Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Snap-on IncFinancial_Report.xls
EX-32.2 - EX-32.2 - Snap-on Incd786164dex322.htm
EX-31.2 - EX-31.2 - Snap-on Incd786164dex312.htm
EX-31.1 - EX-31.1 - Snap-on Incd786164dex311.htm
EX-32.1 - EX-32.1 - Snap-on Incd786164dex321.htm
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2014

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                               to                                                          

Commission File Number 1-7724

 

LOGO

(Exact name of registrant as specified in its charter)

 

Delaware   39-0622040
(State of incorporation)   (I.R.S. Employer Identification No.)
2801 80th Street, Kenosha, Wisconsin   53143
(Address of principal executive offices)   (Zip code)

(262) 656-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

Class

     

Outstanding at October 10, 2014

Common Stock, $1.00 par value     58,107,602 shares


Table of Contents

TABLE OF CONTENTS

 

          Page  

Part I: Financial Information

  

Item 1.    

  

Financial Statements

  
   Condensed Consolidated Statements of Earnings (unaudited) – Three and Nine Months Ended September 27, 2014, and September 28, 2013      3   
   Condensed Consolidated Statements of Comprehensive Income (unaudited) – Three and Nine Months Ended September 27, 2014, and September 28, 2013      4   
   Condensed Consolidated Balance Sheets (unaudited) – September 27, 2014, and December 28, 2013      5-6   
   Condensed Consolidated Statements of Equity (unaudited) – Nine Months Ended September 27, 2014, and September 28, 2013      7   
   Condensed Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 27, 2014, and September 28, 2013      8   
   Notes to Condensed Consolidated Financial Statements (unaudited)      9-33   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34-53   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     54-55   

Item 4.

  

Controls and Procedures

     55-56   

Part II: Other Information

  

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     56-57   

Item 6.

  

Exhibits

     58   
  

Signatures

     59   
  

Exhibit Index

     60   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions, except per share data)

(Unaudited)

 

     Three Months Ended      Nine Months Ended  
     September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Net sales

     $ 806.3            $ 753.2            $ 2,420.3            $ 2,259.0      

Cost of goods sold

         (412.4)               (388.9)               (1,247.3)               (1,164.6)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     393.9            364.3            1,173.0            1,094.4      

Operating expenses

     (263.3)           (253.0)           (782.6)           (757.5)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating earnings before financial services

     130.6            111.3            390.4            336.9      

Financial services revenue

     53.6            45.1            155.5            133.6      

Financial services expenses

     (15.9)           (13.5)           (48.6)           (40.9)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating earnings from financial services

     37.7            31.6            106.9            92.7      
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating earnings

     168.3            142.9            497.3            429.6      

Interest expense

     (12.7)           (14.4)           (39.1)           (41.8)     

Other income (expense) – net

     (0.9)           (0.8)           (0.7)           (3.1)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes and equity earnings

     154.7            127.7            457.5            384.7      

Income tax expense

     (48.4)           (40.8)           (144.6)           (122.1)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before equity earnings

     106.3            86.9            312.9            262.6      

Equity earnings, net of tax

     0.1            0.1            0.5            0.2      
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

     106.4            87.0            313.4            262.8      

Net earnings attributable to noncontrolling interests

     (2.7)           (2.4)           (7.7)           (7.0)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Snap-on Incorporated

     $ 103.7            $ 84.6            $ 305.7            $ 255.8      
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share attributable to Snap-on Incorporated:

           

Basic

     $ 1.78            $ 1.45            $ 5.26            $ 4.40      

Diluted

     1.76            1.43            5.18            4.33      

Weighted-average shares outstanding:

           

Basic

     58.1            58.2            58.1            58.2      

Effect of dilutive securities

     0.9            0.8            0.9            0.9      
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     59.0            59.0            59.0            59.1      
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per common share

     $ 0.44            $ 0.38            $ 1.32            $ 1.14      

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

     Three Months Ended      Nine Months Ended  
     September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Comprehensive income (loss):

        

Net earnings

       $ 106.4                $ 87.0                $ 313.4                $ 262.8        

Other comprehensive income (loss):

        

Foreign currency translation*

         (64.8)             39.3              (63.3)             (4.9)       

Unrealized cash flow hedges, net of tax:

           

Reclassification of cash flow hedges to net earnings

     (0.1)             (0.1)             (0.3)             (0.3)       

Amortization of net unrecognized losses and prior service credits included in net periodic pension cost

     5.6              10.2              16.6              30.5        

Income tax benefit

     (2.1)             (4.6)             (6.1)             (12.2)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net of tax

     3.5              5.6              10.5              18.3        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income

       $ 45.0                $     131.8                $     260.3                $     275.9        

Comprehensive income attributable to noncontrolling interests

     (2.7)             (2.4)             (7.7)             (7.0)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Snap-on Incorporated

       $ 42.3                $ 129.4                $ 252.6                $ 268.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

There was no sale or liquidation of any foreign entity; therefore, there is no reclassification adjustment for any period presented.

See Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

 

     September 27,
2014
     December 28,
2013
 

ASSETS

     

Current assets:

     

Cash and cash equivalents

       $ 124.7                $ 217.6        

Trade and other accounts receivable – net

     574.4              531.6        

Finance receivables – net

     407.3              374.6        

Contract receivables – net

     76.2              68.4        

Inventories – net

     484.6              434.4        

Deferred income tax assets

     96.1              85.4        

Prepaid expenses and other assets

     96.9              84.2        
  

 

 

    

 

 

 

Total current assets

         1,860.2                  1,796.2        

Property and equipment:

     

Land

     18.9              19.6        

Buildings and improvements

     291.7              292.0        

Machinery, equipment and computer software

     754.0              725.4        
  

 

 

    

 

 

 
     1,064.6              1,037.0        

Accumulated depreciation and amortization

     (660.5)             (644.5)       
  

 

 

    

 

 

 

Property and equipment – net

     404.1              392.5        

Deferred income tax assets

     48.1              57.1        

Long-term finance receivables – net

     629.1              560.6        

Long-term contract receivables – net

     237.7              217.1        

Goodwill

     828.5              838.8        

Other intangibles – net

     207.1              190.5        

Other assets

     53.7              57.2        
  

 

 

    

 

 

 

Total assets

       $ 4,268.5                $ 4,110.0        
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

 

     September 27,
2014
     December 28,
2013
 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Notes payable and current maturities of long-term debt

       $ 58.7                $ 113.1        

Accounts payable

     167.6              155.6        

Accrued benefits

     50.7              48.1        

Accrued compensation

     92.1              95.5        

Franchisee deposits

     71.1              59.4        

Other accrued liabilities

     293.7              243.7        
  

 

 

    

 

 

 

Total current liabilities

     733.9              715.4        

Long-term debt

     860.5              858.9        

Deferred income tax liabilities

     148.2              143.8        

Retiree health care benefits

     38.4              41.7        

Pension liabilities

     108.7              135.8        

Other long-term liabilities

     84.3              84.0        
  

 

 

    

 

 

 

Total liabilities

         1,974.0                  1,979.6        
  

 

 

    

 

 

 

Commitments and contingencies (Note 14)

     

Equity

     

Shareholders’ equity attributable to Snap-on Incorporated:

     

Preferred stock (authorized 15,000,000 shares of $1 par value; none outstanding)

     –                  –            

Common stock (authorized 250,000,000 shares of $1 par value; issued 67,382,935 and 67,371,679 shares, respectively)

     67.4              67.4        

Additional paid-in capital

     252.1              225.1        

Retained earnings

     2,552.1              2,324.1        

Accumulated other comprehensive loss

     (97.9)             (44.8)       

Treasury stock at cost (9,276,434 and 9,255,903 shares, respectively)

     (496.7)             (458.6)       
  

 

 

    

 

 

 

Total shareholders’ equity attributable to Snap-on Incorporated

     2,277.0              2,113.2        

Noncontrolling interests

     17.5              17.2        
  

 

 

    

 

 

 

Total equity

     2,294.5              2,130.4        
  

 

 

    

 

 

 

Total liabilities and equity

       $ 4,268.5                $     4,110.0        
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Amounts in millions, except share data)

(Unaudited)

The following summarizes the changes in total equity for the nine month period ended September 27, 2014:

 

     Shareholders’ Equity Attributable to Snap-on Incorporated                
    

Common

Stock

    

Additional

Paid-in

Capital

    

Retained

Earnings

     Accumulated
Other
Comprehensive
Income (Loss)
    

Treasury

Stock

     Noncontrolling
Interests
    

Total

Equity

 
  

 

 

 

Balance at December 28, 2013

     $ 67.4            $ 225.1            $ 2,324.1            $ (44.8)           $ (458.6)           $ 17.2            $ 2,130.4      

Net earnings for the nine months ended

September 27, 2014

     –                –                305.7            –                –                7.7            313.4      

Other comprehensive loss

     –                –                –                (53.1)           –                –                (53.1)     

Cash dividends – $1.32 per share

     –                –                (76.8)           –                –                –                (76.8)     

Dividend reinvestment plan and other

     –                –                (0.9)           –                –                (7.4)           (8.3)     

Stock compensation plans

     –                16.7            –                –                29.4            –                46.1      

Share repurchases – 591,000 shares

     –                –                –                –                (67.5)           –                (67.5)     

Tax benefit from certain stock options

     –                10.3            –                –                –                –                10.3      
  

 

 

 

Balance at September 27, 2014

     $     67.4            $     252.1            $     2,552.1            $     (97.9)           $     (496.7)           $     17.5            $     2,294.5      
  

 

 

 

The following summarizes the changes in total equity for the nine month period ended September 28, 2013:

 

  

     Shareholders’ Equity Attributable to Snap-on Incorporated                
    

Common

Stock

    

Additional

Paid-in

Capital

    

Retained

Earnings

     Accumulated
Other
Comprehensive
Income (Loss)
    

Treasury

Stock

     Noncontrolling
Interests
    

Total

Equity

 
  

 

 

 

Balance at December 29, 2012

     $ 67.4            $ 204.6            $ 2,067.0            $ (124.2)           $ (412.7)           $ 16.9            $ 1,819.0      

Net earnings for the nine months ended

September 28, 2013

     –                –                255.8            –                –                7.0            262.8      

Other comprehensive income

     –                –                –                13.1            –                –                13.1      

Cash dividends – $1.14 per share

     –                –                (66.5)           –                –                –                (66.5)     

Dividend reinvestment plan and other

     –                –                (0.9)           –                –                (7.0)           (7.9)     

Stock compensation plans

     –                15.5            –                –                31.1            –                46.6      

Share repurchases – 782,000 shares

     –                –                –                –                (67.5)           –                (67.5)     

Tax benefit from certain stock options

     –                6.5            –                –                –                –                6.5      
  

 

 

 

Balance at September 28, 2013

     $ 67.4            $ 226.6            $ 2,255.4            $     (111.1)           $ (449.1)           $ 16.9            $ 2,006.1      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

7


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Nine Months Ended  
     September 27,
2014
     September 28,
2013
 

Operating activities:

     

Net earnings

       $ 313.4                $ 262.8        

Adjustments to reconcile net earnings to net cash provided (used) by
operating activities:

     

Depreciation

     40.6              38.3        

Amortization of other intangibles

     18.4              19.4        

Provision for losses on finance receivables

     19.8              15.0        

Provision for losses on non-finance receivables

     10.7              7.9        

Stock-based compensation expense

     27.3              28.9        

Excess tax benefits from stock-based compensation

     (10.3)             (6.5)       

Deferred income tax (benefit) provision

     (3.1)             2.8        

Loss on sale of assets

     0.2              –            

Changes in operating assets and liabilities, net of effects of acquisitions:

     

Increase in trade and other accounts receivable

     (61.7)             (27.8)       

Increase in contract receivables

     (31.7)             (31.4)       

Increase in inventories

     (57.5)             (35.5)       

Increase in prepaid and other assets

     (32.2)             (25.5)       

Increase in accounts payable

     16.6              16.7        

Increase in accruals and other liabilities

     50.2              5.0        
  

 

 

    

 

 

 

Net cash provided by operating activities

     300.7              270.1        

Investing activities:

     

Additions to finance receivables

         (549.2)                 (482.4)       

Collections of finance receivables

     425.1              373.7        

Capital expenditures

     (63.3)             (50.7)       

Acquisitions of businesses

     (41.3)             (38.2)       

Disposal of property and equipment

     0.6              0.7        

Other

     0.9              (9.0)       
  

 

 

    

 

 

 

Net cash used by investing activities

     (227.2)             (205.9)       

Financing activities:

     

Repayment of long-term debt

     (100.0)             –            

Proceeds from short-term borrowings

     4.9              1.6        

Repayments of short-term borrowings

     (1.6)             (0.5)       

Net increase in other short-term borrowings

     43.2              12.1        

Cash dividends paid

     (76.8)             (66.5)       

Purchases of treasury stock

     (67.5)             (67.5)       

Proceeds from stock purchase and option plans

     30.8              27.9        

Excess tax benefits from stock-based compensation

     10.3              6.5        

Other

     (9.0)             (8.7)       
  

 

 

    

 

 

 

Net cash used by financing activities

     (165.7)             (95.1)       

Effect of exchange rate changes on cash and cash equivalents

     (0.7)             (1.1)       
  

 

 

    

 

 

 

Decrease in cash and cash equivalents

     (92.9)             (32.0)       

Cash and cash equivalents at beginning of year

     217.6              214.5        
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

       $ 124.7                $ 182.5        
  

 

 

    

 

 

 

Supplemental cash flow disclosures:

     

Cash paid for interest

       $ (51.1)               $ (53.8)       

Net cash paid for income taxes

     (135.9)             (117.4)       

See Notes to Condensed Consolidated Financial Statements.

 

8


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Summary of Accounting Policies

Principles of consolidation and presentation

The Condensed Consolidated Financial Statements include the accounts of Snap-on Incorporated and its wholly-owned and majority-owned subsidiaries (collectively, “Snap-on” or “the company”). These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Snap-on’s 2013 Annual Report on Form 10-K for the fiscal year ended December 28, 2013 (“2013 year end”).

Snap-on’s 2014 fiscal year, which ends on January 3, 2015, will contain 53 weeks of operating results, with the additional week occurring in the fourth quarter. The company’s 2013 fiscal year contained 52 weeks of operating results. Snap-on’s 2014 fiscal third quarter ended on September 27, 2014; the 2013 fiscal third quarter ended on September 28, 2013.

Snap-on accounts for investments in unconsolidated affiliates where Snap-on has a greater than 20% but less than 50% ownership interest under the equity method of accounting. Investments in unconsolidated affiliates of $13.7 million as of September 27, 2014, and $14.2 million as of December 28, 2013, are included in “Other assets” on the accompanying Condensed Consolidated Balance Sheets. In the normal course of business, the company may purchase products or services from unconsolidated affiliates; purchases from unconsolidated affiliates were $3.5 million in both the third quarters of 2014 and 2013, and were $10.9 million and $11.2 million in the first nine months of 2014 and 2013, respectively. The Condensed Consolidated Financial Statements do not include the accounts of the company’s independent franchisees. Snap-on’s Condensed Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Condensed Consolidated Financial Statements for the three and nine month periods ended September 27, 2014, and September 28, 2013, have been made. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Financial Instruments

The fair value of the company’s derivative financial instruments is generally determined using quoted prices in active markets for similar assets and liabilities. The carrying value of the company’s non-derivative financial instruments either approximates fair value, due to their short-term nature, or the amount disclosed for fair value is based upon a discounted cash flow analysis or quoted market values. See Note 9 for further information on financial instruments.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be

 

9


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for Snap-on at the beginning of its 2017 fiscal year; early adoption is not permitted. The company is currently assessing the impact that this standard will have on its consolidated financial statements.

Note 2: Acquisitions

On May 28, 2014, Snap-on acquired substantially all of the assets of Pro-Cut International, Inc. (“Pro-Cut”) for a cash purchase price of $41.3 million, including post-closing adjustments. Pro-Cut, with 2013 sales of approximately $24 million, designs, manufactures and distributes on-car brake lathes, related equipment and accessories used in brake servicing by automotive repair facilities. The acquisition of the Pro-Cut product line complements and increases Snap-on’s existing undercar equipment product offering, broadens its established capabilities in servicing vehicle repair facilities and expands the company’s presence with repair shop owners and managers. For segment reporting purposes, the results of operations and assets of Pro-Cut have been included in the Repair Systems & Information Group since the date of acquisition. Pro forma financial information has not been presented as the net effects of the Pro-Cut acquisition were neither significant nor material to Snap-on’s results of operations or financial position.

On May 13, 2013, Snap-on acquired Challenger Lifts, Inc. (“Challenger”) for a cash purchase price of $38.2 million, including post-closing adjustments. Challenger designs, manufactures and distributes a comprehensive line of vehicle lifts and accessories to a diverse customer base in the automotive repair sector. For segment reporting purposes, the results of operations and assets of Challenger have been included in the Repair Systems & Information Group since the date of acquisition. Pro forma financial information has not been presented as the net effects of the Challenger acquisition were neither significant nor material to Snap-on’s results of operations or financial position.

Note 3: Receivables

Trade and Other Accounts Receivable

Snap-on’s trade and other accounts receivable primarily arise from the sale of tools and diagnostic and equipment products to a broad range of industrial and commercial customers and to Snap-on’s independent franchise van channel on a non-extended-term basis with payment terms generally ranging from 30 to 120 days.

The components of Snap-on’s trade and other accounts receivable as of September 27, 2014, and December 28, 2013, are as follows:

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

Trade and other accounts receivable

       $     590.0                $     546.5        

Allowances for doubtful accounts

     (15.6)             (14.9)       
  

 

 

    

 

 

 

Total trade and other accounts receivable – net

       $ 574.4                $ 531.6        
  

 

 

    

 

 

 

 

10


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Finance and Contract Receivables

Snap-on Credit LLC (“SOC”), the company’s financial services operation in the United States, originates extended-term finance and contract receivables on sales of Snap-on products through the U.S. franchisee and customer network and to Snap-on’s industrial and other customers; Snap-on’s foreign finance subsidiaries provide similar financing internationally. Interest income on finance and contract receivables is included in “Financial services revenue” on the accompanying Condensed Consolidated Statements of Earnings.

Snap-on’s finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees’ customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with expected average payment terms of approximately three years. Contract receivables, with payment terms of up to 10 years, are comprised of extended-term installment payment contracts to a broad base of industrial and other customers worldwide, including shop owners, both independents and national chains, for their purchase of tools and diagnostic and equipment products. Contract receivables also include extended-term installment loans to franchisees to meet a number of financing needs including working capital loans, loans to enable new franchisees to fund the purchase of the franchise and van leases. Finance and contract receivables are generally secured by the underlying tools and/or diagnostic or equipment products financed and, for installment loans to franchisees, other franchisee assets.

During both the nine months ended September 27, 2014, and the fiscal year ended December 28, 2013, Snap-on did not have any significant purchases or sales of finance or contract receivables.

The components of Snap-on’s current finance and contract receivables as of September 27, 2014, and December 28, 2013, are as follows:

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

Finance receivables, net of unearned finance charges of $16.1 million and $14.1 million, respectively

       $ 419.1                $ 385.3        

Contract receivables, net of unearned finance charges of $14.0 million and $13.0 million, respectively

     77.5              69.6        
  

 

 

    

 

 

 

Total

     496.6              454.9        
  

 

 

    

 

 

 

Allowances for doubtful accounts:

     

Finance receivables

     (11.8)             (10.7)       

Contract receivables

     (1.3)             (1.2)       
  

 

 

    

 

 

 

Total

     (13.1)             (11.9)       
  

 

 

    

 

 

 

Total current finance and contract receivables – net

       $ 483.5                $ 443.0        
  

 

 

    

 

 

 

Finance receivables – net

       $ 407.3                $ 374.6        

Contract receivables – net

     76.2              68.4        
  

 

 

    

 

 

 

Total current finance and contract receivables – net

       $     483.5                $     443.0        
  

 

 

    

 

 

 

 

11


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The components of Snap-on’s finance and contract receivables with payment terms beyond one year as of September 27, 2014, and December 28, 2013, are as follows:

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

Finance receivables, net of unearned finance charges of $10.0 million and $8.9 million, respectively

       $ 648.6                $ 577.7        

Contract receivables, net of unearned finance charges of $18.5 million and $17.3 million, respectively

     240.3              219.2        
  

 

 

    

 

 

 

Total

     888.9              796.9        
  

 

 

    

 

 

 

Allowances for doubtful accounts:

     

Finance receivables

     (19.5)             (17.1)       

Contract receivables

     (2.6)             (2.1)       
  

 

 

    

 

 

 

Total

     (22.1)             (19.2)       
  

 

 

    

 

 

 

Total long-term finance and contract receivables – net

       $ 866.8                $ 777.7        
  

 

 

    

 

 

 

Finance receivables – net

       $ 629.1                $ 560.6        

Contract receivables – net

     237.7              217.1        
  

 

 

    

 

 

 

Total long-term finance and contract receivables – net

       $     866.8                $     777.7        
  

 

 

    

 

 

 

Delinquency is the primary indicator of credit quality for finance and contract receivables. Receivable balances are considered delinquent when contractual payments become 30 days past due.

Finance receivables are generally placed on nonaccrual status (nonaccrual of interest and other fees) (i) when a customer is placed on repossession status; (ii) upon receipt of notification of bankruptcy; (iii) upon notification of the death of a customer; or (iv) in other instances in which management concludes collectability is not reasonably assured. Finance receivables that are considered nonperforming include receivables that are on nonaccrual status and receivables that are generally more than 90 days past due.

Contract receivables are generally placed on nonaccrual status (i) when a receivable is more than 90 days past due or at the point a customer’s account is placed on terminated status regardless of its delinquency status; (ii) upon notification of the death of a customer; or (iii) in other instances in which management concludes collectability is not reasonably assured. Contract receivables that are considered nonperforming include receivables that are on nonaccrual status.

The accrual of interest and other fees is resumed when the finance or contract receivable becomes contractually current and collection of all remaining contractual amounts due is reasonably assured. Finance and contract receivables are evaluated for impairment on a collective basis. A receivable is impaired when it is probable that all amounts related to the receivable will not be collected according to the contractual terms of the applicable agreement. Impaired receivables are covered by the company’s finance and contract allowances for doubtful accounts reserves and are charged-off against the reserves when appropriate. As of September 27, 2014, and December 28, 2013, there were $15.5 million and $15.2 million, respectively, of impaired finance receivables, and there were $1.3 million and $1.0 million, respectively, of impaired contract receivables.

It is the general practice of Snap-on’s financial services business to not engage in contract or loan modifications. In limited instances, Snap-on’s financial services business may modify certain impaired receivables in troubled debt restructurings. The amount and number of restructured finance and contract receivables as of September 27, 2014, and December 28, 2013, were immaterial to both the financial services portfolio and the company’s results of operations and financial position.

 

12


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The aging of finance and contract receivables as of September 27, 2014, and December 28, 2013, is as follows:

 

(Amounts in millions)    30-59
Days Past
Due
     60-90
Days Past
Due
     Greater
Than 90
Days Past
Due
     Total Past
Due
     Total Not
Past Due
     Total      Greater
Than 90
Days Past
Due and
Accruing
 

September 27, 2014:

                    

Finance receivables

     $ 9.6            $   5.9            $ 9.9            $   25.4            $   1,042.3            $   1,067.7            $ 7.2      

Contract receivables

     1.3            0.5            0.6            2.4            315.4            317.8            0.2      

December 28, 2013

                    

Finance receivables

     $   9.3            $ 5.7            $   9.6            $ 24.6            $ 938.4            $ 963.0            $   7.0      

Contract receivables

     1.2            0.8            0.7            2.7            286.1            288.8            0.1      

The amount of performing and nonperforming finance and contract receivables based on payment activity as of September 27, 2014, and December 28, 2013, is as follows:

 

     September 27, 2014      December 28, 2013  
(Amounts in millions)    Finance
Receivables
     Contract
Receivables
     Finance
Receivables
     Contract
Receivables
 

Performing

       $ 1,052.2               $        316.5               $ 947.8               $        287.8       

Nonperforming

     15.5             1.3             15.2             1.0       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $        1,067.7               $ 317.8               $        963.0               $ 288.8       
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of finance and contract receivables on nonaccrual status as of September 27, 2014, and December 28, 2013, is as follows:

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

Finance receivables

       $       8.5                $       8.3        

Contract receivables

     1.3              1.0        

The following is a rollforward of the allowances for credit losses for finance and contract receivables for the three and nine month periods ended September 27, 2014:

 

     Three Months Ended
September 27, 2014
     Nine Months Ended
September 27, 2014
 
(Amounts in millions)    Finance
Receivables
     Contract
Receivables
     Finance
Receivables
     Contract
Receivables
 

Allowances for doubtful accounts:

           

Beginning of period

       $ 30.4                $ 3.8                $ 27.8                $ 3.3        

Provision for bad debt expense

     6.4              0.5              19.8              1.8        

Charge-offs

         (6.6)                 (0.5)                 (20.1)                 (1.5)       

Recoveries

     1.2              0.1              3.8              0.3        

Currency translation

     (0.1)             –                  –                  –            
  

 

 

    

 

 

    

 

 

    

 

 

 

End of period

       $ 31.3                $ 3.9                $ 31.3                $ 3.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following is a rollforward of the allowances for credit losses for finance and contract receivables for the three and nine month periods ended September 28, 2013:

 

     Three Months Ended
September 28, 2013
     Nine Months Ended
September 28, 2013
 
(Amounts in millions)    Finance
Receivables
     Contract
Receivables
     Finance
Receivables
     Contract
Receivables
 

Allowances for doubtful accounts:

           

Beginning of period

       $ 26.6                $ 3.5                $ 26.5                $ 3.2        

Provision for bad debt expense

     5.5              0.2              15.0              1.7        

Charge-offs

         (5.5)                 (0.4)                 (17.1)                 (1.6)       

Recoveries

     1.1              0.1              3.4              0.2        

Currency translation

     –                  –                  (0.1)             (0.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

End of period

       $ 27.7                $ 3.4                $ 27.7                $ 3.4        
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 4: Inventories

Inventories by major classification are as follows:

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

Finished goods

       $ 420.6                $ 374.7        

Work in progress

     47.5              45.0        

Raw materials

     89.1              87.3        
  

 

 

    

 

 

 

Total FIFO value

     557.2              507.0        

Excess of current cost over LIFO cost

     (72.6)             (72.6)       
  

 

 

    

 

 

 

Total inventories – net

       $     484.6                $     434.4        
  

 

 

    

 

 

 

Inventories accounted for using the first-in, first-out (“FIFO”) method as of September 27, 2014, and December 28, 2013, approximated 57% and 60%, respectively, of total inventories. The company accounts for its non-U.S. inventory on the FIFO method. As of September 27, 2014, approximately 29% of the company’s U.S. inventory was accounted for using the FIFO method and 71% was accounted for using the last-in, first-out (“LIFO”) method. There were no LIFO inventory liquidations in the three and nine month periods ended September 27, 2014, or September 28, 2013.

Note 5: Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by segment for the nine month period ended September 27, 2014, are as follows:

 

(Amounts in millions)    Commercial
&  Industrial
Group
     Snap-on
Tools Group
     Repair Systems
& Information
Group
     Total  

Balance as of December 28, 2013

       $       312.5                $       12.5                $ 513.8                $ 838.8        

Currency translation

     (21.4)             –                  (2.1)             (23.5)       

Acquisition

     –                  –                  13.2              13.2        
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 27, 2014

       $ 291.1                $ 12.5                $       524.9                $       828.5        
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Goodwill of $828.5 million as of September 27, 2014, includes $13.2 million from the purchase accounting related to the May 2014 acquisition of Pro-Cut. See Note 2 for additional information on the company’s acquisition of Pro-Cut.

Additional disclosures related to other intangible assets are as follows:

 

     September 27, 2014      December 28, 2013  
(Amounts in millions)    Gross Carrying
Value
     Accumulated
Amortization
     Gross Carrying
Value
     Accumulated
Amortization
 

Amortized other intangible assets:

           

Customer relationships

       $     148.2                $ (69.6)               $ 140.8                $ (62.8)       

Developed technology

     19.5              (19.5)             19.5              (19.2)       

Internally developed software

     138.2              (88.7)             125.3              (80.2)       

Patents

     29.3              (20.7)             28.8              (20.4)       

Trademarks

     2.7              (1.6)             2.8              (1.6)       

Other

     7.6              (1.6)             7.3              (1.4)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     345.5              (201.7)             324.5              (185.6)       

Non-amortized trademarks

     63.3              –                  51.6              –            
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other intangible assets

       $ 408.8                $     (201.7)               $     376.1                $     (185.6)       
  

 

 

    

 

 

    

 

 

    

 

 

 

The gross carrying values of customer relationships and non-amortized trademarks as of September 27, 2014, included $7.4 million and $13.8 million, respectively, related to the Pro-Cut acquisition.

Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2014, the results of which did not result in any impairment. Significant and unanticipated changes in circumstances, such as declines in profitability and cash flow due to significant and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including effects from the sale or disposal of a reporting unit, could require a provision for impairment of goodwill and/or other intangible assets in a future period. As of September 27, 2014, the company did not have any accumulated goodwill and/or other intangible asset impairment losses.

The weighted-average amortization periods related to other intangible assets are as follows:

 

     In Years

Customer relationships

   15

Developed technology

     5

Internally developed software

     3

Patents

   10

Trademarks

     6

Other

   39

Snap-on is amortizing its customer relationships on both an accelerated and straight-line basis over a 15 year weighted-average life; the remaining intangibles are amortized on a straight-line basis. The weighted-average amortization period for all amortizable intangibles on a combined basis is 12 years.

 

15


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The company’s customer relationships generally have contractual terms of three to five years and are typically renewed without significant cost to the company. The weighted-average 15 year life for customer relationships is based on the company’s historical renewal experience. Intangible asset renewal costs are expensed as incurred.

The aggregate amortization expense was $6.1 million and $18.4 million for the three and nine month periods ended September 27, 2014, respectively, and was $6.6 million and $19.4 million for the three and nine month periods ended September 28, 2013, respectively. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated annual amortization expense is expected to be $24.3 million in 2014, $20.1 million in 2015, $15.4 million in 2016, $12.0 million in 2017, $9.6 million in 2018, and $9.2 million in 2019.

Note 6: Exit and Disposal Activities

Snap-on recorded costs associated with exit and disposal activities for the three and nine month periods ended September 27, 2014, and September 28, 2013, as follows:

 

     Three Months Ended      Nine Months Ended  
(Amounts in millions)    September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Exit and disposal costs:

           

Cost of goods sold:

           

Commercial & Industrial Group

       $ 0.5                $ 0.3                $ 0.5                $     2.5        

Snap-on Tools Group

     –                  0.1              –                  0.2        

Repair Systems & Information Group

     1.0              0.9              4.2              1.7        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of goods sold

     1.5              1.3              4.7              4.4        
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

           

Commercial & Industrial Group

     0.4              0.3              0.4              0.4        

Snap-on Tools Group

     –                  0.1              –                  0.3        

Repair Systems & Information Group

     0.1              –                  0.3              1.2        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     0.5              0.4              0.7              1.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Services

     –                  –                  –                  0.1        

Total exit and disposal costs:

           

Commercial & Industrial Group

     0.9              0.6              0.9              2.9        

Snap-on Tools Group

     –                  0.2              –                  0.5        

Repair Systems & Information Group

     1.1              0.9              4.5              2.9        

Financial Services

     –                  –                  –                  0.1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total exit and disposal costs

       $     2.0                $     1.7                $     5.4                $ 6.4        
  

 

 

    

 

 

    

 

 

    

 

 

 

Costs associated with exit and disposal activities in 2014 primarily relate to headcount reduction initiatives. The $2.0 million and $5.4 million of costs incurred during the respective three and nine month periods ended September 27, 2014, qualified for accrual treatment.

 

16


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Snap-on’s exit and disposal accrual activity for the first nine months of 2014 is as follows:

 

     Balance at
December 28,
2013
     Six Months      Balance at
June  28,
2014
     Third Quarter      Balance at
September 27,
2014
 
(Amounts in millions)       Provision      Usage         Provision      Usage     

Severance costs:

                    

Commercial & Industrial Group

       $     1.5                $     –                    $     (0.5)               $     1.0                $     0.9                $     (0.3)               $     1.6        

Snap-on Tools Group

     0.2              –                  (0.1)             0.1              –                  (0.1)             –            

Repair Systems & Information Group

     2.3              3.4              (0.6)             5.1              1.1              (0.9)             5.3        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       $ 4.0                $ 3.4                $ (1.2)               $ 6.2                $ 2.0                $ (1.3)               $     6.9        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 27, 2014, the company expects that approximately $2.0 million of the $6.9 million exit and disposal accrual will be utilized in the balance of 2014 and the remainder will extend into 2015 primarily for longer-term severance obligations.

Snap-on expects to fund the remaining cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the company’s existing credit facilities. The estimated costs for the exit and disposal activities were based on management’s best business judgment under prevailing circumstances.

Note 7: Income Taxes

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 32.1% and 32.3% in the first nine months of 2014 and 2013, respectively.

Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. It is reasonably possible that certain unrecognized tax benefits may either be settled with taxing authorities or the statutes of limitations for such items may lapse within the next 12 months, causing Snap-on’s gross unrecognized tax benefits to decrease by a range of zero to $1.2 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $0.7 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.

Note 8: Short-term and Long-term Debt

Short-term and long-term debt as of September 27, 2014, and December 28, 2013, consisted of the following:

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

5.85% unsecured notes due March 2014

       $ –                    $ 100.0        

5.50% unsecured notes due 2017

     150.0              150.0        

4.25% unsecured notes due 2018

     250.0              250.0        

6.70% unsecured notes due 2019

     200.0              200.0        

6.125% unsecured notes due 2021

     250.0              250.0        

Other debt*

     69.2              22.0        
  

 

 

    

 

 

 
           919.2              972.0        

Less: notes payable and current maturities of long-term debt

     (58.7)                 (113.1)       
  

 

 

    

 

 

 

Total long-term debt

       $ 860.5                $ 858.9        
  

 

 

    

 

 

 

 

* Includes fair value adjustments related to interest rate swaps.

 

17


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Notes payable of $58.7 million as of September 27, 2014, included $36.7 million of commercial paper borrowings and $22.0 million of other notes; there were no current maturities of long-term debt as of that date. As of 2013 year end, notes payable and current maturities of long-term debt of $113.1 million included $100.0 million of 5.85% unsecured notes due March 2014 (the “2014 Notes”) and $13.1 million of other notes. Snap-on repaid the 2014 Notes at maturity with available cash and commercial paper borrowings.

Snap-on has a five-year, $700 million multi-currency revolving credit facility that terminates on September 27, 2018 (the “Credit Facility”); no amounts were outstanding under the Credit Facility as of September 27, 2014. 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; 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. As of September 27, 2014, the company’s actual ratios of 0.28 and 1.20, respectively, were both within the permitted ranges set forth in this financial covenant.

Snap-on’s Credit Facility and other debt agreements also contains certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of September 27, 2014, Snap-on was in compliance with all covenants of its Credit Facility and other debt agreements.

Note 9: Financial Instruments

Derivatives: All derivative instruments are reported in the Condensed Consolidated Financial Statements at fair value. Changes in the fair value of derivatives are recorded each period in earnings or on the accompanying Condensed Consolidated Balance Sheets, depending on whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments recorded in Accumulated other comprehensive income (loss) (“Accumulated OCI”) must be reclassified to earnings in the period in which earnings are affected by the underlying hedged item and the ineffective portion of all hedges must be recognized in earnings in the period that such portion is determined to be ineffective.

The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure; (ii) whether or not overall risk is being reduced; and (iii) if there is a correlation between the value of the derivative instrument and the underlying hedged item. On the date a derivative contract is entered into, Snap-on designates the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a natural hedging instrument whose change in fair value is recognized as an economic hedge against changes in the value of the hedged item. Snap-on does not use derivative instruments for speculative or trading purposes.

The company is exposed to global market risks, including the effects of changes in foreign currency exchange rates, interest rates, and the company’s stock price, and therefore uses derivatives to manage financial exposures that occur in the normal course of business. The primary risks managed by using derivative instruments are foreign currency risk, interest rate risk and stock-based deferred compensation risk.

Foreign Currency Risk Management: Snap-on has significant international operations and is subject to certain risks inherent with foreign operations that include currency fluctuations. Foreign currency exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency, including intercompany loans denominated in foreign currencies. To manage these exposures, Snap-on identifies naturally offsetting positions and purchases hedging instruments to protect the residual net exposures. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets. Foreign currency forward contracts (“foreign currency forwards”) are used to hedge the net exposures. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. Snap-on’s foreign currency forwards are typically not designated as hedges. The fair value changes of these contracts are reported in earnings as foreign exchange

 

18


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

gain or loss, which is included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings.

At September 27, 2014, Snap-on had $205.1 million of net foreign currency forward buy contracts outstanding comprised of buy contracts including $97.7 million in euros, $74.7 million in Swedish kronor, $36.0 million in Australian dollars, $6.0 million in Chinese yuan, $6.0 million in South Korean won, $5.6 million in Singapore dollars, $5.5 million in British pounds, $4.9 million in Mexican pesos, $3.2 million in Hong Kong dollars, and $3.5 million in other currencies, and sell contracts comprised of $16.4 million in Japanese yen, $15.9 million in Canadian dollars, and $5.7 million in other currencies. At December 28, 2013, Snap-on had $197.1 million of net foreign currency forward buy contracts outstanding comprised of buy contracts including $89.1 million in euros, $64.3 million in Swedish kronor, $33.8 million in Australian dollars, $26.2 million in British pounds, $12.7 million in Singapore dollars, $7.8 million in Hong Kong dollars, $5.5 million in South Korean won, and $4.7 million in Mexican pesos, and sell contracts comprised of $25.6 million in Canadian dollars, $12.2 million in Japanese yen, $4.8 million in Danish kroner, and $4.4 million in other currencies.

Interest Rate Risk Management: Snap-on aims to control funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s borrowings through the use of interest rate swap agreements.

Snap-on enters into interest rate swap agreements (“interest rate swaps”) to manage risks associated with changing interest rates related to the company’s fixed rate borrowings. Interest rate swaps are accounted for as fair value hedges. The differentials paid or received on interest rate swaps are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The effective portion of the change in fair value of the derivative is recorded in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The notional amount of interest rate swaps outstanding and designated as fair value hedges was $100.0 million as of both September 27, 2014, and December 28, 2013.

Snap-on enters into treasury lock agreements (“treasury locks”) from time to time to manage the potential change in interest rates in anticipation of issuing fixed rate debt. Treasury locks are accounted for as cash flow hedges. The effective differentials paid or received on treasury locks related to the anticipated issuance of fixed rate debt are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. There were no treasury locks outstanding as of September 27, 2014, or December 28, 2013, and no treasury locks were settled during either of the first nine months of 2014 or 2013.

Stock-based Deferred Compensation Risk Management: Snap-on aims to manage market risk associated with the stock-based portion of its deferred compensation plans through the use of prepaid equity forward agreements (“equity forwards”). Equity forwards are used to aid in offsetting the potential mark-to-market effect on stock-based deferred compensation from changes in Snap-on’s stock price. Since stock-based deferred compensation liabilities increase as the company’s stock price rises and decrease as the company’s stock price declines, the equity forwards are intended to mitigate the potential impact on deferred compensation expense that may result from such mark-to-market changes. As of September 27, 2014, Snap-on had equity forwards in place intended to manage market risk with respect to 118,800 shares of Snap-on common stock associated with its deferred compensation plans.

 

19


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Fair Value Measurements: Snap-on has derivative assets and liabilities related to interest rate swaps, foreign currency forwards and equity forwards that are measured at Level 2 fair value on a recurring basis. The fair value of derivative instruments included within the Condensed Consolidated Balance Sheets as of September 27, 2014, and December 28, 2013, is as follows:

 

          September 27, 2014      December 28, 2013  
(Amounts in millions)   

Balance Sheet
Presentation

   Asset
Derivatives
Fair Value
     Liability
Derivatives
Fair Value
     Asset
Derivatives
Fair Value
     Liability
Derivatives
Fair Value
 
Derivatives designated as hedging instruments:               

Interest rate swaps

   Other assets        $     10.7               $ –                   $ 10.1           $ –           
     

 

 

    

 

 

    

 

 

    

 

 

 
Derivatives not designated as hedging instruments:               

Foreign currency forwards

   Prepaid expenses and other assets        $ 3.8               $ –                   $ 4.1           $ –           

Foreign currency forwards

   Other accrued liabilities      –                 15.2             –                 5.6       

Equity forwards

   Prepaid expenses and other assets      14.5             –                 11.5             –           
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

          $ 18.3               $     15.2               $ 15.6               $     5.6       
     

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives instruments

          $ 29.0               $ 15.2               $     25.7               $ 5.6       
     

 

 

    

 

 

    

 

 

    

 

 

 

As of September 27, 2014, and December 28, 2013, the fair value adjustment to long-term debt related to the interest rate swaps was $10.7 million and $10.1 million, respectively.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swap values are based on the six-month LIBOR swap rate for similar instruments. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. Equity forwards are valued using a market approach based primarily on the company’s stock price at the reporting date. The company did not have any derivative assets or liabilities measured at Level 1 or Level 3, nor did it implement any changes in its valuation techniques as of and for the nine month period ended September 27, 2014.

The effects of derivative instruments designated as fair value hedges as included in the Condensed Consolidated Statements of Earnings are as follows:

 

    

Statement of Earnings

Presentation

   Effective Portion of Gain Recognized in Income  
        Three Months Ended      Nine Months Ended  
(Amounts in millions)       September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Derivatives designated as fair value hedges:

              

Interest rate swaps

   Interest expense                    $       1.0                 $       1.0                 $       3.0                 $       3.0         

 

20


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The effect of derivative instruments designated as cash flow hedges as included in Accumulated OCI on the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Earnings are as follows:

 

     Effective Portion of  Gain
Recognized in
Accumulated OCI
Three Months Ended
    

Statement of
Earnings
Presentation

   Effective Portion of Gain
Reclassified from Accumulated
OCI into Income
Three Months Ended
 
(Amounts in millions)    September 27,
2014
     September 28,
2013
        September 27,
2014
     September 28,
2013
 

Derivatives designated as cash flow hedges:

              

Treasury locks

       $     –                   $     –                   Interest expense            $     0.1               $     0.1       

 

     Effective Portion of  Gain
Recognized in
Accumulated OCI
Nine Months Ended
     Statement of
Earnings
Presentation
   Effective Portion of Gain
Reclassified from Accumulated
OCI into Income
Nine Months Ended
 
(Amounts in millions)    September 27,
2014
     September 28,
2013
        September 27,
2014
     September 28,
2013
 

Derivatives designated as cash flow hedges:

              

Treasury locks

       $     –                   $     –                   Interest expense            $     0.3               $     0.3       

The effects of derivative instruments not designated as hedging instruments as included in the Condensed Consolidated Statements of Earnings are as follows:

 

    

Statement of Earnings
Presentation

   Gain (Loss) Recognized in Income  
        Three Months Ended      Nine Months Ended  
(Amounts in millions)       September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Derivatives not designated as hedging instruments:

              

Foreign currency forwards

       Other income (expense) –net            $     (11.5)               $     8.0                $     (10.5)               $     2.1        

Equity forwards

       Operating expenses      0.6              1.3              1.9              2.4        

Snap-on’s foreign currency forwards are typically not designated as hedges for financial reporting purposes. The fair value changes of foreign currency forwards not designated as hedging instruments are reported in earnings as foreign exchange gain or loss in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. The $11.5 million derivative loss recognized in the third quarter of 2014 was offset by transaction gains on net exposures of $10.5 million, resulting in a net foreign exchange loss of $1.0 million for the quarter. The $8.0 million derivative gain recognized in the third quarter of 2013 was offset by transaction losses on net exposures of $8.9 million, resulting in a net foreign exchange loss of $0.9 million for the quarter. The $10.5 million derivative loss recognized in the first nine months of 2014 was offset by transaction gains on net exposures of $9.4 million, resulting in a 2014 year-to-date net foreign exchange loss of $1.1 million. The $2.1 million derivative gain recognized in the first nine months of 2013 was offset by transaction losses on net exposures of $5.5 million, resulting in a 2013 year-to-date net foreign exchange loss of $3.4 million. The resulting net foreign exchange gains and losses are included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. See Note 15 for additional information on “Other income (expense) – net.”

 

21


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Snap-on’s equity forwards are not designated as hedges for financial reporting purposes. Fair value changes of both the equity forwards and related stock-based (mark-to-market) deferred compensation liabilities are reported in “Operating expenses” on the accompanying Condensed Consolidated Statements of Earnings. The $0.6 million derivative gain recognized in the third quarter of 2014 was offset by $0.5 million of mark-to-market deferred compensation expense. The $1.3 million derivative gain recognized in the third quarter of 2013 was offset by $1.0 million of mark-to-market deferred compensation expense. The $1.9 million derivative gain recognized in the first nine months of 2014 was offset by $1.9 million of mark-to-market deferred compensation expense. The $2.4 million derivative gain recognized in the first nine months of 2013 was offset by $2.8 million of mark-to-market deferred compensation expense.

As of September 27, 2014, the maximum maturity date of any fair value hedge was seven years. During the next 12 months, Snap-on expects to reclassify into earnings net gains from Accumulated OCI of approximately $0.2 million after tax at the time the underlying hedge transactions are realized.

See the accompanying Condensed Consolidated Statements of Comprehensive Income for additional information on changes in comprehensive income.

Counterparty Risk: Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its various financial agreements, including its foreign currency forward contracts, interest rate swap agreements and prepaid equity forward agreements. Snap-on does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of the counterparties and generally enters into agreements with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its counterparties, but cannot provide assurances.

Fair Value of Financial Instruments: The fair values of financial instruments that do not approximate the carrying values in the financial statements are as follows:

 

     September 27, 2014      December 28, 2013  
(Amounts in millions)    Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 

Finance receivables – net

       $     1,036.4               $     1,194.7               $     935.2               $     1,084.1       

Contract receivables – net

     313.9             360.3             285.5             326.7       

Long-term debt, notes payable and current maturities of long-term debt

     919.2             1,028.2             972.0             1,078.9       

The following methods and assumptions were used in estimating the fair value of financial instruments:

 

   

Finance and contract receivables include both short-term and long-term receivables. The fair value of finance and contract receivables was estimated, using Level 2 fair value measurements, based on a discounted cash flow analysis that was performed over the average life of the receivables using a current market discount rate of a similar term adjusted for credit quality.

 

   

Fair value of long-term debt and current maturities of long-term debt was estimated, using Level 2 fair value measurements, based on quoted market values of Snap-on’s publicly traded senior debt. The carrying value of long-term debt and current maturities of long-term debt includes adjustments related to fair value hedges. The fair value of notes payable approximates such instruments’ carrying value due to their short-term nature.

 

   

The fair value of all other financial instruments, including cash equivalents, trade and other accounts receivable, accounts payable and other financial instruments, approximates such instruments’ carrying value due to their short-term nature.

 

22


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 10: Pension Plans

Snap-on’s net periodic pension cost included the following components:

 

     Three Months Ended      Nine Months Ended  
(Amounts in millions)    September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Service cost

       $ 4.5                $ 5.2                $ 13.5                $ 15.4        

Interest cost

     14.4              12.9              43.1              38.7        

Expected return on plan assets

     (18.2)             (17.7)             (54.5)             (53.0)       

Amortization of unrecognized loss

     5.8              10.4              17.2              31.1        

Amortization of prior service credit

     (0.2)             (0.2)             (0.6)             (0.6)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost

       $       6.3                $     10.6                $     18.7                $     31.6        
  

 

 

    

 

 

    

 

 

    

 

 

 

Snap-on intends to make contributions of $8.8 million to its foreign pension plans and $1.8 million to its domestic pension plans in 2014, as required by law. In the first nine months of 2014, Snap-on made $20.9 million of cash contributions to its domestic pension plans that included (i) $20.0 million of discretionary contributions; and (ii) $0.9 million of required contributions. Depending on market and other conditions, Snap-on may elect to make additional discretionary cash contributions to its pension plans in the remainder of 2014.

Note 11: Postretirement Health Care Plans

Snap-on’s net periodic postretirement health care cost included the following components:

 

     Three Months Ended      Nine Months Ended  
(Amounts in millions)    September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Service cost

       $ 0.1                $ –                   $ 0.1                $ 0.1        

Interest cost

     0.6              0.5              1.9              1.6        

Expected return on plan assets

           (0.3)                   (0.2)                   (0.9)                   (0.8)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic postretirement health care cost

       $ 0.4                $ 0.3                $ 1.1                $ 0.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 12: Stock-based Compensation and Other Stock Plans

The 2011 Incentive Stock and Awards Plan (the “2011 Plan”) provides for the grant of stock options, performance awards, stock appreciation rights (“SARs”) and restricted stock awards (which may be designated as “restricted stock units” or “RSUs”). No further grants are being made under its predecessor, the 2001 Incentive Stock and Awards Plan (the “2001 Plan”), although outstanding awards under the 2001 Plan will continue until exercised, forfeited or expired. As of September 27, 2014, the 2011 Plan had 1,873,245 shares available for future grants. The company uses treasury stock to deliver shares under both the 2001 and 2011 Plans.

Net stock-based compensation expense was $8.6 million and $27.3 million for the respective three and nine month periods ended September 27, 2014, and $9.4 million and $28.9 million for the respective three and nine month periods ended September 28, 2013. Cash received from option exercises during the three and nine month periods ended September 27, 2014, totaled $1.8 million and $30.8 million, respectively. Cash received from option exercises during the three and nine month periods ended September 28, 2013, totaled $1.8 million and $27.9 million, respectively. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $0.8 million and $16.2 million for the respective three and nine month periods ended September 27, 2014, and $0.7 million and $11.2 million for the respective three and nine month periods ended September 28, 2013.

 

23


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Stock Options

Stock options are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant and have a contractual term of ten years. Stock option grants vest ratably on the first, second and third anniversaries of the date of grant.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding stock option exercise behaviors for different participating groups to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option.

The following weighted-average assumptions were used in calculating the fair value of stock options granted during the nine month period ended September 27, 2014, and the three and nine month periods ended September 28, 2013, using the Black-Scholes valuation model; no stock options were granted during the three month period ended September 27, 2014:

 

     Three Months Ended    Nine Months Ended
     September 27,
2014
   September 28,
2013
   September 27,
2014
   September 28,
2013

Expected term of option (in years)

             N/A                3.67         4.52         4.29   

Expected volatility factor

   N/A    26.39%    26.76%    33.79%

Expected dividend yield

   N/A      2.68%      2.40%      2.67%

Risk-free interest rate

   N/A              0.64%                      1.30%                      0.79%        

A summary of stock option activity as of and for the nine month period ended September 27, 2014, is presented below:

 

     Shares
(in thousands)
     Exercise
Price Per
Share*
     Remaining
Contractual
Term*

(in years)
     Aggregate
Intrinsic
Value

(in millions)
 

Outstanding at December 28, 2013

            2,429                  $ 58.35             

Granted

     644                    109.44             

Exercised

     (357)               52.34             

Forfeited or expired

     (35)               89.85             
  

 

 

          

Outstanding at September 27, 2014

     2,681                71.01                 7.1               $     136.0       
  

 

 

          

Exercisable at September 27, 2014

     1,445                53.55                 5.7             98.6       

 

* Weighted-average

The weighted-average grant date fair value of options granted during the nine month periods ended September 27, 2014, and September 28, 2013, was $20.19 and $17.36, respectively. The intrinsic value of options exercised was $2.3 million and $21.7 million during the respective three and nine month periods ended September 27, 2014, and $1.7 million and $12.7 million during the respective three and nine month periods ended September 28, 2013. The fair value of vested stock options was $9.5 million and $7.9 million during the respective nine month periods ended September 27, 2014, and September 28, 2013.

 

24


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

As of September 27, 2014, there was $16.2 million of unrecognized compensation cost related to non-vested stock options that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.

Performance Awards

Performance awards, which are granted as performance share units and performance-based RSUs, are earned and expensed using the fair value of the award over a contractual term of three years based on the company’s performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the applicable performance period. For performance achieved above a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance awards initially granted.

The performance share units have a three-year performance period based on the results of the consolidated financial metrics of the company. The performance-based RSUs have a one-year performance period based on the results of the consolidated financial metrics of the company followed by a two-year cliff vesting schedule, assuming continued employment.

The fair value of performance awards is calculated using the market value of a share of Snap-on’s common stock on the date of grant. The weighted-average grant date fair value of performance awards granted during the nine month periods ended September 27, 2014, and September 28, 2013, was $101.08 and $77.31, respectively. Performance share units of 146,313 shares and 213,459 shares were paid out during the respective nine month periods ended September 27, 2014, and September 28, 2013. Earned performance share units are generally paid out following the conclusion of the applicable performance period upon approval by the Organization and Executive Compensation Committee of the company’s Board of Directors (the “Board”).

Based on the company’s 2013 performance, 84,413 RSUs granted in 2013 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2015. Based on the company’s 2012 performance, 95,047 RSUs granted in 2012 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2014. Based on the company’s 2011 performance, 159,970 RSUs granted in 2011 were earned; these RSUs vested as of fiscal 2013 year end and were paid out in the first quarter of 2014. As a result of employee retirements, a total of 1,563 of the RSUs earned in 2013 and 2012 vested pursuant to the terms of the related award agreements and the underlying shares will be paid out in the fourth quarter of 2014.

The changes to the company’s non-vested performance awards during the nine month period ended September 27, 2014, are as follows:

 

     Shares
(in thousands)
     Fair Value
Price per
Share (* )
 

Non-vested performance awards at December 28, 2013

     381                  $ 68.13       

Granted

            176                    101.08       

Vested

     (2)               66.12       

Cancellations and other

     (6)               78.76       
  

 

 

    

Non-vested performance awards at September 27, 2014

     549                78.58       
  

 

 

    

 

* Weighted-average

As of September 27, 2014, there was $18.4 million of unrecognized compensation cost related to non-vested performance awards that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.

 

25


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Stock Appreciation Rights (“SARs”)

The company also issues cash-settled and stock-settled SARs to certain key non-U.S. employees. SARs have a contractual term of ten years and vest ratably on the first, second and third anniversaries of the date of grant. SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant.

Cash-settled SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price. Cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock value over the grant price is paid in cash and not in common stock.

Stock-settled SARs are accounted for as equity instruments and provide for the issuance of Snap-on common stock equal to the amount by which the company’s stock has appreciated over the exercise price. Stock-settled SARs have an effect on dilutive shares and shares outstanding as any appreciation of Snap-on’s common stock value over the exercise price will be settled in shares of common stock.

The fair value of cash-settled SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on Snap-on’s period-end stock price. The fair value of stock-settled SARs is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding SARs exercise behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date (for cash-settled SARs) or grant date (for stock-settled SARs) for the length of time corresponding to the expected term of the SARs.

The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the nine month periods ended September 27, 2014, and September 28, 2013, using the Black-Scholes valuation model; no cash-settled SARs were granted during the three month periods ended September 27, 2014 or September 28, 2013:

 

     Nine Months Ended  
     September 27,
2014
     September 28,
2013
 

Expected term of cash-settled SARs (in years)

     3.74                3.55          

Expected volatility factor

             23.87%                     26.12%       

Expected dividend yield

     2.19%             2.68%       

Risk-free interest rate

     1.08%             0.63%       

The intrinsic value of cash-settled SARs exercised was $0.7 million and $4.7 million during the three and nine month periods ended September 27, 2014, respectively, and $0.9 million and $3.6 million during the three and nine month periods ended September 28, 2013, respectively. The fair value of cash-settled SARs vested during the nine month periods ended September 27, 2014, and September 28, 2013, was $4.7 million and $4.8 million, respectively.

 

26


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Changes to the company’s non-vested cash-settled SARs during the nine month period ended September 27, 2014, are as follows:

 

     Cash-settled
SARs

(in thousands)
     Fair Value
Price per
Share*
 

Non-vested SARs at December 28, 2013

            126                  $     43.72       

Granted

     4                23.03       

Vested

     (81)               58.68       

Cancellations

     (2)               –           
  

 

 

    

Non-vested SARs at September 27, 2014

     47                54.10       
  

 

 

    

 

* Weighted-average

As of September 27, 2014, there was $2.6 million of unrecognized compensation cost related to non-vested cash-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 0.6 years.

The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during the nine month period ended September 27, 2014, and the three and nine month periods ended September 28, 2013, using the Black-Scholes valuation model; no stock-settled SARs were granted during the three month period ended September 27, 2014:

 

     Three Months Ended    Nine Months Ended
     September 27,
2014
   September 28,
2013
   September 27,
2014
   September 28,
2013

Expected term of stock-settled SARs (in years)

             N/A                3.67         4.49         4.24   

Expected volatility factor

   N/A    26.39%    25.64%    33.92%

Expected dividend yield

   N/A      2.68%      2.40%      2.67%

Risk-free interest rate

   N/A              0.64%                      1.50%                      0.91%        

A summary of stock-settled SARs activity as of and for the nine month period ended September 27, 2014, is presented below:

 

     Stock-settled
SARs

(in thousands)
     Exercise
Price Per
Share*
     Remaining
Contractual
Term*

(in years)
     Aggregate
Intrinsic
Value

(in millions)
 

Outstanding at December 28, 2013

            122                  $ 79.29             

Granted

     116                    109.98             

Exercised

     (3)               79.04             

Forfeited or expired

     (10)               79.04             
  

 

 

          

Outstanding at September 27, 2014

     225                94.82                 8.9               $     6.1       
  

 

 

          

Exercisable at September 27, 2014

     30                79.39                 8.4             1.3       

 

* Weighted-average

 

27


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The weighted-average grant date fair value of stock-settled SARs granted during the nine month periods ended September 27, 2014, and September 28, 2013, was $19.55 and $17.47, respectively. The intrinsic value of stock-settled SARs exercised was zero and $0.1 million during the three and nine month periods ended September 27, 2014, respectively, and zero for both the three and nine month periods ended September 28, 2013. The fair value of stock-settled SARs vested during the nine month periods ended September 27, 2014, and September 28, 2013, was $0.6 million and zero, respectively.

As of September 27, 2014, there was $2.8 million of unrecognized compensation cost related to non-vested stock-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 2.0 years.

Restricted Stock Awards – Non-employee Directors

The company awarded 10,398 shares of restricted stock and 13,437 shares of restricted stock to non-employee directors in the first nine months of 2014 and 2013, respectively. The fair value of the restricted stock awards is expensed over the one year vesting period based on the fair value on the date of grant. All restrictions on the restricted stock generally lapse upon the earlier of the first anniversary of the grant date, the recipient’s death or disability or in the event of a change in control, as defined in the 2011 Plan. If termination of the recipient’s service occurs prior to the first anniversary of the grant date for any reason other than death or disability, the shares of restricted stock would be forfeited, unless otherwise determined by the Board.

Employee Stock Purchase Plan

Substantially all Snap-on employees in the United States and Canada are eligible to participate in an employee stock purchase plan. The purchase price of the company’s common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For the nine months ended September 27, 2014, and September 28, 2013, issuances under this plan totaled 56,582 shares and 93,442 shares, respectively. As of September 27, 2014, shares reserved for issuance under this plan totaled 865,043 shares and Snap-on held participant contributions of approximately $1.3 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. Compensation expense for plan participants was $0.1 million and $1.1 million for the three and nine month periods ended September 27, 2014, respectively, and $0.1 million and $2.4 million for the three and nine month periods ended September 28, 2013, respectively.

Franchisee Stock Purchase Plan

All franchisees in the United States and Canada are eligible to participate in a franchisee stock purchase plan. The purchase price of the company’s common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For the nine months ended September 27, 2014, and September 28, 2013, issuances under this plan totaled 74,502 shares and 105,406 shares, respectively. As of September 27, 2014, shares reserved for issuance under this plan totaled 230,337 shares and Snap-on held participant contributions of approximately $1.8 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. Expense for plan participants was $0.2 million and $1.0 million for the three and nine month periods ended September 27, 2014, respectively, and $0.2 million and $2.7 million for the three and nine month periods ended September 28, 2013, respectively.

 

28


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 13: Earnings Per Share

The shares used in the computation of the company’s basic and diluted earnings per common share are as follows:

 

     Three Months Ended      Nine Months Ended  
     September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Weighted-average common shares outstanding

         58,110,855                 58,163,261                 58,148,345                 58,221,047       

Effect of dilutive securities

     902,197             837,840             881,249             848,938       
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding assuming dilution

     59,013,052             59,001,101             59,029,594             59,069,985       
  

 

 

    

 

 

    

 

 

    

 

 

 

The dilutive effect of the potential exercise of outstanding options and stock-settled SARs to purchase common shares is calculated using the treasury stock method. As of both September 27, 2014, and September 28, 2013, there were no outstanding options or stock-settled SARs that were anti-dilutive. Performance-based equity awards do not affect the diluted earnings per share calculation until it is determined that the applicable performance metrics have been met.

Note 14: Commitments and Contingencies

Snap-on provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the sale is recorded. Snap-on calculates its accrual requirements based on historic warranty loss experience that is periodically adjusted for recent actual experience, including the timing of claims during the warranty period and actual costs incurred.

Snap-on’s product warranty accrual activity for the three and nine month periods ended September 27, 2014, and September 28, 2013, is as follows:

 

     Three Months Ended      Nine Months Ended  
(Amounts in millions)    September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Warranty reserve:

           

Beginning of period

       $ 17.7                $     17.9                $ 17.0                $     18.9        

Additions

     3.5              3.5              10.4              8.3        

Usage

     (3.6)             (2.4)             (9.8)             (8.2)       
  

 

 

    

 

 

    

 

 

    

 

 

 

End of period

       $     17.6                $ 19.0                $     17.6                $ 19.0        
  

 

 

    

 

 

    

 

 

    

 

 

 

Snap-on has credit risk exposure for certain SOC-originated contracts with recourse provisions related to franchisee van leases sold by SOC; as of September 27, 2014, and December 28, 2013, $2.7 million and $7.7 million, respectively, of franchisee leases contain a recourse provision to Snap-on if the leases become more than 90 days past due. The asset value of the collateral underlying these recourse leases would serve to mitigate Snap-on’s loss in the event of default. The estimated fair value of the guarantees for all lease originations with recourse as of September 27, 2014, was not material.

Snap-on is involved in various legal matters that are being litigated and/or settled in the ordinary course of business. Although it is not possible to predict the outcome of these legal matters, management believes that the results of these legal matters will not have a material impact on Snap-on’s consolidated financial position, results of operations or cash flows.

 

29


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 15: Other Income (Expense) Net

“Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings consists of the following:

 

     Three Months Ended      Nine Months Ended  
(Amounts in millions)    September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Interest income

       $ 0.1                $ 0.1                $ 0.3                $ 0.3        

Net foreign exchange loss

         (1.0)                 (0.9)                 (1.1)                 (3.4)       

Other

     –                 –                 0.1              –           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (expense) – net

       $ (0.9)               $ (0.8)               $ (0.7)               $ (3.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 16: Accumulated Other Comprehensive Income (Loss)

The following is a summary of net changes in Accumulated OCI by component and net of tax for the three month period ended September 27, 2014:

 

(Amounts in millions)    Foreign
Currency
Translation
     Cash Flow
Hedges
     Defined
Benefit
Pension and
Postretirement
Plans
     Total  

Balance as of June 28, 2014

       $     122.6                $ 1.1                $     (160.2)               $     (36.5)       

Other comprehensive income before reclassifications

     (64.8)             –                 –                 (64.8)       

Amounts reclassified from Accumulated OCI

     –                 (0.1)             3.5              3.4        
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other comprehensive income (loss)

     (64.8)                 (0.1)             3.5              (61.4)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 27, 2014

       $ 57.8                $ 1.0               $ (156.7)               $ (97.9)       
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of net changes in Accumulated OCI by component and net of tax for the nine month period ended September 27, 2014:

 

(Amounts in millions)    Foreign
Currency
Translation
     Cash Flow
Hedges
     Defined
Benefit
Pension and
Postretirement
Plans
     Total  

Balance as of December 28, 2013

       $     121.1                $ 1.3                $ (167.2)               $     (44.8)       

Other comprehensive income before reclassifications

     (63.3)             –                 –                 (63.3)       

Amounts reclassified from Accumulated OCI

     –                 (0.3)             10.5              10.2        
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other comprehensive income (loss)

     (63.3)                 (0.3)             10.5              (53.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 27, 2014

       $ 57.8                $ 1.0                $     (156.7)               $ (97.9)       
  

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following is a summary of net changes in Accumulated OCI by component and net of tax for the three month period ended September 28, 2013:

 

(Amounts in millions)    Foreign
Currency
Translation
     Cash Flow
Hedges
     Defined
Benefit
Pension and
Postretirement
Plans
     Total  

Balance as of June 29, 2013

       $     85.5                $ 1.5                $     (242.9)               $     (155.9)       

Other comprehensive income before reclassifications

     39.3              –                 –                 39.3        

Amounts reclassified from Accumulated OCI

     –                     (0.1)             5.6              5.5        
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other comprehensive income (loss)

     39.3              (0.1)             5.6              44.8        
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 28, 2013

       $ 124.8               $ 1.4                $ (237.3)               $     (111.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of net changes in Accumulated OCI by component and net of tax for the nine month period ended September 28, 2013:

 

(Amounts in millions)    Foreign
Currency
Translation
     Cash Flow
Hedges
     Defined
Benefit
Pension and
Postretirement
Plans
     Total  

Balance as of December 29, 2012

       $     129.7                $ 1.7                $     (255.6)               $     (124.2)       

Other comprehensive income before reclassifications

     (4.9)             –                 –                 (4.9)       

Amounts reclassified from Accumulated OCI

     –                 (0.3)             18.3              18.0        
  

 

 

    

 

 

    

 

 

    

 

 

 

Net other comprehensive income (loss)

     (4.9)                 (0.3)             18.3              13.1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 28, 2013

       $ 124.8                $ 1.4                $ (237.3)               $ (111.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The reclassifications out of Accumulated OCI for the three and nine month periods ended September 27, 2014, and September 28, 2013, are as follows:

 

    Amount Reclassified from Accumulated OCI    

Statement of Earnings
Presentation

    Three Months Ended     Nine Months Ended    

Details about Accumulated OCI Components

  September 27,
2014
    September 28,
2013
    September 27,
2014
    September 28,
2013
   

(Amounts in millions)

         

Gains on cash flow hedges:

         

Treasury locks

      $ 0.1               $ 0.1               $ 0.3               $ 0.3           Interest expense

Income tax expense

    –                –                –                –              Income tax expense
 

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

    0.1             0.1             0.3             0.3          
 

 

 

   

 

 

   

 

 

   

 

 

   

Amortization of net unrecognized losses and prior service credits included in net periodic pension cost

    (5.6)                (10.2)            (16.6)            (30.5)          See footnote*

Income tax benefit

    2.1             4.6             6.1             12.2           Income tax expense
 

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

    (3.5)            (5.6)            (10.5)            (18.3)         
 

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period, net of tax

      $     (3.4)              $ (5.5)              $     (10.2)              $     (18.0)         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

* These Accumulated OCI components are included in the computation of net periodic pension cost. See Note 10 for further information.

Note 17: Segments

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, 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 original equipment manufacturer (“OEM”) dealership service and repair shops (“OEM dealerships”), through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.

Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

 

32


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Financial data by segment was as follows:

 

     Three Months Ended      Nine Months Ended  
(Amounts in millions)    September 27,
2014
     September 28,
2013
     September 27,
2014
     September 28,
2013
 

Net sales:

        

Commercial & Industrial Group

       $ 298.8                $ 275.2                $ 876.6                $ 807.8        

Snap-on Tools Group

     355.0              333.8              1,067.7              1,007.3        

Repair Systems & Information Group

     271.2              252.7              812.4              745.0        
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net sales

     925.0              861.7                  2,756.7              2,560.1        

Intersegment eliminations

         (118.7)                 (108.5)             (336.4)             (301.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

       $ 806.3                $ 753.2                $ 2,420.3                $     2,259.0        

Financial Services revenue

     53.6              45.1              155.5              133.6        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

       $ 859.9                $ 798.3                $ 2,575.8                $ 2,392.6        
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating earnings:

        

Commercial & Industrial Group

       $ 40.8                $ 36.0                $ 118.1                $ 100.2        

Snap-on Tools Group

     49.5              41.9              159.2              143.6        

Repair Systems & Information Group

     63.3              57.9              186.0              171.1        

Financial Services

     37.7              31.6              106.9              92.7        
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment operating earnings

     191.3              167.4              570.2              507.6        

Corporate

     (23.0)             (24.5)             (72.9)             (78.0)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating earnings

       $ 168.3                $ 142.9                $ 497.3                $ 429.6        

Interest expense

     (12.7)             (14.4)             (39.1)             (41.8)       

Other income (expense) – net

     (0.9)             (0.8)             (0.7)             (3.1)       
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income taxes and equity earnings

       $ 154.7                $ 127.7                $ 457.5                $ 384.7        
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(Amounts in millions)    September 27,
2014
     December 28,
2013
 

Assets:

     

Commercial & Industrial Group

       $ 989.9                $ 971.0        

Snap-on Tools Group

     616.9              557.3        

Repair Systems & Information Group

     1,030.1              979.6        

Financial Services

     1,348.5              1,224.0        
  

 

 

    

 

 

 

Total assets from reportable segments

       $ 3,985.4                $ 3,731.9        

Corporate

     330.2              431.8        

Elimination of intersegment receivables

     (47.1)             (53.7)       
  

 

 

    

 

 

 

Total assets

       $     4,268.5                $     4,110.0        
  

 

 

    

 

 

 

 

33


Table of Contents

SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward-Looking Statements:

Statements in this document that are not historical facts, including statements that (i) are in the future tense; (ii) include the words “expects,” “plans,” “targets,” “estimates,” “believes,” “anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”) or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-on’s or management’s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in its Annual Report on Form 10-K for the fiscal year ended December 28, 2013, which are incorporated herein by reference, could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.

These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain value through its Snap-on Value Creation Processes, including its ability to realize efficiencies and savings from its rapid continuous improvement and other cost reduction initiatives, improve workforce productivity, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and/or lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby help improve their sales and profitability, introduce successful new products, successfully pursue, complete and integrate acquisitions, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, the effects of external negative factors, including uncertainty and adverse developments in world financial markets, weakness in certain areas of the global economy, and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, changes in tax rates and regulations, and the impact of energy and raw material supply and pricing, including steel and gasoline, the amount, rate and growth of Snap-on’s general and administrative expenses, including health care and postretirement costs (resulting from, among other matters, U.S. health care legislation and its implementation), continuing and potentially increasing required contributions to pension and postretirement plans, the impacts of non-strategic business and/or product line rationalizations, and the effects on business as a result of new legislation, regulations or government-related developments or issues, risks associated with data security and technological systems and protections, and other world or local events outside Snap-on’s control, including terrorist disruptions. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law.

In addition, investors should be aware that generally accepted accounting principles in the United States of America (“U.S. GAAP”) prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.

 

34


Table of Contents

SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

(continued)

 

RESULTS OF OPERATIONS

Results of operations for the three month periods ended September 27, 2014, and September 28, 2013, are as follows:

 

     Three Months Ended  
(Amounts in millions)    September 27, 2014      September 28, 2013      Change  

Net sales

     $ 806.3              100.0%           $ 753.2              100.0%         $ 53.1            7.0%     

Cost of goods sold

       (412.4)           -51.1%             (388.9)           -51.6%           (23.5)           -6.0%     
  

 

 

       

 

 

       

 

 

    

Gross profit

     393.9            48.9%           364.3            48.4%           29.6            8.1%     

Operating expenses

     (263.3)           -32.7%           (253.0)           -33.6%           (10.3)           -4.1%     
  

 

 

       

 

 

       

 

 

    

Operating earnings before financial services

     130.6            16.2%           111.3            14.8%           19.3            17.3%     

Financial services revenue

     53.6            100.0%           45.1            100.0%           8.5            18.8%     

Financial services expenses

     (15.9)           -29.7%           (13.5)           -29.9%           (2.4)             -17.8%     
  

 

 

       

 

 

       

 

 

    

Operating earnings from financial services

     37.7            70.3%           31.6            70.1%           6.1            19.3%     
  

 

 

       

 

 

       

 

 

    

Operating earnings

     168.3            19.6%           142.9            17.9%           25.4            17.8%     

Interest expense

     (12.7)           -1.5%           (14.4)           -1.8%           1.7            11.8%     

Other income (expense) – net

     (0.9)           -0.1%           (0.8)           -0.1%           (0.1)           -12.5%     
  

 

 

       

 

 

       

 

 

    

Earnings before income taxes and equity earnings

     154.7            18.0%           127.7            16.0%           27.0            21.1%     

Income tax expense

     (48.4)           -5.6%           (40.8)           -5.1%           (7.6)           -18.6%     
  

 

 

       

 

 

       

 

 

    

Earnings before equity earnings

     106.3            12.4%           86.9            10.9%           19.4            22.3%     

Equity earnings, net of tax

     0.1            –                 0.1            –                 –                 NM        
  

 

 

       

 

 

       

 

 

    

Net earnings

     106.4            12.4%           87.0            10.9%           19.4            22.3%     
  

 

 

       

 

 

       

 

 

    

Net earnings attributable to noncontrolling interests

     (2.7)           -0.3%           (2.4)           -0.3%           (0.3)           -12.5%     
  

 

 

       

 

 

       

 

 

    

Net earnings attributable to Snap-on Inc.

     $ 103.7            12.1%           $ 84.6            10.6%           $ 19.1            22.6%     
  

 

 

       

 

 

       

 

 

    

 

NM: Not meaningful

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

Net sales of $806.3 million in the third quarter of 2014 increased $53.1 million, or 7.0%, from 2013 levels, including $5.6 million of acquisition-related sales and $0.7 million of favorable foreign currency translation. Organic sales (excluding acquisition-related sales and foreign currency translation impacts) in the third quarter of 2014 increased $46.8 million, or 6.2%, from 2013 levels. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

Gross profit of $393.9 million in the third quarter of 2014 increased $29.6 million from $364.3 million last year. Gross margin (gross profit as a percentage of net sales) of 48.9% in the quarter increased 50 basis points (100 basis points equals 1.0 percent) from 48.4% last year primarily due to benefits from higher sales and savings from ongoing efficiency and productivity initiatives, as well as benefits from restructuring actions (collectively, “Rapid Continuous Improvement” or “RCI initiatives”). Gross profit in the third quarter of 2014 reflects $1.5 million of restructuring costs as compared with $1.3 million of such costs last year.

 

35


Table of Contents

SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

(continued)

 

Operating expenses of $263.3 million in the third quarter of 2014 increased $10.3 million from $253.0 million last year primarily due to higher volume-related and other expenses. The operating expense margin (operating expenses as a percentage of net sales) of 32.7% in the quarter improved 90 basis points from 33.6% last year primarily due to sales volume leverage. Operating expenses in the third quarter of 2014 included $0.5 million of restructuring costs as compared with $0.4 million of such costs last year.

Operating earnings before financial services in the third quarter of 2014 of $130.6 million increased $19.3 million, or 17.3%, as compared to $111.3 million last year. As a percentage of net sales, operating earnings before financial services of 16.2% in the quarter improved 140 basis points from 14.8% last year.

Financial services operating earnings of $37.7 million on revenue of $53.6 million in the third quarter of 2014 compared with operating earnings of $31.6 million on revenue of $45.1 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 in the third quarter of 2014 of $168.3 million increased $25.4 million, or 17.8%, from $142.9 million last year. As a percentage of revenues (net sales plus financial services revenue), operating earnings of 19.6% improved 170 basis points from 17.9% last year.

Interest expense of $12.7 million in the third quarter of 2014 compared with $14.4 million last year. See Note 8 to the Condensed Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $0.9 million and $0.8 million in the third quarters of 2014 and 2013, respectively. Other income (expense) – net reflects net losses and gains associated with hedging and currency exchange rate transactions, and interest income. See Note 15 to the Condensed Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 31.8% in the third quarter of 2014 and 32.6% in the third quarter of 2013. See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $103.7 million, or $1.76 per diluted share, in the third quarter of 2014 increased $19.1 million, or $0.33 per diluted share, from 2013 levels. Net earnings attributable to Snap-on in the third quarter of 2013 were $84.6 million or $1.43 per diluted share.

 

36


Table of Contents

SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

(continued)

 

Results of operations for the nine month periods ended September 27, 2014, and September 28, 2013, are as follows:

 

     Nine Months Ended  
(Amounts in millions)    September 27, 2014      September 28, 2013      Change  

Net sales

     $ 2,420.3              100.0%           $ 2,259.0              100.0%         $ 161.3            7.1%     

Cost of goods sold

       (1,247.3)           -51.5%             (1,164.6)           -51.6%           (82.7)           -7.1%     
  

 

 

       

 

 

       

 

 

    

Gross profit

     1,173.0            48.5%           1,094.4            48.4%           78.6            7.2%     

Operating expenses

     (782.6)           -32.4%           (757.5)           -33.5%           (25.1)           -3.3%     
  

 

 

       

 

 

       

 

 

    

Operating earnings before financial services

     390.4            16.1%           336.9            14.9%           53.5            15.9%     

Financial services revenue

     155.5            100.0%           133.6            100.0%           21.9            16.4%     

Financial services expenses

     (48.6)           -31.3%           (40.9)           -30.6%           (7.7)           -18.8%     
  

 

 

       

 

 

       

 

 

    

Operating earnings from financial services

     106.9            68.7%           92.7            69.4%           14.2            15.3%     
  

 

 

       

 

 

       

 

 

    

Operating earnings

     497.3            19.3%           429.6            18.0%           67.7            15.8%     

Interest expense

     (39.1)           -1.5%           (41.8)           -1.8%           2.7            6.5%     

Other income (expense) – net

     (0.7)           –                 (3.1)           -0.1%           2.4            77.4%     
  

 

 

       

 

 

       

 

 

    

Earnings before income taxes and equity earnings

     457.5            17.8%           384.7            16.1%           72.8            18.9%     

Income tax expense

     (144.6)           -5.6%           (122.1)           -5.1%           (22.5)             -18.4%