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EX-32.2 - EXHIBIT 32.2 - Snap-on Incq1fy18_ex322.htm
EX-32.1 - EXHIBIT 32.1 - Snap-on Incq1fy18_ex321.htm
EX-31.2 - EXHIBIT 31.2 - Snap-on Incq1fy18_ex312.htm
EX-31.1 - EXHIBIT 31.1 - Snap-on Incq1fy18_ex311.htm

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 March 31, 2018
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
g469765g1011025319062.jpg
(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 ☒   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 ☒   No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
 
Accelerated filer ☐
 
Non-accelerated filer ☐
 
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒
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 April 13, 2018
Common Stock, $1.00 par value
 
56,595,222 shares



TABLE OF CONTENTS 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


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
 
 
March 31, 2018
 
April 1, 2017
 
Net sales
$
935.5

 
$
887.1

 
Cost of goods sold
(463.9
)
 
(438.8
)
 
Gross profit
471.6

 
448.3

 
Operating expenses
(293.9
)
 
(278.1
)
 
Operating earnings before financial services
177.7

 
170.2

 
 
 
 
 
 
Financial services revenue
83.0

 
76.8

 
Financial services expenses
(26.1
)
 
(24.3
)
 
Operating earnings from financial services
56.9

 
52.5

 
 
 
 
 
 
Operating earnings
234.6

 
222.7

 
Interest expense
(13.6
)
 
(12.7
)
 
Other income (expense) – net
2.8

 
(2.4
)
 
Earnings before income taxes and equity earnings
223.8

 
207.6

 
Income tax expense
(57.6
)
 
(62.6
)
 
Earnings before equity earnings
166.2

 
145.0

 
Equity earnings, net of tax
0.6

 
0.1

 
Net earnings
166.8

 
145.1

 
Net earnings attributable to noncontrolling interests
(3.8
)
 
(3.5
)
 
Net earnings attributable to Snap-on Incorporated
$
163.0

 
$
141.6

 
 
 
 
 
 
Net earnings per share attributable to Snap-on Incorporated:
 
 
 
 
Basic
$
2.87

 
$
2.45

 
Diluted
2.82

 
2.39

 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
Basic
56.7

 
57.9

 
Effect of dilutive securities
1.1

 
1.4

 
Diluted
57.8

 
59.3

 
 
 
 
 
 
Dividends declared per common share
$
0.82

 
$
0.71

 

See Notes to Condensed Consolidated Financial Statements.

3


SNAP-ON INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
(Unaudited)
 
 
Three Months Ended
 
 
March 31, 2018
 
April 1, 2017
 
Comprehensive income (loss):
 
 
 
 
Net earnings
$
166.8

 
$
145.1

 
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation*
39.1

 
38.1

 
Unrealized gain/loss on cash flow hedges, net of tax:
 
 
 
 
Other comprehensive income (loss) before reclassifications
(0.8
)
 
6.1

 
Reclassification of cash flow hedges to net earnings
(0.5
)
 
(0.3
)
 
Defined benefit pension and postretirement plans:
 
 
 
 
Amortization of net unrecognized losses and prior service credits included in net periodic benefit cost
7.6

 
6.5

 
Income tax benefit
(1.8
)
 
(2.3
)
 
Net of tax
5.8

 
4.2

 
Total comprehensive income
$
210.4

 
$
193.2

 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interests
(3.8
)
 
(3.5
)
 
Comprehensive income attributable to Snap-on Incorporated
$
206.6

 
$
189.7

 

* There is no reclassification adjustment as there was no sale or liquidation of any foreign entity during any period presented.


See Notes to Condensed Consolidated Financial Statements.

4


SNAP-ON INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
(Unaudited)

 
March 31, 2018
 
December 30, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
97.5

 
$
92.0

Trade and other accounts receivable – net
680.8

 
675.6

Finance receivables – net
512.2

 
505.4

Contract receivables – net
92.0

 
96.8

Inventories – net
678.8

 
638.8

Prepaid expenses and other assets
107.1

 
110.7

Total current assets
2,168.4

 
2,119.3

 
 
 
 
Property and equipment:
 
 
 
Land
25.3

 
24.5

Buildings and improvements
371.3

 
357.4

Machinery, equipment and computer software
928.2

 
889.2

 
1,324.8

 
1,271.1

Accumulated depreciation and amortization
(835.1
)
 
(786.7
)
Property and equipment – net
489.7

 
484.4

 
 
 
 
Deferred income tax assets
52.1

 
52.0

Long-term finance receivables – net
1,035.9

 
1,039.2

Long-term contract receivables – net
326.1

 
322.6

Goodwill
941.4

 
924.1

Other intangibles – net
251.7

 
253.7

Other assets
52.3

 
53.8

Total assets
$
5,317.6

 
$
5,249.1


See Notes to Condensed Consolidated Financial Statements.

5


SNAP-ON INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
(Unaudited)

 
March 31, 2018
 
December 30, 2017
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable and current maturities of long-term debt
$
145.2

 
$
433.2

Accounts payable
188.2

 
178.2

Accrued benefits
53.8

 
55.8

Accrued compensation
62.4

 
71.5

Franchisee deposits
66.8

 
66.5

Other accrued liabilities
435.2

 
388.1

Total current liabilities
951.6

 
1,193.3

 
 
 
 
Long-term debt
946.3

 
753.6

Deferred income tax liabilities
31.7

 
28.4

Retiree health care benefits
35.2

 
36.0

Pension liabilities
146.6

 
158.9

Other long-term liabilities
103.9

 
106.6

Total liabilities
2,215.3

 
2,276.8

 
 
 
 
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 67,414,748 and 67,407,704 shares, respectively)
67.4

 
67.4

Additional paid-in capital
343.9

 
343.2

Retained earnings
3,886.7

 
3,772.3

Accumulated other comprehensive loss
(285.4
)
 
(329.0
)
Treasury stock at cost (10,819,564 and 10,717,455 shares, respectively)
(928.7
)
 
(900.0
)
Total shareholders’ equity attributable to Snap-on Incorporated
3,083.9

 
2,953.9

Noncontrolling interests
18.4

 
18.4

Total equity
3,102.3

 
2,972.3

Total liabilities and equity
$
5,317.6

 
$
5,249.1


See Notes to Condensed Consolidated Financial Statements.

6


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 three month period ended March 31, 2018:
 
 
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 30, 2017
 
$
67.4

 
$
343.2

 
$
3,772.3

 
$
(329.0
)
 
$
(900.0
)
 
$
18.4

 
$
2,972.3

Net Earnings for the three months ended March 31, 2018
 

 

 
163.0

 

 

 
3.8

 
166.8

Other comprehensive income
 

 

 

 
43.6

 

 

 
43.6

Cash dividends – $0.82 per share
 

 

 
(46.5
)
 

 

 

 
(46.5
)
Stock compensation plans
 

 
0.7

 

 

 
14.8

 

 
15.5

Share repurchases – 275,000 shares
 

 

 

 

 
(43.5
)
 

 
(43.5
)
Other
 

 

 
(2.1
)
 

 

 
(3.8
)
 
(5.9
)
Balance at March 31, 2018
 
$
67.4

 
$
343.9

 
$
3,886.7

 
$
(285.4
)
 
$
(928.7
)
 
$
18.4

 
$
3,102.3


The following summarizes the changes in total equity for the three month period ended April 1, 2017:
 
 
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 31, 2016
 
$
67.4

 
$
317.3

 
$
3,384.9

 
$
(498.5
)
 
$
(653.9
)
 
$
18.0

 
$
2,635.2

Net Earnings for the three months ended April 1, 2017
 

 

 
141.6

 

 

 
3.5

 
145.1

Other comprehensive income
 

 

 

 
48.1

 

 

 
48.1

Cash dividends – $0.71 per share
 

 

 
(41.2
)
 

 

 

 
(41.2
)
Stock compensation plans
 

 
3.5

 

 

 
14.4

 

 
17.9

Share repurchases – 210,000 shares
 

 

 

 

 
(35.8
)
 

 
(35.8
)
Other
 

 

 
(0.1
)
 

 

 
(3.4
)
 
(3.5
)
Balance at April 1, 2017
 
$
67.4

 
$
320.8

 
$
3,485.2

 
$
(450.4
)
 
$
(675.3
)
 
$
18.1

 
$
2,765.8


See Notes to Condensed Consolidated Financial Statements.

7


SNAP-ON INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
Three Months Ended
 
March 31,
2018
 
April 1,
2017
Operating activities:
 
 
 
Net earnings
$
166.8

 
$
145.1

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
 
 
 
Depreciation
17.4

 
16.0

Amortization of other intangibles
6.6

 
7.1

Provision for losses on finance receivables
15.8

 
13.0

Provision for losses on non-finance receivables
2.0

 
2.2

Stock-based compensation expense
6.7

 
7.4

Deferred income tax provision
0.4

 
7.4

Gain on sales of assets
(0.1
)
 
(0.2
)
Settlement of treasury lock

 
14.9

Loss on early extinguishment of debt
7.8

 

Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
(Increase) decrease in trade and other accounts receivable
1.6

 
(1.9
)
(Increase) decrease in contract receivables
2.2

 
(2.1
)
Increase in inventories
(10.2
)
 
(17.3
)
Increase in prepaid and other assets

 
(7.5
)
Increase in accounts payable
9.5

 
20.3

Increase (decrease) in accruals and other liabilities
5.4

 
(12.0
)
Net cash provided by operating activities
231.9

 
192.4

Investing activities:
 
 
 
Additions to finance receivables
(205.6
)
 
(227.0
)
Collections of finance receivables
189.1

 
173.8

Capital expenditures
(18.0
)
 
(18.6
)
Acquisitions of businesses, net of cash acquired
(3.0
)
 
(9.5
)
Disposals of property and equipment
0.4

 
1.0

Other

 
(1.4
)
Net cash used by investing activities
(37.1
)
 
(81.7
)
Financing activities:
 
 
 
Proceeds from issuance of long-term debt
395.4

 
297.8

Repayments of long-term debt
(457.8
)
 
(150.0
)
Repayment of notes payable
(16.8
)
 

Net decrease in other short-term borrowings
(21.1
)
 
(135.7
)
Cash dividends paid
(46.5
)
 
(41.2
)
Purchases of treasury stock
(43.5
)
 
(35.8
)
Proceeds from stock purchase and option plans
11.5

 
14.1

Other
(11.7
)
 
(15.8
)
Net cash used by financing activities
(190.5
)
 
(66.6
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
1.2

 
1.3

Increase in cash and cash equivalents
5.5

 
45.4

Cash and cash equivalents at beginning of year
92.0

 
77.6

Cash and cash equivalents at end of period
$
97.5

 
$
123.0

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
(26.3
)
 
$
(24.0
)
Net cash paid for income taxes
(11.4
)
 
(14.0
)

See Notes to Condensed Consolidated Financial Statements.

8

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 2017 Annual Report on Form 10-K for the fiscal year ended December 30, 2017 (“2017 year end”). The company’s 2018 fiscal first quarter ended on March 31, 2018; the 2017 fiscal first quarter ended on April 1, 2017. The company’s 2018 and 2017 fiscal first quarters each contained 13 weeks of operating results.

Certain prior year amounts have been reclassified on the Condensed Consolidated Statements of Earnings to conform to the 2018 presentation following the retrospective adoption of ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  “Cost of goods sold” of $0.3 million and “Operating expenses” of $0.4 million in the first quarter of 2017 were reclassified to “Other income (expense) - net”.  As a result, previously reported “Cost of goods sold” of $439.1 million is now $438.8 million, “Operating expenses” of $278.5 million is now $278.1 million and “Other income (expense) - net” of $1.7 million of expense is now $2.4 million of expense.  Additionally, prior year "Operating earnings" for certain reportable business segments have been restated to reflect these reclassifications.  See Note 17 for information on Snap-on’s reportable business segments.
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 month periods ended March 31, 2018, and April 1, 2017, 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 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
The following new accounting pronouncements were adopted in fiscal year 2018:
In March 2017, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The non-service-cost components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset).

Snap-on adopted this ASU at the beginning of its 2018 fiscal year, with the changes related to the presentation in the statements of earnings of the service cost and non-service-cost components of net periodic benefit costs applied retrospectively, using the practical expedient permitting the use of the amounts disclosed in pension and other postretirement benefit plan notes as the estimation basis for the presentation of the prior comparative periods. For fiscal 2018 and all comparative periods, the non-service-

9

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


cost components of net periodic benefit costs are included in “Other income (expense) - net” on the accompanying condensed consolidated statements of earnings. Beginning in fiscal 2018, changes related to the capitalization in assets of the service cost component of net periodic benefit costs were applied prospectively. The adoption of this ASU did not have a significant impact on the company’s Condensed Consolidated Statements of Earnings.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory. The ASU eliminates the requirement to defer the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. Under the new guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU were to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the time of adoption. The adoption of this ASU did not have an impact on the company's consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of the ASU did not have a significant impact to the designations of operating, investing and financing activities on the company's Condensed Consolidated Statements of Cash Flows.

On December 31, 2017, the beginning of Snap-on’s 2018 fiscal year, Snap-on adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Topic 606 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Snap-on adopted Topic 606 using the modified retrospective approach applied to those contracts that were not completed as of December 31, 2017, which means Topic 606 has been applied to the fiscal 2018 financial statements and disclosures going forward, but that prior period financial statements and disclosures reflect the prior revenue recognition standard. See Note 2 for additional information on revenue recognition.

Snap-on’s revenues are primarily from the selling of products that are shipped and billed, services provided to customers and from subscriptions, including software subscriptions. Approximately 90% of net sales are earned at a point in time through ship-and- bill performance obligations. The remaining performance obligations that are recorded over time relate primarily to software subscriptions and to a lesser extent extended warranty and other subscription agreements. Revenues are recognized when control is transferred to customers, in an amount that reflects the consideration Snap-on expects to be entitled to in exchange for those goods and services. Revenue recognition is evaluated through the following five steps: (i) identification of the contract, or contracts, with a customer; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) recognition of revenue when or as a performance obligation is satisfied.

Revenue related to software subscriptions, as well as extended warranty and other subscription agreements, is generally recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer.

Contracts with customers may include multiple performance obligations related to sales of hardware, software and software-related services. For these contracts, individual performance obligations are recorded separately if they are distinct. The transaction price, including any discounts, is allocated to each separate performance obligation based on its relative standalone selling price. The standalone selling prices are determined based on the prices charged to customers or by using an expected cost plus margin approach. The amount assigned to the products or services is recognized when the product is delivered and/or when the services are performed. In instances where the product and/or services are performed over an extended period, as is the case with subscription agreements, revenue is generally recognized over time on a ratable basis using a time-based output method applied over the contract term beginning on the date that the service is made available to the customer. These contracts are generally for 12 months but can be for a term up to 60 months.


10

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Franchise fee revenue, including nominal, non-refundable initial fees, is recognized upon the granting of a franchise, which is when the company has performed substantially all initial services required by the franchise agreement. Franchise fee revenue also includes ongoing monthly fees (primarily for sales and business training as well as marketing and product promotion programs) that are recognized as the fees are earned. Franchise fee revenue totaled $3.9 million for the three month period ended March 31, 2018.
 
The following new accounting pronouncements, and related impacts on adoption, are being evaluated by the company:
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220), which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Tax Act"). ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The company is currently assessing the impact this ASU will have on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The company is currently assessing the impact this ASU will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU No. 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; the ASU allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. The company is currently assessing the impact this ASU will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is intended to represent an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. This ASU, which supersedes most current lease guidance, affects any entity that enters into a lease (as that term is defined in the ASU), with some specified scope exemptions. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption as of the beginning of an interim or annual reporting period. The company is currently assessing the impact this ASU will have on its consolidated financial statements.

Note 2: Revenue Recognition

Snap-on recognizes revenue from the sale of tools, diagnostic and equipment products and related services based on when control of the product passes to the customer or the service is provided and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services.


11

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The effects of adjustments to the December 30, 2017 consolidated balance sheet for the adoption of Topic 606 were as follows:
 
 
Balance at
 
Topic 606
 
Opening Balance at
(Amounts in millions)
 
December 30, 2017
 
Adjustments
 
December 31, 2017
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Inventories - net
 
$
638.8

 
$
20.9

 
$
659.7

Deferred income tax assets
 
52.0

 
0.6

 
52.6

 
 
 
 
 
 
 
Liabilities and Equity
 
 
 
 
 
 
Other accrued liabilities
 
$
388.1

 
$
23.3

 
$
411.4

Retained earnings
 
3,772.3

 
(1.8
)
 
3,770.5


The adoption of Topic 606 did not have a significant impact on the company’s consolidated financial statements. The adoption resulted in the recognition of an inventory asset related to certain product returns by increasing the returns liability and recognizing an inventory asset for the anticipated value of the returns to recognize Snap-on's contractual obligation to recover products from customers; this gross up had no corresponding impact on the Condensed Consolidated Statement of Earnings. For the anticipated value of the returns, the adoption resulted in the recognition of an increase in the inventory obsolescence reserve of $2.4 million with a corresponding adjustment to fiscal 2018 beginning retained earnings. Other than the amounts recorded for the adoption of Topic 606 on the Condensed Consolidated Balance Sheets, there were no other changes since the adoption that would be materially different from previous accounting standards that would affect the Condensed Consolidated Statements of Earnings, Balance Sheets, or Cash Flows.

Revenue Disaggregation
The following table shows the consolidated revenues by revenue source:
 
 
Three Months Ended
(Amounts in millions)
 
March 31, 2018
 
 
 
Revenue from contracts with customers
 
$
930.4

Other revenues
 
5.1

Total net sales
 
935.5

Financial services revenue
 
83.0

Total revenues
 
$
1,018.5

 
 
 

Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for both intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.


12

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The following table represents external net sales disaggregated by geography, based on the customers' billing addresses:
 
 
For the three months ended March 31, 2018
 
 
Commercial &
 
Snap-on
 
Repair Systems
 
 
 
 
 
 
 
 
Industrial
 
Tools
 
& Information
 
Financial
 
 
 
Snap-on
(Amounts in millions)
 
Group
 
Group
 
Group
 
Services
 
Eliminations
 
Incorporated
Net sales by geographic region:
 
 
 
 
 
 
 
 
 
 
 
 
North America*
 
$
107.5

 
$
338.9

 
$
185.3

 
$

 
$

 
$
631.7

Europe
 
82.9

 
41.5

 
67.0

 

 

 
191.4

All other
 
68.4

 
24.3

 
19.7

 

 

 
112.4

External net sales
 
258.8

 
404.7

 
272.0

 

 

 
935.5

Intersegment net sales
 
72.8

 

 
65.0

 

 
(137.8
)
 

Total net sales
 
331.6

 
404.7

 
337.0

 

 
(137.8
)
 
935.5

Financial services revenue
 

 

 

 
83.0

 

 
83.0

Total revenue
 
$
331.6

 
$
404.7

 
$
337.0

 
$
83.0

 
$
(137.8
)
 
$
1,018.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* North America is comprised of the United States, Canada and Mexico.

The following table represents external net sales disaggregated by customer type:
 
 
For the three months ended March 31, 2018
 
 
Commercial &
 
Snap-on
 
Repair Systems
 
 
 
 
 
 
 
 
Industrial
 
Tools
 
& Information
 
Financial
 
 
 
Snap-on
(Amounts in millions)
 
Group
 
Group
 
Group
 
Services
 
Eliminations
 
Incorporated
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle service professionals
 
$
22.5

 
$
404.7

 
$
272.0

 
$

 
$

 
$
699.2

All other professionals
 
236.3

 

 

 

 

 
236.3

External net sales
 
258.8

 
404.7

 
272.0

 

 

 
935.5

Intersegment net sales
 
72.8

 

 
65.0

 

 
(137.8
)
 

Total net sales
 
331.6

 
404.7

 
337.0

 

 
(137.8
)
 
935.5

Financial services revenue
 

 

 

 
83.0

 

 
83.0

Total revenue
 
$
331.6

 
$
404.7

 
$
337.0

 
$
83.0

 
$
(137.8
)
 
$
1,018.5

 
 
 
 
 
 
 
 
 
 
 
 
 

Nature of Goods and Services
Snap-on derives net sales from a broad line of products and complementary services that are grouped into three categories (i) tools; (ii) diagnostics, information and management systems; and (iii) equipment. The tools product category includes Snap-on’s hand tools, power tools, tool storage products and other similar products. The diagnostics, information and management systems product category includes handheld and PC-based diagnostic products, service and repair information products, diagnostic software solutions, electronic parts catalogs, business management systems and services, point-of-sale systems, integrated systems for vehicle service shops, original equipment manufacturer ("OEM") purchasing facilitation services, and warranty management systems and analytics to help OEM dealerships manage and track performance. The equipment product category includes solutions for the service of vehicles and industrial equipment. Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs as well as after-sales support to its customers. Through its financial services businesses, Snap-on also derives revenue from various financing programs designed to facilitate the sales of its products and support its franchise business.


13

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Approximately 90% of Snap-on’s net sales are products sold at a point in time through ship-and-bill performance obligations that also includes service repair services. The remaining sales revenue is earned over time primarily on a subscription basis including software, extended warranty and other subscription service agreements.

Snap-on enters into contracts related to the selling of tools, diagnostic and repair information and equipment products and related services. At contract inception, an assessment of the goods and services promised in the contracts with customers is performed and a performance obligation is identified for each distinct promise to transfer to the customer a good or service (or bundle of goods or services). To identify the performance obligations, Snap-on considers all of the goods or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. Contracts with customers are comprised of customer purchase orders, invoices and written contracts.

When Performance Obligations Are Satisfied
For performance obligations related to the majority of ship-and-bill products, including repair services contracts, control transfers at a point in time when title transfers upon shipment of the product to the customer, and for some sales, control transfers when title is transferred at time of receipt by customer. Once a product or repaired product has shipped or has been delivered, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Snap-on considers control to have transferred upon shipment or delivery because Snap-on has a present right to payment at that time, the customer has legal title to the asset, Snap-on has transferred physical possession of the asset, and the customer has significant risk and rewards of ownership of the asset.

For performance obligations related to software subscriptions, extended warranties and other subscription agreements, Snap-on transfers control and recognizes revenue over time on a ratable basis using a time-based output method. The performance obligations are typically satisfied as services are rendered on a straight-line basis over the contract term, which is generally for 12 months but can be for a term up to 60 months.

Significant Payment Terms
For ship-and-bill type contracts with customers, the contract states the final terms of the sale, including the description, quantity, and price of each product or service purchased. Payment terms are typically due upon delivery or up to 30 days after delivery but can range up to 120 days after delivery.

For subscription contracts, payment terms are in advance or in arrears of services on a monthly, quarterly or annual basis over the contract term, which is generally for 12 months but can be for a term up to 60 months depending on the product or service. The customer typically agrees to a stated rate and price in the contract that does not vary over the contract term. In some cases, customers prepay for their licenses, or in other cases, pay on a monthly or quarterly basis. When the timing of the payment made by the customer precedes the delivery of the performance obligation, a contract liability is recognized.

Variable Consideration
In some cases, the nature of Snap-on’s contracts give rise to variable consideration, including rebates, credits, allowances for returns or other similar items that generally decrease the transaction price. These variable amounts generally are credited to the customer, based on achieving certain levels of sales activity, product returns and making payments within specific terms.

In the normal course of business, Snap-on allows franchisees to return product per the provisions in the franchise agreement that allow for the return of product in a saleable condition. For other customers, product returns are generally not accepted unless the item is defective as manufactured. Where applicable, Snap-on establishes provisions for estimated sales returns. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and is adjusted for known trends to arrive at the amount of consideration to which Snap-on expects to receive.

Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information (historical, current and forecasted) that is reasonably available.

Warranties
Snap-on allows customers to return product when the product is defective as manufactured. Where applicable, Snap-on establishes provisions for estimated warranties. Estimated product warranties are provided for specific product lines and Snap-on accrues for

14

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


estimated future warranty cost in the period in which the sale is recorded. The costs are included in “Cost of goods sold” on the accompanying Condensed Consolidated Statements of Earnings. 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 does not typically provide customers with the right to a refund.

Practical Expedients and Exemptions
Snap-on typically expenses incremental direct costs of obtaining a contract (sales commissions) when incurred because the amortization period is generally 12 months or less. Capitalized long-term contract costs are not significant. Contract costs are expensed or amortized in “Operating expenses” on the accompanying Condensed Consolidated Statements of Earnings.

Snap-on elected to account for shipping and handling activities that occur after control of the related good transfers to the customer as fulfillment activities and are therefore recognized upon shipment of the goods.

Snap-on has applied the portfolio approach to its ship-and-bill contracts that have similar characteristics as it reasonably expects that the effects on the financial statements of applying this guidance to the portfolio of contracts would not differ materially from applying this guidance to the individual contracts within the portfolio.

Snap-on typically excludes from its transaction price any amounts collected from customers for sales (and similar) taxes.

For certain performance obligations related to software subscriptions, extended warranty and other subscription agreements that are settled over time, Snap-on has elected not to disclose the value of unsatisfied performance obligations for: (i) contracts that have an original expected length of one year or less; (ii) contracts where revenue is recognized as invoiced; and (iii) contracts with variable consideration related to unsatisfied performance obligations.  The remaining duration of these unsatisfied performance obligations range from one month up to 60 months.  Snap-on had approximately $216.0 million of long-term contracts that have fixed consideration that extends beyond one year as of March 31, 2018.  Snap-on expects to recognize approximately 65% of these contracts as revenue by the end of fiscal 2019, an additional 25% by the end of fiscal 2021 and the balance thereafter. 

Contract Liabilities (Deferred Revenues)
Contract liabilities are recorded when cash payments are received in advance of Snap-on’s performance.  The timing of payment is typically on a monthly, quarterly or annual basis. The balance of total contract liabilities at March 31, 2018 was $56.1 million and $49.4 million at the beginning of fiscal 2018.   The current portion of contract liabilities and the non-current portion are included in “Other accrued liabilities” and “Other long-term liabilities”, respectively, on the accompanying Condensed Consolidated Balance Sheets.  During the three months ended March 31, 2018, Snap-on recognized revenue of $24.0 million that was included in the contract liability balance at the beginning of the period, which was primarily from the amortization of software subscriptions, extended warranties and other subscription agreements.  The increase in the total contract liabilities balance is primarily driven by the timing of cash payments received or due in advance of satisfying Snap-on’s performance obligations and growth in certain software subscriptions, partially offset by revenues recognized that were included in the contract liability balance at the beginning of the period. 

Revenue Recognition Prior to 2018
Revenue recognition for fiscal 2017, as presented, is based upon the accounting revenue recognition standard of Topic 605, Revenue Recognition. Snap-on recognized revenue from the sale of tools and diagnostic and equipment products when contract terms were met, the price was fixed or determinable, collectability was reasonably assured and a product was shipped or risk of ownership had been transferred to and accepted by the customer. For sales contingent upon customer acceptance, revenue recognition was deferred until such obligations were fulfilled. Estimated product returns were recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and gross profit margin was adjusted for known trends. Provisions for customer volume rebates, discounts and allowances were also recorded as a reduction in reported revenues at the time of sale based on historical experience and known trends. Revenue related to extended warranty and subscription agreements was recognized over the terms of the respective agreements.

Snap-on also recognized revenue related to multiple element arrangements, including sales of hardware, software and software-related services. When a sales arrangement contained multiple elements, such as hardware and software products and/or services, Snap‑on used the relative selling price method to allocate revenues between hardware and software elements. For software elements that were not essential to the hardware’s functionality and related software post-contract customer support, vendor specific objective evidence (“VSOE”) of fair value was used to further allocate revenue to each element based on its relative fair value and, when necessary, the residual method was used to assign value to the delivered elements when VSOE only existed for the

15

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


undelivered elements. The amount assigned to the products or services was recognized when the product was delivered and/or when the services were performed. In instances where the product and/or services were performed over an extended period, as is the case with subscription agreements or the providing of ongoing support, revenue was generally recognized on a straight-line basis over the term of the agreement, which generally ranged from 12 months to 60 months.

Franchise fee revenue, including nominal, non-refundable initial fees, was recognized upon the granting of a franchise, which was when the company performed substantially all initial services required by the franchise agreement. Franchise fee revenue also included ongoing monthly fees (primarily for sales and business training as well as marketing and product promotion programs) that were recognized as the fees were earned. Franchise fee revenue totaled $3.5 million for the three month period ended April 1, 2017.

Note 3: Acquisitions
On January 31, 2018, Snap-on acquired substantially all of the assets of George A. Sturdevant, Inc. (d/b/a Fastorq) for a cash purchase price of $3.0 million. Fastorq, based in New Caney, Texas, designs, assembles and distributes hydraulic torque and hydraulic tensioning products for use in critical industries. As of the first quarter of 2018, the company has substantially completed the purchase accounting valuations for the acquired net assets of Fastorq. The $2.6 million excess of the purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets.
On July 28, 2017, Snap-on acquired Torque Control Specialists Pty Ltd (“TCS”) for a cash purchase price of $3.6 million (or $3.5 million, net of cash acquired). TCS distributes a full range of torque products, including wrenches, multipliers and calibrators for use in critical industries. As of the first quarter of 2018, the company has substantially completed the purchase accounting valuations for the acquired net assets of TCS. The $2.3 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets.
On May 4, 2017, Snap-on acquired Norbar Torque Tools Holdings Limited, along with its U.S. and Chinese joint ventures (“Norbar”) for a cash purchase price of $71.6 million (or $69.9 million, net of cash acquired). Norbar designs and manufactures a full range of torque products, including wrenches, multipliers and calibrators for use in critical industries. As of the first quarter of 2018, the company has substantially completed the purchase accounting valuations for the acquired net assets of Norbar, including intangible assets. The $26.5 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets.
On January 30, 2017, Snap-on acquired BTC Global Limited (“BTC”) for a cash purchase price of $9.2 million. BTC designs and implements automotive vehicle inspection and management software for OEM franchise repair shops. In the second quarter of 2017, the company completed the purchase accounting valuations for the acquired net assets of BTC, including intangible assets. The $5.9 million excess of purchase price over the fair value of the net assets acquired was recorded in “Goodwill” on the accompanying Condensed Consolidated Balance Sheets.
For segment reporting purposes, the results of operations and assets of Fastorq, TCS and Norbar have been included in the Commercial & Industrial Group since the acquisition date and the results of operations and assets of BTC have been included in the Repair Systems and Information Group since the acquisition date.
Pro forma financial information has not been presented for any of these acquisitions as the net effects, individually and collectively, were neither significant nor material to Snap-on’s results of operations or financial position. See Note 6 for further information on goodwill and other intangible assets.
Note 4: 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.


16

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The components of Snap-on’s trade and other accounts receivable as of March 31, 2018, and December 30, 2017, are as follows:
(Amounts in millions)
March 31, 2018
 
December 30, 2017
Trade and other accounts receivable
$
696.9

 
$
690.2

Allowances for doubtful accounts
(16.1
)
 
(14.6
)
Total trade and other accounts receivable – net
$
680.8

 
$
675.6

Finance and Contract Receivables
Snap-on Credit LLC (“SOC”), the company’s financial services operation in the United States, originates extended-term finance and contract receivables on sales of Snap-on’s products sold through the U.S. franchisee and customer network and to certain other customers of Snap-on; Snap-on’s foreign finance subsidiaries provide similar financing internationally. Interest income on finance and contract receivables is included in “Financial services revenue” on the accompanying Condensed Consolidated Statements of Earnings.
Snap-on’s finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees’ customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with average payment terms approaching four years. Contract receivables, with payment terms of up to 10 years, are comprised of extended-term installment payment contracts to a broad base of customers worldwide, including shop owners, both independents and national chains, for their purchase of tools and diagnostic and equipment products. Contract receivables also include extended-term installment loans to franchisees to meet a number of financing needs, including working capital loans, loans to enable new franchisees to fund the purchase of the franchise and van leases. Finance and contract receivables are generally secured by the underlying tools and/or diagnostic or equipment products financed and, for installment loans to franchisees, other franchisee assets.
The components of Snap-on’s current finance and contract receivables as of March 31, 2018, and December 30, 2017, are as follows:
(Amounts in millions)
March 31, 2018
 
December 30, 2017
Finance receivables, net of unearned finance charges of $21.6 million and $21.0 million, respectively
$
530.5

 
$
523.1

Contract receivables, net of unearned finance charges of $18.0 million and $17.6 million, respectively
93.3

 
98.1

Total
623.8

 
621.2

Allowances for doubtful accounts:
 
 
 
Finance receivables
(18.3
)
 
(17.7
)
Contract receivables
(1.3
)
 
(1.3
)
Total
(19.6
)
 
(19.0
)
Total current finance and contract receivables – net
$
604.2

 
$
602.2

 
 
 
 
Finance receivables – net
$
512.2

 
$
505.4

Contract receivables – net
92.0

 
96.8

Total current finance and contract receivables – net
$
604.2

 
$
602.2

 

17

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 March 31, 2018, and December 30, 2017, are as follows: 
(Amounts in millions)
March 31, 2018
 
December 30, 2017
Finance receivables, net of unearned finance charges of $17.1 million and $16.7 million, respectively
$
1,075.9

 
$
1,078.0

Contract receivables, net of unearned finance charges of $26.5 million and $25.5 million, respectively
329.4

 
325.9

Total
1,405.3

 
1,403.9

Allowances for doubtful accounts:
 
 
 
Finance receivables
(40.0
)
 
(38.8
)
Contract receivables
(3.3
)
 
(3.3
)
Total
(43.3
)
 
(42.1
)
Total long-term finance and contract receivables – net
$
1,362.0

 
$
1,361.8

 
 
 
 
Finance receivables – net
$
1,035.9

 
$
1,039.2

Contract receivables – net
326.1

 
322.6

Total long-term finance and contract receivables – net
$
1,362.0

 
$
1,361.8

Delinquency is the primary indicator of credit quality for finance and contract receivables. The entire receivable balance of a contract is considered delinquent when contractual payments become 30 days past due. Depending on the contract, payments for finance and contract receivables are due on a monthly or weekly basis. Weekly payments are converted into a monthly equivalent for purposes of calculating delinquency. Delinquencies are assessed at the end of each month following the monthly equivalent due date. Removal from delinquent status occurs when the cumulative number of monthly payments due has been received by the company.
Finance receivables are generally placed on nonaccrual status (nonaccrual of interest and other fees): (i) when a customer is placed on repossession status; (ii) upon receipt of notification of bankruptcy; (iii) upon notification of the death of a customer; or (iv) in other instances in which management concludes collectability is not reasonably assured. Finance receivables that are considered nonperforming include receivables that are on nonaccrual status and receivables that are generally more than 90 days past due.
Contract receivables are generally placed on nonaccrual status: (i) when a receivable is more than 90 days past due or at the point a customer’s account is placed on terminated status regardless of its delinquency status; (ii) upon notification of the death of a customer; or (iii) in other instances in which management concludes collectability is not reasonably assured. Contract receivables that are considered nonperforming include receivables that are on nonaccrual status and receivables that are generally more than 90 days past due.
The accrual of interest and other fees is resumed when the finance or contract receivable becomes contractually current and collection of all remaining contractual amounts due is reasonably assured. Finance and contract receivables are evaluated for impairment on a collective basis. A receivable is impaired when it is probable that all amounts related to the receivable will not be collected according to the contractual terms of the applicable agreement. Impaired finance and contract receivables are covered by the company’s respective allowances for doubtful accounts and are charged-off against the allowances when appropriate. As of March 31, 2018, and December 30, 2017, there were $27.9 million and $28.0 million, respectively, of impaired finance receivables, and there were $3.1 million and $2.3 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 March 31, 2018, and December 30, 2017, were immaterial to both the financial services portfolio and the company’s results of operations and financial position.


18

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The aging of finance and contract receivables as of March 31, 2018, and December 30, 2017, 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
March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables
$
13.2

 
$
10.0

 
$
20.1

 
$
43.3

 
$
1,563.1

 
$
1,606.4

 
$
15.8

Contract receivables
1.6

 
0.9

 
2.4

 
4.9

 
417.8

 
422.7

 
0.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables
$
19.3

 
$
13.9

 
$
20.1

 
$
53.3

 
$
1,547.8

 
$
1,601.1

 
$
15.4

Contract receivables
1.2

 
0.6

 
1.9

 
3.7

 
420.3

 
424.0

 
0.6

The amount of performing and nonperforming finance and contract receivables based on payment activity as of March 31, 2018, and December 30, 2017, is as follows: 
 
March 31, 2018
 
December 30, 2017
(Amounts in millions)
Finance
Receivables
 
Contract
Receivables
 
Finance
Receivables
 
Contract
Receivables
Performing
$
1,578.5

 
$
419.6

 
$
1,573.1

 
$
421.7

Nonperforming
27.9

 
3.1

 
28.0

 
2.3

Total
$
1,606.4

 
$
422.7

 
$
1,601.1

 
$
424.0

The amount of finance and contract receivables on nonaccrual status as of March 31, 2018, and December 30, 2017, is as follows: 
(Amounts in millions)
March 31, 2018
 
December 30, 2017
Finance receivables
$
12.1

 
$
12.6

Contract receivables
2.7

 
1.7

The following is a rollforward of the allowances for doubtful accounts for finance and contract receivables for the three months ended March 31, 2018, and April 1, 2017:
 
 
Three Months Ended
March 31, 2018
 
Three Months Ended
April 1, 2017
(Amounts in millions)
Finance
Receivables
 
Contract
Receivables
 
Finance
Receivables
 
Contract
Receivables
Allowances for doubtful accounts:
 
 
 
 
 
 
 
Beginning of period
$
56.5

 
$
4.6

 
$
48.6

 
$
3.9

Provision
15.8

 
0.5

 
13.0

 
1.3

Charge-offs
(15.8
)
 
(0.6
)
 
(12.9
)
 
(0.6
)
Recoveries
1.9

 
0.1

 
1.7

 
0.1

Currency translation
(0.1
)
 

 
0.1

 

End of period
$
58.3

 
$
4.6

 
$
50.5

 
$
4.7

 
 
 
 
 
 
 
 
Note 5: Inventories

19

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Inventories by major classification are as follows:
(Amounts in millions)
March 31, 2018
 
December 30, 2017
Finished goods
$
577.3

 
$
541.9

Work in progress
50.7

 
49.3

Raw materials
126.5

 
122.7

Total FIFO value
754.5

 
713.9

Excess of current cost over LIFO cost
(75.7
)
 
(75.1
)
Total inventories – net
$
678.8

 
$
638.8

Inventories accounted for using the first-in, first-out (“FIFO”) method approximated 60% and 61% of total inventories as of March 31, 2018, and December 30, 2017, respectively. The company accounts for its non-U.S. inventory on the FIFO method. As of March 31, 2018, approximately 32% of the company’s U.S. inventory was accounted for using the FIFO method and 68% was accounted for using the last-in, first-out (“LIFO”) method. There were no LIFO inventory liquidations in the three months ended March 31, 2018, or April 1, 2017.
Note 6: Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment for the three months ended March 31, 2018, are as follows:
(Amounts in millions)
Commercial
& Industrial
Group
 
Snap-on
Tools Group
 
Repair Systems
& Information
Group
 
Total
Balance as of December 30, 2017
$
298.4

 
$
12.5

 
$
613.2

 
$
924.1

Currency translation
8.3

 

 
3.2

 
11.5

Acquisitions and related adjustments
5.8

 

 

 
5.8

Balance as of March 31, 2018
$
312.5

 
$
12.5

 
$
616.4

 
$
941.4


Goodwill of $941.4 million as of March 31, 2018, includes: (i) $26.5 million, on a preliminary basis, from the acquisition of Norbar, (ii) $2.6 million, on a preliminary basis, from the acquisition of Fastorq, and (iii) $2.3 million, on a preliminary basis, from the acquisition of TCS. The goodwill from the Norbar, Fastorq and TCS acquisitions is included in the Commercial & Industrial Group. See Note 3 for additional information on acquisitions.
As the purchase accounting for deferred taxes for the acquired net assets of Norbar, Fastorq and TCS was not complete as of March 31, 2018, the allocation of the respective purchase prices and resulting goodwill has been prepared on a preliminary basis and changes to the allocations will occur as the deferred taxes are determined. The company expects to complete the purchase accounting within one year of the respective acquisition dates.

20

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Additional disclosures related to other intangible assets are as follows:
 
March 31, 2018
 
December 30, 2017
(Amounts in millions)
Gross Carrying
Value
 
Accumulated
Amortization
 
Gross Carrying
Value
 
Accumulated
Amortization
Amortized other intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
176.5

 
$
(101.7
)
 
$
175.2

 
$
(98.2
)
Developed technology
19.2

 
(18.8
)
 
18.9

 
(18.4
)
Internally developed software
179.3

 
(137.1
)
 
177.0

 
(133.4
)
Patents
34.7

 
(23.1
)
 
34.1

 
(22.7
)
Trademarks
3.0

 
(2.0
)
 
3.0

 
(2.0
)
Other
8.0

 
(2.9
)
 
7.7

 
(2.7
)
Total
420.7

 
(285.6
)
 
415.9

 
(277.4
)
Non-amortized trademarks
116.6

 

 
115.2

 

Total other intangible assets
$
537.3

 
$
(285.6
)
 
$
531.1

 
$
(277.4
)
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 March 31, 2018, the company had no accumulated impairment losses.
The weighted-average amortization periods related to other intangible assets are as follows:
 
In Years
Customer relationships
15
Developed technology
3
Internally developed software
4
Patents
8
Trademarks
6
Other
39
Snap-on is amortizing its customer relationships on both an accelerated and straight-line basis over a 15-year weighted-average life; the remaining intangibles are amortized on a straight-line basis. The weighted-average amortization period for all amortizable intangibles on a combined basis is 11 years.
The company’s customer relationships generally have contractual terms of three to five years and are typically renewed without significant cost to the company. The weighted-average 15-year life for customer relationships is based on the company’s historical renewal experience. Intangible asset renewal costs are expensed as incurred.
The aggregate amortization expense was $6.6 million and $7.1 million for the respective three months ended March 31, 2018, and April 1, 2017. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated annual amortization expense is expected to be $25.4 million in 2018, $22.3 million in 2019, $18.1 million in 2020, $14.8 million in 2021, $13.5 million in 2022, and $12.4 million in 2023.
Note 7: Income Taxes
Snap-on’s effective income tax rate on earnings attributable to Snap-on was 26.2% and 30.7% in the first three months of 2018 and 2017, respectively.   The effective tax rate for 2018 includes the net tax benefits attributable to "H.R.1", formerly known as the U.S. Tax Cuts and Jobs Act (the "Tax Act"), which was signed into law on December 22, 2017.

The Tax Act made broad and complex changes to the U.S. tax code, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; and (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries.

21

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)



The Tax Act also established new tax laws that affect 2018, including, but not limited to: (i) the reduction of the U.S. federal corporate tax rate discussed above; (ii) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income (“GILTI”); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce the U.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

The Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under ASC 740, Accounting for Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The company’s accounting for the certain elements of the Tax Act was incomplete as of the period ended December 30, 2017, and remains incomplete as of March 31, 2018. However, the company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax Act, the company recorded a provisional discrete net tax expense of $7.0 million in the period ended December 30, 2017. This provisional estimate consists of a net expense of $13.7 million for the one-time transition tax and a net benefit of $6.7 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the company must determine the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the company was able to make a reasonable estimate of the transition tax, it is continuing to gather additional information to more precisely compute the final amount. Likewise, while the company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, its rate may be affected by other analyses related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. Due to the complexity of the new GILTI tax rules, the company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under GAAP, the company is allowed to make an accounting policy choice to either (i) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method"); or (ii) factor in such amounts into a company’s measurement of its deferred taxes (the “deferred method”). The company’s selection of an accounting policy with respect to the new GILTI tax rules is dependent on additional analysis and potential future modifications to existing structures, which are not currently known. The company has not made a policy decision regarding whether to record deferred taxes on GILTI. The company will continue to analyze the full effects of the Tax Act on its consolidated financial statements.

During the first three months of 2018, the Internal Revenue Service issued new guidance affecting the computation of the company’s 2017 federal income tax liability. As a result of this new guidance and additional analysis of the impacts of the Tax Act, the company revised its prior estimates and recorded $2.6 million of additional tax expense related to the Tax Act during the period. The ultimate impact of the Tax Act may differ from the current estimates, possibly materially, due to changes in interpretations and assumptions the company has made, future guidance that may be issued and actions the company may take as a result of the law.
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 $0.7 million. Over the next 12 months, Snap-on anticipates taking certain tax positions on various tax returns for which the related tax benefit does not meet the recognition threshold. Accordingly, Snap-on’s gross unrecognized tax benefits may increase by a range of zero to $1.5 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.


22

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Note 8: Short-term and Long-term Debt
Short-term and long-term debt as of March 31, 2018, and December 30, 2017, consisted of the following:
(Amounts in millions)
March 31, 2018
 
December 30, 2017
4.25% unsecured notes due 2018
$

 
$
250.0

6.70% unsecured notes due 2019

 
200.0

6.125% unsecured notes due 2021
250.0

 
250.0

3.25% unsecured notes due 2027
300.0

 
300.0

4.10% unsecured notes due 2048
400.0

 

Other debt*
141.5

 
186.8

 
1,091.5

 
1,186.8

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

 
(250.0
)
Commercial paper borrowings
(132.0
)
 
(151.0
)
Other notes
(13.2
)
 
(32.2
)
 
(145.2
)
 
(433.2
)
Total long-term debt
$
946.3

 
$
753.6

 
 
 
 
*
Includes fair value adjustments related to interest rate swaps, debt discounts and debt issuance costs.
Notes payable and current maturities of long-term debt of $145.2 million as of March 31, 2018, included $132 million of commercial paper borrowings and $13.2 million of other notes. As of 2017 year end, notes payable and current maturities of long-term debt of $433.2 million included $250 million of unsecured 4.25% notes due on January 16, 2018 (the "2018 Notes"), that were repaid upon maturity in accordance with their terms, $151 million of commercial paper borrowings and $32.2 million of other notes. As of 2017 year end, $200 million of unsecured 6.70% notes due March 1, 2019 (the "2019 Notes") were included in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets as their scheduled maturity was in excess of one year of the 2017 year-end balance sheet date.
On February 20, 2018, Snap-on commenced a tender offer to repurchase the 2019 Notes with $26.1 million of the 2019 Notes tendered and repaid on February 27, 2018. On February 20, 2018, Snap-on also issued a notice of redemption for any remaining outstanding 2019 Notes not tendered, with the redemption completed on March 22, 2018. The total cash cost for this tender and redemption was $209.1 million, including accrued interest of $1.5 million. Snap-on recorded $7.8 million for the loss on the early extinguishment of debt related to the 2019 Notes, which included the redemption premium and other issuance costs associated with this debt in "Other income (expense) - net" on the accompanying Condensed Consolidated Statement of Earnings. See Note 15 for additional information on other income (expense) - net.
On February 20, 2018, Snap-on sold, at a discount, $400 million of unsecured 4.10% long-term notes that mature on March 1, 2048 (the "2048 Notes"). Interest on the 2048 Notes is payable semi-annually beginning September 1, 2018. Snap-on used a portion of the $395.4 million of net proceeds from the sale of the 2048 Notes, reflecting $3.5 million of transaction costs, to repay the 2019 Notes. The remaining net proceeds were used to repay a portion of its then-outstanding commercial paper borrowings and for general corporate purposes, which may include working capital, capital expenditures and possible acquisitions.
On February 15, 2017, Snap-on sold, at a discount, $300 million of unsecured 3.25% long-term notes that mature on March 1, 2027 (the “2027 Notes”). Interest on the 2027 Notes is payable semi-annually beginning September 1, 2017. Snap-on used the $297.8 million of net proceeds from the sale of the 2027 Notes, reflecting $1.9 million of transaction costs, to repay a portion of its then-outstanding commercial paper borrowings and the remainder was retained for general corporate purposes, including working capital, capital expenditures and possible acquisitions.
 
Snap-on has a five-year, $700 million multi-currency revolving credit facility that terminates on December 15, 2020 (the “Credit Facility”); no amounts were outstanding under the Credit Facility as of March 31, 2018. Borrowings under the Credit Facility bear interest at varying rates based on Snap-on’s then-current, long-term debt ratings. The Credit Facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio not greater than 0.60 to 1.00 of consolidated net debt

23

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


(consolidated debt net of certain cash adjustments) to the sum of such consolidated net debt plus total equity and less accumulated other comprehensive income or loss (the “Debt Ratio”); or (ii) a ratio not greater than 3.50 to 1.00 of such consolidated net debt to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the “Debt to EBITDA Ratio”). Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), increase the maximum Debt Ratio to 0.65 to 1.00 and/or increase the maximum Debt to EBITDA Ratio to 3.75 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of March 31, 2018, the company’s actual ratios of 0.24 and 1.04 respectively, were both within the permitted ranges set forth in this financial covenant. Snap-on generally issues commercial paper to fund its financing needs on a short-term basis and uses the Credit Facility as back-up liquidity to support such commercial paper issuances.
Note 9: 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 then purchases hedging instruments to protect the residual net exposures. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets. Foreign currency forward contracts (“foreign currency forwards”) are used to hedge the net exposures. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. Snap-on’s foreign currency forwards are typically not designated as hedges. The fair value changes of these contracts are reported in earnings as foreign exchange gain or loss, which is included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings.
Interest Rate Risk Management: Snap-on aims to control funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s borrowings through the use of interest rate swap agreements (“interest rate swaps”) and treasury lock agreements (“treasury locks”).
Snap-on enters into interest rate swaps to manage risks associated with changing interest rates related to the company’s fixed rate borrowings. Interest rate swaps are accounted for as fair value hedges. The differentials paid or received on interest rate swaps are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The 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 million as of both March 31, 2018, and December 30, 2017.
Snap-on entered into a $300 million treasury lock in the fourth quarter of 2017 to manage the potential change in interest rates in anticipation of the possible issuance of fixed rate debt in the first quarter of 2018. Treasury locks are accounted for as cash flow

24

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


hedges. The effective differentials to be paid or received on treasury locks related to the anticipated issuance of fixed rate debt are initially recorded in Accumulated OCI, net of tax effect.
In the first quarter of 2018, Snap-on settled the outstanding $300 million treasury lock after it was deemed to be an ineffective hedge related to the 2048 Notes which were issued in February 2018. The $13.3 million gain on the settlement of the treasury lock was recorded in "Other income (expense) - net" on the accompanying Condensed Consolidated Statements of Earnings. As of March 31, 2018, no treasury locks were outstanding. The notional amount of treasury locks outstanding and designated as cash flow hedges as of December 30, 2017, was $300 million. See Note 15 for additional information on other income (expense) - net.
In first quarter of 2017, Snap-on settled the $250 million treasury lock in conjunction with the February 2017 issuance of the 2027 Notes. The $14.9 million gain on the settlement of the treasury lock was recorded in Accumulated OCI and is being amortized over the term of the 2027 Notes and recognized as an adjustment to interest expense on the Condensed Consolidated Statements of Earnings.
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 March 31, 2018, Snap-on had equity forwards in place intended to manage market risk with respect to 102,300 shares of Snap-on common stock associated with its deferred compensation plans.
Counterparty Risk: Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its various financial agreements, including its foreign currency forward contracts, interest rate swap agreements, treasury lock agreements and prepaid equity forward agreements. Snap-on does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of the counterparties and generally enters into agreements with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its counterparties, but cannot provide assurances.
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:
 
March 31, 2018
 
December 30, 2017
(Amounts in millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Finance receivables – net
$
1,548.1

 
$
1,782.0

 
$
1,544.6

 
$
1,791.5

Contract receivables – net
418.1

 
456.1

 
419.4

 
459.1

Long-term debt, notes payable and current maturities of long-term debt
1,091.5

 
1,119.7

 
1,186.8

 
1,235.6

The following methods and assumptions were used in estimating the fair value of financial instruments:
 
Finance and contract receivables include both short-term and long-term receivables. The fair value estimates of finance and contract receivables are derived utilizing discounted cash flow analyses performed on groupings of receivables that are similar in terms of loan type and characteristics. The cash flow analyses consider recent prepayment trends where applicable. The cash flows are discounted over the average life of the receivables using a current market discount rate of a similar term adjusted for credit quality. Significant inputs to the fair value measurements of the receivables are unobservable and, as such, are classified as Level 3.

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

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


25

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
 
(Amounts in millions)
March 31, 2018
 
April 1, 2017
 
Service cost
$
6.5

 
$
5.9

 
Interest cost
13.2

 
14.0

 
Expected return on plan assets
(21.7
)
 
(20.1
)
 
Amortization of unrecognized loss
8.0

 
6.9

 
Amortization of prior service credit
(0.3
)
 
(0.3
)
 
Net periodic pension cost
$
5.7

 
$
6.4

 
The components of net periodic pension cost, other than the service cost component, are included in "Other income (expense) - net" on the accompanying Condensed Consolidated Statements of Earnings. See Note 15 for additional information on other income (expense) - net.
Snap-on intends to make contributions of $9.7 million to its foreign pension plans and $2.4 million to its domestic pension plans in 2018, as required by law. In the first three months of 2018, Snap-on made $10.3 million of cash contributions to its domestic pension plans consisting of (i) $10.0 million of discretionary contributions and (ii) $0.3 million of required contributions. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2018.
Note 11: Postretirement Health Care Plans
Snap-on’s net periodic postretirement health care cost included the following components: 
 
Three Months Ended
 
(Amounts in millions)
March 31, 2018
 
April 1, 2017
 
Interest cost
$
0.5

 
$
0.5

 
Expected return on plan assets
(0.2
)
 
(0.2
)
 
Amortization of unrecognized gain
(0.1
)
 
(0.1
)
 
Net periodic postretirement health care cost
$
0.2

 
$
0.2

 

The components of net periodic postretirement health care cost, other than the service cost component, are included in "Other income (expense) - net" on the accompanying Condensed Consolidated Statements of Earnings. See Note 15 for additional information on other income (expense) - net.
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 in accordance with their terms. As of March 31, 2018, the 2011 Plan had 2,571,111 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 $6.7 million and $7.4 million for the respective three months ended March 31, 2018, and April 1, 2017. Cash received from stock purchase and option plan exercises during the respective three months ended March 31, 2018, and April 1, 2017, totaled $11.5 million and $14.1 million. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $5.1 million and $9.0 million for the respective three months ended March 31, 2018, and April 1, 2017.
 

26

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 and forfeiture behaviors for different participating groups to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option.
The following weighted-average assumptions were used in calculating the fair value of stock options granted during the three months ended March 31, 2018, and April 1, 2017, using the Black-Scholes valuation model:    
 
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Expected term of option (in years)
5.35
 
5.15
Expected volatility factor
20.08%
 
22.01%
Expected dividend yield
1.68%
 
1.63%
Risk-free interest rate
2.71%
 
1.78%
A summary of stock option activity as of and for the three months ended March 31, 2018, is presented below:
 
Shares
(in thousands)
 
Exercise
Price Per
Share*
 
Remaining
Contractual
Term*
(in years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 30, 2017
3,198

 
$
115.30

 
 
 
 
Granted
515

 
161.18

 
 
 
 
Exercised
(137
)
 
83.75

 
 
 
 
Forfeited or expired
(10
)
 
157.97

 
 
 
 
Outstanding at March 31, 2018
3,566

 
123.02

 
6.7
 
$
107.5

Exercisable at March 31, 2018
2,446

 
106.15

 
5.6
 
105.6

 
 
 
*
Weighted-average
The weighted-average grant date fair value of options granted during the three months ended March 31, 2018, and April 1, 2017, was $30.21 and $31.13, respectively. The intrinsic value of options exercised was $11.0 million and $13.2 million during the respective three months ended March 31, 2018, and April 1, 2017. The fair value of stock options vested was $16.0 million and $14.0 million during the respective three months ended March 31, 2018, and April 1, 2017.
 
As of March 31, 2018, there was $30.7 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 2.2 years.
Performance Awards
Performance awards, which are granted as performance share units (“PSUs”) and performance-based RSUs, are earned and expensed using the fair value of the award over a contractual term of three years based on the company’s performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the applicable performance period. For performance achieved above specified levels, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance awards initially granted.

27

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The PSUs have a three-year performance period based on the results of the consolidated financial metrics of the company. The performance-based RSUs have a one-year performance period based on the results of the consolidated financial metrics of the company followed by a two-year cliff vesting schedule, assuming continued employment.
The fair value of performance awards is calculated using the market value of a share of Snap-on’s common stock on the date of grant and assumed forfeitures based on recent historical experience; in recent years, forfeitures have not been significant. The weighted-average grant date fair value of performance awards granted during the three months ended March 31, 2018, and April 1, 2017, was $160.22 and $168.70, respectively. PSUs related to 50,182 shares and 60,980 shares were paid out during the respective three months ended March 31, 2018, and April 1, 2017. Earned PSUs are generally paid out following the conclusion of the applicable performance period upon approval by the Organization and Executive Compensation Committee of the company’s Board of Directors (the “Board”).
Based on the company’s 2017 performance, 13,648 RSUs granted in 2017 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2019. Based on the company’s 2016 performance, 45,502 RSUs granted in 2016 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2018. Based on the company’s 2015 performance, 64,327 RSUs granted in 2015 were earned; these RSUs vested as of fiscal 2017 year end and were paid out shortly thereafter.
Changes to the company’s non-vested performance awards during the three months ended March 31, 2018, are as follows:
 
Shares
(in thousands)
 
Fair Value
Price per
Share*
Non-vested performance awards at December 30, 2017
132

 
$
149.93

Granted
91

 
160.22

Vested

 

Cancellations and other
(3
)
 
157.54

Non-vested performance awards at March 31, 2018
220

 
154.08

 
 
 
*
Weighted-average
As of March 31, 2018, there was $20.5 million of unrecognized compensation cost related to non-vested performance awards that is expected to be recognized as a charge to earnings over a weighted-average period of 2.2 years.

Stock Appreciation Rights (“SARs”)
The company also issues stock-settled and cash-settled SARs to certain key non-U.S. employees. SARs have a contractual term of ten years and vest ratably on the first, second and third anniversaries of the date of grant. SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant.
Stock-settled SARs are accounted for as equity instruments and provide for the issuance of Snap-on common stock equal to the amount by which the company’s stock has appreciated over the exercise price. Stock-settled SARs have an effect on dilutive shares and shares outstanding as any appreciation of Snap-on’s common stock value over the exercise price will be settled in shares of common stock. Cash-settled SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price. Cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock over the grant price is paid in cash and not in common stock.
The fair value of stock-settled SARs is estimated on the date of grant using the Black-Scholes valuation model. The fair value of cash-settled SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on Snap-on’s period-end stock price. The company uses historical data regarding SARs exercise and forfeiture behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date (for stock-settled SARs) or reporting date (for cash-settled SARs) for the length of time corresponding to the expected term of the SARs.

28

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during the three months ended March 31, 2018, and April 1, 2017, using the Black-Scholes valuation model:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Expected term of stock-settled SARs (in years)
3.58
 
3.99
Expected volatility factor
20.08%
 
19.39%
Expected dividend yield
1.63%
 
1.46%
Risk-free interest rate
2.40%
 
1.55%
Changes to the company’s stock-settled SARs during the three months ended March 31, 2018, are as follows:
 
Stock-settled
SARs
(in thousands)
 
Exercise
Price Per
Share*
 
Remaining
Contractual
Term*
(in years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 30, 2017
360

 
$
138.63

 
 
 
 
Granted
89

 
161.18

 
 
 
 
Exercised
(8
)
 
101.87

 
 
 
 
Forfeited or expired
(17
)
 
126.80

 
 
 
 
Outstanding at March 31, 2018
424

 
144.50

 
7.9
 
$
4.6

Exercisable at March 31, 2018
240

 
132.62

 
7.0
 
4.3

 
 
 
*
Weighted-average
 
The weighted-average grant date fair value of stock-settled SARs granted during the three months ended March 31, 2018, and April 1, 2017, was $24.71 and $24.13, respectively. The intrinsic value of stock-settled SARs exercised was $0.6 million and $0.5 million during the respective three months ended March 31, 2018, and April 1, 2017. The fair value of stock-settled SARs vested was $2.2 million and $2.1 million during the respective three months ended March 31, 2018, and April 1, 2017.
As of March 31, 2018, there was $4.1 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 2.2 years.
The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the three months ended March 31, 2018, and April 1, 2017, using the Black-Scholes valuation model:
 
Three Months Ended
 
March 31, 2018
 
April 1, 2017
Expected term of cash-settled SARs (in years)
3.50
 
3.90
Expected volatility factor
20.41%
 
19.27%
Expected dividend yield
1.63%
 
1.55%
Risk-free interest rate
2.39%
 
1.50%
The intrinsic value of cash-settled SARs exercised was $2.0 million and $0.6 million during the respective three months ended March 31, 2018, and April 1, 2017. The fair value of cash-settled SARs vested during the three months ended March 31, 2018, and April 1, 2017, was zero and $0.2 million, respectively.

29

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Changes to the company’s non-vested cash-settled SARs during the three months ended March 31, 2018, are as follows:
 
Cash-settled
SARs
(in thousands)
 
Fair Value
Price per
Share*
Non-vested cash-settled SARs at December 30, 2017
5

 
$
35.41

Granted
1

 
24.71

Vested
(3
)
 
16.08

Non-vested cash-settled SARs at March 31, 2018
3

 
19.66

 
 
 
*
Weighted-average

As of March 31, 2018, there was $0.1 million of unrecognized compensation cost related to non-vested cash-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 1.9 years.
Restricted Stock Awards – Non-employee Directors
The company awarded 6,975 shares and 6,966 shares of restricted stock to non-employee directors in the first three months of 2018 and 2017, respectively. The fair value of the restricted stock awards is expensed over a one-year vesting period based on the fair value on the date of grant. All restrictions for the restricted stock generally lapse upon the earlier of the first anniversary of the grant date, the recipient’s death or disability or in the event of a change in control, as defined in the 2011 Plan. If termination of the recipient’s service occurs prior to the first anniversary of the grant date for any reason other than death or disability, the shares of restricted stock would be forfeited, unless otherwise determined by the Board.
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
 
 
March 31, 2018
 
April 1, 2017
 
Weighted-average common shares outstanding
56,651,508

 
57,940,664