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-ons 2015
Annual Report on Form 10-K for the fiscal year ended January 2, 2016 (2015 year end). The companys 2016 fiscal third quarter ended on October 1, 2016; the 2015 fiscal third quarter ended on October 3, 2015. The
companys 2016 and 2015 fiscal first, second and third quarters each contained 13 weeks of operating results.
Snap-on
accounts for investments in unconsolidated affiliates where Snap-on has a greater than 20% but less than 50% ownership interest under the equity method of accounting. Investments in unconsolidated affiliates of $15.8 million as of October 1,
2016, and $13.3 million as of January 2, 2016, are included in Other assets on the accompanying Condensed Consolidated Balance Sheets; no equity investment dividends were received in any period presented. In the normal course of
business, the company may purchase products or services from unconsolidated affiliates; purchases from unconsolidated affiliates were $2.7 million in both the third quarters of 2016 and 2015, and $10.1 million and $10.4 million in the respective
first nine months of 2016 and 2015. The Condensed Consolidated Financial Statements do not include the accounts of the companys independent franchisees. Snap-ons Condensed Consolidated Financial Statements are prepared in
conformity with generally accepted accounting principles in the United States of America (U.S. GAAP). All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the
Condensed Consolidated Financial Statements for the three and nine month periods ended October 1, 2016, and October 3, 2015, have been made. Interim results of operations are not necessarily indicative of the results to be expected for the full
fiscal year.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instruments
The fair value of the companys derivative financial instruments is generally determined using quoted prices in active markets for
similar assets and liabilities. The carrying value of the companys non-derivative financial instruments either approximates fair value, due to their short-term nature, or the amount disclosed for fair value is based upon a discounted cash
flow analysis or quoted market values. See Note 9 for further information on financial instruments.
New Accounting Standards
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2016-15,
Statement of Cash Flows (Topic 230)
, which adds and/or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is intended to reduce
diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years; early adoption is
permitted. The company is currently assessing the impact that this standard will have on its consolidated statements of cash flows.
9
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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. The ASU 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 that this standard will have on its consolidated financial statements.
In March 2016, the
FASB issued ASU No. 2016-09,
Compensation Stock Compensation (Topic 718) Improvements to
Employee Share-Based Payment Accounting
, which is intended to simplify several aspects of the accounting for stock-based
compensation transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. Snap-on elected to early adopt this ASU as of January 3,
2016. Prior to the adoption of the ASU, excess tax benefits or expense related to stock-based compensation transactions were recognized in Additional paid-in capital on the Condensed Consolidated Balance Sheets; following the
adoption of the ASU, all excess tax benefits or expense related to stock-based compensation transactions are recognized prospectively as income tax benefits or expense in the Condensed Consolidated Statements of Earnings and the excess tax benefits
or expense from stock-based compensation transactions previously included in Financing activities on the Condensed Consolidated Statements of Cash Flows are prospectively included on that statement as a component of Net
earnings. The adoption of this ASU did not have a significant impact on the companys Condensed 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. The ASU 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 that this standard will have on its consolidated
financial statements.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred
Taxes
, to simplify the presentation of deferred income taxes by requiring that all deferred tax liabilities and assets be classified as long term on the balance sheet. Snap-on elected to early adopt this ASU as of April 2, 2016; the ASU was
initially effective for Snap-on no later than January 1, 2017. Upon adoption, Snap-on retrospectively reclassified $109.9 million of current Deferred income tax assets, $45.9 million of long-term Deferred income tax assets,
and $0.3 million of current deferred income tax liabilities (included in Other accrued liabilities) to long-term Deferred income tax liabilities on the accompanying Condensed Consolidated Balance Sheet as of January 2,
2016. The adoption of this ASU did not have a significant impact on the companys Condensed Consolidated Financial Statements.
In May 2014, the FASB issued 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. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract.
10
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers
(Topic 606) Narrow-Scope Improvements and Practical Expedients,
which clarifies the guidance in Topic 606 on assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications
at transition. The amendments in ASU No. 2016-12 do not change the core principles of the guidance in Topic 606.
In
April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606) Identifying
Performance Obligations and Licensing
,
which clarifies the identification of performance obligations and the
licensing implementation guidance in Topic 606. The amendments in ASU No. 2016-10 do not change the core principles of the guidance in Topic 606.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
, which amends the
principal-versus-agent implementation guidance in ASU No. 2014-09 (Topic 606). ASU No. 2016-08 clarifies the principal-versus-agent guidance in Topic 606 and requires an entity to determine whether the nature of its promise to provide goods or
services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation.
Entities may early adopt ASU No. 2014-09 (and related updates) only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. ASU No. 2014-09 (and related updates) will become effective for Snap-on at the beginning of its 2018 fiscal year. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption
of the standard. The company is currently assessing the impact that this standard will have on its consolidated financial statements.
Note 2: Acquisition
On
July 27, 2015, Snap-on acquired the assets of Ecotechnics S.p.A. (Ecotechnics) for a preliminary cash purchase price of $13.1 million; the final cash purchase price of $11.8 million, including post-closing adjustments, was concluded in
the fourth quarter of 2015. Ecotechnics designs and manufactures vehicle air conditioning service equipment for original equipment manufacturer (OEM) dealerships and the automotive aftermarket worldwide. For segment reporting purposes,
the results of operations and assets of Ecotechnics have been included in the Repair Systems & Information Group since the date of acquisition. Pro forma financial information has not been presented as the net effects of the Ecotechnics
acquisition were neither significant nor material to Snap-ons results of operations or financial position.
Note 3: Receivables
Trade and Other Accounts Receivable
Snap-ons 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-ons independent franchise van channel on a non-extended-term basis with payment terms generally ranging from 30 to 120 days.
The components of Snap-ons trade and other accounts receivable as of October 1, 2016, and January 2, 2016, are as follows:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
Trade and other accounts receivable
|
|
$
|
603.6
|
|
|
$
|
579.2
|
|
Allowances for doubtful accounts
|
|
|
(14.5)
|
|
|
|
(16.7)
|
|
|
|
|
|
|
|
|
|
|
Total trade and other accounts receivable net
|
|
$
|
589.1
|
|
|
$
|
562.5
|
|
|
|
|
|
|
|
|
|
|
11
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Finance and Contract Receivables
Snap-on Credit LLC (SOC), the companys financial services operation in the United States, originates extended-term
finance and contract receivables on sales of Snap-ons products sold through the U.S. franchisee and customer network and to certain other customers of Snap-on; Snap-ons 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-ons finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop
owners (i.e., franchisees customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with expected average payment terms of approximately three years. Contract
receivables, with payment terms of up to 10 years, are comprised of extended-term installment payment contracts to a broad base of 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-ons current finance and contract receivables as of October 1, 2016, and January 2, 2016, are as follows:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
Finance receivables, net of unearned finance charges of $16.9 million and $16.9 million, respectively
|
|
$
|
489.3
|
|
|
$
|
460.7
|
|
Contract receivables, net of unearned finance charges of $15.5 million and $15.1 million, respectively
|
|
|
94.1
|
|
|
|
83.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
583.4
|
|
|
|
544.2
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts:
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
(14.9)
|
|
|
|
(13.4)
|
|
Contract receivables
|
|
|
(1.4)
|
|
|
|
(1.4)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(16.3)
|
|
|
|
(14.8)
|
|
|
|
|
|
|
|
|
|
|
Total current finance and contract receivables net
|
|
$
|
567.1
|
|
|
$
|
529.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables net
|
|
$
|
474.4
|
|
|
$
|
447.3
|
|
Contract receivables net
|
|
|
92.7
|
|
|
|
82.1
|
|
|
|
|
|
|
|
|
|
|
Total current finance and contract receivables net
|
|
$
|
567.1
|
|
|
$
|
529.4
|
|
|
|
|
|
|
|
|
|
|
12
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The components of Snap-ons finance and contract receivables with payment terms
beyond one year as of October 1, 2016, and January 2, 2016, are as follows:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
Finance receivables, net of unearned finance charges of $13.3 million and $10.9 million, respectively
|
|
$
|
930.5
|
|
|
$
|
797.5
|
|
Contract receivables, net of unearned finance charges of $21.3 million and $21.1 million, respectively
|
|
|
287.1
|
|
|
|
269.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,217.6
|
|
|
|
1,067.1
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts:
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
|
(30.7)
|
|
|
|
(24.8)
|
|
Contract receivables
|
|
|
(3.1)
|
|
|
|
(3.0)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(33.8)
|
|
|
|
(27.8)
|
|
|
|
|
|
|
|
|
|
|
Total long-term finance and contract receivables net
|
|
$
|
1,183.8
|
|
|
$
|
1,039.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables net
|
|
$
|
899.8
|
|
|
$
|
772.7
|
|
Contract receivables net
|
|
|
284.0
|
|
|
|
266.6
|
|
|
|
|
|
|
|
|
|
|
Total long-term finance and contract receivables net
|
|
$
|
1,183.8
|
|
|
$
|
1,039.3
|
|
|
|
|
|
|
|
|
|
|
Delinquency is the primary indicator of credit quality for finance and contract
receivables. Receivable balances are considered delinquent when contractual payments become 30 days past due.
Finance
receivables are generally placed on nonaccrual status (nonaccrual of interest and other fees) (i) when a customer is placed on repossession status; (ii) upon receipt of notification of bankruptcy; (iii) upon notification of the death of a customer;
or (iv) in other instances in which management concludes collectability is not reasonably assured. Finance receivables that are considered nonperforming include receivables that are on nonaccrual status and receivables that are generally more
than 90 days past due.
Contract receivables are generally placed on nonaccrual status (i) when a receivable is more than 90
days past due or at the point a customers 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 receivables are covered by the companys finance and contract allowances for doubtful accounts reserves and are charged-off against the reserves when
appropriate. As of October 1, 2016, and January 2, 2016, there were $22.0 million and $18.2 million, respectively, of impaired finance receivables, and there were $2.2 million and $1.7 million, respectively, of impaired contract receivables.
It is the general practice of Snap-ons financial services business to not engage in contract or loan
modifications. In limited instances, Snap-ons financial services business may modify certain impaired receivables in troubled debt restructurings. The amount and number of restructured finance and contract receivables as of October
1, 2016, and January 2, 2016, were immaterial to both the financial services portfolio and the companys results of operations and financial position.
13
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The aging of finance and contract receivables as of October 1, 2016, and January 2,
2016, 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
|
|
October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
14.2
|
|
|
$
|
8.5
|
|
|
$
|
14.2
|
|
|
$
|
36.9
|
|
|
$
|
1,382.9
|
|
|
$
|
1,419.8
|
|
|
$
|
10.9
|
|
Contract receivables
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
1.8
|
|
|
|
3.4
|
|
|
|
377.8
|
|
|
|
381.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
January 2, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance receivables
|
|
$
|
12.1
|
|
|
$
|
7.6
|
|
|
$
|
11.9
|
|
|
$
|
31.6
|
|
|
$
|
1,226.6
|
|
|
$
|
1,258.2
|
|
|
$
|
9.1
|
|
Contract receivables
|
|
|
1.3
|
|
|
|
0.7
|
|
|
|
1.3
|
|
|
|
3.3
|
|
|
|
349.8
|
|
|
|
353.1
|
|
|
|
0.3
|
|
The amount of performing and nonperforming finance and contract receivables based on payment activity as
of October 1, 2016, and January 2, 2016, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
(Amounts in millions)
|
|
Finance
Receivables
|
|
|
Contract
Receivables
|
|
|
Finance
Receivables
|
|
|
Contract
Receivables
|
|
Performing
|
|
$
|
1,397.8
|
|
|
$
|
379.0
|
|
|
$
|
1,240.0
|
|
|
$
|
351.4
|
|
Nonperforming
|
|
|
22.0
|
|
|
|
2.2
|
|
|
|
18.2
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,419.8
|
|
|
$
|
381.2
|
|
|
$
|
1,258.2
|
|
|
$
|
353.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of finance and contract receivables on nonaccrual status as of October 1, 2016, and January 2,
2016, is as follows:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
Finance receivables
|
|
$
|
11.5
|
|
|
$
|
9.3
|
|
Contract receivables
|
|
|
1.7
|
|
|
|
1.5
|
|
The following is a rollforward of the allowances for credit losses for finance and contract receivables
for the three and nine month periods ended October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 1, 2016
|
|
|
Nine Months Ended
October 1, 2016
|
|
(Amounts in millions)
|
|
Finance
Receivables
|
|
|
Contract
Receivables
|
|
|
Finance
Receivables
|
|
|
Contract
Receivables
|
|
Allowances for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
42.6
|
|
|
$
|
4.5
|
|
|
$
|
38.2
|
|
|
$
|
4.4
|
|
Provision for bad debt expense
|
|
|
10.8
|
|
|
|
0.5
|
|
|
|
30.4
|
|
|
|
1.1
|
|
Charge-offs
|
|
|
(9.2)
|
|
|
|
(0.6)
|
|
|
|
(28.0)
|
|
|
|
(1.3)
|
|
Recoveries
|
|
|
1.4
|
|
|
|
0.1
|
|
|
|
5.0
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
45.6
|
|
|
$
|
4.5
|
|
|
$
|
45.6
|
|
|
$
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following is a rollforward of the allowances for credit losses for finance and
contract receivables for the three and nine month periods ended October 3, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
October 3, 2015
|
|
|
Nine Months Ended
October 3, 2015
|
|
(Amounts in millions)
|
|
Finance
Receivables
|
|
|
Contract
Receivables
|
|
|
Finance
Receivables
|
|
|
Contract
Receivables
|
|
Allowances for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
34.9
|
|
|
$
|
4.2
|
|
|
$
|
32.7
|
|
|
$
|
3.5
|
|
Provision for bad debt expense
|
|
|
8.0
|
|
|
|
0.5
|
|
|
|
22.4
|
|
|
|
2.1
|
|
Charge-offs
|
|
|
(7.4)
|
|
|
|
(0.5)
|
|
|
|
(22.5)
|
|
|
|
(1.5)
|
|
Recoveries
|
|
|
1.4
|
|
|
|
0.1
|
|
|
|
4.4
|
|
|
|
0.3
|
|
Currency translation
|
|
|
(0.1)
|
|
|
|
|
|
|
|
(0.2)
|
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
36.8
|
|
|
$
|
4.3
|
|
|
$
|
36.8
|
|
|
$
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4: Inventories
Inventories by major classification are as follows:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
Finished goods
|
|
$
|
458.5
|
|
|
$
|
437.9
|
|
Work in progress
|
|
|
42.3
|
|
|
|
42.9
|
|
Raw materials
|
|
|
96.1
|
|
|
|
90.3
|
|
|
|
|
|
|
|
|
|
|
Total FIFO value
|
|
|
596.9
|
|
|
|
571.1
|
|
Excess of current cost over LIFO cost
|
|
|
(73.3)
|
|
|
|
(73.3)
|
|
|
|
|
|
|
|
|
|
|
Total inventories net
|
|
$
|
523.6
|
|
|
$
|
497.8
|
|
|
|
|
|
|
|
|
|
|
Inventories accounted for using the first-in, first-out (FIFO) method approximated 58% and
57% as October 1, 2016, and January 2, 2016, respectively. The company accounts for its non-U.S. inventory on the FIFO method. As of October 1, 2016, approximately 29% of the companys U.S. inventory was accounted for using the
FIFO method and 71% was accounted for using the last-in, first-out (LIFO) method. There were no LIFO inventory liquidations in the three and nine month periods ended October 1, 2016, or October 3, 2015.
Note 5: Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill by segment for the nine month period ended October 1, 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Commercial
& Industrial
Group
|
|
|
Snap-on
Tools Group
|
|
|
Repair Systems
& Information
Group
|
|
|
Total
|
|
Balance as of January 2, 2016
|
|
$
|
253.1
|
|
|
$
|
12.5
|
|
|
$
|
524.5
|
|
|
$
|
790.1
|
|
Currency translation
|
|
|
0.3
|
|
|
|
|
|
|
|
(2.1)
|
|
|
|
(1.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2016
|
|
$
|
253.4
|
|
|
$
|
12.5
|
|
|
$
|
522.4
|
|
|
$
|
788.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Additional disclosures related to other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
(Amounts in millions)
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Value
|
|
|
Accumulated
Amortization
|
|
Amortized other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
143.6
|
|
|
$
|
(84.5)
|
|
|
$
|
146.2
|
|
|
$
|
(79.7)
|
|
Developed technology
|
|
|
18.0
|
|
|
|
(18.0)
|
|
|
|
18.9
|
|
|
|
(18.9)
|
|
Internally developed software
|
|
|
163.5
|
|
|
|
(115.1)
|
|
|
|
156.0
|
|
|
|
(105.6)
|
|
Patents
|
|
|
31.6
|
|
|
|
(21.6)
|
|
|
|
30.1
|
|
|
|
(20.9)
|
|
Trademarks
|
|
|
2.7
|
|
|
|
(1.8)
|
|
|
|
2.6
|
|
|
|
(1.7)
|
|
Other
|
|
|
7.4
|
|
|
|
(2.2)
|
|
|
|
7.6
|
|
|
|
(1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
366.8
|
|
|
|
(243.2)
|
|
|
|
361.4
|
|
|
|
(228.7)
|
|
Non-amortized trademarks
|
|
|
61.9
|
|
|
|
|
|
|
|
62.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets
|
|
$
|
428.7
|
|
|
$
|
(243.2)
|
|
|
$
|
423.7
|
|
|
$
|
(228.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets
in the second quarter of 2016, the results of which did not result in any impairment. Significant and unanticipated changes in circumstances, such as declines in profitability and cash flow due to significant and long-term deterioration in
macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including
effects from the sale or disposal of a reporting unit, could require a provision for impairment of goodwill and/or other intangible assets in a future period. As of October 1, 2016, 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
|
Internally developed software
|
|
3
|
Patents
|
|
9
|
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 companys 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 companys historical renewal experience. Intangible asset renewal costs are expensed as incurred.
The aggregate amortization expense was $5.9 million and $18.2 million for the respective three and nine month periods ended
October 1, 2016, and $6.0 million and $18.4 million for the respective three and nine month periods ended October 3, 2015. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated
annual amortization expense is expected to be $23.6 million in 2016, $22.2 million in 2017, $19.8 million in 2018, $17.2 million in 2019, $13.9 million in 2020, and $12.2 million in 2021.
16
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 6: Exit and Disposal Activities
Snap-on did not record any costs for exit and disposal activities in the three month period ended October 1, 2016; Snap-on recorded
$0.9 million of costs for exit and disposal activities in the nine month period ended October 1, 2016, as follows:
|
|
|
|
|
|
|
Nine
Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
Exit and disposal costs:
|
|
|
|
|
Repair Systems & Information Group:
|
|
|
|
|
Cost of goods sold
|
|
$
|
0.8
|
|
Operating expenses
|
|
|
0.1
|
|
|
|
|
|
|
Total exit and disposal costs
|
|
$
|
0.9
|
|
|
|
|
|
|
The $0.9 million of costs incurred during the nine month period ended October 1, 2016, qualified for
accrual treatment. Snap-on did not record any costs for exit and disposal activities in the three and nine month periods ended October 3, 2015.
Snap-ons exit and disposal accrual activity for the first nine months of 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
First Six Months
|
|
|
Balance at
|
|
|
Third Quarter
|
|
|
Balance at
|
|
(Amounts in millions)
|
|
January 2,
2016
|
|
|
Provision
|
|
|
Usage
|
|
|
July 2,
2016
|
|
|
Provision
|
|
|
Usage
|
|
|
October 1,
2016
|
|
Severance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial Group
|
|
$
|
0.3
|
|
|
$
|
|
|
|
$
|
(0.1)
|
|
|
$
|
0.2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.2
|
|
Repair Systems & Information Group
|
|
|
3.8
|
|
|
|
0.9
|
|
|
|
(1.2)
|
|
|
|
3.5
|
|
|
|
|
|
|
|
(0.6)
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4.1
|
|
|
$
|
0.9
|
|
|
$
|
(1.3)
|
|
|
$
|
3.7
|
|
|
$
|
|
|
|
$
|
(0.6)
|
|
|
$
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company expects that approximately $1.0 million of the $3.1 million exit and disposal accrual as of
October 1, 2016, will be utilized in the balance of 2016; due to the timing of longer-term severance payments, it is anticipated that the remainder of the exit and disposal accrual will be utilized in 2017. Snap-on expects to fund the remaining
cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the companys existing credit facilities. The estimated costs for the exit and disposal activities were based on
managements best business judgment under prevailing circumstances.
Note 7: Income Taxes
Snap-ons effective income tax rate on earnings attributable to Snap-on was 31.1% and 31.9% in the first nine months of 2016 and
2015, respectively. The effective tax rate for the first nine months of 2016 included tax benefits from the reversal of deferred tax asset valuation allowances that are now expected to be realized in future years, as well as tax benefits associated
with the adoption of ASU No. 2016-09; these tax benefits were partially offset by tax contingency reserves established for certain non-U.S. tax audits. The effective tax rate for the first nine months of 2015 included tax benefits associated
with distributions from certain non-U.S. subsidiaries, partially offset by a tax assessment in a foreign jurisdiction.
17
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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-ons gross unrecognized tax benefits to decrease by a range of zero to $3.9 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-ons gross unrecognized tax benefits may increase by a range of zero to $1.1 million over the next 12 months for uncertain tax positions expected to be taken in future tax filings.
Note 8: Short-term and Long-term Debt
Short-term and long-term debt as of October 1, 2016, and January 2, 2016, consisted of the following:
|
|
|
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
January 2,
2016
|
5.50% unsecured notes due 2017
|
|
$ 150.0
|
|
$ 150.0
|
4.25% unsecured notes due 2018
|
|
250.0
|
|
250.0
|
6.70% unsecured notes due 2019
|
|
200.0
|
|
200.0
|
6.125% unsecured notes due 2021
|
|
250.0
|
|
250.0
|
Other debt*
|
|
46.0
|
|
30.1
|
|
|
|
|
|
|
|
896.0
|
|
880.1
|
|
|
|
Less: notes payable and current maturities of long-term debt
|
|
(182.6)
|
|
(18.4)
|
|
|
|
|
|
Total long-term debt
|
|
$ 713.4
|
|
$ 861.7
|
|
|
|
|
|
*
Includes fair value adjustments related to interest rate swaps.
Notes payable and current maturities of long-term debt of
$182.6 million as of October 1, 2016, consisted of $150.0 million of 5.50% unsecured notes that mature on January 15, 2017 (the 2017 Notes) and $32.6 million of other notes, including $8.0 million of commercial paper
borrowings. Notes payable at 2015 year end totaled $18.4 million and there were no commercial paper borrowings outstanding. As of 2015 year end, the 2017 Notes were included in Long-term debt on the accompanying Condensed Consolidated
Balance Sheet as their scheduled maturity was in excess of one year of the 2015 year-end balance sheet date.
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 October 1, 2016. Borrowings under the Credit
Facility bear interest at varying rates based on Snap-ons then-current, long-term debt ratings. The Credit Facilitys financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio not greater
than 0.60 to 1.00 of consolidated net debt (consolidated debt net of certain cash adjustments) to the sum of such consolidated net debt plus total equity and less accumulated other comprehensive income or loss (the Debt Ratio); or
(ii) a ratio not greater than 3.50 to 1.00 of such consolidated net debt to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the Debt to EBITDA
Ratio). Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), increase the maximum Debt Ratio to 0.65 to 1.00 and/or increase the maximum Debt to EBITDA Ratio to
3.75 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of October 1, 2016, the companys actual ratios of 0.22 and 0.90, respectively, were both
within the permitted ranges set forth in this financial covenant.
18
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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 companys 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-ons 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.
As of October 1, 2016, Snap-on had $108.7 million of
net foreign currency forward buy contracts outstanding comprised of buy contracts including $59.0 million in euros, $46.9 million in Swedish kronor, $23.2 million in British pounds, $6.5 million in South Korean won, $5.8 million in Singapore
dollars, $5.6 million in Hong Kong dollars, $5.0 million in Chinese yuan, and $12.6 million in other currencies, and sell contracts comprised of $20.5 million in Japanese yen, $18.5 million in Canadian dollars, $4.7 million in Indian rupees, and
$12.2 million in other currencies. As of 2015 year end, Snap-on had $98.3 million of net foreign currency forward buy contracts outstanding comprised of buy contracts including $52.0 million in euros, $31.4 million in British pounds, $23.4 million
in Swedish kronor, $12.9 million in Singapore dollars, $6.2 million in South Korean won, $5.5 million in Mexican pesos and $8.7 million in other currencies, and sell contracts comprised of $18.4 million in Canadian dollars, $9.7 million in Japanese
yen, $4.2 million in Australian dollars and $9.5 million in other currencies.
Interest Rate Risk Management:
Snap-on
aims to control funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-ons borrowings through the use of interest rate swap agreements (interest rate swaps).
19
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Snap-on enters into interest rate swaps to manage risks associated with changing
interest rates related to the companys fixed rate borrowings. Interest rate swaps are accounted for as fair value hedges. The differentials paid or received on interest rate swaps are recognized as adjustments to Interest expense
on the accompanying Condensed Consolidated Statements of Earnings. The effective portion of the change in fair value of the derivative is recorded in Long-term debt on the accompanying Condensed Consolidated Balance Sheets, while any
ineffective portion is recorded as an adjustment to Interest expense on the accompanying Condensed Consolidated Statements of Earnings. The notional amount of interest rate swaps outstanding and designated as fair value hedges was $100.0
million as of both October 1, 2016, and January 2, 2016.
Snap-on enters into treasury lock agreements
(treasury locks) from time to time to manage the potential change in interest rates in anticipation of issuing fixed rate debt. Treasury locks are accounted for as cash flow hedges. The effective differentials paid or received on
treasury locks related to the anticipated issuance of fixed rate debt are recognized as adjustments to Interest expense on the accompanying Condensed Consolidated Statements of Earnings. There were no treasury locks outstanding as of
October 1, 2016, or January 2, 2016, and no treasury locks were settled during the first nine months of 2016 or 2015.
Stock-based Deferred Compensation Risk Management:
Snap-on aims to manage market risk associated with the stock-based portion of
its deferred compensation plans through the use of prepaid equity forward agreements (equity forwards). Equity forwards are used to aid in offsetting the potential mark-to-market effect on stock-based deferred compensation from changes
in Snap-ons stock price. Since stock-based deferred compensation liabilities increase as the companys stock price rises and decrease as the companys 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 October 1, 2016, Snap-on had equity forwards in place intended to manage market risk with respect to 111,200 shares of Snap-on common stock
associated with its deferred compensation plans.
Fair Value Measurements:
Snap-on has derivative assets and
liabilities related to interest rate swaps, foreign currency forwards and equity forwards that are measured at Level 2 fair value on a recurring basis. The fair values of derivative instruments included within the Condensed Consolidated Balance
Sheets as of October 1, 2016, and January 2, 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
(Amounts in millions)
|
|
Balance Sheet
Presentation
|
|
Asset
Derivatives
Fair Value
|
|
|
Liability
Derivatives
Fair Value
|
|
|
Asset
Derivatives
Fair Value
|
|
|
Liability
Derivatives
Fair Value
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
13.7
|
|
|
$
|
|
|
|
$
|
12.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards
|
|
Prepaid expenses and other assets
|
|
$
|
1.9
|
|
|
$
|
|
|
|
$
|
2.8
|
|
|
$
|
|
|
Foreign currency forwards
|
|
Other accrued liabilities
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
5.9
|
|
Equity forwards
|
|
Prepaid expenses and other assets
|
|
|
16.9
|
|
|
|
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
18.8
|
|
|
$
|
2.3
|
|
|
$
|
21.3
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives instruments
|
|
|
|
$
|
32.5
|
|
|
$
|
2.3
|
|
|
$
|
34.2
|
|
|
$
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As of October 1, 2016, and January 2, 2016, the fair value adjustment to long-term debt
related to the interest rate swaps was $13.7 million and $12.9 million, respectively.
Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in
active markets for similar assets and liabilities. Interest rate swaps are valued based on the six-month LIBOR swap rate for similar instruments. Foreign currency forwards are valued based on exchange rates quoted by domestic and foreign banks
for similar instruments. Equity forwards are valued using a market approach based primarily on the companys stock price at the reporting date. The company did not have any derivative assets or liabilities measured at Level 1 or Level 3, nor
did it implement any changes in its valuation techniques as of and for the nine month period ended October 1, 2016.
The
effect of derivative instruments designated as fair value hedges as included in the Condensed Consolidated Statements of Earnings is as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of Gain Recognized in Income
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
Statement of Earnings
Presentation
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Derivatives designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
0.4
|
|
|
$
|
0.8
|
|
|
$
|
1.9
|
|
|
$
|
2.8
|
|
The effect of derivative instruments designated as cash flow hedges as included in Accumulated OCI on the
Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Earnings is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of
Gain
Recognized in
Accumulated OCI
Three Months Ended
|
|
|
Statement of
Earnings
Presentation
|
|
Effective Portion of
Gain
Reclassified from Accumulated
OCI into Income
Three Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury locks
|
|
$
|
|
|
|
$
|
|
|
|
Interest expense
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion of Gain
Recognized in
Accumulated OCI
Nine Months Ended
|
|
|
Statement of
Earnings
Presentation
|
|
Effective Portion of Gain
Reclassified from Accumulated
OCI into
Income
Nine Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury locks
|
|
$
|
|
|
|
$
|
|
|
|
Interest expense
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
21
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The effects of derivative instruments not designated as hedging instruments as included
in the Condensed Consolidated Statements of Earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
Statement of Earnings
Presentation
|
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards
|
|
Other income (expense) net
|
|
|
|
$
|
(0.7)
|
|
|
$
|
(3.0)
|
|
|
$
|
(4.9)
|
|
|
$
|
(13.9)
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
Operating expenses
|
|
|
|
|
(0.7)
|
|
|
|
(1.1)
|
|
|
|
(1.4)
|
|
|
|
2.1
|
|
Snap-ons foreign currency forwards are typically not designated as hedges for financial reporting
purposes. The fair value changes of foreign currency forwards not designated as hedging instruments are reported in earnings as foreign exchange gain or loss in Other income (expense) net on the accompanying Condensed
Consolidated Statements of Earnings. The $0.7 million derivative loss recognized in the third quarter of 2016 was increased by transaction losses on net exposures of $0.3 million, resulting in a foreign exchange loss of $1.0 million for the quarter.
The $3.0 million derivative loss recognized in the third quarter of 2015 was partially offset by transaction gains on net exposures of $2.4 million, resulting in a net foreign exchange loss of $0.6 million for the quarter. The $4.9 million
derivative loss recognized in the first nine months of 2016 was partially offset by transaction gains on net exposures of $4.0 million, resulting in a 2016 year-to-date net foreign exchange loss of $0.9 million. The $13.9 million derivative loss
recognized in the first nine months of 2015 was partially offset by transaction gains on net exposures of $11.8 million, resulting in a 2015 year-to-date net foreign exchange loss of $2.1 million. The resulting net foreign exchange gains and losses
are included in Other income (expense) net on the accompanying Condensed Consolidated Statements of Earnings. See Note 15 for additional information on Other income (expense) net.
Snap-ons equity forwards are not designated as hedges for financial reporting purposes. Fair value changes of both the equity
forwards and related stock-based (mark-to-market) deferred compensation liabilities are reported in Operating expenses on the accompanying Condensed Consolidated Statements of Earnings. The $0.7 million derivative loss recognized in the
third quarter of 2016 was offset by $0.7 million of mark-to-market deferred compensation income. The $1.1 million derivative loss recognized in the third quarter of 2015 was offset by $1.1 million of mark-to-market deferred compensation income. The
$1.4 million derivative loss recognized in the first nine months of 2016 was more than offset by $1.8 million of mark-to-market deferred compensation income. The $2.1 million derivative gain recognized in the first nine months of 2015 was largely
offset by $2.0 million of mark-to-market deferred compensation expense.
As of October 1, 2016, the maximum maturity date of
any fair value hedge was five years. During the next 12 months, Snap-on expects to reclassify into earnings net gains from Accumulated OCI of approximately $0.2 million after tax at the time the underlying hedge transactions are realized.
See the accompanying Condensed Consolidated Statements of Comprehensive Income for additional information on changes in comprehensive
income.
Counterparty Risk:
Snap-on is exposed to credit losses in the event of non-performance by the counterparties to
its various financial agreements, including its foreign currency forward contracts, interest rate swap agreements and prepaid equity forward agreements. Snap-on does not obtain collateral or other security to support financial instruments subject to
credit risk, but monitors the credit standing of the counterparties and generally enters into agreements with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its
counterparties, but cannot provide assurances.
22
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
|
January 2, 2016
|
|
(Amounts in millions)
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Finance receivables net
|
|
$
|
1,374.2
|
|
|
$
|
1,592.0
|
|
|
$
|
1,220.0
|
|
|
$
|
1,381.9
|
|
Contract receivables net
|
|
|
376.7
|
|
|
|
415.3
|
|
|
|
348.7
|
|
|
|
380.2
|
|
|
|
|
|
|
Long-term debt, notes payable and current maturities of long-term debt
|
|
|
896.0
|
|
|
|
981.7
|
|
|
|
880.1
|
|
|
|
961.1
|
|
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 was estimated, using Level 2 fair value measurements, based on quoted market
values of Snap-ons 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 cash equivalents, trade and other accounts receivable, accounts payable and other
financial instruments, approximates such instruments carrying value due to their short-term nature.
|
Note 10:
Pension Plans
Snap-ons net periodic pension cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Service cost
|
|
$
|
4.8
|
|
|
$
|
5.1
|
|
|
$
|
14.5
|
|
|
$
|
15.2
|
|
Interest cost
|
|
|
14.2
|
|
|
|
13.4
|
|
|
|
42.6
|
|
|
|
40.2
|
|
Expected return on plan assets
|
|
|
(20.4)
|
|
|
|
(19.8)
|
|
|
|
(60.8)
|
|
|
|
(59.5)
|
|
Amortization of unrecognized loss
|
|
|
7.8
|
|
|
|
9.7
|
|
|
|
23.5
|
|
|
|
29.1
|
|
Amortization of prior service credit
|
|
|
(0.2)
|
|
|
|
(0.3)
|
|
|
|
(0.8)
|
|
|
|
(0.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
6.2
|
|
|
$
|
8.1
|
|
|
$
|
19.0
|
|
|
$
|
24.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snap-on intends to make contributions of $7.4 million to its foreign pension plans and $2.0 million to
its domestic pension plans in 2016, as required by law. In the first nine months of 2016, Snap-on made $41.2 million of cash contributions to its domestic pension plans consisting of (i) $40.0 million of discretionary contributions; and (ii)
$1.2 million of required contributions. Depending on market and other conditions, Snap-on may make additional discretionary contributions in the balance of 2016.
23
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 11: Postretirement Health Care Plans
Snap-ons net periodic postretirement health care cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Service cost
|
|
$
|
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.1
|
|
Interest cost
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
1.7
|
|
|
|
1.6
|
|
Expected return on plan assets
|
|
|
(0.3)
|
|
|
|
(0.2)
|
|
|
|
(0.7)
|
|
|
|
(0.7)
|
|
Amortization of unrecognized loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement health care cost
|
|
$
|
0.3
|
|
|
$
|
0.4
|
|
|
$
|
1.0
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 12: Stock-based Compensation and Other Stock Plans
The 2011 Incentive Stock and Awards Plan, as amended and restated as of April 30, 2015 (the 2011 Plan), provides for the
grant of stock options, performance awards, stock appreciation rights (SARs) and restricted stock awards (which may be designated as restricted stock units or RSUs). No further grants are being made under its
predecessor, the 2001 Incentive Stock and Awards Plan (the 2001 Plan), although outstanding awards under the 2001 Plan will continue until exercised, vested, forfeited or expired. As of October 1, 2016, the 2011 Plan had 4,100,874
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 $7.3 million and $21.5 million for the respective three and nine month periods ended October 1, 2016, and $6.7 million and $29.8 million for the respective three and nine month periods ended October 3,
2015. Cash received from stock purchase and option plan exercises during the three and nine month periods ended October 1, 2016, totaled $4.0 million and $32.4 million, respectively. Cash received from stock purchase and option plan exercises
during the three and nine month periods ended October 3, 2015, totaled $3.2 million and $39.7 million, respectively. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $1.8 million and $14.9
million for the respective three and nine month periods ended October 1, 2016, and $1.1 million and $20.4 million for the respective three and nine month periods ended October 3, 2015.
Stock Options
Stock options are granted with an exercise price equal to
the market value of a share of Snap-ons 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 companys stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the companys 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.
24
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 options granted during the nine month period ended October 1, 2016, and the three and nine month periods ended October 3, 2015, using the Black-Scholes valuation model; there were no stock options granted during the three month period ended
October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Expected term of option
(in years)
|
|
N/A
|
|
3.64
|
|
5.05
|
|
4.76
|
Expected volatility factor
|
|
N/A
|
|
19.20%
|
|
22.17%
|
|
24.13%
|
Expected dividend yield
|
|
N/A
|
|
1.75%
|
|
1.77%
|
|
2.04%
|
Risk-free interest rate
|
|
N/A
|
|
0.99%
|
|
1.04%
|
|
1.38%
|
A summary of stock option activity as of and for the nine month period ended October 1, 2016, is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
|
Exercise
Price Per
Share*
|
|
|
Remaining
Contractual
Term*
(in
years)
|
|
|
Aggregate
Intrinsic
Value
(in millions)
|
|
Outstanding at January 2, 2016
|
|
|
2,811
|
|
|
$
|
88.62
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
644
|
|
|
|
138.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(283)
|
|
|
|
75.81
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(27)
|
|
|
|
133.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 1, 2016
|
|
|
3,145
|
|
|
|
99.50
|
|
|
|
6.7
|
|
|
$
|
165.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 1, 2016
|
|
|
1,910
|
|
|
|
76.09
|
|
|
|
5.4
|
|
|
|
144.9
|
|
*
Weighted-average
The weighted-average grant date fair value of options granted during the nine month periods ended October 1,
2016, and October 3, 2015, was $22.99 and $25.64, respectively. The intrinsic value of options exercised was $4.8 million and $22.2 million during the respective three and nine month periods ended October 1, 2016, and $5.5 million and $35.7
million during the respective three and nine month periods ended October 3, 2015. The fair value of stock options vested was $12.7 million and $9.9 million during the respective nine month periods ended October 1, 2016, and October 3, 2015.
As of October 1, 2016, there was $20.1 million of unrecognized compensation cost related to non-vested stock options that is
expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.
Performance Awards
Performance awards, which are granted as performance share units and performance-based RSUs, are earned and expensed using the fair value
of the award over a contractual term of three years based on the companys performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the
applicable performance period. For performance achieved above a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance awards initially granted.
The performance share units have a three-year performance period based on the results of the consolidated financial metrics of the
company. The performance-based RSUs have a one-year performance period based on the results of the consolidated financial metrics of the company followed by a two-year cliff vesting schedule, assuming continued employment.
25
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The fair value of performance awards is calculated using the market value of a share of
Snap-ons common stock on the date of grant and assumed forfeitures based on recent historical experience; in recent years, forfeitures have not been significant. The
weighted-average
grant date fair
value of performance awards granted during the nine month periods ended October 1, 2016, and October 3, 2015, was $138.80 and $139.05, respectively. Performance share units related to 94,186 shares and 130,764 shares were paid out during the
respective nine month periods ended October 1, 2016, and October 3, 2015. Earned performance share units are generally paid out following the conclusion of the applicable performance period upon approval by the Organization and Executive
Compensation Committee of the companys Board of Directors (the Board).
Based on the companys 2015
performance, 64,327 RSUs granted in 2015 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2017. Based on the companys 2014 performance, 78,585 RSUs granted in 2014 were earned; assuming continued
employment, these RSUs will vest at the end of fiscal 2016. Based on the companys 2013 performance, 81,453 RSUs granted in 2013 were earned; these RSUs vested as of fiscal 2015 year end and were paid out shortly thereafter.
Changes to the companys non-vested performance awards during the nine month period ended October 1, 2016, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
(in thousands)
|
|
|
Fair Value
Price per
Share*
|
|
Non-vested performance awards at January 2, 2016
|
|
|
265
|
|
|
$
|
124.16
|
|
Granted
|
|
|
100
|
|
|
|
138.80
|
|
Vested
|
|
|
|
|
|
|
|
|
Cancellations and other
|
|
|
(17)
|
|
|
|
112.60
|
|
|
|
|
|
|
|
|
|
|
Non-vested performance awards at October 1, 2016
|
|
|
348
|
|
|
|
128.96
|
|
|
|
|
|
|
|
|
|
|
*
Weighted-average
As of October 1, 2016, there was $17.7 million of unrecognized compensation cost related to non-vested
performance awards that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.
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-ons 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 companys stock has appreciated over the exercise price. Stock-settled SARs have an effect on dilutive shares and shares outstanding as any appreciation of Snap-ons 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-ons 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-ons common stock over the grant price is paid in cash and not in common stock.
26
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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-ons 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 companys stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the companys historical dividend payments. The risk-free interest rate is
based on the U.S. treasury yield curve in effect as of the grant date (for stock-settled SARs) or reporting date (for cash-settled SARs) for the length of time corresponding to the expected term of the SARs.
The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during the nine month
period ended October 1, 2016, and the three and nine month periods ended October 3, 2015, using the Black-Scholes valuation model; there were no stock-settled SARs granted during the three month period ended October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 1,
2016
|
|
October 3,
2015
|
|
October 1,
2016
|
|
October 3,
2015
|
Expected term of stock-settled SARs
(in years)
|
|
N/A
|
|
4.01
|
|
4.03
|
|
4.72
|
Expected volatility factor
|
|
N/A
|
|
23.06%
|
|
20.09%
|
|
23.66%
|
Expected dividend yield
|
|
N/A
|
|
1.75%
|
|
1.66%
|
|
2.04%
|
Risk-free interest rate
|
|
N/A
|
|
1.52%
|
|
1.11%
|
|
1.50%
|
Changes to the companys stock-settled SARs during the nine month period ended October 1, 2016, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-settled
SARs
(in
thousands)
|
|
|
Exercise
Price Per
Share*
|
|
|
Remaining
Contractual
Term*
(in
years)
|
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
|
Outstanding at January 2, 2016
|
|
|
269
|
|
|
$
|
113.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
101
|
|
|
|
138.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(12)
|
|
|
|
88.43
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(21)
|
|
|
|
103.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 1, 2016
|
|
|
337
|
|
|
|
122.59
|
|
|
|
8.1
|
|
|
$
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 1, 2016
|
|
|
139
|
|
|
|
104.17
|
|
|
|
7.2
|
|
|
|
6.6
|
|
*
Weighted-average
The weighted-average grant date fair value of stock-settled SARs granted during the nine month periods ended
October 1, 2016, and October 3, 2015, was $19.47 and $25.37, respectively. The intrinsic value of stock-settled SARs exercised was $0.1 million and $0.8 million during the respective three and nine month periods ended October 1, 2016, and $0.2
million and $0.9 million during the respective three and nine month periods ended October 3, 2015. The fair value of stock-settled SARs vested during the nine month periods ended October 1, 2016, and October 3, 2015, was $2.1 million and $1.4
million, respectively.
27
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As of October 1, 2016, there was $2.9 million of unrecognized compensation cost related
to non-vested stock-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.
The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the nine month periods ended October 1, 2016, and October 3, 2015, using the
Black-Scholes valuation model; no cash-settled SARs were granted during the three month periods ended October 1, 2016, or October 3, 2015:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
October 1,
2016
|
|
October 3,
2015
|
Expected term of cash-settled SARs
(in years)
|
|
3.43
|
|
3.37
|
Expected volatility factor
|
|
19.03%
|
|
19.34%
|
Expected dividend yield
|
|
1.58%
|
|
1.76%
|
Risk-free interest rate
|
|
0.88%
|
|
0.85%
|
The intrinsic value of cash-settled SARs exercised was $0.1 million and $0.9 million during the
respective three and nine month periods ended October 1, 2016, and $0.4 million and $10.4 million during the respective three and nine month periods ended October 3, 2015. The fair value of cash-settled SARs vested during the nine month
periods ended October 1, 2016, and October 3, 2015, was $0.2 million and $3.8 million, respectively.
Changes to the
companys non-vested cash-settled SARs during the nine month period ended October 1, 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Cash-settled
SARs
(in
thousands)
|
|
|
Fair Value
Price per
Share*
|
|
Non-vested cash-settled SARs at January 2, 2016
|
|
|
7
|
|
|
$
|
51.71
|
|
Granted
|
|
|
4
|
|
|
|
24.87
|
|
Vested
|
|
|
(4)
|
|
|
|
44.28
|
|
|
|
|
|
|
|
|
|
|
Non-vested cash-settled SARs at October 1, 2016
|
|
|
7
|
|
|
|
25.93
|
|
|
|
|
|
|
|
|
|
|
*
Weighted-average
As of October 1, 2016, there was $0.2 million of unrecognized compensation cost related to non-vested
cash-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.
Restricted Stock
Awards Non-employee Directors
The company awarded 7,145 shares and 8,640 shares of restricted stock to
non-employee directors in the first nine months of 2016 and 2015, respectively. The fair value of the restricted stock awards is expensed over a one year vesting period based on the fair value on the date of grant. All restrictions for the
restricted stock generally lapse upon the earlier of the first anniversary of the grant date, the recipients death or disability or in the event of a change in control, as defined in the 2011 Plan. If termination of the recipients
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.
28
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Employee Stock Purchase Plan
Substantially all Snap-on employees in the United States and Canada are eligible to participate in an employee stock purchase plan. The
purchase price of the companys common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For the nine months ended
October 1, 2016, and October 3, 2015, issuances under this plan totaled 27,156 shares and 57,324 shares, respectively. As of October 1, 2016, shares reserved for issuance under this plan totaled 780,563 shares and Snap-on held participant
contributions of approximately $1.4 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. No compensation costs were recognized for plan
participants in the third quarters of 2016 and 2015. The company recognized compensation costs for plan participants of a $0.1 million benefit and $2.1 million of expense for the respective nine month periods ended October 1, 2016, and October
3, 2015.
Franchisee Stock Purchase Plan
All franchisees in the United States and Canada are eligible to participate in a franchisee stock purchase plan. The purchase price of the companys common stock to participants is the lesser of
the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For the nine months ended October 1, 2016, and October 3, 2015, issuances under this plan totaled 42,867 shares
and 74,001 shares, respectively. As of October 1, 2016, shares reserved for issuance under this plan totaled 613,469 shares and Snap-on held participant contributions of approximately $2.6 million. Participants are able to withdraw from the
plan at any time prior to the ending date and receive back all contributions made during the plan year. The company did not recognize any mark-to-market costs for plan participants in the third quarters of 2016 and 2015. The company recognized
mark-to-market costs for plan participants of a $0.4 million benefit and $2.2 million of expense for the respective nine month periods ended October 1, 2016, and October 3, 2015.
Note 13: Earnings Per Share
The shares used in the computation of the
companys basic and diluted earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Weighted-average common shares outstanding
|
|
|
58,013,852
|
|
|
|
58,084,784
|
|
|
|
58,076,627
|
|
|
|
58,110,620
|
|
Effect of dilutive securities
|
|
|
1,251,062
|
|
|
|
998,920
|
|
|
|
1,292,765
|
|
|
|
987,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, assuming dilution
|
|
|
59,264,914
|
|
|
|
59,083,704
|
|
|
|
59,369,392
|
|
|
|
59,098,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dilutive effect of the potential exercise of outstanding options and stock-settled SARs is calculated
using the treasury stock method. As of both October 1, 2016, and October 3, 2015, there were 1,600 awards outstanding that were anti-dilutive. Performance-based equity awards do not affect the diluted earnings per share calculation until
it is determined that the applicable performance metrics have been met.
Note 14: Commitments and Contingencies
Snap-on provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the
sale is recorded. Snap-on calculates its accrual requirements based on historic warranty loss experience that is periodically adjusted for recent actual experience, including the timing of claims during the warranty period and actual costs
incurred. Snap-ons product warranty accrual activity for the three and nine month periods ended October 1, 2016, and October 3, 2015, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Warranty reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
16.1
|
|
|
$
|
18.0
|
|
|
$
|
16.4
|
|
|
$
|
17.3
|
|
Additions
|
|
|
2.8
|
|
|
|
3.7
|
|
|
|
8.8
|
|
|
|
11.3
|
|
Usage
|
|
|
(3.3)
|
|
|
|
(3.6)
|
|
|
|
(9.6)
|
|
|
|
(10.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
15.6
|
|
|
$
|
18.1
|
|
|
$
|
15.6
|
|
|
$
|
18.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Snap-on is involved in various legal matters that are being litigated and/or settled in
the ordinary course of business. Although it is not possible to predict the outcome of these legal matters, management believes that the results of these legal matters will not have a material impact on Snap-ons consolidated financial
position, results of operations or cash flows.
Note 15: Other Income (Expense) Net
Other income (expense) net on the accompanying Condensed Consolidated Statements of Earnings consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Interest income
|
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
Net foreign exchange loss
|
|
|
(1.0)
|
|
|
|
(0.6)
|
|
|
|
(0.9)
|
|
|
|
(2.1)
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) net
|
|
$
|
(0.8)
|
|
|
$
|
(0.5)
|
|
|
$
|
(0.3)
|
|
|
$
|
(1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16: Accumulated Other Comprehensive Income (Loss)
The following is a summary of net changes in Accumulated OCI by component and net of tax for the three months ended October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Foreign
Currency
Translation
|
|
|
Cash Flow
Hedges
|
|
|
Defined
Benefit
Pension and
Postretirement
Plans
|
|
|
Total
|
|
Balance as of July 2, 2016
|
|
$
|
(133.5)
|
|
|
$
|
0.5
|
|
|
$
|
(236.8)
|
|
|
$
|
(369.8)
|
|
Other comprehensive loss before reclassifications
|
|
|
(7.8)
|
|
|
|
|
|
|
|
|
|
|
|
(7.8)
|
|
Amounts reclassified from Accumulated OCI
|
|
|
|
|
|
|
(0.1)
|
|
|
|
4.8
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(7.8)
|
|
|
|
(0.1)
|
|
|
|
4.8
|
|
|
|
(3.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2016
|
|
$
|
(141.3)
|
|
|
$
|
0.4
|
|
|
$
|
(232.0)
|
|
|
$
|
(372.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following is a summary of net changes in Accumulated OCI by component and net of tax
for the first nine months of fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Foreign
Currency
Translation
|
|
|
Cash Flow
Hedges
|
|
|
Defined
Benefit
Pension and
Postretirement
Plans
|
|
|
Total
|
|
Balance as of January 2, 2016
|
|
$
|
(118.5)
|
|
|
$
|
0.7
|
|
|
$
|
(246.4)
|
|
|
$
|
(364.2)
|
|
Other comprehensive loss before reclassifications
|
|
|
(22.8)
|
|
|
|
|
|
|
|
|
|
|
|
(22.8)
|
|
Amounts reclassified from Accumulated OCI
|
|
|
|
|
|
|
(0.3)
|
|
|
|
14.4
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(22.8)
|
|
|
|
(0.3)
|
|
|
|
14.4
|
|
|
|
(8.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 1, 2016
|
|
$
|
(141.3)
|
|
|
$
|
0.4
|
|
|
$
|
(232.0)
|
|
|
$
|
(372.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of net changes in Accumulated OCI by component and net of tax for the three
months ended October 3, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Foreign
Currency
Translation
|
|
|
Cash Flow
Hedges
|
|
|
Defined
Benefit
Pension and
Postretirement
Plans
|
|
|
Total
|
|
Balance as of July 4, 2015
|
|
$
|
(73.3)
|
|
|
$
|
0.8
|
|
|
$
|
(229.5)
|
|
|
$
|
(302.0)
|
|
Other comprehensive loss before reclassifications
|
|
|
(26.1)
|
|
|
|
|
|
|
|
|
|
|
|
(26.1)
|
|
Amounts reclassified from Accumulated OCI
|
|
|
|
|
|
|
(0.1)
|
|
|
|
6.0
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(26.1)
|
|
|
|
(0.1)
|
|
|
|
6.0
|
|
|
|
(20.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 3, 2015
|
|
$
|
(99.4)
|
|
|
$
|
0.7
|
|
|
$
|
(223.5)
|
|
|
$
|
(322.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of net changes in Accumulated OCI by component and net of tax for the first
nine months of fiscal 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
Foreign
Currency
Translation
|
|
|
Cash Flow
Hedges
|
|
|
Defined
Benefit
Pension and
Postretirement
Plans
|
|
|
Total
|
|
Balance as of January 3, 2015
|
|
$
|
(7.7)
|
|
|
$
|
1.0
|
|
|
$
|
(241.5)
|
|
|
$
|
(248.2)
|
|
Other comprehensive loss before reclassifications
|
|
|
(91.7)
|
|
|
|
|
|
|
|
|
|
|
|
(91.7)
|
|
Amounts reclassified from Accumulated OCI
|
|
|
|
|
|
|
(0.3)
|
|
|
|
18.0
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(91.7)
|
|
|
|
(0.3)
|
|
|
|
18.0
|
|
|
|
(74.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 3, 2015
|
|
$
|
(99.4)
|
|
|
$
|
0.7
|
|
|
$
|
(223.5)
|
|
|
$
|
(322.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The reclassifications out of Accumulated OCI for the three and nine month periods ended
October 1, 2016, and October 3 2015, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Reclassified from Accumulated OCI
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Details about Accumulated OCI
Components
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
Statement of Earnings
Presentation
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury locks
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
Interest expense
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net unrecognized losses and prior service credits
|
|
|
(7.6)
|
|
|
|
(9.4)
|
|
|
|
(22.7)
|
|
|
|
(28.6)
|
|
|
See footnote below*
|
Income tax benefit
|
|
|
2.8
|
|
|
|
3.4
|
|
|
|
8.3
|
|
|
|
10.6
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax
|
|
|
(4.8)
|
|
|
|
(6.0)
|
|
|
|
(14.4)
|
|
|
|
(18.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period, net of tax
|
|
$
|
(4.7)
|
|
|
$
|
(5.9)
|
|
|
$
|
(14.1)
|
|
|
$
|
(17.7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
These Accumulated OCI components are included in the computation of net periodic pension and postretirement health care costs; see Note 10 and Note
11 for further information.
|
Note 17: Segments
Snap-ons business segments are based on the organization structure used by management for making operating and investment decisions
and for assessing performance. Snap-ons reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The
Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government and technical education market segments
(collectively, critical industries), primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the companys worldwide
mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and original
equipment manufacturer (OEM) dealership service and repair shops (OEM dealerships), through direct and distributor channels. Financial Services consists of the business operations of Snap-ons finance
subsidiaries.
Snap-on evaluates the performance of its operating segments based on segment revenues, including both external
and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are
those assets used in the respective reportable segments operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment
amounts are eliminated to arrive at Snap-ons consolidated financial results.
32
SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Financial data by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
(Amounts in millions)
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
|
October 1,
2016
|
|
|
October 3,
2015
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial Group
|
|
$
|
289.3
|
|
|
$
|
288.5
|
|
|
$
|
862.0
|
|
|
$
|
881.8
|
|
Snap-on Tools Group
|
|
|
397.2
|
|
|
|
380.6
|
|
|
|
1,216.4
|
|
|
|
1,157.5
|
|
Repair Systems & Information Group
|
|
|
286.1
|
|
|
|
282.9
|
|
|
|
860.1
|
|
|
|
832.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
|
972.6
|
|
|
|
952.0
|
|
|
|
2,938.5
|
|
|
|
2,871.9
|
|
Intersegment eliminations
|
|
|
(138.5)
|
|
|
|
(130.5)
|
|
|
|
(397.9)
|
|
|
|
(370.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
834.1
|
|
|
$
|
821.5
|
|
|
$
|
2,540.6
|
|
|
$
|
2,501.1
|
|
Financial Services revenue
|
|
|
71.6
|
|
|
|
61.1
|
|
|
|
207.2
|
|
|
|
177.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
905.7
|
|
|
$
|
882.6
|
|
|
$
|
2,747.8
|
|
|
$
|
2,678.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial Group
|
|
$
|
43.7
|
|
|
$
|
41.3
|
|
|
$
|
124.1
|
|
|
$
|
127.5
|
|
Snap-on Tools Group
|
|
|
64.6
|
|
|
|
56.3
|
|
|
|
207.6
|
|
|
|
184.1
|
|
Repair Systems & Information Group
|
|
|
71.8
|
|
|
|
69.7
|
|
|
|
215.3
|
|
|
|
201.3
|
|
Financial Services
|
|
|
50.6
|
|
|
|
43.5
|
|
|
|
147.1
|
|
|
|
125.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating earnings
|
|
|
230.7
|
|
|
|
210.8
|
|
|
|
694.1
|
|
|
|
638.1
|
|
Corporate
|
|
|
(22.5)
|
|
|
|
(23.7)
|
|
|
|
(67.6)
|
|
|
|
(80.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
$
|
208.2
|
|
|
$
|
187.1
|
|
|
$
|
626.5
|
|
|
$
|
557.5
|
|
Interest expense
|
|
|
(13.1)
|
|
|
|
(13.0)
|
|
|
|
(39.1)
|
|
|
|
(38.9)
|
|
Other income (expense) net
|
|
|
(0.8)
|
|
|
|
(0.5)
|
|
|
|
(0.3)
|
|
|
|
(1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and equity earnings
|
|
$
|
194.3
|
|
|
$
|
173.6
|
|
|
$
|
587.1
|
|
|
$
|
516.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
|
|
October 1,
2016
|
|
|
January 2,
2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Commercial & Industrial Group
|
|
|
$
|
923.6
|
|
|
$
|
901.6
|
|
Snap-on Tools Group
|
|
|
|
680.3
|
|
|
|
646.7
|
|
Repair Systems & Information Group
|
|
|
|
1,062.4
|
|
|
|
1,041.6
|
|
Financial Services
|
|
|
|
1,758.1
|
|
|
|
1,572.4
|
|
|
|
|
|
|
|
|
|
|
|
Total assets from reportable segments
|
|
|
$
|
4,424.4
|
|
|
$
|
4,162.3
|
|
Corporate
|
|
|
|
234.0
|
|
|
|
203.6
|
|
Elimination of intersegment receivables
|
|
|
|
(58.3)
|
|
|
|
(34.8)
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
4,600.1
|
|
|
$
|
4,331.1
|
|
|
|
|
|
|
|
|
|
|
|
Note 18: Subsequent Event
On October 17, 2016, Snap-on announced that it had entered into a definitive agreement to acquire Car-O-Liner Holding AB (Car-O-Liner) for approximately $155 million in cash. Based
in Gothenburg, Sweden, Car-O-Liner, with trailing 12 month sales of approximately $95 million, is a leading global provider of collision repair equipment and information and truck alignment systems. Snap-on believes the acquisition of
Car-O-Liner will further expand its capabilities with repair shop owners and managers. Snap-on intends to finance the acquisition with available cash and the issuance of commercial paper; subject to certain closing conditions, the transaction
is expected to close within 30 days.
33
SNAP-ON INCORPORATED