as follows:
| 2017 | 2016 | 2015 | ||||||||||
| Discount rate | 4.1% | 4.1% | 3.6% |
The weighted-average discount rate used to determine Snap-on’s accumulated benefit obligation is as follows:
| 2017 | 2016 | |||
| Discount rate | 3.6% | 4.1% |
The methodology for selecting the year-end 2017 and 2016 weighted-average discount rate for the company’s domestic postretirement plans was to match the plans’ yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. As a practical expedient, Snap-on uses the calendar year end as the measurement date for its plans.
For 2018, the actuarial calculations assume a pre-65 health care cost trend rate of 5.8% and a post-65 health care cost trend rate of 6.5%, both decreasing gradually to 4.5% in 2038 and thereafter. As of 2017 year end, a one-percentage-point increase in the health care cost trend rate for future years would increase the accumulated postretirement benefit obligation by approximately $0.6 million and the aggregate of the service cost and interest cost components by less than $0.1 million. Conversely, a one-percentage-point decrease in the health care cost trend rate for future years would decrease the accumulated postretirement benefit obligation by $0.6 million and the aggregate of the service cost and interest rate components by less than $0.1 million.
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Notes to Consolidated Financial Statements (continued)
The following benefit payments, which reflect expected future service, are expected to be paid as follows:
| (Amounts in millions) | Amount | |||
| Year: | ||||
| 2018 | $ | 4.1 | ||
| 2019 | 4.2 | |||
| 2020 | 4.3 | |||
| 2021 | 4.4 | |||
| 2022 | 4.5 | |||
| 2023-2027 | 23.0 |
The objective of the VEBA trust is to achieve net of expense returns that meet or exceed the 6.3% long-term return on plan assets assumption used for reporting purposes. Investments are diversified to attempt to minimize the risk of large losses. Since asset allocation is a key determinant of expected investment returns, assets are periodically rebalanced to the targeted allocation to correct significant deviations from the asset allocation policy that are caused by market fluctuations and cash flow.
The basis for determining the overall expected long-term return on plan assets assumption is a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums, which are calculated using the geometric mean, are then adjusted based on current relative valuation levels and macro-economic conditions. The asset return assumption is also adjusted by an implicit expense load for estimated administrative and investment-related expenses.
Snap-on’s VEBA plan target allocation and actual weighted-average asset allocation by asset category and fair value of plan assets as of 2017 and 2016 year end are as follows:
| Target | 2017 | 2016 | ||||||||||
| Asset category: | ||||||||||||
| Debt securities and cash and cash equivalents | 46% | 42% | 45% | |||||||||
| Equity securities | 29% | 29% | 28% | |||||||||
| Hedge funds | 25% | 29% | 27% | |||||||||
| Total | 100% | 100% | 100% | |||||||||
| Fair value of plan assets (Amounts in millions) | $ | 13.4 | $ | 13.2 | ||||||||
The fair value measurement hierarchy prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority (Level 1) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs. Fair value measurements primarily based on observable market information are given a Level 2 priority.
Debt securities are valued at quoted per share or unit market prices for which an official close or last trade pricing on an active exchange is available and are categorized as Level 1 in the fair value hierarchy.
Equity securities are valued at the NAV per share or unit multiplied by the number of shares or units held as of the measurement date, as reported by the fund managers. The share or unit price is quoted on a private market and is based on the value of the underlying investments, which are primarily based on observable inputs; such investments that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
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Hedge funds are stated at the NAV per share or unit (based on the estimated fair market value of the underlying investments) multiplied by the number of shares or units held as of the measurement date, as reported by the fund managers. These investments are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy.
The company regularly reviews fund performance directly with its investment advisor and the fund managers, and performs qualitative analysis to corroborate the reasonableness of the reported NAVs. For funds for which the company did not receive a year-end NAV, the company recorded an estimate of the change in fair value for the latest period based on return estimates and other fund activity obtained from the fund managers.
The columns labeled “Investments Measured at NAV” in the following tables are measured at fair value using the NAV per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in these tables are intended to permit a reconciliation of the fair value hierarchy to the VEBA plan assets.
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of the VEBA plan assets as of 2017 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) | Investments Measured at NAV | Total | |||||||||
| Asset category: | ||||||||||||
| Cash and cash equivalents | $ | 0.2 | $ | – | $ | 0.2 | ||||||
| Debt securities | 5.5 | – | 5.5 | |||||||||
| Equity securities | – | 3.8 | 3.8 | |||||||||
| Hedge fund | – | 3.9 | 3.9 | |||||||||
| Total | $ | 5.7 | $ | 7.7 | $ | 13.4 | ||||||
The following is a summary, by asset category, of the fair value and the level within the fair value hierarchy of the VEBA plan assets as of 2016 year end:
| (Amounts in millions) | Quoted Prices for Identical Assets (Level 1) | Investments Measured at NAV | Total | |||||||||
| Asset category: | ||||||||||||
| Cash and cash equivalents | $ | 0.7 | $ | – | $ | 0.7 | ||||||
| Debt securities | 5.3 | – | 5.3 | |||||||||
| Equity securities | – | 3.6 | 3.6 | |||||||||
| Hedge fund | – | 3.6 | 3.6 | |||||||||
| Total | $ | 6.0 | $ | 7.2 | $ | 13.2 | ||||||
Note 13: Stock-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 2017 year end, the 2011 Plan had 3,296,859 shares available for future grants. The company uses treasury stock to deliver shares under both the 2001 and 2011 Plans.
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Notes to Consolidated Financial Statements (continued)
Net stock-based compensation expense was $30.3 million in 2017, $31.0 million in 2016 and $39.8 million in 2015. Cash received from stock purchase and option plan exercises was $46.2 million in 2017, $41.8 million in 2016 and $41.6 million in 2015. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $20.9 million in 2017, $24.8 million in 2016 and $26.4 million in 2015.
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 ten 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.
The following weighted-average assumptions were used in calculating the fair value of stock options granted during 2017, 2016 and 2015, using the Black-Scholes valuation model:
| 2017 | 2016 | 2015 | ||||||||||
| Expected term of option (in years) | 5.15 | 5.05 | 4.76 | |||||||||
| Expected volatility factor | 22.01% | 22.17% | 24.13% | |||||||||
| Expected dividend yield | 1.63% | 1.77% | 2.04% | |||||||||
| Risk-free interest rate | 1.78% | 1.04% | 1.38% |
A summary of stock option activity during 2017 is presented below:
| Shares (in thousands) | Exercise Price per Share* | Remaining Contractual Term* (in years) | Aggregate Intrinsic Value (in millions) | |||||||||||||
| Outstanding at beginning of year | 3,011 | $ | 100.78 | |||||||||||||
| Granted | 655 | 168.71 | ||||||||||||||
| Exercised | (396) | 86.29 | ||||||||||||||
| Forfeited or expired | (72) | 153.53 | ||||||||||||||
| Outstanding at end of year | 3,198 | 115.30 | 6.4 | $ | 188.7 | |||||||||||
| Exercisable at end of year | 1,990 | 91.27 | 5.1 | 165.2 |
| * | Weighted-average |
|---|
The weighted-average grant date fair value of options granted was $31.13 in 2017, $22.99 in 2016 and $25.64 in 2015. The intrinsic value of options exercised was $33.3 million in 2017, $35.2 million in 2016 and $37.6 million in 2015. The fair value of stock options vested was $14.0 million in 2017, $12.7 million in 2016 and $9.9 million in 2015.
As of 2017 year end, there was $19.3 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 1.5 years.
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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 three 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 100% 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 2017, 2016 and 2015 was $168.70, $138.83 and $139.30, respectively. Vested PSUs totaled 50,316 shares as of 2017 year end, 61,149 shares as of 2016 year end and 94,186 shares as of 2015 year end. PSUs related to 60,980 shares, 94,186 shares and 130,764 shares were paid out in 2017, 2016 and 2015, respectively. 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 2017 performance, 13,648 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, 45,502 RSUs granted in 2016 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2018. Based on the company’s 2015 performance, 64,327 RSUs granted in 2015 were earned; these RSUs vested as of fiscal 2017 year end and were paid out shortly thereafter.
Changes to the company’s non-vested performance awards in 2017 are as follows:
| Shares (in thousands) | Fair Value Price per Share* | |||||||
| Non-vested performance awards at beginning of year | 207 | $ | 141.94 | |||||
| Granted | 77 | 168.70 | ||||||
| Vested | (114) | 144.61 | ||||||
| Cancellations and other | (38) | 159.80 | ||||||
| Non-vested performance awards at end of year | 132 | 149.93 | ||||||
| * | Weighted-average |
|---|
As of 2017 year end, there was $9.5 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 1.6 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 ten 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.
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Notes to Consolidated Financial Statements (continued)
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.
The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during 2017, 2016 and 2015, using the Black-Scholes valuation model:
| 2017 | 2016 | 2015 | ||||||||||
| Expected term of stock-settled SARs (in years) | 3.99 | 4.03 | 4.72 | |||||||||
| Expected volatility factor | 19.39% | 20.09% | 23.66% | |||||||||
| Expected dividend yield | 1.46% | 1.66% | 2.04% | |||||||||
| Risk-free interest rate | 1.55% | 1.11% | 1.50% |
Changes to the company’s stock-settled SARs in 2017 are as follows:
| Stock-settled SARs (in thousands) | Exercise Price per Share* | Remaining Contractual Term* (in years) | Aggregate Intrinsic Value (in millions) | |||||||||||
| Outstanding at beginning of year | 303 | $ | 125.38 | |||||||||||
| Granted | 100 | 168.73 | ||||||||||||
| Exercised | (13) | 103.16 | ||||||||||||
| Forfeited or expired | (30) | 121.53 | ||||||||||||
| Outstanding at end of year | 360 | 138.63 | 7.6 | $ | 12.8 | |||||||||
| Exercisable at end of year | 165 | 119.46 | 6.6 | 9.1 |
| * | Weighted-average |
|---|
The weighted-average grant date fair value of stock-settled SARs granted was $24.13 in 2017, $19.47 in 2016 and $25.37 in 2015. The intrinsic value of stock-settled SARs exercised was $0.9 million in 2017, $1.9 million in 2016 and $1.0 million in 2015. The fair value of stock-settled SARs vested was $2.1 million in both 2017 and 2016 and $1.4 million in 2015.
As of 2017 year end there was $2.5 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 1.5 years.
The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during 2017, 2016 and 2015, using the Black-Scholes valuation model:
| 2017 | 2016 | 2015 | ||||||||||
| Expected term of cash-settled SARs (in years) | 3.09 | 3.11 | 3.10 | |||||||||
| Expected volatility factor | 19.93% | 19.53% | 18.14% | |||||||||
| Expected dividend yield | 1.59% | 1.56% | 1.69% | |||||||||
| Risk-free interest rate | 1.98% | 1.47% | 1.31% |
| 110 | SNAP-ON INCORPORATED |
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The intrinsic value of cash-settled SARs exercised was $1.6 million in 2017, $3.3 million in 2016 and $11.0 million in 2015. The fair value of cash-settled SARs vested during both 2017 and 2016 was $0.2 million and was $4.6 million in 2015.
Changes to the company’s non-vested cash-settled SARs in 2017 are as follows:
| Cash-settled SARs (in thousands) | Fair Value Price per Share* | |||||
| Non-vested cash-settled SARs at beginning of year | 7 | $ | 40.83 | |||
| Granted | 1 | 26.36 | ||||
| Vested | (3) | 46.16 | ||||
| Non-vested cash-settled SARs at end of year | 5 | 35.41 | ||||
| * | Weighted-average |
|---|
As of 2017 year end there was $0.2 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 1.1 years.
Restricted Stock Awards – Non-employee Directors
The company awarded 6,966 shares, 7,145 shares and 8,640 shares of restricted stock to non-employee directors in 2017, 2016 and 2015, respectively. 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 for the restricted stock 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.
Directors’ Fee Plan
Under the Directors’ 1993 Fee Plan, as amended, non-employee directors may elect to receive up to 100% of their fees and retainer in shares of Snap-on’s common stock. Directors may elect to defer receipt of all or part of these shares. For 2017, 2016 and 2015, issuances under the Directors’ Fee Plan totaled 1,800 shares, 2,579 shares and 2,747 shares, respectively, of which 1,312 shares, 2,019 shares and 1,969 shares, respectively, were deferred. As of 2017 year end, shares reserved for issuance to directors under this plan totaled 169,080 shares.
Employee Stock Purchase Plan
Substantially all Snap-on employees in the United States and Canada are eligible to participate in an employee stock purchase plan. The purchase price of the company’s common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For 2017, 2016 and 2015, issuances under this plan totaled 26,963 shares, 27,156 shares and 57,324 shares, respectively. As of 2017 year end, shares reserved for issuance under this plan totaled 753,600 shares and Snap-on held participant contributions of approximately $2.5 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. Compensation expense for plan participants was $0.1 million in 2017, zero in 2016 and $2.3 million in 2015.
| 2017 ANNUAL REPORT | 111 |
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Notes to Consolidated Financial Statements (continued)
Franchisee Stock Purchase Plan
All franchisees in the United States and Canada are eligible to participate in a franchisee stock purchase plan. The purchase price of the company’s common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For 2017, 2016 and 2015, issuances under this plan totaled 47,314 shares, 42,867 shares and 74,001 shares, respectively. As of 2017 year end, shares reserved for issuance under this plan totaled 566,155 shares and Snap-on held participant contributions of approximately $4.8 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. The company recognized mark-to-market expense of $0.2 million in 2017, a mark-to-market benefit of $0.2 million in 2016, and mark-to-market expense of $2.9 million in 2015.
Note 14: Capital Stock
Snap-on has undertaken repurchases of Snap-on common stock from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, stock awards and other corporate purposes. Snap-on repurchased 1,820,000 shares, 758,000 shares and 723,000 shares in 2017, 2016 and 2015, respectively. As of 2017 year end, Snap-on has remaining availability to repurchase up to an additional $390.7 million in common stock pursuant to Board authorizations. The purchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions.
Cash dividends paid in 2017, 2016 and 2015 totaled $169.4 million, $147.5 million and $127.9 million, respectively. Cash dividends per share in 2017, 2016 and 2015 were $2.95, $2.54 and $2.20, respectively. On February 15, 2018, the company’s Board declared a quarterly dividend of $0.82 per share, payable on March 10, 2018, to shareholders of record on February 24, 2018.
Note 15: Commitments and Contingencies
Snap-on leases facilities, office equipment and vehicles under non-cancelable operating and capital leases that extend for varying amounts of time. Snap-on’s future minimum lease commitments under these leases, net of sub-lease rental income, are as follows:
| (Amounts in millions) | Operating Leases | Capital Leases | ||||||
| Year: | ||||||||
| 2018 | $ | 25.5 | $ | 3.6 | ||||
| 2019 | 19.6 | 3.2 | ||||||
| 2020 | 14.1 | 3.0 | ||||||
| 2021 | 10.5 | 2.6 | ||||||
| 2022 | 7.2 | 2.2 | ||||||
| 2023 and thereafter | 7.9 | 3.5 | ||||||
| Total minimum lease payments | $ | 84.8 | $ | 18.1 | ||||
| Less: amount representing interest | (1.2) | |||||||
| Total present value of minimum capital lease payments | $ | 16.9 | ||||||
| 112 | SNAP-ON INCORPORATED |
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Amounts included in the accompanying Consolidated Balance Sheets for the present value of minimum capital lease payments as of 2017 year end are as follows:
| (Amounts in millions) | 2017 | |||
| Other accrued liabilities | $ | 3.2 | ||
| Other long-term liabilities | 13.7 | |||
| Total present value of minimum capital lease payments | $ | 16.9 | ||
Rent expense for worldwide facilities, office equipment and vehicles, net of sub-lease rental income, was $35.2 million, $31.2 million and $29.4 million in 2017, 2016 and 2015, respectively.
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. Snap-on’s product warranty accrual activity for 2017, 2016 and 2015 is as follows:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Warranty accrual: | ||||||||||||
| Beginning of year | $ | 16.0 | $ | 16.4 | $ | 17.3 | ||||||
| Additions | 15.2 | 12.8 | 13.3 | |||||||||
| Usage | (14.0) | (13.2) | (14.2) | |||||||||
| End of year | $ | 17.2 | $ | 16.0 | $ | 16.4 | ||||||
Approximately 2,700 employees, or 21% of Snap-on’s worldwide workforce, are represented by unions and/or covered under collective bargaining agreements. The number of covered union employees whose contracts expire over the next five years approximates 1,450 employees in 2018, 225 employees in 2019, 825 employees in 2020, 125 employees in 2021, and 25 employees in 2022. In recent years, Snap-on has not experienced any significant work slowdowns, stoppages or other labor disruptions.
Snap-on is involved in various legal matters that are being litigated and/or settled in the ordinary course of business. The year ended December 30, 2017, included accruals for $30.9 million related to a judgment in a patent-related litigation matter, as well as $15.0 million related to a judgment in an employment-related litigation matter brought by an individual; both judgments are being appealed.
Although it is not possible to predict the outcome of these and other 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.
Note 16: Other Income (Expense) – Net
“Other income (expense) – net” on the accompanying Consolidated Statements of Earnings consists of the following:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Interest income | $ | 0.3 | $ | 0.6 | $ | 0.5 | ||||||
| Net foreign exchange loss | (7.0) | (1.3) | (2.7) | |||||||||
| Other | (0.5) | 0.1 | (0.2) | |||||||||
| Total other income (expense) – net | $ | (7.2) | $ | (0.6) | $ | (2.4) | ||||||
| 2017 ANNUAL REPORT | 113 |
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Notes to Consolidated Financial Statements (continued)
Note 17: Accumulated Other Comprehensive Income (Loss)
The following is a summary of net changes in Accumulated OCI by component and net of tax for 2017 and 2016:
| (Amounts in millions) | Foreign Currency Translation | Cash Flow Hedges | Defined Benefit Pension and Postretirement Plans | Total | ||||||||||||
| Balance as of 2015 year end | $ | (118.5) | $ | 0.7 | $ | (246.4) | $ | (364.2) | ||||||||
| Other comprehensive income (loss) before reclassifications | (99.2) | 8.8 | (62.6) | (153.0) | ||||||||||||
| Amounts reclassified from Accumulated OCI | – | (0.3) | 19.0 | 18.7 | ||||||||||||
| Net other comprehensive income (loss) | (99.2) | 8.5 | (43.6) | (134.3) | ||||||||||||
| Balance as of 2016 year end | $ | (217.7) | $ | 9.2 | $ | (290.0) | $ | (498.5) | ||||||||
| Other comprehensive income before reclassifications | 135.2 | 6.9 | 11.8 | 153.9 | ||||||||||||
| Amounts reclassified from Accumulated OCI | – | (1.6) | 17.2 | 15.6 | ||||||||||||
| Net other comprehensive income | 135.2 | 5.3 | 29.0 | 169.5 | ||||||||||||
| Balance as of 2017 year end | $ | (82.5) | $ | 14.5 | $ | (261.0) | $ | (329.0) | ||||||||
The reclassifications out of Accumulated OCI in 2017 and 2016 are as follows:
| Amounts Reclassified from Accumulated OCI | Statement of Earnings Presentation | |||||||||
| (Amounts in millions) | 2017 | 2016 | ||||||||
| Gains on cash flow hedges: | ||||||||||
| Treasury locks | $ | 1.6 | $ | 0.3 | Interest expense | |||||
| Income tax expense | – | – | Income tax expense | |||||||
| Net of tax | 1.6 | 0.3 | ||||||||
| Amortization of net unrecognized losses and prior service credits | (26.6) | (30.1) | See footnote below* | |||||||
| Income tax benefit | 9.4 | 11.1 | Income tax expense | |||||||
| Net of tax | (17.2) | (19.0) | ||||||||
| Total reclassifications for the period, net of tax | $ | (15.6) | $ | (18.7) | ||||||
| * | These Accumulated OCI components are included in the computation of net periodic pension and postretirement health care costs; see Note 11 and Note 12 for further information. |
|---|
Note 18: Segments
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.
| 114 | SNAP-ON INCORPORATED |
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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.
Neither Snap-on nor any of its segments depend on any single customer, small group of customers or government for more than 10% of its revenues.
Financial Data by Segment:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Net sales: | ||||||||||||
| Commercial & Industrial Group | $ | 1,265.0 | $ | 1,148.3 | $ | 1,163.6 | ||||||
| Snap-on Tools Group | 1,625.1 | 1,633.9 | 1,568.7 | |||||||||
| Repair Systems & Information Group | 1,347.2 | 1,179.9 | 1,113.2 | |||||||||
| Segment net sales | 4,237.3 | 3,962.1 | 3,845.5 | |||||||||
| Intersegment eliminations | (550.4) | (531.7) | (492.7) | |||||||||
| Total net sales | $ | 3,686.9 | $ | 3,430.4 | $ | 3,352.8 | ||||||
| Financial Services revenue | 313.4 | 281.4 | 240.3 | |||||||||
| Total revenues | $ | 4,000.3 | $ | 3,711.8 | $ | 3,593.1 | ||||||
| Operating earnings: | ||||||||||||
| Commercial & Industrial Group | $ | 185.3 | $ | 168.0 | $ | 169.4 | ||||||
| Snap-on Tools Group | 274.5 | 281.1 | 256.0 | |||||||||
| Repair Systems & Information Group | 333.8 | 297.8 | 273.4 | |||||||||
| Financial Services | 217.5 | 198.7 | 170.2 | |||||||||
| Segment operating earnings | 1,011.1 | 945.6 | 869.0 | |||||||||
| Corporate | (129.6) | (91.4) | (104.2) | |||||||||
| Operating earnings | 881.5 | 854.2 | 764.8 | |||||||||
| Interest expense | (52.4) | (52.2) | (51.9) | |||||||||
| Other income (expense) – net | (7.2) | (0.6) | (2.4) | |||||||||
| Earnings before income taxes and equity earnings | $ | 821.9 | $ | 801.4 | $ | 710.5 | ||||||
| (Amounts in millions) | 2017 | 2016 | ||||||
| Assets: | ||||||||
| Commercial & Industrial Group | $ | 1,113.9 | $ | 907.1 | ||||
| Snap-on Tools Group | 714.3 | 668.1 | ||||||
| Repair Systems & Information Group | 1,314.3 | 1,211.0 | ||||||
| Financial Services | 1,971.8 | 1,789.7 | ||||||
| Total assets from reportable segments | 5,114.3 | 4,575.9 | ||||||
| Corporate | 200.6 | 212.3 | ||||||
| Elimination of intersegment receivables | (65.8) | (65.0) | ||||||
| Total assets | $ | 5,249.1 | $ | 4,723.2 | ||||
| 2017 ANNUAL REPORT | 115 |
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Notes to Consolidated Financial Statements (continued)
Financial Data by Segment (continued):
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Capital expenditures: | ||||||||||||
| Commercial & Industrial Group | $ | 22.6 | $ | 19.3 | $ | 31.0 | ||||||
| Snap-on Tools Group | 40.1 | 38.3 | 38.1 | |||||||||
| Repair Systems & Information Group | 13.4 | 13.1 | 9.0 | |||||||||
| Financial Services | 1.2 | 0.6 | 1.0 | |||||||||
| Total from reportable segments | 77.3 | 71.3 | 79.1 | |||||||||
| Corporate | 4.7 | 3.0 | 1.3 | |||||||||
| Total capital expenditures | $ | 82.0 | $ | 74.3 | $ | 80.4 | ||||||
| Depreciation and amortization: | ||||||||||||
| Commercial & Industrial Group | $ | 22.8 | $ | 20.7 | $ | 20.1 | ||||||
| Snap-on Tools Group | 29.1 | 27.6 | 24.9 | |||||||||
| Repair Systems & Information Group | 37.8 | 33.9 | 34.0 | |||||||||
| Financial Services | 0.6 | 0.6 | 0.7 | |||||||||
| Total from reportable segments | 90.3 | 82.8 | 79.7 | |||||||||
| Corporate | 2.9 | 2.8 | 2.8 | |||||||||
| Total depreciation and amortization | $ | 93.2 | $ | 85.6 | $ | 82.5 | ||||||
| Revenues by geographic region:* | ||||||||||||
| United States | $ | 2,703.3 | $ | 2,588.8 | $ | 2,483.9 | ||||||
| Europe | 748.8 | 654.4 | 635.0 | |||||||||
| All other | 548.2 | 468.6 | 474.2 | |||||||||
| Total revenues | $ | 4,000.3 | $ | 3,711.8 | $ | 3,593.1 | ||||||
| (Amounts in millions) | 2017 | 2016 | ||||||||||
| Long-lived assets:** | ||||||||||||
| United States | $ | 1,081.2 | $ | 1,048.6 | ||||||||
| Sweden | 252.6 | 218.8 | ||||||||||
| All other | 328.4 | 237.9 | ||||||||||
| Total long-lived assets | $ | 1,662.2 | $ | 1,505.3 | ||||||||
| * | Revenues are attributed to countries based on the origin of the sale. |
|---|
| ** | Long-lived assets consist of Property and equipment – net, Goodwill, and Other intangibles – net. |
|---|
Products and Services: 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 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, 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 service 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. Further product line information is not presented as it is not practicable to do so.
| 116 | SNAP-ON INCORPORATED |
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The following table shows the consolidated net sales and revenues of these product groups in the last three years:
| (Amounts in millions) | 2017 | 2016 | 2015 | |||||||||
| Net sales: | ||||||||||||
| Tools | $ | 1,946.7 | $ | 1,899.2 | $ | 1,910.1 | ||||||
| Diagnostics, information and management systems | 800.4 | 748.2 | 689.6 | |||||||||
| Equipment | 939.8 | 783.0 | 753.1 | |||||||||
| Total net sales | $ | 3,686.9 | $ | 3,430.4 | $ | 3,352.8 | ||||||
| Financial services revenue | 313.4 | 281.4 | 240.3 | |||||||||
| Total revenues | $ | 4,000.3 | $ | 3,711.8 | $ | 3,593.1 | ||||||
Note 19: Quarterly Data (unaudited)
| (Amounts in millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | |||||||||||||||
| 2017 | ||||||||||||||||||||
| Net sales | $ | 887.1 | $ | 921.4 | $ | 903.8 | $ | 974.6 | $ | 3,686.9 | ||||||||||
| Gross profit | 448.0 | 463.0 | 448.6 | 465.3 | 1,824.9 | |||||||||||||||
| Financial services revenue | 76.8 | 77.7 | 79.0 | 79.9 | 313.4 | |||||||||||||||
| Financial services expenses | (24.3) | (23.1) | (23.0) | (25.5) | (95.9) | |||||||||||||||
| Net earnings | 145.1 | 156.8 | 137.1 | 133.2 | 572.2 | |||||||||||||||
| Net earnings attributable to Snap-on Incorporated | 141.6 | 153.2 | 133.4 | 129.5 | 557.7 | |||||||||||||||
| Earnings per share – basic | 2.45 | 2.65 | 2.33 | 2.28 | 9.72 | |||||||||||||||
| Earnings per share – diluted | 2.39 | 2.60 | 2.29 | 2.24 | 9.52 | |||||||||||||||
| Cash dividends paid per share | 0.71 | 0.71 | 0.71 | 0.82 | 2.95 | |||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total | ||||||||||||||||
| 2016 | ||||||||||||||||||||
| Net sales | $ | 834.2 | $ | 872.3 | $ | 834.1 | $ | 889.8 | $ | 3,430.4 | ||||||||||
| Gross profit | 415.3 | 431.3 | 419.1 | 443.9 | 1,709.6 | |||||||||||||||
| Financial services revenue | 66.3 | 69.3 | 71.6 | 74.2 | 281.4 | |||||||||||||||
| Financial services expenses | (19.3) | (19.8) | (21.0) | (22.6) | (82.7) | |||||||||||||||
| Net earnings | 131.3 | 143.4 | 135.2 | 149.7 | 559.6 | |||||||||||||||
| Net earnings attributable to Snap-on Incorporated | 128.3 | 140.1 | 131.7 | 146.3 | 546.4 | |||||||||||||||
| Earnings per share – basic | 2.21 | 2.41 | 2.27 | 2.52 | 9.40 | |||||||||||||||
| Earnings per share – diluted | 2.16 | 2.36 | 2.22 | 2.47 | 9.20 | |||||||||||||||
| Cash dividends paid per share | 0.61 | 0.61 | 0.61 | 0.71 | 2.54 |
Note 20: Subsequent Event
On January 16, 2018, Snap-on repaid the 2018 Notes upon maturity with an aggregate of $250 million of available cash and cash generated from issuances of commercial paper.
| 2017 ANNUAL REPORT | 117 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Snap-on has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SNAP-ON INCORPORATED | ||||||
| By: | /s/ Nicholas T. Pinchuk | Date: February 15, 2018 | ||||
| Nicholas T. Pinchuk, Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Snap-on and in the capacities and on the date indicated.
| /s/ Nicholas T. Pinchuk | Date: February 15, 2018 | |||||
| Nicholas T. Pinchuk, Chairman, President and Chief Executive Officer | ||||||
| /s/ Aldo J. Pagliari | Date: February 15, 2018 | |||||
| Aldo J. Pagliari, Principal Financial Officer, Senior Vice President – Finance and Chief Financial Officer | ||||||
| /s/ Richard K. Strege | Date: February 15, 2018 | |||||
| Richard K. Strege, Principal Accounting Officer, Vice President and Controller |
| 118 | SNAP-ON INCORPORATED |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Snap-on and in the capacities and on the date indicated.
| By: | /s/ David C. Adams | Date: February 15, 2018 | ||||
| David C. Adams, Director | ||||||
| By: | /s/ Karen L. Daniel | Date: February 15, 2018 | ||||
| Karen L. Daniel, Director | ||||||
| By: | /s/ Ruth Ann M. Gillis | Date: February 15, 2018 | ||||
| Ruth Ann M. Gillis, Director | ||||||
| By: | /s/ James P. Holden | Date: February 15, 2018 | ||||
| James P. Holden, Director | ||||||
| By: | /s/ Nathan J. Jones | Date: February 15, 2018 | ||||
| Nathan J. Jones, Director | ||||||
| By: | /s/ Henry W. Knueppel | Date: February 15, 2018 | ||||
| Henry W. Knueppel, Director | ||||||
| By: | /s/ W. Dudley Lehman | Date: February 15, 2018 | ||||
| W. Dudley Lehman, Director | ||||||
| By: | /s/ Nicholas T. Pinchuk | Date: February 15, 2018 | ||||
| Nicholas T. Pinchuk, Director | ||||||
| By: | /s/ Gregg M. Sherrill | Date: February 15, 2018 | ||||
| Gregg M. Sherrill, Director | ||||||
| By: | /s/ Donald J. Stebbins | Date: February 15, 2018 | ||||
| Donald J. Stebbins, Director |
| 2017 ANNUAL REPORT | 119 |
Previous: Item 15. (a): Documents Filed as Part of This Report: