filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management Overview
References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “organic sales” refer to sales from continuing operations calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding acquisition-related sales and the impact of foreign currency translation. Management evaluates the company’s sales performance based on organic sales growth, which primarily reflects growth from the company’s existing businesses as a result of increased output, customer base and geographic expansion, new product development and/or pricing, and excludes sales contributions from acquired operations the company did not own as of the comparable prior-year reporting period. The company’s organic sales disclosures also exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying growth trends in our businesses and facilitating comparisons of our sales performance with prior periods.
We believe our 2018 operating results demonstrate our commitment in providing repeatability and reliability to a wide range of professional customers performing critical tasks in workplaces of consequence. Leveraging capabilities already demonstrated in the automotive repair arena, our “coherent growth” strategy focuses on developing and expanding our professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high. Snap-on’s value proposition of making work easier for serious professionals in workplaces of consequence is an ongoing strength as we move forward along our runways for coherent growth:
| • | Enhancing the franchise network, where we continued to focus on helping our franchisees extend their reach through innovative selling processes and productivity initiatives that break the traditional time and space barriers inherent in a mobile van; |
| • | Expanding in the vehicle repair garage, where we continued to make progress in connecting with customers and translating the resulting insights into innovation that solves specific challenges in the repair facility; |
| • | Further extending in critical industries, where we continued to grow our lines of products customized for specific industries, including through acquisitions; and |
| • | Building in emerging markets, where we continued to build manufacturing capacity, focused product lines and distribution capability. |
Our strategic priorities and plans for 2019 will continue to build on our Snap-on Value Creation Processes – our suite of strategic principles and processes we employ every day designed to create value, and employed in the areas of safety, quality, customer connection, innovation and rapid continuous improvement (“Rapid Continuous Improvement” or “RCI”). We expect to continue to deploy these processes in our existing operations as well as into our recently acquired businesses.
Snap-on’s RCI initiatives employ a structured set of tools and processes across multiple businesses and geographies intended to eliminate waste and improve operations. Savings from Snap-on’s RCI initiatives reflect benefits from a wide variety of ongoing efficiency, productivity and process improvements, including savings generated from product design cost reductions, improved manufacturing line set-up and change-over practices, lower-cost sourcing initiatives and facility consolidations. Unless individually significant, it is not practicable to disclose each RCI activity that generated savings and/or segregate RCI savings embedded in sales volume increases.
Our global financial services operations continue to serve a significant strategic role in offering financing options to our franchisees, to their customers, and to customers in other parts of our business. We expect that our global financial services business, which includes both Snap-on Credit LLC (“SOC”) in the United States and our other international finance subsidiaries, will continue to be a meaningful contributor to our operating earnings going forward.
Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.
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Recent Acquisitions
On January 31, 2018, Snap-on acquired substantially all of the assets of George A. Sturdevant, Inc. (d/b/a Fastorq) for a cash purchase price of $3.0 million. Fastorq, based in New Caney, Texas, designs, assembles and distributes hydraulic torque and hydraulic tensioning products for use in critical industries. The acquisition of the Fastorq product line complemented and increased Snap-on’s existing torque product offering and broadened its established capabilities in serving in critical industries. For segment reporting purposes, the results of operations and assets of Fastorq have been included in the Commercial & Industrial Group since the acquisition date.
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. The acquisition of TCS enhanced and expanded Snap-on’s capabilities in providing solutions that address torque requirements, which are increasingly essential to critical mechanical performance. 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. The acquisition of Norbar enhanced and expanded Snap-on’s capabilities in providing solutions that address torque requirements. 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. The acquisition of BTC enhanced Snap-on’s capabilities to grow enterprise revenues and add increased productivity for repair workshops. For segment reporting purposes, the results of operations and assets of BTC have been included in the Repair Systems & 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. The acquisition of Sturtevant Richmont enhanced and expanded Snap-on’s capabilities in providing solutions that address torque requirements. 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. The acquisition of Car-O-Liner complemented and increased Snap-on’s existing equipment and repair and service information product offerings, broadened its established capabilities in serving vehicle repair facilities and further expanded the company’s presence with repair shop owners and managers. 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.
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.
Impact of Accounting Standards Update No. 2017-07
At the beginning of fiscal 2018, Snap-on adopted ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU requires changes to be applied retrospectively; as such, prior periods have been adjusted to reflect this adoption and conform to the 2018 presentation. See Note 1 to the Consolidated Financial Statements for further information on the effect of adoption of this ASU.
| 2018 ANNUAL REPORT | 27 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Summary of Consolidated Performance
Consolidated net sales of $3,740.7 million in 2018 increased $53.8 million, or 1.5%, from 2017 levels, reflecting a $19.3 million, or 0.5%, increase in organic sales (a non-GAAP financial measure that excludes acquisition-related sales and the impact of foreign currency translation), $24.2 million of acquisition-related sales and $10.3 million of favorable foreign currency translation.
Operating earnings before financial services of $726.0 million in 2018, including $4.4 million of favorable foreign currency effects, increased $61.4 million, or 9.2%, as compared to $664.6 million last year. Fiscal 2018 results included a $4.3 million benefit related to a settlement in an employment-related litigation matter that was being appealed (the “legal settlement”). Fiscal 2017 results included $45.9 million of charges related to the judgment that was the subject of the legal settlement and a judgment in a patent-related litigation matter that is being appealed (collectively the “legal charges”). The company can provide no assurance as to the result of the appeal. As a percentage of net sales, operating earnings before financial services of 19.4% in 2018 compared to 18.0% last year.
Operating earnings of $956.1 million in 2018, including the $4.3 million benefit for the legal settlement and $4.7 million of favorable foreign currency effects, increased $74.0 million, or 8.4% from $882.1 million last year. In 2017, operating earnings included $45.9 million of expense for the legal charges. As a percentage of revenues, operating earnings of 23.5% compared to 22.1% last year.
In 2018, net earnings attributable to Snap-on were $679.9 million, or $11.87 per diluted share, increased $122.2 million, or $2.35 per diluted share, from $557.7 million, or $9.52 per diluted share, in 2017. In 2018, net earnings attributable to Snap-on included a $4.1 million, or $0.07 per diluted share, benefit from an after-tax net gain of $4.1 million associated with a treasury lock settlement of $10.0 million related to the issuance of debt, partially offset by $5.9 million of expense related to the early extinguishment of debt (collectively, the “net debt items”), as well as $3.2 million, or $0.06 per diluted share, for the after-tax benefit related to the legal settlement, partially offset by $3.9 million, or $0.07 per diluted share, of tax expense for newly issued guidance associated with the U.S. Tax Cuts and Jobs Act (the “Tax Act”) or (“tax charge”). Net earnings attributable to Snap-on in 2017 included $28.4 million, or $0.48 per diluted share, for the after-tax expense related to the legal charges, and $7.0 million, or $0.12 per diluted share, of tax expense as a result of the implementation of the Tax Act.
Impact of the Tax Act
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 affected 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, for the company’s year ended December 30, 2017. 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 Accounting Standards Codification (“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.
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The company’s accounting for certain elements of the Tax Act was incomplete as of December 30, 2017. 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 recorded a provisional discrete net tax expense of $7.0 million in the fiscal year ended December 29, 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 for 2017, it continued to gather additional information to more precisely compute the final amount reported on its 2017 U.S. federal tax return which was filed in October 2018. The actual transition tax reported was $8.3 million greater than the company’s initial estimate and was included in income tax expense for 2018. Likewise, while the company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it was 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. During 2018, the company recorded additional net tax benefits of $4.4 million attributable to pension contributions made in 2018 that were deductible for 2017 at the higher 35% federal tax rate and other changes to the 2017 tax provision related to the Tax Act and subsequently issued tax guidance. Due to the complexity of the new GILTI tax rules, the company continued to evaluate this provision of the Tax Act and the application of ASC 740 throughout 2018. Under GAAP, the company is allowed to make an accounting policy choice to either: (i) 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 (ii) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The company selected to apply the “period cost method” to account for the new GILTI tax, and treated it as a current-period expense for 2018. The company will continue to analyze the full effects of the Tax Act on its financial statements in 2019 as additional guidance is issued and interpretations evolve.
Summary of Segment Performance
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. Segment net sales of $1,343.3 million in 2018 increased $78.3 million, or 6.2%, from 2017 levels, reflecting a $52.1 million, or 4.1%, organic sales gain, $23.5 million of acquisition-related sales and $2.7 million of favorable foreign currency translation. The organic sales increase includes higher sales to customers in critical industries, in the Asia Pacific operations, in power tools operations and in the European-based hand tools business. Operating earnings of $199.3 million in 2018, increased $12.8 million, or 6.9%, from 2017 levels, primarily due to increased organic sales volume and acquisitions, partially offset by $2.5 million of unfavorable foreign currency effects.
The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2019:
| • | Continuing to invest in emerging market growth initiatives; |
| • | Expanding our business with existing customers and reaching new customers in critical industries and other market segments; |
| • | Broadening our product offering designed particularly for critical industry segments; |
| • | Increasing our customer-connection-driven understanding of work across multiple industries; |
| • | Investing in innovation that, guided by that understanding of work, delivers an ongoing stream of productivity-enhancing custom engineered solutions; and |
| • | Continuing to reduce structural and operating costs, as well as improve efficiencies, through RCI initiatives. |
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. Segment net sales of $1,613.8 million in 2018 decreased $11.3 million, or 0.7%, from 2017 levels, reflecting a $15.6 million, or 1.0%, organic sales decrease, partially offset by $4.3 million of favorable foreign currency translation. The organic sales decrease includes a decline in the company’s international franchise operations while sales in the U.S. franchise operations were essentially flat. Operating earnings of $264.2 million in 2018 decreased $10.5 million, or 3.8%, from 2017 levels primarily due to the impact of lower sales volumes and higher costs, partially offset by $7.7 million of favorable foreign currency effects and benefits from the company’s RCI initiatives.
| 2018 ANNUAL REPORT | 29 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Despite the sales challenges in 2018, the Snap-on Tools Group remained focused on its fundamental, strategic initiatives to strengthen the franchise network and enhance franchisee profitability. In 2019, the Snap-on Tools Group intends to continue these initiatives, with specific focus on the following:
| • | Continuing to improve franchisee satisfaction, productivity, profitability and commercial health; |
| • | Developing new programs and products to expand market coverage, reaching new technician customers and increasing penetration with existing customers; |
| • | Increasing investment in new product innovation and development; and |
| • | Increasing customer service levels and productivity in back office support functions, manufacturing and the supply chain through RCI initiatives and investment. |
By focusing on these areas, we believe that Snap-on, as well as its franchisees, will have the opportunity to continue to serve customers more effectively, more profitably and with improved satisfaction.
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 dealerships through direct and distributor channels. Segment net sales of $1,334.4 million in 2018 decreased $12.8 million, or 1.0%, from 2017 levels, reflecting a $19.6 million, or 1.4%, organic sales decline, partially offset by $0.7 million of acquisition-related sales and $6.1 million of favorable foreign currency translation. The organic sales decrease primarily reflects lower sales to OEM dealerships and in sales of undercar equipment, partially offset by increased sales of diagnostic and repair information products to independent repair shop owners and managers. Operating earnings of $342.6 million in 2018 increased $7.3 million, or 2.2%, from 2017 levels, primarily due to benefits from the company’s RCI initiatives, partially offset by $0.8 million of unfavorable foreign currency effects.
The Repair Systems & Information Group intends to focus on the following strategic priorities in 2019:
| • | Expanding the product offering with new products and services, thereby providing more to sell to repair shop owners and managers; |
| • | Continuing software and hardware upgrades to further improve functionality, performance and efficiency; |
| • | Leveraging integration of software solutions; |
| • | Continuing productivity advancements through RCI initiatives and leveraging of resources; and |
| • | Increasing penetration in geographic markets, including emerging markets. |
Financial Services revenue was $329.7 million in 2018 and $313.4 million in 2017; originations of $1,057.5 million in 2018 decreased $14.5 million, or 1.4%, from 2017 levels. In 2018, operating earnings from financial services of $230.1 million, including $0.3 million of favorable foreign currency effects, increased $12.6 million, or 5.8%, from $217.5 million last year. In recent years, Snap-on has steadily grown its financial services portfolio by providing financing for new finance and contract receivables originated by our global financial services operations.
Financial Services intends to focus on the following strategic priorities in 2019:
| • | Delivering financial products and services that attract and sustain profitable franchisees and support Snap-on’s strategies for expanding market coverage and penetration; |
| • | Improving productivity levels and ensuring high quality in all financial products and processes through the use of RCI initiatives; and |
| • | Maintaining healthy portfolio performance levels. |
Cash Flows
Net cash provided by operating activities of $764.5 million in 2018 increased $156.0 million from $608.5 million in 2017. The $156.0 million increase is primarily due to $124.0 million of higher net earnings and $34.0 million from net changes in operating assets and liabilities. Net cash provided by operating activities was $576.1 million in 2016.
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Net cash used by investing activities of $210.2 million in 2018 included additions to finance receivables of $865.6 million, partially offset by collections of $747.7 million, as well as $3.0 million for the acquisition of Fastorq. Net cash used by investing activities of $341.4 million in 2017 included additions to finance receivables of $892.0 million, partially offset by collections of $712.7 million, as well as a total of $82.9 million (net of $1.8 million of cash acquired) for the acquisitions of BTC, Norbar, and TCS, and working capital adjustments for the Car-O-Liner and Sturtevant Richmont acquisitions. Net cash used by investing activities of $473.4 million in 2016 included additions to finance receivables of $915.0 million, partially offset by collections of $671.7 million, as well as, on a preliminary basis, $160.4 million (net of $4.3 million of cash acquired) for the acquisitions of Car-O-Liner and Sturtevant Richmont. Capital expenditures in 2018, 2017 and 2016 totaled $90.9 million, $82.0 million and $74.3 million, respectively. Capital expenditures in all three years included investments to support the company’s execution of its strategic growth initiatives and Value Creation Processes around safety, quality, customer connection, innovation and RCI.
Net cash used by financing activities of $502.2 million in 2018 included repayments of $250 million of the unsecured 4.25% notes, due January 16, 2018 (the “2018 Notes”), at maturity, and $200 million of the unsecured 6.70% notes that were scheduled to mature on March 1, 2019 (the “2019 Notes”), and a $7.8 million loss on early extinguishment of debt. These amounts were partially offset by Snap-on’s sale, on February 20, 2018, of $400 million of unsecured 4.10% notes that mature on March 1, 2048 (the “2048 Notes”) at a discount, from which Snap-on received $395.4 million of net proceeds, reflecting $3.5 million of transaction costs. Net cash used by financing activities in 2018 also included $284.1 million for the repurchase of 1,769,000 shares of Snap-on’s common stock and $192.0 million for dividend payments to shareholders, partially offset by $55.5 million of proceeds from stock purchase and option plan exercises and $4.9 million of proceeds from a net increase in notes payable and other short-term borrowings. Net cash used by financing activities of $256.1 million in 2017 included the January 2017 repayment of $150 million of 5.5% unsecured notes upon maturity (the “2017 Notes”). These amounts were partially offset by Snap-on’s sale, on February 15, 2017, of $300 million of unsecured 3.25% notes that mature on March 1, 2027 (the “2027 Notes”) at a discount, from which Snap-on received $297.8 million of net proceeds, reflecting $1.9 million of transaction costs. Net cash used by financing activities in 2017 also included $287.9 million for the repurchase of 1,820,000 shares of Snap-on’s common stock, and $169.4 million for dividend payments to shareholders, partially offset by $46.2 million of proceeds from stock purchase and option plan exercises and $30.6 million of proceeds from a net increase in notes payable and other short-term borrowings. Net cash used by financing activities of $116.0 million in 2016 included $147.5 million for dividend payments to shareholders and $120.4 million for the repurchase of 758,000 shares of Snap-on’s common stock, partially offset by $134.2 million of proceeds from a net increase in notes payable and other short-term borrowings and $41.8 million of proceeds from stock purchase and option plan exercises.
Fiscal Year
Snap-on’s fiscal year ends on the Saturday that is on or nearest to December 31. Unless otherwise indicated, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “fiscal 2018” or “2018” refer to the fiscal year ended December 29, 2018; references to “fiscal 2017” or “2017” refer to the fiscal year ended December 30, 2017; and references to “fiscal 2016” or “2016” refer to the fiscal year ended December 31, 2016. References in this document to 2018, 2017 and 2016 year end refer to December 29, 2018, December 30, 2017, and December 31, 2016, respectively.
Snap-on’s 2018, 2017 and 2016 fiscal years each contained 52 weeks of operating results.
| 2018 ANNUAL REPORT | 31 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Results of Operations
2018 vs. 2017
Results of operations for 2018 and 2017 are as follows:
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| Net sales | $ | 3,740.7 | 100.0 | % | $ | 3,686.9 | 100.0 | % | $ | 53.8 | 1.5 | % | |||||||||
| Cost of goods sold | (1,870.7 | ) | (50.0 | )% | (1,861.0 | ) | (50.5 | )% | (9.7 | ) | (0.5 | )% | |||||||||
| Gross profit | 1,870.0 | 50.0 | % | 1,825.9 | 49.5 | % | 44.1 | 2.4 | % | ||||||||||||
| Operating expenses | (1,144.0 | ) | (30.6 | )% | (1,161.3 | ) | (31.5 | )% | 17.3 | 1.5 | % | ||||||||||
| Operating earnings before financial services | 726.0 | 19.4 | % | 664.6 | 18.0 | % | 61.4 | 9.2 | % | ||||||||||||
| Financial services revenue | 329.7 | 100.0 | % | 313.4 | 100.0 | % | 16.3 | 5.2 | % | ||||||||||||
| Financial services expenses | (99.6 | ) | (30.2 | )% | (95.9 | ) | (30.6 | )% | (3.7 | ) | (3.9 | )% | |||||||||
| Operating earnings from financial services | 230.1 | 69.8 | % | 217.5 | 69.4 | % | 12.6 | 5.8 | % | ||||||||||||
| Operating earnings | 956.1 | 23.5 | % | 882.1 | 22.1 | % | 74.0 | 8.4 | % | ||||||||||||
| Interest expense | (50.4 | ) | (1.2 | )% | (52.4 | ) | (1.3 | )% | 2.0 | 3.8 | % | ||||||||||
| Other income (expense) – net | 4.2 | 0.1 | % | (7.8 | ) | (0.3 | )% | 12.0 | NM | ||||||||||||
| Earnings before income taxes and equity earnings | 909.9 | 22.4 | % | 821.9 | 20.5 | % | 88.0 | 10.7 | % | ||||||||||||
| Income tax expense | (214.4 | ) | (5.3 | )% | (250.9 | ) | (6.2 | )% | 36.5 | 14.5 | % | ||||||||||
| Earnings before equity earnings | 695.5 | 17.1 | % | 571.0 | 14.3 | % | 124.5 | 21.8 | % | ||||||||||||
| Equity earnings, net of tax | 0.7 | — | 1.2 | — | (0.5 | ) | (41.7 | )% | |||||||||||||
| Net earnings | 696.2 | 17.1 | % | 572.2 | 14.3 | % | 124.0 | 21.7 | % | ||||||||||||
| Net earnings attributable to noncontrolling interests | (16.3 | ) | (0.4 | )% | (14.5 | ) | (0.4 | )% | (1.8 | ) | (12.4 | )% | |||||||||
| Net earnings attributable to Snap-on Inc. | $ | 679.9 | 16.7 | % | $ | 557.7 | 13.9 | % | $ | 122.2 | 21.9 | % |
| NM: Not meaningful | |
| Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue. |
Net sales of $3,740.7 million in 2018 increased $53.8 million, or 1.5%, from 2017 levels, reflecting a $19.3 million, or 0.5%, organic sales gain, $24.2 million of acquisition-related sales and $10.3 million of favorable foreign currency translation.
Gross profit of $1,870.0 million in 2018 compared to $1,825.9 million last year. Gross margin (gross profit as a percentage of net sales) of 50.0% in 2018 improved 50 basis points (100 basis points (“bps”) equals 1.0 percent) from 49.5% last year primarily due to a shift in sales that included increased volumes of higher gross margin products and savings from the company’s RCI initiatives, partially offset by higher material and other costs.
Operating expenses of $1,144.0 million in 2018, including a $4.3 million benefit for the legal settlement, compared to $1,161.3 million, including $45.9 million for the legal charges, in 2017. The operating expense margin (operating expenses as a percentage of net sales) of 30.6% in 2018 improved 90 bps from 31.5% last year primarily due to 130 bps for the legal charges that occurred in 2017 and 10 bps for the legal settlement, partially offset by 10 bps of operating expenses from acquisitions and higher costs.
Operating earnings before financial services of $726.0 million in 2018, including $4.4 million of favorable foreign currency effects, increased $61.4 million, or 9.2%, as compared to $664.6 million last year. Fiscal 2018 results included a $4.3 million benefit for the legal settlement. Fiscal 2017 results included $45.9 million for the legal charges. As a percentage of net sales, operating earnings before financial services, including the legal settlement, of 19.4% compared to 18.0% last year, which included the legal charges.
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Financial services revenue of $329.7 million in 2018 compared to revenue of $313.4 million last year. Financial services operating earnings of $230.1 million, including $0.3 million of favorable foreign currency effects in 2018, increased $12.6 million, or 5.8%, as compared to $217.5 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.
Operating earnings of $956.1 million in 2018, including $4.7 million of favorable foreign currency effects, increased $74.0 million, or 8.4%, from $882.1 million last year. Fiscal 2018 results included a $4.3 million benefit for the legal settlement. Fiscal 2017 included $45.9 million of expense for the legal charges. As a percentage of revenues, operating earnings of 23.5% compared to 22.1% last year.
Interest expense of $50.4 million in 2018 decreased $2.0 million from $52.4 million last year. See Note 10 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.
Other income (expense) – net was income of $4.2 million in 2018 and expense of $7.8 million in 2017. Other income (expense) – net in fiscal 2018 includes a net gain of $5.5 million for the net debt items. Other income (expense) - net also includes net gains and losses associated with hedging and currency exchange rate transactions, non-service components of net periodic benefit costs, and interest income. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net.
Snap-on’s effective income tax rate on earnings attributable to Snap-on was 24.0% in 2018, including a 50 bps charge related to the newly issued guidance associated with the Tax Act, as compared to 31.1% in 2017, which included a 40 bps benefit from the legal charges, and a net $7.0 million charge, or 90 bps impact, from the implementation of the Tax Act. See Note 9 to the Consolidated Financial Statements for information on income taxes.
Net earnings attributable to Snap-on in 2018 of $679.9 million, or $11.87 per diluted share, increased $122.2 million, or $2.35 per diluted share, from $557.7 million, or $9.52 per diluted share, in 2017. In 2018, net earnings attributable to Snap-on included a $4.1 million, or $0.07 per diluted share, benefit from the after-tax net debt items, as well as a $3.2 million, or $0.06 per diluted share, after-tax benefit related to the legal settlement, and $3.9 million, or $0.07 per diluted share, for the tax charge. Net earnings attributable to Snap-on in 2017 included $28.4 million, or $0.48 per diluted share, of after-tax legal charges, and $7.0 million, or $0.12 per diluted share, of tax expense as a result of the implementation of the Tax Act.
Segment Results
Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments, 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 dealerships through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.
Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.
| 2018 ANNUAL REPORT | 33 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Commercial & Industrial Group
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| External net sales | $ | 1,051.6 | 78.3 | % | $ | 986.1 | 78.0 | % | $ | 65.5 | 6.6 | % | |||||||||
| Intersegment net sales | 291.7 | 21.7 | % | 278.9 | 22.0 | % | 12.8 | 4.6 | % | ||||||||||||
| Segment net sales | 1,343.3 | 100.0 | % | 1,265.0 | 100.0 | % | 78.3 | 6.2 | % | ||||||||||||
| Cost of goods sold | (817.7 | ) | (60.9 | )% | (766.4 | ) | (60.6 | )% | (51.3 | ) | (6.7 | )% | |||||||||
| Gross profit | 525.6 | 39.1 | % | 498.6 | 39.4 | % | 27.0 | 5.4 | % | ||||||||||||
| Operating expenses | (326.3 | ) | (24.3 | )% | (312.1 | ) | (24.7 | )% | (14.2 | ) | (4.5 | )% | |||||||||
| Segment operating earnings | $ | 199.3 | 14.8 | % | $ | 186.5 | 14.7 | % | $ | 12.8 | 6.9 | % |
Segment net sales of $1,343.3 million in 2018 increased $78.3 million, or 6.2%, from 2017 levels, reflecting a $52.1 million or 4.1%, organic sales gain, $23.5 million of acquisition-related sales and $2.7 million of favorable foreign currency translation. The organic sales increase primarily includes mid single-digit gains in sales to customers in both critical industries and in the segment’s Asia Pacific operations, as well as low single-digit gains in sales in the power tools operations and in the European-based hand tools business.
Segment gross profit of $525.6 million in 2018 compared to $498.6 million last year. Gross margin of 39.1% in 2018 declined 30 bps from 39.4% last year primarily due to 10 bps of unfavorable foreign currency effects and higher material and other costs, partially offset by benefits from the company’s RCI initiatives.
Segment operating expenses of $326.3 million in 2018 compared to $312.1 million last year. The operating expense margin of 24.3% in 2018 improved 40 bps from 24.7% last year as benefits from higher sales volumes were partially offset by 10 bps of unfavorable foreign currency effects.
As a result of these factors, segment operating earnings of $199.3 million in 2018, including $2.5 million of unfavorable foreign currency effects, increased $12.8 million from 2017 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group was 14.8% and 14.7%, in 2018 and 2017, respectively.
Snap-on Tools Group
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| Segment net sales | $ | 1,613.8 | 100.0 | % | $ | 1,625.1 | 100.0 | % | $ | (11.3 | ) | (0.7 | )% | ||||||||
| Cost of goods sold | (910.8 | ) | (56.4 | )% | (930.9 | ) | (57.3 | )% | 20.1 | 2.2 | % | ||||||||||
| Gross profit | 703.0 | 43.6 | % | 694.2 | 42.7 | % | 8.8 | 1.3 | % | ||||||||||||
| Operating expenses | (438.8 | ) | (27.2 | )% | (419.5 | ) | (25.8 | )% | (19.3 | ) | (4.6 | )% | |||||||||
| Segment operating earnings | $ | 264.2 | 16.4 | % | $ | 274.7 | 16.9 | % | $ | (10.5 | ) | (3.8 | )% |
Segment net sales of $1,613.8 million in 2018 decreased $11.3 million, or 0.7%, from 2017 levels, reflecting a $15.6 million, or 1.0% organic sales decrease, partially offset by $4.3 million of favorable foreign currency translation. The organic sales decline reflects a low single-digit decline in the company’s international franchise operations while sales in the U.S. operations were essentially flat.
Segment gross profit of $703.0 million in 2018 compared to $694.2 million last year. Gross margin of 43.6% in 2018 improved from 42.7% last year primarily due to increased sales of higher gross margin products, benefits from the company’s RCI initiatives and 40 bps of favorable foreign currency effects.
Segment operating expenses of $438.8 million in 2018 compared to $419.5 million last year. The operating expense margin of 27.2% in 2018 increased 140 bps from 25.8% last year primarily due to higher costs.
As a result of these factors, segment operating earnings of $264.2 million in 2018, including $7.7 million of favorable foreign currency effects, decreased $10.5 million from 2017 levels. Operating margin for the Snap-on Tools Group of 16.4% in 2018 compared to 16.9% last year.
| 34 | SNAP-ON INCORPORATED |
Repair Systems & Information Group
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| External net sales | $ | 1,075.3 | 80.6 | % | $ | 1,075.7 | 79.8 | % | $ | (0.4 | ) | — | |||||||||
| Intersegment net sales | 259.1 | 19.4 | % | 271.5 | 20.2 | % | (12.4 | ) | (4.6 | )% | |||||||||||
| Segment net sales | 1,334.4 | 100.0 | % | 1,347.2 | 100.0 | % | (12.8 | ) | (1.0 | )% | |||||||||||
| Cost of goods sold | (693.0 | ) | (51.9 | )% | (714.1 | ) | (53.0 | )% | 21.1 | 3.0 | % | ||||||||||
| Gross profit | 641.4 | 48.1 | % | 633.1 | 47.0 | % | 8.3 | 1.3 | % | ||||||||||||
| Operating expenses | (298.8 | ) | (22.4 | )% | (297.8 | ) | (22.1 | )% | (1.0 | ) | (0.3 | )% | |||||||||
| Segment operating earnings | $ | 342.6 | 25.7 | % | $ | 335.3 | 24.9 | % | $ | 7.3 | 2.2 | % |
Segment net sales of $1,334.4 million in 2018 decreased $12.8 million, or 1.0%, from 2017 levels, reflecting a $19.6 million, or 1.4%, organic sales decline, partially offset by $0.7 million of acquisition-related sales and $6.1 million of favorable foreign currency translation. The organic sales decrease includes low single-digit decreases in sales to OEM dealerships and in sales of undercar equipment, partially offset by a low single-digit increase in sales of diagnostic and repair information products to independent repair shop owners and managers.
Segment gross profit of $641.4 million in 2018 compared to $633.1 million last year. Gross margin of 48.1% in 2018 improved 110 bps from 47.0% last year, primarily as a result of a shift in sales that included lower volumes of lower gross margin products and savings from the company’s RCI initiatives, partially offset by 20 bps of unfavorable foreign currency effects.
Segment operating expenses of $298.8 million in 2018 compared to $297.8 million last year. The operating expense margin of 22.4% in 2018 increased 30 bps from 22.1% last year primarily due to the effect of lower sales volumes, partially offset by benefits from the company’s RCI initiatives.
As a result of these factors, segment operating earnings of $342.6 million in 2018, including $0.8 million of unfavorable foreign currency effects, increased $7.3 million from 2017 levels. Operating margin for the Repair Systems & Information Group of 25.7% in 2018 compared to 24.9% last year.
Financial Services
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| Financial services revenue | $ | 329.7 | 100.0 | % | $ | 313.4 | 100.0 | % | $ | 16.3 | 5.2 | % | |||||||||
| Financial services expenses | (99.6 | ) | (30.2 | )% | (95.9 | ) | (30.6 | )% | (3.7 | ) | (3.9 | )% | |||||||||
| Segment operating earnings | $ | 230.1 | 69.8 | % | $ | 217.5 | 69.4 | % | $ | 12.6 | 5.8 | % |
Financial services revenue of $329.7 million in 2018 increased $16.3 million, or 5.2%, from $313.4 million last year primarily reflecting $18.9 million of higher revenue as a result of continued growth of the company’s financial services portfolio, partially offset by $2.6 million of decreased revenue from lower average yields on finance receivables. In 2018 and 2017, the respective average yields on finance receivables were 17.7% and 17.9%, and the average yield on contract receivables was 9.2% in both years. Originations of $1,057.5 million in 2018 decreased $14.5 million, or 1.4%, from 2017 levels.
Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $99.6 million in 2018 increased from $95.9 million last year primarily due to increases in both the provisions for credit losses and in the size of the portfolio. As a percentage of the average financial services portfolio, financial services expenses were 4.9% and 5.0% in 2018 and 2017, respectively.
Financial services operating earnings of $230.1 million in 2018, including $0.3 million of favorable foreign currency effects, increased $12.6 million, or 5.8%, from 2017 levels.
See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services.
| 2018 ANNUAL REPORT | 35 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Corporate
Snap-on’s general corporate expenses in 2018 of $80.1 million decreased $51.8 million from $131.9 million last year. The year-over-year decrease in general corporate expenses primarily reflects a $4.3 million benefit in 2018 from the legal settlement and $45.9 million in 2017 for the legal charges.
Fourth Quarter
Results of operations for the fourth quarters of 2018 and 2017 are as follows:
| Fourth Quarter | |||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| Net sales | $ | 952.5 | 100.0 | % | $ | 974.6 | 100.0 | % | $ | (22.1 | ) | (2.3 | )% | ||||||||
| Cost of goods sold | (495.1 | ) | (52.0 | )% | (509.0 | ) | (52.2 | )% | 13.9 | 2.7 | % | ||||||||||
| Gross profit | 457.4 | 48.0 | % | 465.6 | 47.8 | % | (8.2 | ) | (1.8 | )% | |||||||||||
| Operating expenses | (275.3 | ) | (28.9 | )% | (307.6 | ) | (31.6 | )% | 32.3 | 10.5 | % | ||||||||||
| Operating earnings before financial services | 182.1 | 19.1 | % | 158.0 | 16.2 | % | 24.1 | 15.3 | % | ||||||||||||
| Financial services revenue | 82.7 | 100.0 | % | 79.9 | 100.0 | % | 2.8 | 3.5 | % | ||||||||||||
| Financial services expenses | (26.6 | ) | (32.2 | )% | (25.5 | ) | (31.9 | )% | (1.1 | ) | (4.3 | )% | |||||||||
| Operating earnings from financial services | 56.1 | 67.8 | % | 54.4 | 68.1 | % | 1.7 | 3.1 | % | ||||||||||||
| Operating earnings | 238.2 | 23.0 | % | 212.4 | 20.1 | % | 25.8 | 12.1 | % | ||||||||||||
| Interest expense | (12.4 | ) | (1.2 | )% | (13.6 | ) | (1.3 | )% | 1.2 | 8.8 | % | ||||||||||
| Other income (expense) – net | 3.0 | 0.3 | % | (1.8 | ) | (0.1 | )% | 4.8 | NM | ||||||||||||
| Earnings before income taxes and equity earnings | 228.8 | 22.1 | % | 197.0 | 18.7 | % | 31.8 | 16.1 | % | ||||||||||||
| Income tax expense | (49.5 | ) | (4.8 | )% | (63.8 | ) | (6.1 | )% | 14.3 | 22.4 | % | ||||||||||
| Earnings before equity earnings | 179.3 | 17.3 | % | 133.2 | 12.6 | % | 46.1 | 34.6 | % | ||||||||||||
| Equity earnings, net of tax | — | — | — | — | — | — | |||||||||||||||
| Net earnings | 179.3 | 17.3 | % | 133.2 | 12.6 | % | 46.1 | 34.6 | % | ||||||||||||
| Net earnings attributable to noncontrolling interests | (4.3 | ) | (0.4 | )% | (3.7 | ) | (0.3 | )% | (0.6 | ) | (16.2 | )% | |||||||||
| Net earnings attributable to Snap-on Inc. | $ | 175.0 | 16.9 | % | $ | 129.5 | 12.3 | % | $ | 45.5 | 35.1 | % |
| NM: Not meaningful | |
| Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue. |
Net sales of $952.5 million in the fourth quarter of 2018 decreased $22.1 million, or 2.3%, from 2017 levels, reflecting a $5.4 million, or 0.6%, organic sales decrease and $17.1 million of unfavorable foreign currency translation, partially offset by $0.4 million of acquisition-related sales.
Gross profit of $457.4 million in the fourth quarter of 2018 compared to $465.6 million last year. Gross margin of 48.0% in the quarter improved 20 bps from 47.8% last year primarily due to savings from the company’s RCI initiatives, partially offset by higher material and other costs.
Operating expenses of $275.3 million in the fourth quarter of 2018 compared to $307.6 million last year, as 2018 included a $4.3 million benefit for the legal settlement, while 2017 included a $30.9 million legal charge. The operating expense margin of 28.9% in the quarter improved 270 bps from 31.6% last year primarily due to 320 bps related to the legal charge occurring in fiscal 2017 and 40 bps for the 2018 legal settlement, partially offset by 10 bps of unfavorable foreign currency effects and higher costs.
| 36 | SNAP-ON INCORPORATED |
Operating earnings before financial services of $182.1 million in the fourth quarter of 2018, including a $4.3 million benefit for the legal settlement and $4.2 million of unfavorable foreign currency effects, increased $24.1 million, or 15.3%, as compared to $158.0 million last year, which included $30.9 million for the legal charge. As a percentage of net sales, operating earnings before financial services of 19.1% in the quarter, including the legal settlement, compared to 16.2% last year, including the legal charge.
Financial services revenue of $82.7 million in the fourth quarter of 2018 compared to revenue of $79.9 million last year. Financial services operating earnings of $56.1 million in the fourth quarter of 2018, including $0.3 million of unfavorable foreign currency effects, increased $1.7 million, or 3.1%, as compared to $54.4 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.
Operating earnings of $238.2 million in the fourth quarter of 2018, including a $4.3 million benefit for the legal settlement and $4.5 million of unfavorable foreign currency effects, increased $25.8 million, or 12.1%, from $212.4 million last year, which included $30.9 million of expense for the legal charge. As a percentage of revenues, operating earnings of 23.0% in the quarter compared to 20.1% last year.
Interest expense of $12.4 million in the fourth quarter of 2018 decreased $1.2 million from $13.6 million last year. See Note 10 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.
Other income (expense) – net was income of $3.0 million and expense of $1.8 million in the respective fourth quarters of 2018 and 2017. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net.
Snap-on’s fourth quarter effective income tax rate on earnings attributable to Snap-on was 22.0% in 2018 compared to 33.0% in 2017, which included a 120 bps benefit from the legal charge, and $7.0 million, or 360 bps impact, related to the implementation of the Tax Act. See Note 9 to the Consolidated Financial Statements for information on income taxes.
Net earnings attributable to Snap-on in the fourth quarter of 2018 of $175.0 million, or $3.09 per diluted share, increased $45.5 million, or $0.85 per diluted share, from $129.5 million or $2.24 per diluted share in 2017. The fourth quarter of 2018, included $3.2 million, or $0.06 per diluted share, for the after-tax benefit from the legal settlement, while the fourth quarter of 2017 included $19.1 million, or $0.33 per diluted share, for the after-tax expense associated with the legal charge, and a $7.0 million, or $0.12 per diluted share, charge related to the Tax Act.
Segment Results
Commercial & Industrial Group
| Fourth Quarter | |||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| External net sales | $ | 270.0 | 78.6 | % | $ | 273.2 | 80.0 | % | $ | (3.2 | ) | (1.2 | )% | ||||||||
| Intersegment net sales | 73.7 | 21.4 | % | 68.5 | 20.0 | % | 5.2 | 7.6 | % | ||||||||||||
| Segment net sales | 343.7 | 100.0 | % | 341.7 | 100.0 | % | 2.0 | 0.6 | % | ||||||||||||
| Cost of goods sold | (211.3 | ) | (61.5 | )% | (207.5 | ) | (60.7 | )% | (3.8 | ) | (1.8 | )% | |||||||||
| Gross profit | 132.4 | 38.5 | % | 134.2 | 39.3 | % | (1.8 | ) | (1.3 | )% | |||||||||||
| Operating expenses | (81.6 | ) | (23.7 | )% | (82.9 | ) | (24.3 | )% | 1.3 | 1.6 | % | ||||||||||
| Segment operating earnings | $ | 50.8 | 14.8 | % | $ | 51.3 | 15.0 | % | $ | (0.5 | ) | (1.0 | )% |
Segment net sales of $343.7 million in the fourth quarter of 2018 increased $2.0 million, or 0.6%, from 2017 levels, reflecting an $11.5 million, or 3.5%, organic sales gain and $0.4 million of acquisition-related sales, partially offset by $9.9 million of unfavorable foreign currency translation. The organic sales increase primarily includes double-digit gains in both the segment’s Asia Pacific operations and specialty tools business, as well as low single-digit gains in sales in the European-based hand tools business and in sales to customers in critical industries.
Segment gross profit of $132.4 million in the fourth quarter of 2018 compared to $134.2 million last year. Gross margin of 38.5% in the quarter declined 80 bps from 39.3% last year primarily due to higher sales volumes of lower gross margin products and higher material and other costs, partially offset by benefits from the company’s RCI initiatives.
| 2018 ANNUAL REPORT | 37 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Segment operating expenses of $81.6 million in the fourth quarter of 2018 compared to $82.9 million last year. The operating expense margin of 23.7% in the quarter, improved 60 bps from 24.3% last year primarily due to the benefits of sales volume leverage.
As a result of these factors, segment operating earnings of $50.8 million in the fourth quarter of 2018, including $1.5 million of unfavorable foreign currency effects, decreased $0.5 million from 2017 levels. Operating margin for the Commercial & Industrial Group of 14.8% in the fourth quarter of 2018 compared to 15.0% last year.
Snap-on Tools Group
| Fourth Quarter | |||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| Segment net sales | $ | 407.4 | 100.0 | % | $ | 409.2 | 100.0 | % | $ | (1.8 | ) | (0.4 | )% | ||||||||
| Cost of goods sold | (243.7 | ) | (59.8 | )% | (239.9 | ) | (58.6 | )% | (3.8 | ) | (1.6 | )% | |||||||||
| Gross profit | 163.7 | 40.2 | % | 169.3 | 41.4 | % | (5.6 | ) | (3.3 | )% | |||||||||||
| Operating expenses | (106.7 | ) | (26.2 | )% | (102.0 | ) | (25.0 | )% | (4.7 | ) | (4.6 | )% | |||||||||
| Segment operating earnings | $ | 57.0 | 14.0 | % | $ | 67.3 | 16.4 | % | $ | (10.3 | ) | (15.3 | )% |
Segment net sales of $407.4 million in the fourth quarter of 2018 decreased $1.8 million, or 0.4%, from 2017 levels, reflecting a $1.6 million, or 0.4%, organic sales increase, which was more than offset by $3.4 million of unfavorable foreign currency translation. The organic sales increase reflects a low single-digit increase in the company’s U.S. franchise operations, partially offset by a low single-digit decline in the segments international operations.
Segment gross profit of $163.7 million in the fourth quarter of 2018 compared to $169.3 million last year. Gross margin of 40.2%, in the quarter declined 120 bps from 41.4% primarily due to 20 bps of unfavorable foreign currency effects, increased sales of lower gross margin products, and higher material and other costs.
Segment operating expenses of $106.7 million in the fourth quarter of 2018 increased from $102.0 million last year. The operating expense margin of 26.2% in the quarter increased 120 bps from 25.0% last year primarily due to efforts to provide increased levels of field and technical support to franchisees.
As a result of these factors, segment operating earnings of $57.0 million in the fourth quarter of 2018, including $1.4 million of unfavorable foreign currency effects, decreased $10.3 million from 2017 levels. Operating margin for the Snap-on Tools Group of 14.0% in the fourth quarter of 2018 compared to 16.4% last year.
Repair Systems & Information Group
| Fourth Quarter | |||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| External net sales | $ | 275.1 | 80.9 | % | $ | 292.2 | 81.9 | % | $ | (17.1 | ) | (5.9 | )% | ||||||||
| Intersegment net sales | 64.8 | 19.1 | % | 64.6 | 18.1 | % | 0.2 | 0.3 | % | ||||||||||||
| Segment net sales | 339.9 | 100.0 | % | 356.8 | 100.0 | % | (16.9 | ) | (4.7 | )% | |||||||||||
| Cost of goods sold | (178.6 | ) | (52.5 | )% | (194.7 | ) | (54.6 | )% | 16.1 | 8.3 | % | ||||||||||
| Gross profit | 161.3 | 47.5 | % | 162.1 | 45.4 | % | (0.8 | ) | (0.5 | )% | |||||||||||
| Operating expenses | (73.9 | ) | (21.8 | )% | (71.9 | ) | (20.1 | )% | (2.0 | ) | (2.8 | )% | |||||||||
| Segment operating earnings | $ | 87.4 | 25.7 | % | $ | 90.2 | 25.3 | % | $ | (2.8 | ) | (3.1 | )% |
Segment net sales of $339.9 million in the fourth quarter of 2018 decreased $16.9 million, or 4.7%, from 2017 levels, reflecting a $12.2 million, or 3.5%, organic sales decline and $4.7 million of unfavorable foreign currency translation. The organic sales decrease includes a high single-digit decline in sales to OEM dealerships and a low single-digit decline in sales of undercar equipment.
| 38 | SNAP-ON INCORPORATED |
Segment gross profit of $161.3 million in the fourth quarter of 2018 compared to $162.1 million last year. Gross margin of 47.5% in the quarter improved 210 bps from 45.4% last year as a result of a shift in sales that included decreased volumes of lower gross margin products and savings from the company’s RCI initiatives.
Segment operating expenses of $73.9 million in the fourth quarter of 2018 compared to $71.9 million last year. The operating expense margin of 21.8% increased 170 bps from 20.1% last year primarily due to the effect of lower sales volume and higher costs.
As a result of these factors, segment operating earnings of $87.4 million in the fourth quarter of 2018, including $1.3 million of unfavorable foreign currency effects, decreased $2.8 million from 2017 levels. Operating margin for the Repair Systems & Information Group of 25.7% in the fourth quarter of 2018 compared to 25.3% last year.
Financial Services
| Fourth Quarter | |||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | Change | ||||||||||||||||||
| Financial services revenue | $ | 82.7 | 100.0 | % | $ | 79.9 | 100.0 | % | $ | 2.8 | 3.5 | % | |||||||||
| Financial services expenses | (26.6 | ) | (32.2 | )% | (25.5 | ) | (31.9 | )% | (1.1 | ) | (4.3 | )% | |||||||||
| Segment operating earnings | $ | 56.1 | 67.8 | % | $ | 54.4 | 68.1 | % | $ | 1.7 | 3.1 | % |
Financial services revenue of $82.7 million in the fourth quarter of 2018 increased $2.8 million, or 3.5%, from $79.9 million last year primarily reflecting $3.1 million of higher revenue as a result of continued growth of the company’s financial services portfolio, partially offset by $0.3 million of decreased revenue from lower average yields on finance receivables. In the fourth quarters of 2018 and 2017, the respective average yields on finance receivables were 17.7% and 17.8%, and the average yields on contract receivables were 9.2% in both periods. Originations of $267.1 million in the fourth quarter of 2018 increased $2.1 million, or 0.8%, from 2017 levels.
Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $26.6 million in the fourth quarter of 2018 increased from $25.5 million last year primarily due to increases in both the provisions for credit losses and in the size of the portfolio. As a percentage of the average financial services portfolio, financial services expenses were 1.3% for both the fourth quarters of 2018 and 2017.
Financial services operating earnings of $56.1 million in the fourth quarter of 2018, including $0.3 million of unfavorable foreign currency effects, increased $1.7 million, or 3.1%, from 2017 levels.
See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services.
Corporate
Snap-on’s fourth quarter 2018 general corporate expenses of $13.1 million decreased $37.7 million from $50.8 million last year. The year-over-year decrease in general corporate expenses primarily reflects a $4.3 million benefit in 2018 from the legal settlement and a $30.9 million legal charge in 2017.
| 2018 ANNUAL REPORT | 39 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
2017 vs. 2016
Results of operations for 2017 and 2016 are as follows:
| (Amounts in millions) | 2017 | 2016 | Change | ||||||||||||||||||
| Net sales | $ | 3,686.9 | 100.0 | % | $ | 3,430.4 | 100.0 | % | $ | 256.5 | 7.5 | % | |||||||||
| Cost of goods sold | (1,861.0 | ) | (50.5 | )% | (1,720.0 | ) | (50.1 | )% | (141.0 | ) | (8.2 | )% | |||||||||
| Gross profit | 1,825.9 | 49.5 | % | 1,710.4 | 49.9 | % | 115.5 | 6.8 | % | ||||||||||||
| Operating expenses | (1,161.3 | ) | (31.5 | )% | (1,048.0 | ) | (30.6 | )% | (113.3 | ) | (10.8 | )% | |||||||||
| Operating earnings before financial services | 664.6 | 18.0 | % | 662.4 | 19.3 | % | 2.2 | 0.3 | % | ||||||||||||
| Financial services revenue | 313.4 | 100.0 | % | 281.4 | 100.0 | % | 32.0 | 11.4 | % | ||||||||||||
| Financial services expenses | (95.9 | ) | (30.6 | )% | (82.7 | ) | (29.4 | )% | (13.2 | ) | (16.0 | )% | |||||||||
| Operating earnings from financial services | 217.5 | 69.4 | % | 198.7 | 70.6 | % | 18.8 | 9.5 | % | ||||||||||||
| Operating earnings | 882.1 | 22.1 | % | 861.1 | 23.2 | % | 21.0 | 2.4 | % | ||||||||||||
| Interest expense | (52.4 | ) | (1.3 | )% | (52.2 | ) | (1.4 | )% | (0.2 | ) | (0.4 | )% | |||||||||
| Other income (expense) – net | (7.8 | ) | (0.3 | )% | (7.5 | ) | (0.2 | )% | (0.3 | ) | (4.0 | )% | |||||||||
| Earnings before income taxes and equity earnings | 821.9 | 20.5 | % | 801.4 | 21.6 | % | 20.5 | 2.6 | % | ||||||||||||
| Income tax expense | (250.9 | ) | (6.2 | )% | (244.3 | ) | (6.6 | )% | (6.6 | ) | (2.7 | )% | |||||||||
| Earnings before equity earnings | 571.0 | 14.3 | % | 557.1 | 15.0 | % | 13.9 | 2.5 | % | ||||||||||||
| Equity earnings, net of tax | 1.2 | — | 2.5 | 0.1 | % | (1.3 | ) | NM | |||||||||||||
| Net earnings | 572.2 | 14.3 | % | 559.6 | 15.1 | % | 12.6 | 2.3 | % | ||||||||||||
| Net earnings attributable to noncontrolling interests | (14.5 | ) | (0.4 | )% | (13.2 | ) | (0.4 | )% | (1.3 | ) | (9.8 | )% | |||||||||
| Net earnings attributable to Snap-on Inc. | $ | 557.7 | 13.9 | % | $ | 546.4 | 14.7 | % | $ | 11.3 | 2.1 | % |
| NM: Not meaningful | |
| Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue. |
Net sales of $3,686.9 million in 2017 increased $256.5 million, or 7.5%, from 2016 levels, reflecting a $115.0 million, or 3.4%, organic sales gain and $141.5 million of acquisition-related sales. Foreign currency translation had no effect on net sales in 2017.
Gross profit of $1,825.9 million in 2017 compared to $1,710.4 million in 2016. Gross margin of 49.5% in 2017 decreased 40 basis points from 49.9% in 2016 due to 20 bps of unfavorable foreign currency effects and a 20 bps impact from acquisitions. Restructuring costs included in gross profit were $0.8 million in 2016.
Operating expenses of $1,161.3 million in 2017 compared to $1,048.0 million in 2016, as 2017 included $45.9 million for the legal charges. The operating expense margin (operating expenses as a percentage of net sales) of 31.5% in 2017 increased 90 bps from 30.6% in 2016 as 130 bps for the legal charges and 30 bps of operating expenses from acquisitions were partially offset by benefits from sales volume leverage. Restructuring costs included in operating expenses were $0.1 million in 2016.
Operating earnings before financial services of $664.6 million in 2017, including $45.9 million of expense for the legal charges and $8.6 million of unfavorable foreign currency effects, increased $2.2 million, or 0.3%, as compared to $662.4 million in 2016. As a percentage of net sales, operating earnings before financial services of 18.0%, including 130 bps impact from the legal charges, compared to 19.3% in 2016.
Financial services revenue of $313.4 million in 2017 compared to revenue of $281.4 million in 2016. Financial services operating earnings of $217.5 million in 2017 increased $18.8 million, or 9.5%, as compared to $198.7 million in 2016, including $0.4 million of unfavorable foreign currency effects. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.
| 40 | SNAP-ON INCORPORATED |
Operating earnings of $882.1 million in 2017, including $45.9 million of expense related to the legal charges and $9.0 million of unfavorable foreign currency effects, increased $21.0 million, or 2.4%, from $861.1 million in 2016. As a percentage of revenues, operating earnings of 22.1% compared to 23.2% in 2016.
Interest expense of $52.4 million in 2017 increased $0.2 million from $52.2 million in 2016. See Note 10 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.
Other income (expense) - net was expense of $7.8 million and $7.5 million in 2017 and 2016, respectively. Other income (expense) - net reflects net losses and gains associated with hedging and currency exchange rate transactions, non-service cost components of net periodic pension and postretirement costs, and interest income. See Note 17 to the Consolidated Financial Statements for information on other income (expense) - net.
Snap-on’s effective income tax rate on earnings attributable to Snap-on was 31.1% in 2017, including a 0.4% benefit from the legal charges, compared to 31.0% in 2016. The 2017 tax rate includes a net $7.0 million charge, or 90 bps impact, from the implementation of the Tax Act, including the estimated transition tax of $13.7 million on previously unremitted foreign earnings, partially offset by a $6.7 million estimated tax benefit related to revaluation of deferred tax assets and liabilities. See Note 9 to the Consolidated Financial Statements for information on income taxes.
Net earnings attributable to Snap-on of $557.7 million, or $9.52 per diluted share, in 2017, including $28.4 million, or $0.48 per diluted share, for the after-tax expense related to the legal charges, and $7.0 million, or $0.12 per diluted share related to the Tax Act, increased $11.3 million, or $0.32 per diluted share, from 2016 levels. Net earnings attributable to Snap-on in 2016 were $546.4 million or $9.20 per diluted share.
Segment Results
Commercial & Industrial Group
| (Amounts in millions) | 2017 | 2016 | Change | ||||||||||||||||||
| External net sales | $ | 986.1 | 78.0 | % | $ | 863.0 | 75.2 | % | $ | 123.1 | 14.3 | % | |||||||||
| Intersegment net sales | 278.9 | 22.0 | % | 285.3 | 24.8 | % | (6.4 | ) | (2.2 | )% | |||||||||||
| Segment net sales | 1,265.0 | 100.0 | % | 1,148.3 | 100.0 | % | 116.7 | 10.2 | % | ||||||||||||
| Cost of goods sold | (766.4 | ) | (60.6 | )% | (697.8 | ) | (60.8 | )% | (68.6 | ) | (9.8 | )% | |||||||||
| Gross profit | 498.6 | 39.4 | % | 450.5 | 39.2 | % | 48.1 | 10.7 | % | ||||||||||||
| Operating expenses | (312.1 | ) | (24.7 | )% | (281.7 | ) | (24.5 | )% | (30.4 | ) | (10.8 | )% | |||||||||
| Segment operating earnings | $ | 186.5 | 14.7 | % | $ | 168.8 | 14.7 | % | $ | 17.7 | 10.5 | % |
Segment net sales of $1,265.0 million in 2017 increased $116.7 million, or 10.2%, from 2016 levels, reflecting a $52.0 million or 4.5%, organic sales gain and $65.5 million of acquisition-related sales, partially offset by $0.8 million of unfavorable foreign currency translation. The organic sales increase primarily includes a high single-digit gain in sales to customers in critical industries, and a mid single-digit gain in the segment’s European-based hand tools business. These organic sales gains were partially offset by a low single-digit decline in sales in the segment’s power tools operations.
Segment gross profit of $498.6 million in 2017 compared to $450.5 million in 2016. Gross margin of 39.4% in 2017 improved 20 bps from 39.2% in 2016 primarily due to savings from RCI and other cost reduction initiatives.
Segment operating expenses of $312.1 million in 2017 compared to $281.7 million in 2016. The operating expense margin of 24.7% in 2017 increased 20 bps from 24.5% in 2016 as 40 bps of operating expenses from acquisitions and increased costs for research and engineering activities were partially offset by benefits from sales volume leverage.
As a result of these factors, segment operating earnings of $186.5 million in 2017, including $0.4 million of favorable foreign currency effects, increased $17.7 million from 2016 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group was 14.7% in both years.
| 2018 ANNUAL REPORT | 41 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Snap-on Tools Group
| (Amounts in millions) | 2017 | 2016 | Change | ||||||||||||||||||
| Segment net sales | $ | 1,625.1 | 100.0 | % | $ | 1,633.9 | 100.0 | % | $ | (8.8 | ) | (0.5 | )% | ||||||||
| Cost of goods sold | (930.9 | ) | (57.3 | )% | (929.9 | ) | (56.9 | )% | (1.0 | ) | (0.1 | )% | |||||||||
| Gross profit | 694.2 | 42.7 | % | 704.0 | 43.1 | % | (9.8 | ) | (1.4 | )% | |||||||||||
| Operating expenses | (419.5 | ) | (25.8 | )% | (423.6 | ) | (25.9 | )% | 4.1 | 1.0 | % | ||||||||||
| Segment operating earnings | $ | 274.7 | 16.9 | % | $ | 280.4 | 17.2 | % | $ | (5.7 | ) | (2.0 | )% |
Segment net sales of $1,625.1 million in 2017 decreased $8.8 million, or 0.5%, from 2016 levels, reflecting a $6.9 million, or 0.4%, organic sales decrease and $1.9 million of unfavorable foreign currency translation. The organic sales decrease reflects a low single-digit decline in the company’s U.S. franchise operations partially offset by a high single-digit gain in the international franchise operations.
Segment gross profit of $694.2 million in 2017 compared to $704.0 million in 2016. Gross margin of 42.7% in 2017 decreased from 43.1% in 2016 due to 40 bps of unfavorable foreign currency effects.
Segment operating expenses of $419.5 million in 2017 compared to $423.6 million in 2016. The operating expense margin of 25.8% in 2017 improved 10 bps from 25.9% in 2016.
As a result of these factors, segment operating earnings of $274.7 million in 2017, including $7.9 million of unfavorable foreign currency effects, decreased $5.7 million from 2016 levels. Operating margin for the Snap-on Tools Group of 16.9% in 2017 compared to 17.2% in 2016.
Repair Systems & Information Group
| (Amounts in millions) | 2017 | 2016 | Change | ||||||||||||||||||
| External net sales | $ | 1,075.7 | 79.8 | % | $ | 933.5 | 79.1 | % | $ | 142.2 | 15.2 | % | |||||||||
| Intersegment net sales | 271.5 | 20.2 | % | 246.4 | 20.9 | % | 25.1 | 10.2 | % | ||||||||||||
| Segment net sales | 1,347.2 | 100.0 | % | 1,179.9 | 100.0 | % | 167.3 | 14.2 | % | ||||||||||||
| Cost of goods sold | (714.1 | ) | (53.0 | )% | (624.0 | ) | (52.9 | )% | (90.1 | ) | (14.4 | )% | |||||||||
| Gross profit | 633.1 | 47.0 | % | 555.9 | 47.1 | % | 77.2 | 13.9 | % | ||||||||||||
| Operating expenses | (297.8 | ) | (22.1 | )% | (257.3 | ) | (21.8 | )% | (40.5 | ) | (15.7 | )% | |||||||||
| Segment operating earnings | $ | 335.3 | 24.9 | % | $ | 298.6 | 25.3 | % | $ | 36.7 | 12.3 | % |
Segment net sales of $1,347.2 million in 2017 increased $167.3 million, or 14.2%, from 2016 levels, reflecting an $89.6 million, or 7.6%, organic sales gain, $76.0 million of acquisition-related sales and $1.7 million of favorable foreign currency translation. The organic sales increase includes a double-digit gain in sales to OEM dealerships, a high single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, and mid single-digit increases in sales of undercar equipment.
Segment gross profit of $633.1 million in 2017 compared to $555.9 million in 2016. Gross margin of 47.0% in 2017 decreased 10 bps from 47.1% in 2016, as the impact from higher sales of lower gross margin products were partially offset by savings from RCI initiatives and 20 bps of benefits from acquisitions. Restructuring costs included in gross profit were $0.8 million in 2016.
Segment operating expenses of $297.8 million in 2017 compared to $257.3 million in 2016. The operating expense margin of 22.1% in 2017 increased 30 bps from 21.8% in 2016 primarily due to a 120 bps impact from acquisitions, partially offset by benefits from sales volume leverage. Restructuring costs included in operating expenses were $0.1 million in 2016.
| 42 | SNAP-ON INCORPORATED |
As a result of these factors, segment operating earnings of $335.3 million in 2017, including $1.1 million of unfavorable foreign currency effects, increased $36.7 million from 2016 levels. Operating margin for the Repair Systems & Information Group of 24.9% in 2017 compared to 25.3% in 2016.
Financial Services
| (Amounts in millions) | 2017 | 2016 | Change | ||||||||||||||||||
| Financial services revenue | $ | 313.4 | 100.0 | % | $ | 281.4 | 100.0 | % | $ | 32.0 | 11.4 | % | |||||||||
| Financial services expenses | (95.9 | ) | (30.6 | )% | (82.7 | ) | (29.4 | )% | (13.2 | ) | (16.0 | )% | |||||||||
| Segment operating earnings | $ | 217.5 | 69.4 | % | $ | 198.7 | 70.6 | % | $ | 18.8 | 9.5 | % |
Financial services revenue of $313.4 million in 2017 increased $32.0 million, or 11.4%, from $281.4 million in 2016 primarily reflecting $34.9 million of higher revenue as a result of continued growth of the company’s financial services portfolio, partially offset by $2.9 million of decreased revenue from lower average yields on finance and contract receivables. In 2017 and 2016, the respective average yields on finance receivables were 17.9% and 18.0%, and the respective average yield on contract receivables were 9.2% and 9.4%. Originations of $1,072.0 million in 2017 decreased $3.7 million, or 0.3%, from 2016 levels.
Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $95.9 million in 2017 increased from $82.7 million in 2016 primarily due to changes in both the provisions for credit losses and in the size of the portfolio. As a percentage of the average financial services portfolio, financial services expenses were 5.0% and 4.9% in 2017 and 2016, respectively.
Financial services operating earnings of $217.5 million in 2017, including $0.4 million of unfavorable foreign currency effects, increased $18.8 million, or 9.5%, from 2016 levels.
See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services.
Corporate
Snap-on’s general corporate expenses in 2017 of $131.9 million increased $46.5 million from $85.4 million in 2016. The year-over-year increase in general corporate expenses primarily reflects $45.9 million of expense for the legal charges.
Non-GAAP Supplemental Data
The following non-GAAP supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing the operating performance of Snap-on Incorporated’s (“Snap-on”) non-financial services (“Operations”) and “Financial Services” businesses.
The supplemental Operations data reflects the results of operations and financial position of Snap-on’s tools, diagnostic and equipment products, software and other non-financial services operations with Financial Services on the equity method. The supplemental Financial Services data reflects the results of operations and financial position of Snap-on’s U.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings and cash generated from Operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Income taxes are charged to Financial Services on the basis of the specific tax attributes generated by the U.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the Consolidated Financial Statements.
| 2018 ANNUAL REPORT | 43 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Non-GAAP Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2018, 2017 and 2016 is as follows:
| Operations* | Financial Services | |||||||||||||||||||||||
| (Amounts in millions) | 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | ||||||||||||||||||
| Net sales | $ | 3,740.7 | $ | 3,686.9 | $ | 3,430.4 | $ | — | $ | — | $ | — | ||||||||||||
| Cost of goods sold | (1,870.7 | ) | (1,861.0 | ) | (1,720.0 | ) | — | — | — | |||||||||||||||
| Gross profit | 1,870.0 | 1,825.9 | 1,710.4 | — | — | — | ||||||||||||||||||
| Operating expenses | (1,144.0 | ) | (1,161.3 | ) | (1,048.0 | ) | — | — | — | |||||||||||||||
| Operating earnings before financial services | 726.0 | 664.6 | 662.4 | — | — | — | ||||||||||||||||||
| Financial services revenue | — | — | — | 329.7 | 313.4 | 281.4 | ||||||||||||||||||
| Financial services expenses | — | — | — | (99.6 | ) | (95.9 | ) | (82.7 | ) | |||||||||||||||
| Operating earnings from financial services | — | — | — | 230.1 | 217.5 | 198.7 | ||||||||||||||||||
| Operating earnings | 726.0 | 664.6 | 662.4 | 230.1 | 217.5 | 198.7 | ||||||||||||||||||
| Interest expense | (50.1 | ) | (52.1 | ) | (51.9 | ) | (0.3 | ) | (0.3 | ) | (0.3 | ) | ||||||||||||
| Intersegment interest income (expense) – net | 69.7 | 70.8 | 72.2 | (69.7 | ) | (70.8 | ) | (72.2 | ) | |||||||||||||||
| Other income (expense) – net | 4.1 | (7.8 | ) | (7.6 | ) | 0.1 | — | 0.1 | ||||||||||||||||
| Earnings before income taxes and equity earnings | 749.7 | 675.5 | 675.1 | 160.2 | 146.4 | 126.3 | ||||||||||||||||||
| Income tax expense | (173.1 | ) | (196.8 | ) | (197.7 | ) | (41.3 | ) | (54.1 | ) | (46.6 | ) | ||||||||||||
| Earnings before equity earnings | 576.6 | 478.7 | 477.4 | 118.9 | 92.3 | 79.7 | ||||||||||||||||||
| Financial services – net earnings attributable to Snap-on | 118.9 | 92.3 | 79.7 | — | — | — | ||||||||||||||||||
| Equity earnings, net of tax | 0.7 | 1.2 | 2.5 | — | — | — | ||||||||||||||||||
| Net earnings | 696.2 | 572.2 | 559.6 | 118.9 | 92.3 | 79.7 | ||||||||||||||||||
| Net earnings attributable to noncontrolling interests | (16.3 | ) | (14.5 | ) | (13.2 | ) | — | — | — | |||||||||||||||
| Net earnings attributable to Snap-on | $ | 679.9 | $ | 557.7 | $ | 546.4 | $ | 118.9 | $ | 92.3 | $ | 79.7 |
- Snap-on with Financial Services on the equity method.
| 44 | SNAP-ON INCORPORATED |
Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2018 and 2017 year end is as follows:
| Operations* | Financial Services | |||||||||||||||
| (Amounts in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 140.5 | $ | 91.8 | $ | 0.4 | $ | 0.2 | ||||||||
| Intersegment receivables | 15.1 | 17.1 | — | — | ||||||||||||
| Trade and other accounts receivable – net | 692.1 | 674.9 | 0.5 | 0.7 | ||||||||||||
| Finance receivables – net | — | — | 518.5 | 505.4 | ||||||||||||
| Contract receivables – net | 6.6 | 9.4 | 91.7 | 87.4 | ||||||||||||
| Inventories – net | 673.8 | 638.8 | — | — | ||||||||||||
| Prepaid expenses and other assets | 100.2 | 117.6 | 0.5 | 0.7 | ||||||||||||
| Total current assets | 1,628.3 | 1,549.6 | 611.6 | 594.4 | ||||||||||||
| Property and equipment – net | 493.5 | 482.4 | 1.6 | 2.0 | ||||||||||||
| Investment in Financial Services | 329.5 | 317.4 | — | — | ||||||||||||
| Deferred income tax assets | 45.8 | 25.2 | 18.9 | 26.8 | ||||||||||||
| Intersegment long-term notes receivable | 701.3 | 583.7 | — | — | ||||||||||||
| Long-term finance receivables – net | — | — | 1,074.4 | 1,039.2 | ||||||||||||
| Long-term contract receivables – net | 11.9 | 13.2 | 333.0 | 309.4 | ||||||||||||
| Goodwill | 902.2 | 924.1 | — | — | ||||||||||||
| Other intangibles – net | 232.9 | 253.7 | — | — | ||||||||||||
| Other assets | 51.9 | 63.1 | 0.1 | — | ||||||||||||
| Total assets | $ | 4,397.3 | $ | 4,212.4 | $ | 2,039.6 | $ | 1,971.8 |
- Snap-on with Financial Services on the equity method.
| 2018 ANNUAL REPORT | 45 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information (continued):
| Operations* | Financial Services | |||||||||||||||
| (Amounts in millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Notes payable and current maturities of long-term debt | $ | 186.3 | $ | 183.2 | $ | — | $ | 250.0 | ||||||||
| Accounts payable | 199.6 | 177.1 | 1.5 | 1.1 | ||||||||||||
| Intersegment payables | — | — | 15.1 | 17.1 | ||||||||||||
| Accrued benefits | 52.0 | 55.8 | — | — | ||||||||||||
| Accrued compensation | 66.8 | 67.8 | 4.7 | 3.7 | ||||||||||||
| Franchisee deposits | 67.5 | 66.5 | — | — | ||||||||||||
| Other accrued liabilities | 355.4 | 366.0 | 26.1 | 29.7 | ||||||||||||
| Total current liabilities | 927.6 | 916.4 | 47.4 | 301.6 | ||||||||||||
| Long-term debt and intersegment long-term debt | — | — | 1,647.3 | 1,337.3 | ||||||||||||
| Deferred income tax liabilities | 41.4 | 28.4 | — | — | ||||||||||||
| Retiree health care benefits | 31.8 | 36.0 | — | — | ||||||||||||
| Pension liabilities | 171.3 | 158.9 | — | — | ||||||||||||
| Other long-term liabilities | 106.6 | 100.4 | 15.4 | 15.5 | ||||||||||||
| Total liabilities | 1,278.7 | 1,240.1 | 1,710.1 | 1,654.4 | ||||||||||||
| Total shareholders’ equity attributable to Snap-on | 3,098.8 | 2,953.9 | 329.5 | 317.4 | ||||||||||||
| Noncontrolling interests | 19.8 | 18.4 | — | — | ||||||||||||
| Total equity | 3,118.6 | 2,972.3 | 329.5 | 317.4 | ||||||||||||
| Total liabilities and equity | $ | 4,397.3 | $ | 4,212.4 | $ | 2,039.6 | $ | 1,971.8 |
- Snap-on with Financial Services on the equity method.
| 46 | SNAP-ON INCORPORATED |
Liquidity and Capital Resources
Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. On February 20, 2018, the company issued $400 million (with net proceeds of $395.4 million) of the 2048 Notes; the company used the proceeds from the offering to repay, prior to maturity, $200 million of the 2019 Notes, as well as to reduce outstanding commercial paper borrowings. In addition, on January 16, 2018, Snap-on repaid $250 million of the 2018 Notes upon maturity with available cash and cash generated from issuances of commercial paper. Snap-on believes that its cash from operations and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for scheduled debt repayments, payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise.
Due to Snap-on’s credit rating over the years, external funds have been available at an acceptable cost. As of the close of business on February 8, 2019, Snap-on’s long-term debt and commercial paper were rated, respectively, A2 and P-1 by Moody’s Investors Service; A- and A-2 by Standard & Poor’s; and A and F1 by Fitch Ratings. Snap-on believes that its current credit arrangements are sound and that the strength of its balance sheet affords the company the financial flexibility, including through access to financial markets for potential new financing, to respond to both internal growth opportunities and those available through acquisitions. However, Snap-on cannot provide any assurances of the availability of future financing or the terms on which it might be available, or that its debt ratings may not decrease.
The following discussion focuses on information included in the accompanying Consolidated Balance Sheets.
As of 2018 year end, working capital (current assets less current liabilities) of $1,264.9 million increased $338.9 million from $926.0 million as of 2017 year end primarily as a result of other net changes in working capital discussed below.
The following represents the company’s working capital position as of 2018 and 2017 year end:
| (Amounts in millions) | 2018 | 2017 | ||||||
| Cash and cash equivalents | $ | 140.9 | $ | 92.0 | ||||
| Trade and other accounts receivable – net | 692.6 | 675.6 | ||||||
| Finance receivables – net | 518.5 | 505.4 | ||||||
| Contract receivables – net | 98.3 | 96.8 | ||||||
| Inventories – net | 673.8 | 638.8 | ||||||
| Prepaid expenses and other assets | 92.8 | 110.7 | ||||||
| Total current assets | 2,216.9 | 2,119.3 | ||||||
| Notes payable and current maturities of long-term debt | (186.3 | ) | (433.2 | ) | ||||
| Accounts payable | (201.1 | ) | (178.2 | ) | ||||
| Other current liabilities | (564.6 | ) | (581.9 | ) | ||||
| Total current liabilities | (952.0 | ) | (1,193.3 | ) | ||||
| Working capital | $ | 1,264.9 | $ | 926.0 |
Cash and cash equivalents of $140.9 million as of 2018 year end increased $48.9 million from 2017 year-end levels primarily due to: (i) $764.5 million of cash generated from operations, net of $50.0 million of discretionary cash contributions to the company’s domestic pension plans; (ii) $747.7 million of cash from collections of finance receivables; (iii) $395.4 million of net proceeds from the 2048 Notes; (iv) $55.5 million of cash proceeds from stock purchase and option plan exercises; and (v) $4.9 million of net proceeds from notes payable and other short-term borrowings. These increases in cash and cash equivalents were partially offset by: (i) the funding of $865.6 million of new finance receivables; (ii) the repurchase of 1,769,000 shares of the company’s common stock for $284.1 million; (iii) the repayment of $250 million of the 2018 Notes; (iv) the repayment of $200 million of the 2019 Notes; (v) dividend payments to shareholders of $192.0 million; (vi) the funding of $90.9 million of capital expenditures; and (vii) the funding of $3.0 million for acquisitions.
| 2018 ANNUAL REPORT | 47 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Of the $140.9 million of cash and cash equivalents as of 2018 year end, $121.4 million was held outside of the United States. Snap-on maintains non-U.S. funds in its foreign operations to: (i) provide adequate working capital; (ii) satisfy various regulatory requirements; and/or (iii) take advantage of business expansion opportunities as they arise. Although the Tax Act generally eliminates U.S. federal taxation on dividends from foreign subsidiaries, such dividends may still be subject to state income taxation and foreign withholding taxes. Snap-on periodically evaluates its cash held outside the United States and may pursue opportunities to repatriate certain foreign cash amounts to the extent that it can be accomplished in a tax efficient manner.
Trade and other accounts receivable – net of $692.6 million as of 2018 year end increased $17.0 million from 2017 year-end levels primarily due to an increase in days sales outstanding and $0.2 million of receivables related to the Fastorq acquisition, partially offset by $20.8 million of unfavorable foreign currency translation. Days sales outstanding (trade and other accounts receivable – net as of the respective period end, divided by the respective trailing 12 months sales, times 360 days) was 67 days at 2018 year end and 66 days at 2017 year end.
The current portions of net finance and contract receivables of $616.8 million as of 2018 year end compared to $602.2 million at 2017 year end. The long-term portions of net finance and contract receivables of $1,419.3 million as of 2018 year end compared to $1,361.8 million at 2017 year end. The combined $72.1 million increase in net current and long-term finance and contract receivables over 2017 year-end levels is primarily due to continued growth of the company’s financial services portfolio, partially offset by $16.8 million of unfavorable foreign currency translation.
Inventories – net of $673.8 million as of 2018 year end increased $35.0 million from 2017 year-end levels primarily due to $20.9 million related to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), continued support for new product introductions, as well as $0.7 million of inventories related to the Fastorq acquisition, partially offset by $23.2 million of foreign currency translation. As of 2018 and 2017 year end, inventory turns (trailing 12 months of cost of goods sold, divided by the average of the beginning and ending inventory balance for the trailing 12 months) were 2.9 turns and 3.2 turns, respectively. Inventories accounted for using the first-in, first-out (“FIFO”) method as of both 2018 and 2017 year end approximated 61% of total inventories. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve was $78.4 million and $75.1 million at 2018 and 2017 year end, respectively.
Notes payable and current maturities of long-term debt of $186.3 million as of 2018 year end included $177.1 million of commercial paper borrowings and $9.2 million of other notes. Notes payable and current maturities of long-term debt of $433.2 million as of 2017 year end consisted of $250 million of the 2018 Notes (which were subsequently repaid), $151 million of commercial paper borrowings and $32.2 million of other notes.
Average notes payable outstanding, including commercial paper borrowings, were $167.7 million and $126.8 million in 2018 and 2017, respectively. The weighted-average interest rate of 2.84% in 2018 increased from 2.45% last year primarily due to the impact of higher rates on commercial paper borrowings. Average commercial paper borrowings were $154.9 million and $103.3 million in 2018 and 2017, respectively, and the weighted-average interest rate of 2.03% in 2018 increased from 1.14% last year. At 2018 year end, the weighted-average interest rate on outstanding notes payable of 3.21% compared with 2.34% at 2017 year end. The 2018 year-end rate increased primarily due to higher rates on commercial borrowings.
Accounts payable of $201.1 million as of 2018 year end increased $22.9 million from 2017 year-end levels primarily due to the timing of payments, partially offset by $5.0 million of foreign currency translation.
Other accrued liabilities of $373.6 million as of 2018 year end decreased $14.5 million from 2017 year-end levels primarily due to lower income tax accruals, the settlement of an employment-related litigation matter and $8.7 million of foreign currency translation.
Long-term debt of $946.0 million as of 2018 year end consisted of: (i) $250.0 million of unsecured 6.125% notes that mature in 2021; (ii) $300.0 million of the 2027 Notes; (iii) $400 million of the 2048 Notes, partially offset by $4.0 million of fair value adjustments related to interest rate swaps.
| 48 | SNAP-ON INCORPORATED |
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 29, 2018. 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 2018 year end, the company’s actual ratios of 0.23 and 0.99, 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.
Snap-on’s Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2018 year end, Snap-on was in compliance with all covenants of its Credit Facility and other debt agreements.
Snap-on believes it has sufficient available cash and access to both committed and uncommitted credit facilities to cover its expected funding needs on both a short-term and long-term basis. Snap-on manages its aggregate short-term borrowings so as not to exceed its availability under the revolving Credit Facility. Snap-on believes that it can access short-term debt markets, predominantly through commercial paper issuances and existing lines of credit, to fund its short-term requirements and to ensure near-term liquidity. Snap-on regularly monitors the credit and financial markets and may take advantage of what it believes are favorable market conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include scheduled debt payments, payments of interest and dividends, funding to support new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise. Snap-on intends to make contributions of $9.4 million to its foreign pension plans and $1.9 million to its domestic pension plans in 2019, as required by law. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2019.
Snap-on’s long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs, including the use of commercial paper, additional fixed-term debt and/or securitizations.
The following discussion focuses on information included in the accompanying Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided by operating activities of $764.5 million in 2018 increased $156.0 million from $608.5 million in 2017. The $156.0 million increase is primarily due to $124.0 million of higher net earnings and $34.0 million from net changes in operating assets and liabilities. Net cash provided by operating activities was $576.1 million in 2016.
Depreciation expense was $68.8 million in 2018, $65.6 million in 2017 and $61.4 million in 2016. Amortization expense was $25.3 million in 2018, $27.6 million in 2017 and $24.2 million in 2016. See Note 7 to the Consolidated Financial Statements for information on goodwill and other intangible assets.
Investing Activities
Net cash used by investing activities of $210.2 million in 2018 included additions to finance receivables of $865.6 million, partially offset by collections of $747.7 million. Net cash used by investing activities of $341.4 million in 2017 included additions to finance receivables of $892.0 million, partially offset by collections of $712.7 million. Net cash used by investing activities of $473.4 million in 2016 included additions to finance receivables of $915.0 million, partially offset by collections of $671.7 million. Finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees’ customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with average payment terms of approximately four years.
| 2018 ANNUAL REPORT | 49 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Net cash used by investing activities in 2018 also included a total of $3.0 million for the acquisition of Fastorq. Net cash used by investing activities in 2017 included, a total of $82.9 million (net of $1.8 million of cash acquired) for the acquisitions of BTC, Norbar and TCS, as well as working capital adjustments for the Car-O-Liner and Sturtevant Richmont acquisitions. Net cash used by investing activities in 2016 included, on a preliminary basis, $160.4 million (net of $4.3 million of cash acquired) for the acquisitions of Car-O-Liner and Sturtevant Richmont. See Note 3 to the Consolidated Financial Statements for information on acquisitions.
Capital expenditures in 2018, 2017 and 2016 totaled $90.9 million, $82.0 million and $74.3 million, respectively. Capital expenditures in all three years included continued investments related to the company’s execution of its strategic Value Creation Processes and strategic growth initiatives. The company also invested in: (i) new product, efficiency, safety and cost reduction initiatives that are intended to expand and improve its manufacturing and distribution capabilities worldwide; (ii) new production and machine tooling to enhance manufacturing operations, as well as ongoing replacements of manufacturing and distribution equipment, particularly in the United States; (iii) the ongoing replacement and enhancement of the company’s global enterprise resource planning (ERP) management information systems; and (iv) improvements to the company’s research and development facilities and corporate headquarters in Kenosha, Wisconsin. Snap-on believes that its cash generated from operations, as well as its available cash on hand and funds available from its credit facilities will be sufficient to fund the company’s capital expenditure requirements in 2019.
Financing Activities
Net cash used by financing activities of $502.2 million in 2018 included repayments of $250 million of the 2018 Notes at maturity and $200 million of the 2019 Notes prior to maturity, as well as a $7.8 million loss on early extinguishment of debt. These amounts were partially offset by Snap-on’s sale, on February 20, 2018, of $400 million of the 2048 Notes at a discount, from which Snap-on received $395.4 million of net proceeds, reflecting $3.5 million of transaction costs, and $4.9 million of proceeds from the net increase in notes payable and other short-term borrowings. Net cash used by financing activities of $256.1 million in 2017 included the January 2017 repayment of $150 million of the 2017 Notes. These amounts were partially offset by Snap-on’s sale, on February 15, 2017, of $300 million of the 2027 Notes sold at a discount, from which Snap-on received $297.8 million of net proceeds, reflecting $1.9 million of transaction costs, and $30.6 million of proceeds from a net increase in notes payable and other short-term borrowings. Net cash used by financing activities of $116.0 million in 2016 included $134.2 million of proceeds from a net increase in notes payable and other short-term borrowings.
Proceeds from stock purchase and option plan exercises totaled $55.5 million in 2018, $46.2 million in 2017 and $41.8 million in 2016. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, stock options and other corporate purposes. In 2018, Snap-on repurchased 1,769,000 shares of its common stock for $284.1 million under its previously announced share repurchase programs. As of 2018 year end, Snap-on had remaining availability to repurchase up to an additional $215.7 million in common stock pursuant to its Board of Directors’ (the “Board”) authorizations. The purchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions. Snap-on repurchased 1,820,000 shares of its common stock for $287.9 million in 2017 and Snap-on repurchased 758,000 shares of its common stock for $120.4 million in 2016. Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities, will be sufficient to fund the company’s share repurchases, if any, in 2019.
Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2018, 2017 and 2016 totaled $192.0 million, $169.4 million and $147.5 million, respectively. On November 8, 2018, the company announced that its Board increased the quarterly cash dividend by 15.9% to $0.95 per share ($3.80 per share annualized). Quarterly dividends in 2018 were $0.95 per share in the fourth quarter and $0.82 per share in the first three quarters ($3.41 per share for the year). Quarterly dividends in 2017 were $0.82 per share in the fourth quarter and $0.71 per share in the first three quarters ($2.95 per share for the year). Quarterly dividends in 2016 were $0.71 per share in the fourth quarter and $0.61 per share in the first three quarters ($2.54 per share for the year).
| 2018 | 2017 | 2016 | ||||||||||
| Cash dividends paid per common share | $ | 3.41 | $ | 2.95 | $ | 2.54 | ||||||
| Cash dividends paid as a percent of prior-year retained earnings | 5.1 | % | 5.0 | % | 4.9 | % |
Snap-on believes that its cash generated from operations, available cash on hand and funds available from its credit facilities will be sufficient to pay dividends in 2019.
| 50 | SNAP-ON INCORPORATED |
Off-Balance-Sheet Arrangements
Except as included below in the section labeled “Contractual Obligations and Commitments” and Note 16 to the Consolidated Financial Statements, the company had no off-balance-sheet arrangements as of 2018 year end.
Contractual Obligations and Commitments
A summary of Snap-on’s future contractual obligations and commitments as of 2018 year end are as follows:
| (Amounts in millions) | Total | 2019 | 2020-2021 | 2022-2023 | 2024 and thereafter | |||||||||||||||
| Contractual obligations: | ||||||||||||||||||||
| Notes payable and current maturities of long-term debt | $ | 186.3 | $ | 186.3 | $ | — | $ | — | $ | — | ||||||||||
| Long-term debt | 946.0 | — | 254.0 | — | 692.0 | |||||||||||||||
| Interest on fixed rate debt | 598.7 | 41.5 | 77.8 | 52.3 | 427.1 | |||||||||||||||
| Operating leases | 77.0 | 25.6 | 32.3 | 14.7 | 4.4 | |||||||||||||||
| Capital leases | 16.0 | 3.3 | 6.1 | 4.7 | 1.9 | |||||||||||||||
| Purchase obligations | 72.5 | 65.2 | 7.1 | — | 0.2 | |||||||||||||||
| Total | $ | 1,896.5 | $ | 321.9 | $ | 377.3 | $ | 71.7 | $ | 1,125.6 |
Snap-on intends to make contributions of $9.4 million to its foreign pension plans and $1.9 million to its domestic pension plans in 2019, as required by law. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2019. Snap-on has not presented estimated pension and postretirement funding contributions in the table above as the funding can vary from year to year based on changes in the fair value of the plan assets and actuarial assumptions; see Note 12 and Note 13 to the Consolidated Financial Statements for information on the company’s benefit plans and payments.
Due to the uncertainty of the timing of settlements with taxing authorities, Snap-on is unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits for its remaining uncertain tax liabilities. As a result, $11.1 million of unrecognized tax benefits have been excluded from the table above; see Note 9 to the Consolidated Financial Statements for information on income taxes.
Environmental Matters
Snap-on is subject to various federal, state and local government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Snap-on’s policy is to comply with these requirements and the company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with its business. Some risk of environmental damage is, however, inherent in some of Snap-on’s operations and products, as it is with other companies engaged in similar businesses.
Snap-on is and has been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous or toxic by one or more regulatory agencies. Snap-on believes that, as a general matter, its handling, manufacture, use and disposal of these substances are in accordance with environmental laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question the company’s handling, manufacture, use or disposal of these substances.
New Accounting Standards
See Note 1 to the Consolidated Financial Statements for information on new accounting standards.
| 2018 ANNUAL REPORT | 51 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Critical Accounting Policies and Estimates
The Consolidated Financial Statements and related notes contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates.
In addition to the company’s significant accounting policies described in Note 1 to the Consolidated Financial Statements, Snap-on considers the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company’s consolidated financial statements and the uncertainties that could impact the company’s financial position, results of operations and cash flows.
Impairment of Goodwill and Other Indefinite-lived Intangible Assets: Goodwill and other indefinite-lived intangible 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 recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. Estimated cash flows and related goodwill are grouped at the reporting unit level. The company has determined that its reporting units for testing goodwill impairment are its operating segments or components of an operating segment that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. Within its four reportable operating segments, the company has identified 11 reporting units.
Snap-on evaluates the recoverability of goodwill by utilizing an income approach that estimates the fair value of the future discounted cash flows of the reporting units to which the goodwill relates. The future projections, which are based on both past performance and the projections and assumptions used in the company’s operating plans, are subject to change as a result of changing economic and competitive conditions. This approach reflects management’s internal outlook at the reporting units, which management believes provides the best determination of value due to management’s insight and experience with the reporting units. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, working capital levels, expected benefits from RCI initiatives, and a weighted-average cost of capital that reflects the specific risk profile of the reporting unit being tested. The company’s methodologies for valuing goodwill are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2018 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the reporting units’ projections of future operating results and cash flows and replicates how market participants would value the company’s reporting units in an orderly transaction.
In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the company would then record an impairment charge based on the excess of a reporting units carrying amount over its fair value.
Snap-on also evaluates the recoverability of its indefinite-lived trademarks by utilizing an income approach that estimates the fair value of the future discounted cash flows of each of its trademarks. The future projections, which are based on both past performance and the projections and assumptions used in the company’s operating plans, are subject to change as a result of changing economic and competitive conditions. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth and royalty rates, expected synergies, and a weighted-average cost of capital that reflects the specific risk profile of the trademark being tested. The company’s methodologies for valuing trademarks are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2018 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the trademarks’ projected future cash flows and replicates how market participants would value the company’s trademarks in an orderly transaction.
| 52 | SNAP-ON INCORPORATED |
Inherent in fair value determinations are significant judgments and estimates, including material assumptions about future revenue, profitability and cash flows, the company’s operational plans and its interpretation of current economic indicators. Should the operations of the businesses with which goodwill or other indefinite-lived intangible assets are associated incur significant 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, some or all of the recorded goodwill or other indefinite-lived intangible assets could be subject to impairment and could result in a material adverse effect on Snap-on’s financial position or results of operations.
Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2018, which did not result in any impairment. As of 2018 year end, the company has no accumulated impairment losses. Although the company consistently uses the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results. In performing its annual impairment testing the company performed a sensitivity analysis on the material assumptions used in the discounted cash flow valuation models for each of its 11 reporting units. Based on the company’s second quarter 2018 impairment testing and assuming a hypothetical 10% decrease in the estimated fair values of each of its 11 reporting units, the hypothetical fair value of each of the company’s 11 reporting units would have been greater than its carrying value. See Note 7 to the Consolidated Financial Statements for further information about goodwill and other intangible assets.
Pension Benefits: The pension benefit obligation and related pension expense are calculated in accordance with GAAP and are impacted by certain actuarial assumptions. Changes in these assumptions are primarily influenced by factors outside of Snap-on’s control, such as changes in economic conditions, and can have a significant effect on the amounts reported in the financial statements. Snap-on believes that the two most critical assumptions are (i) the expected return on plan assets; and (ii) the assumed discount rate.
Snap-on’s domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. In 2018, the long-term investment performance objective for Snap-on’s domestic plans’ assets was to achieve net of expense returns that met or exceeded the 7.45% domestic expected return on plan assets assumption. 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 2018 year end, Snap-on’s domestic pension plans’ assets comprised approximately 86% of the company’s worldwide pension plan assets.
Based on forward-looking capital market expectations, Snap-on selected an expected return on plan assets assumption for its U.S. pension plans of 7.45%, the same as 2018, to be used in determining pension expense for 2019. In estimating the domestic expected return on plan assets, Snap-on utilizes 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, 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. Since asset allocation is a key determinant of expected investment returns, the current and expected mix of plan assets are also considered when setting the assumption.
Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected rate of return assumption for Snap-on’s domestic pension plans’ assets by 50 bps would have increased Snap-on’s 2018 domestic pension expense by approximately $5.3 million.
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 2018 and 2017 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.
| 2018 ANNUAL REPORT | 53 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
The selection of the 4.4% weighted-average discount rate for Snap-on’s domestic pension plans as of 2018 year end (compared to 3.9% as of 2017 year end) 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 bps would have increased Snap-on’s 2018 domestic pension expense and projected benefit obligation by approximately $3.7 million and $62.9 million, respectively. As of 2018 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 3.0% (compared to 2.7% as of 2017 year end) 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 2018 foreign pension expense and projected benefit obligation by approximately $1.9 million and $21.0 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.
To determine the 2019 net periodic benefit cost, Snap-on is using weighted-average discount rates for its domestic and foreign pension plans of 4.4% and 3.0%, respectively, and an expected return on plan assets for its domestic pension plans of 7.45%. The expected returns on plan assets for foreign pension plans ranged from 2.0% and 6.1% as of 2018 year end. The net change in these two key assumptions from those used in 2018 is expected to decrease pension expense in 2019. Other factors, such as changes in plan demographics and discretionary contributions, may further increase or decrease pension expense in 2019. See Note 12 to the Consolidated Financial Statements for further information on pension plans.
Allowance for Doubtful Accounts on Finance Receivables: The allowance for doubtful accounts on finance receivables is maintained at a level management believes is adequate to cover probable losses inherent in Snap-on’s finance receivables portfolio as of the measurement date. The allowance represents 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. Determination of the proper level of the allowance requires management to exercise 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 allowance takes 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. Some of these factors are influenced by items such as 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. Changes in economic conditions and assumptions, including the resulting credit quality metrics relative to the performance of the finance receivable portfolio create uncertainty and could result in a change to both the allowance for doubtful accounts and provision for credit losses.
Management utilizes established policies and procedures in an effort to ensure the estimates and assumptions are well controlled, reviewed and consistently applied. As of December 29, 2018, the ratio of the allowance for doubtful accounts for finance receivables was 3.71%. As of December 30, 2017, the allowance ratio was 3.53%. While management believes it exercises prudent judgment and applies reasonable assumptions in establishing its estimate for the allowance for finance receivables, there can be no assurance that changes in economic conditions or other factors would not adversely impact the financial health of our customers and result in changes to the estimates used in the allowance calculation. For reference, a 100 bps increase in the allowance ratio for finance receivables as of December 29, 2018, would have increased Snap-on’s 2018 provision expense and related allowance for doubtful accounts by approximately $16.5 million.
For additional information on Snap-on’s allowances for doubtful accounts, see Note 1 and Note 4 to the Consolidated Financial Statements.
Outlook
Snap-on expects to make continued progress in 2019 along its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive repair arena and developing and expanding its professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including extending in critical industries, where the cost and penalties for failure can be high. In pursuit of these initiatives, Snap-on expects that capital expenditures in 2019 will be in a range of $90 million to $100 million.
Snap-on currently anticipates that its full year 2019 effective income tax rate will be comparable to its full year 2018 effective tax rate of 24.0%.
| 54 | SNAP-ON INCORPORATED |
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