SNAP-ON INCORPORATED Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Caution Regarding Forward-Looking Statements: Statements in this document that are not historical facts, including statements that: (i) are in the future tense; (ii) include the words "expects," "plans," "targets," "estimates," "believes," "anticipates," or similar words that referenceSnap-on Incorporated ("Snap-on" or "the company") or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-on's or management's future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, the factors discussed in its Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 , and in Part II, Item 1A. Risk Factors in its quarterly report on Form 10-Q for the quarterly period endedMarch 28, 2020 , and those discussed in this document, could affect the company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on. These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain value through its Snap-on Value Creation Processes, including its ability to realize efficiencies and savings from its rapid continuous improvement and other cost reduction initiatives, improve workforce productivity, achieve improvements in the company's manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and/or lost revenues. These risks include the evolving impact and unknown duration of the coronavirus (COVID-19) pandemic, which has the potential to amplify the impact of the other risks facing the company. These risks also include governmental actions related thereto on Snap-on's business, as well as uncertainties related to Snap-on's capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby help improve their sales and profitability, introduce successful new products, successfully pursue, complete and integrate acquisitions, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, the effects of external negative factors, including adverse developments in world financial markets, developments related to tariffs and other trade issues or disputes, weakness in certain areas of the global economy (including as a result of theUnited Kingdom's exit from theEuropean Union and the COVID-19 pandemic), and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, changes in tax rates, laws and regulations, and the impact of energy and raw material supply and pricing, including steel (as a result ofU.S. tariffs imposed on certain steel imports or otherwise) and gasoline, the amount, rate and growth of Snap-on's general and administrative expenses, including health care and postretirement costs (resulting from, among other matters,U.S. health care legislation and its ongoing implementation or reform), continuing and potentially increasing required contributions to pension and postretirement plans, the impacts of non-strategic business and/or product line rationalizations, and the effects on business as a result of new legislation, regulations or government-related developments or issues, risks associated with data security and technological systems and protections, potential reputational damages and costs related to litigation as well as an inability to assure that costs will be reduced or eliminated on appeal, the impact of changes in financial accounting standards, and other world or local events outside Snap-on's control, including terrorist disruptions and other outbreaks of infectious diseases. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law. In addition, investors should be aware that generally accepted accounting principles inthe United States of America ("GAAP") prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods. 40
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(continued)
Non-GAAP Measures
References in this report to "organic sales" refer to sales from continuing
operations calculated in accordance with GAAP, excluding acquisition-related
sales and the impact of foreign currency translation. Snap-on has significant
international operations and is subject to risks inherent with foreign
operations, including foreign currency translation fluctuations. Management
evaluates the company's sales performance based on organic sales growth, which
primarily reflects growth from the company's existing businesses as a result of
increased output, customer base and geographic expansion, new product
development and/or pricing, and excludes sales contributions from acquired
operations the company did not own as of the comparable prior-year reporting
period. The company's organic sales disclosures also exclude the effects of
foreign currency translation as foreign currency translation is subject to
volatility that can obscure underlying business trends. Management believes that
the non-GAAP financial measure of organic sales is meaningful to investors as it
provides them with useful information to aid in identifying underlying growth
trends in our businesses and facilitates comparisons of our sales performance
with prior periods.
Recent Acquisitions
On January 31, 2020 , Snap-on acquired substantially all of the assets of the
TreadReader product line from Sigmavision Limited ("Sigmavision") for a cash
purchase price of $5.9 million . Sigmavision designs and manufactures handheld
devices and drive-over ramps that provide tire information for use in the
automotive industry. The acquisition enhances and expands Snap-on's existing
capabilities in serving vehicle repair facilities and will expand the company's
presence with repair shop owners and managers.
On August 7, 2019 , Snap-on acquired Cognitran Limited ("Cognitran") for a cash
purchase price of $30.6 million (or $29.6 million , net of cash acquired).
Cognitran, based in Chelmsford, United Kingdom , specializes in flexible, modular
and highly scalable "Software as a Service" (SaaS) products for original
equipment manufacturer ("OEM") customers and their dealers, focused on the
creation and delivery of service, diagnostics, parts and repair information to
OEM dealers and connected vehicle platforms. The acquisition enhanced and
expanded Snap-on's capabilities in providing shop efficiency solutions through
integrated upstream services to OEM customers in automotive, heavy duty,
agricultural and recreational applications.
On April 2, 2019 , Snap-on acquired Power Hawk Technologies, Inc. ("Power Hawk")
for a cash purchase price of $7.9 million . Power Hawk, based in Rockaway, New
Jersey , designs, manufactures and distributes rescue tools and related equipment
for a variety of military, governmental, and fire, rescue and emergency
operations. The acquisition of the Power Hawk product line complemented and
increased Snap-on's existing product offering and broadened its established
capabilities in serving critical industries.
On January 25, 2019 , Snap-on acquired substantially all of the assets of TMB
GeoMarketing Limited ("TMB") for a cash purchase price of $1.3 million . TMB,
based in Dorking, United Kingdom , designs planning software used by OEMs to
optimize dealer locations and manage the performance of dealer outlets. The
acquisition of TMB extended Snap-on's product line in its core dealer network
solutions business.
For segment reporting purposes, the results of operations and assets of
Sigmavision, Cognitran and TMB have been included in the Repair Systems &
Information Group since the respective acquisition dates and the results of
operations and assets of Power Hawk have been included in the Commercial &
Industrial Group since the acquisition date.
Pro forma financial information has not been presented for these acquisitions as
the net effects were neither significant nor material to Snap-on's results of
operations or financial position.
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(continued)Impact of COVID-19
During the second quarter of 2020, the COVID-19 pandemic and associated
government measures to limit the spread of the virus heavily impacted Snap-on's
sales and earnings, and as anticipated resulted in substantially lower
performance in the period as compared to a year ago. Moving through the quarter,
the company accommodated its operations to the virus environment, implementing
appropriate measures to ensure the health and safety of its personnel,
continuing without disruption to serve its franchisees and other professional
customers performing essential work. In turn, Snap-on provided assistance to its
franchisees with their accommodations of the turbulence to enable continued
service to technicians. As a result, the impact of the virus on our operations
lessened as we moved through the quarter from April to May to June. During this
period, the company has invested in offsetting the virus impact, including
absorbing temporary closures of certain facilities, wages for quarantined
associates, event cancellation fees, as well as other related costs
(collectively "direct COVID-19-related costs" or "direct costs associated with
COVID-19")
. Snap-on has generally maintained its headcount, manufacturing capacity and
product development, in anticipation of the return to pre-COVID-19 demand
levels.
The ultimate impact of COVID-19 on our business, results of operations,
financial condition and cash flows is dependent on future developments,
including the duration of the pandemic and the related length of its impact on
the global economy, which are uncertain and cannot be predicted at this time.
See Part II, Item 1A, Risk Factors in Snap-on's 2020 first quarter Form 10-Q,
for an additional discussion of risks related to COVID-19.
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RESULTS OF OPERATIONS
Results of operations for the three months ended June 27, 2020 , and June 29,
2019 , are as follows:
Three Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
Net sales $ 724.3 100.0 % $ 951.3 100.0 % $ (227.0) (23.9) %
Cost of goods sold (383.1) (52.9) % (477.5) (50.2) % 94.4 19.8 %
Gross profit 341.2 47.1 % 473.8 49.8 % (132.6) (28.0) %
Operating expenses (250.1) (34.5) % (283.9) (29.8) % 33.8 11.9 %
Operating earnings before financial
services 91.1 12.6 % 189.9 20.0 % (98.8) (52.0) %
Financial services revenue 84.6 100.0 % 84.1 100.0 % 0.5 0.6 %
Financial services expenses (27.0) (31.9) % (23.5) (27.9) % (3.5) (14.9) %
Operating earnings from financial services 57.6 68.1 % 60.6 72.1 % (3.0) (5.0) %
Operating earnings 148.7 18.4 % 250.5 24.2 % (101.8) (40.6) %
Interest expense (13.4) (1.6) % (12.4) (1.2) % (1.0) (8.1) %
Other income (expense) - net 2.0 0.2 % 2.1 0.2 % (0.1) (4.8) %
Earnings before income taxes and equity
earnings 137.3 17.0 % 240.2 23.2 % (102.9) (42.8) %
Income tax expense (31.9) (4.0) % (55.6) (5.4) % 23.7 42.6 %
Earnings before equity earnings 105.4 13.0 % 184.6 17.8 % (79.2) (42.9) %
Equity earnings, net of tax 0.5 0.1 % 0.3 0.1 % 0.2 66.7 %
Net earnings 105.9 13.1 % 184.9 17.9 % (79.0) (42.7) %
Net earnings attributable to
noncontrolling interests (4.7) (0.6) % (4.5) (0.5) % (0.2) (4.4) %
Net earnings attributable to Snap-on Inc. $ 101.2 12.5 % $ 180.4 17.4 % $ (79.2) (43.9) %
Percentage Disclosure: All income statement line item percentages below "Operating
earnings from financial services" are calculated as a percentage of the sum of Net sales
and Financial services revenue.
Net sales of $724.3 in the second quarter of 2020, reflecting a $214.9 million ,
or 22.9%, decrease in organic sales and $14.4 million of unfavorable foreign
currency translation, partially offset by $2.3 million of acquisition-related
sales, compared to $951.3 million in 2019. The decline in sales volume primarily
reflects the impact of the COVID-19 pandemic in the second quarter of 2020.
Gross profit of $341.2 million in the second quarter of 2020, including $3.1
million of direct costs associated with COVID-19, $2.0 million of exit and
disposal ("restructuring") costs and $7.8 million of unfavorable foreign
currency effects, compared to $473.8 million in 2019. Gross margin (gross profit
as a percentage of net sales) of 47.1% in the quarter declined 270 basis points
(100 basis points ("bps") equals 1.0 percent) from last year primarily due to
the impact of lower sales volumes, including costs to maintain manufacturing
capacity, 40 bps of direct costs associated with COVID-19, 30 bps from costs
related to restructuring actions outside of the United States and 10 bps of
unfavorable foreign currency effects. These decreases in gross margin were
partially offset by benefits from the company's "Rapid Continuous Improvement"
or "RCI" initiatives.
Snap-on's RCI initiatives employ a structured set of tools and processes across
multiple businesses and geographies intended to eliminate waste and improve
operations. Savings from Snap-on's RCI initiatives reflect benefits from a wide
variety of ongoing efficiency, productivity and process improvements, including
savings generated from product design cost reductions, improved manufacturing
line set-up and change-over practices, lower-cost sourcing initiatives and
facility optimization. Unless individually significant, it is not practicable to
disclose each RCI activity that generated savings and/or segregate RCI savings
embedded in sales volume increases.
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Operating expenses of $250.1 million in the second quarter of 2020, including
$2.7 million of direct costs associated with COVID-19 and $2.0 million of
restructuring charges, compared to $283.9 million in 2019. The operating expense
margin (operating expenses as a percentage of net sales) of 34.5% increased 470
bps from last year primarily due to lower sales volumes, 40 bps of direct costs
associated with COVID-19, 20 bps from costs related to restructuring actions and
10 bps of unfavorable foreign currency effects. These items were partially
offset by savings from cost containment actions in response to lower sales
volumes.
Operating earnings before financial services of $91.1 million in the second
quarter of 2020, including $5.8 million of direct costs associated with
COVID-19, $4.0 million of restructuring charges and $3.8 million of unfavorable
foreign currency effects, compared to $189.9 million in the second quarter of
2019. As a percentage of net sales, operating earnings before financial services
of 12.6%, including 80 bps of direct costs associated with COVID-19, 50 bps of
costs from restructuring actions and 20 bps of unfavorable foreign currency
effects, compared to 20.0% last year.
Financial services revenue of $84.6 million in the second quarter of 2020
compared to $84.1 million last year. Financial services operating earnings of
$57.6 million in the period, including $0.3 million of unfavorable foreign
currency effects, compared to $60.6 million last year.
Operating earnings of $148.7 million in the second quarter of 2020, including
$5.8 million of direct costs associated with COVID-19, $4.0 million of
restructuring charges and $4.1 million of unfavorable foreign currency effects,
compared to $250.5 million last year. As a percentage of revenues (net sales
plus financial services revenue), operating earnings of 18.4% in the quarter,
including 70 bps of direct costs associated with COVID-19, 50 bps of costs from
restructuring actions and 20 bps of unfavorable foreign currency effects,
compared to 24.2% last year.
Interest expense in the second quarter of 2020 increased $1.0 million compared
to last year. See Note 9 to the Condensed Consolidated Financial Statements for
information on Snap-on's debt and credit facilities.
Other income (expense) - net includes net gains and losses associated with
hedging and currency exchange rate transactions, non-service components of net
periodic benefit costs, and interest income. See Note 17 to the Condensed
Consolidated Financial Statements for information on Other income (expense) -
net.
Snap-on's 2020 second quarter effective income tax rate on earnings attributable
to Snap-on was 24.1%, which includes a 20 bps increase related to the
restructuring actions. The 2019 effective income tax rate was 23.6%. See Note 8
to the Condensed Consolidated Financial Statements for information on income
taxes.
Net earnings attributable to Snap-on in the second quarter of 2020 of
$101.2 million , or $1.85 per diluted share, includes a $3.3 million , or $0.06
per diluted share, after-tax charge related to restructuring actions. Net
earnings attributable to Snap-on in the second quarter of 2019 were
$180.4 million , or $3.22 per diluted share.
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Results of operations for the six months ended June 27, 2020 , and June 29, 2019 ,
are as follows:
Six Months Ended(Amounts in millions) June 27, 2020 June 29, 2019 Change Net sales$ 1,576.5 100.0 %$ 1,873.0 100.0 %$ (296.5) (15.8) % Cost of goods sold (813.7) (51.6) % (927.6) (49.5) % 113.9 12.3 % Gross profit 762.8 48.4 % 945.4 50.5 % (182.6) (19.3) % Operating expenses (532.8) (33.8) % (568.1) (30.4) % 35.3 6.2 % Operating earnings before financial services 230.0 14.6 % 377.3 20.1 % (147.3) (39.0) % Financial services revenue 170.5 100.0 % 169.7 100.0 % 0.8 0.5 % Financial services expenses (56.0) (32.8) % (47.0) (27.7) % (9.0) (19.1) % Operating earnings from financial services 114.5 67.2 % 122.7 72.3 % (8.2) (6.7) % Operating earnings 344.5 19.7 % 500.0 24.5 % (155.5) (31.1) % Interest expense (24.8) (1.4) % (24.9) (1.2) % 0.1 0.4 % Other income (expense) - net 3.5 0.2 % 3.6 0.1 % (0.1) (2.8) % Earnings before income taxes and equity earnings 323.2 18.5 % 478.7 23.4 % (155.5) (32.5) % Income tax expense (75.8) (4.3) % (112.5) (5.5) % 36.7 32.6 % Earnings before equity earnings 247.4 14.2 % 366.2 17.9 % (118.8) (32.4) % Equity earnings, net of tax 0.5 - 0.8 0.1 % (0.3) (37.5) % Net earnings 247.9 14.2 % 367.0 18.0 % (119.1) (32.5) % Net earnings attributable to noncontrolling interests (9.5) (0.6) % (8.7) (0.5) % (0.8) (9.2) % Net earnings attributable to Snap-on Inc.$ 238.4 13.6 %$ 358.3 17.5 %$ (119.9) (33.5) % Percentage Disclosure: All income statement line item percentages below "Operating earnings from financial services" are calculated as a percentage of the sum of Net sales and Financial services revenue. Net sales of$1,576.5 in the first six months of 2020, reflecting a$277.6 million , or 15.0%, decrease in organic sales and$24.7 million of unfavorable foreign currency translation, partially offset by$5.8 million of acquisition-related sales, compared to$1,873.0 million in 2019. The decline in sales volume primarily reflects the impact associated with the COVID-19 pandemic in the first six months of 2020. Gross profit of$762.8 million in the first six months of 2020, including$7.1 million of restructuring costs,$4.6 million of direct costs associated with COVID-19, and$13.9 million of unfavorable foreign currency effects, compared to$945.4 million in 2019. Gross margin of 48.4% in the first six months of 2020 declined 210 basis points from last year primarily due to the impact of lower sales volumes, including costs to maintain manufacturing capacity, 40 bps from costs related to restructuring actions outside ofthe United States , 30 bps of direct costs associated with COVID-19 and 10 bps of unfavorable foreign currency effects. These decreases in gross margins were partially offset by benefits from the company's RCI initiatives. Operating expenses of$532.8 million in the first six months of 2020, including$4.4 million of restructuring charges and$3.0 million of direct costs associated with COVID-19, compared to$568.1 million in 2019. Operating expenses in the first six months of 2019 included an$11.6 million benefit related to a legal settlement in a patent-related litigation matter that was being appealed (the "legal settlement"). The operating expense margin of 33.8% increased 340 bps from last year primarily due to lower sales volumes, 60 bps of a non-recurring benefit in 2019 from the legal settlement, 30 bps from costs related to restructuring actions, 20 bps of direct costs associated from COVID-19 and 10 bps of unfavorable foreign currency effects. These items were partially offset by savings from cost containment actions in response to lower sales volumes. 45
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Operating earnings before financial services of $230.0 million in the first six
months of 2020, including $11.5 million of restructuring charges, $7.6 million
of direct costs associated with COVID-19 and $7.1 million of unfavorable foreign
currency effects, compared to $377.3 million in the first six months of 2019,
which benefited from the $11.6 million legal settlement. As a percentage of net
sales, operating earnings before financial services of 14.6%, including 70 bps
of costs from restructuring actions, 50 bps of direct costs associated with
COVID-19 and 20 bps of unfavorable foreign currency effects, compared to 20.1%
last year, which included 60 bps of non-recurring benefit from the legal
settlement.
Financial services revenue of $170.5 million in the first six months of 2020
compared to $169.7 million last year. Financial services operating earnings of
$114.5 million in the first six months of 2020, including $2.6 million of higher
credit reserve requirements associated with the impact of the COVID-19 pandemic
recorded in the first quarter of 2020, and $0.5 million of unfavorable foreign
currency effects, compared to $122.7 million last year.
Operating earnings of $344.5 million in the first six months of 2020, including
$11.5 million of restructuring charges, $7.6 million of direct costs associated
with COVID-19 and $7.6 million of unfavorable foreign currency effects, compared
to $500.0 million last year, which included the benefit from the $11.6 million
legal settlement. As a percentage of revenues, operating earnings of 19.7% in
the first six months of 2020, including 70 bps of costs from restructuring
actions, 50 bps of direct costs associated with COVID-19 and 20 bps of
unfavorable foreign currency effects, compared to 24.5% last year, which
included 60 bps of non-recurring benefit from the legal settlement.
Interest expense in the first six months of 2020 decreased $0.1 million compared
to last year. See Note 9 to the Condensed Consolidated Financial Statements for
information on Snap-on's debt and credit facilities.
Other income (expense) - net includes net gains and losses associated with
hedging and currency exchange rate transactions, non-service components of net
periodic benefit costs, and interest income. See Note 17 to the Condensed
Consolidated Financial Statements for information on Other income (expense) -
net.
In the first six months of 2020, Snap-on's effective income tax rate on earnings
attributable to Snap-on was 24.2%, which includes a 20 bps increase related to
the restructuring actions. The 2019 effective income tax rate was 23.9%. See
Note 8 to the Condensed Consolidated Financial Statements for information on
income taxes.
Net earnings attributable to Snap-on in the first six months of 2020 of
$238.4 million , or $4.34 per diluted share, includes a $9.3 million , or $0.17
per diluted share, after-tax charge related to restructuring actions. Net
earnings attributable to Snap-on in the first six months of 2019 were
$358.3 million , or $6.38 per diluted share, included an $8.7 million , or $0.15
per diluted share, after-tax benefit from the legal settlement.
Exit and Disposal Activities
Snap-on recorded costs of $4.0 million and $11.5 million for exit and disposal
activities outside of the United States in the respective three and six month
periods ended June 27, 2020 . There were no restructuring costs recorded for the
three and six month periods ended June 29, 2019 . See Note 7 to the Condensed
Consolidated Financial Statements for information on Snap-on's exit and disposal
activities.
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Segment Results
Snap-on's business segments are based on the organization structure used by
management for making operating and investment decisions and for assessing
performance. Snap-on's reportable business segments are: (i) the Commercial &
Industrial Group ; (ii) the Snap-on Tools Group ; (iii) the Repair Systems &
Information Group ; and (iv) Financial Services. The Commercial & Industrial
Group consists of business operations serving a broad range of industrial and
commercial customers worldwide, including customers in the aerospace, natural
resources, government, power generation, transportation and technical education
market segments (collectively, "critical industries"), primarily through direct
and distributor channels. The Snap-on Tools Group consists of business
operations primarily serving vehicle service and repair technicians through the
company's worldwide mobile tool distribution channel. The Repair Systems &
Information Group consists of business operations serving other professional
vehicle repair customers worldwide, primarily owners and managers of independent
repair shops and OEM dealership service and repair shops ("OEM dealerships"),
through direct and distributor channels. Financial Services consists of the
business operations of Snap-on's finance subsidiaries.
Snap-on evaluates the performance of its operating segments based on segment
revenues, including both external and intersegment net sales, and segment
operating earnings. Snap-on accounts for intersegment sales and transfers based
primarily on standard costs with reasonable mark-ups established between the
segments. Identifiable assets by segment are those assets used in the respective
reportable segment's operations. Corporate assets consist of cash and cash
equivalents (excluding cash held at Financial Services), deferred income taxes
and certain other assets. Intersegment amounts are eliminated to arrive at
Snap-on's consolidated financial results.
Commercial & Industrial Group
Three Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
External net sales $ 204.5 78.1 % $ 263.0 78.5 % $ (58.5) (22.2) %
Intersegment net sales 57.4 21.9 % 72.0 21.5 % (14.6) (20.3) %
Segment net sales 261.9 100.0 % 335.0 100.0 % (73.1) (21.8) %
Cost of goods sold (171.7) (65.6) % (205.8) (61.4) % 34.1 16.6 %
Gross profit 90.2 34.4 % 129.2 38.6 % (39.0) (30.2) %
Operating expenses (67.3) (25.7) % (80.3) (24.0) % 13.0 16.2 %
Segment operating earnings $ 22.9 8.7 % $ 48.9 14.6 % $ (26.0) (53.2) %
Segment net sales of $261.9 million in the second quarter of 2020, reflecting a
$66.2 million , or 20.2%, organic sales decline and $6.9 million of unfavorable
foreign currency translation, compared to $335.0 million in the second quarter
of 2019. The organic sales decrease includes mid-teen declines in both sales to
customers in critical industries and in the segment's power tools operation.
Segment gross margin in the second quarter of 2020 of 34.4% declined 420 bps
from last year primarily due to the impact of lower sales volumes, including
lower utilization of manufacturing capacity, 80 bps from $2.0 million of costs
related to restructuring actions in the segment's European-based hand tools
business, 70 bps of direct COVID-19-related costs and 50 bps of unfavorable
foreign currency effects. These items were partially offset by material cost
savings and benefits from the company's RCI initiatives.
Segment operating expense margin in the second quarter of 2020 of 25.7%
increased 170 bps as compared to last year primarily due to the impact of lower
sales volumes and 50 bps for direct costs associated with COVID-19. These costs
were partially offset by savings from cost containment actions.
As a result of these factors, segment operating earnings of $22.9 million in the
second quarter of 2020, including $3.0 million of direct costs associated with
COVID-19, $2.0 million of restructuring charges and $1.9 million of unfavorable
foreign currency effects, compared to $48.9 million in the second quarter of
2019. Operating margin (segment operating earnings as a percentage of segment
net sales) for the Commercial & Industrial Group of 8.7% in the second quarter
of 2020 compared to 14.6% in 2019.
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(continued)
Six Months Ended(Amounts in millions) June 27, 2020 June 29, 2019 Change External net sales$ 431.5 76.8 %$ 512.5 77.9 %$ (81.0) (15.8) % Intersegment net sales 130.3 23.2 % 145.0 22.1 % (14.7) (10.1) % Segment net sales 561.8 100.0 % 657.5 100.0 % (95.7) (14.6) % Cost of goods sold (361.1) (64.3) % (398.0) (60.5) % 36.9 9.3 % Gross profit 200.7 35.7 % 259.5 39.5 % (58.8) (22.7) % Operating expenses (146.3) (26.0) % (164.1) (25.0) % 17.8 10.8 % Segment operating earnings$ 54.4 9.7 %$ 95.4 14.5 %$ (41.0) (43.0) % Segment net sales of$561.8 million in the first six months of 2020, reflecting an$84.2 million , or 13.0%, organic sales decline and$12.2 million of unfavorable foreign currency translation, partially offset by$0.7 million of acquisition-related sales, compared to$657.5 million in the first six months of 2019. The organic sales decrease primarily includes double-digit declines in sales in both the European-based hand tools business andAsia Pacific operations and a high single-digit decline in sales to customers in critical industries. Segment gross margin of 35.7% in the first six months of 2020 declined 380 bps from last year primarily due to the impact of lower sales volumes, including lower utilization of manufacturing capacity, 110 bps from$6.4 million of costs related to restructuring actions in the segment's European-based hand tools business, 60 bps for direct COVID-19-related costs and 30 bps of unfavorable foreign currency effects. These items were partially offset by material cost savings and by RCI initiatives. Segment operating expense margin in the first six months of 2020 of 26.0% compared to 25.0% in the first six months of 2019. The 100 bps increase is primarily due to the impact of lower sales volumes and 20 bps for direct costs associated with COVID-19, partially offset by savings from cost containment actions. As a result of these factors, segment operating earnings of$54.4 million in the first six months of 2020, including$6.4 million of restructuring charges,$4.7 million of direct costs associated with COVID-19 and$3.1 million of unfavorable foreign currency effects, compared to$95.4 million in the first six months of 2019. Operating margin for theCommercial & Industrial Group of 9.7% in 2020 compared to 14.5% in 2019. Snap-on Tools Group Three Months Ended (Amounts in millions) June 27, 2020 June 29, 2019 Change Segment net sales$ 323.3 100.0 %$ 405.8 100.0 %$ (82.5) (20.3) % Cost of goods sold (188.5) (58.3) % (222.9) (54.9) % 34.4 15.4 % Gross profit 134.8 41.7 % 182.9 45.1 % (48.1) (26.3) % Operating expenses (96.4) (29.8) % (111.6) (27.5) % 15.2 13.6 % Segment operating earnings$ 38.4 11.9 %$ 71.3 17.6 %$ (32.9) (46.1) % Segment net sales of$323.3 million in the second quarter of 2020, reflecting a$79.2 million , or 19.7%, organic sales decline and$3.3 million of unfavorable foreign currency translation, compared to$405.8 million in the second quarter of 2019. The organic sales decrease reflects a mid-teen decline in theU.S. franchise operations and a nearly 40% decrease in the segment's international operations. Segment gross margin in the second quarter of 41.7% declined 340 bps from last year primarily due to lower sales volumes, including costs to maintain manufacturing capacity, 30 bps of direct COVID-19-related costs and 20 bps of unfavorable foreign currency effects. Segment operating expense margin in the second quarter of 2020 of 29.8% increased 230 bps from last year primarily due to the impact of lower sales volumes, 30 bps of direct costs associated with COVID-19 and 20 bps from$0.6 million of restructuring actions inEurope , partially offset by savings from cost containment actions. 48
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As a result of these factors, segment operating earnings of $38.4 million in the
second quarter of 2020, including $1.9 million of direct costs associated with
COVID-19, $0.6 million of restructuring charges and $1.1 million of unfavorable
foreign currency effects, compared to $71.3 million in 2019. Operating margin
for the Snap-on Tools Group of 11.9% in the second quarter of 2020, compared to
17.6% last year.
Six Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
Segment net sales $ 699.2 100.0 % $ 816.0 100.0 % $ (116.8) (14.3) %
Cost of goods sold (404.0) (57.8) % (450.0) (55.1) % 46.0 10.2 %
Gross profit 295.2 42.2 % 366.0 44.9 % (70.8) (19.3) %
Operating expenses (208.2) (29.8) % (227.5) (27.9) % 19.3 8.5 %
Segment operating earnings $ 87.0 12.4 % $ 138.5 17.0 % $ (51.5) (37.2) %
Segment net sales of $699.2 million in the first six months of 2020, reflecting
a $111.0 million , or 13.7%, organic sales decline and $5.8 of unfavorable
foreign currency translation, compared to $816.0 million in the first six months
of 2019. The organic sales decrease reflects a low-teen decline in the U.S.
franchise operations and an approximately 25% decline in the segment's
international operations.
Segment gross margin in the first six months of 2020 of 42.2% declined 270 bps
from last year primarily due to the impact of lower sales volumes, including
costs to maintain manufacturing capacity, 30 bps of unfavorable foreign currency
effects and 10 bps of direct COVID-19-related costs.
Segment operating expense margin in the first six months of 2020 of 29.8%
increased 190 bps primarily due to the impact of lower sales volumes, 20 bps of
direct costs associated with COVID-19 and 10 bps from $0.6 million of
restructuring actions in Europe , partially offset by savings from cost
containment actions.
As a result of these factors, segment operating earnings of $87.0 million in the
first six months of 2020, including $1.9 million of direct costs associated with
COVID-19, $0.6 million of restructuring charges and $2.5 million of unfavorable
foreign currency effects, compared to $138.5 million in 2019. Operating margin
for the Snap-on Tools Group of 12.4% in the first six months of 2020 compared to
17.0% last year.
Three Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
External net sales $ 196.5 80.2 % $ 282.5 81.0 % $ (86.0) (30.4) %
Intersegment net sales 48.5 19.8 % 66.4 19.0 % (17.9) (27.0) %
Segment net sales 245.0 100.0 % 348.9 100.0 % (103.9) (29.8) %
Cost of goods sold (128.8) (52.6) % (187.2) (53.7) % 58.4 31.2 %
Gross profit 116.2 47.4 % 161.7 46.3 % (45.5) (28.1) %
Operating expenses (65.6) (26.7) % (73.1) (20.9) % 7.5 10.3 %
Segment operating earnings $ 50.6 20.7 % $ 88.6 25.4 % $ (38.0) (42.9) %
Segment net sales of $245.0 million in the second quarter of 2020, reflecting a
$101.4 million , or 29.5%, organic sales decrease and $4.8 million of unfavorable
foreign currency translation, partially offset by $2.3 million from
acquisition-related sales, compared to $348.9 million in the second quarter of
2019. The lower sales volume reflects organic declines of over 30% in both sales
of undercar equipment and to OEM dealerships, as well as a mid-teen decrease in
sales of diagnostic and repair information products to independent repair shop
owners and managers.
Segment gross margin in the second quarter of 2020 of 47.4% improved 110 bps
from last year, primarily due to the impact of reduced sales in lower gross
margin businesses and savings from RCI initiatives, partially offset by 20 bps
of direct COVID-19-related costs.
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Segment operating expense margin in the second quarter of 26.7% in 2020
increased 580 bps from last year primarily due to the impact of lower sales
volumes and 50 bps from $1.4 million of costs from restructuring actions in
Europe , partially offset by savings from cost containment actions and RCI
initiatives.
As a result of these factors, segment operating earnings of $50.6 million in the
second quarter of 2020, including $1.4 million of costs related to restructuring
actions, $0.7 million of direct costs associated with COVID-19 and $0.8 million
of unfavorable foreign currency effects, compared to $88.6 million in 2019.
Operating margin for the Repair Systems & Information Group of 20.7% in the
second quarter of 2020 compared to 25.4% last year.
Six Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
External net sales $ 445.8 79.7 % $ 544.5 80.5 % $ (98.7) (18.1) %
Intersegment net sales 113.8 20.3 % 132.3 19.5 % (18.5) (14.0) %
Segment net sales 559.6 100.0 % 676.8 100.0 % (117.2) (17.3) %
Cost of goods sold (292.7) (52.3) % (356.9) (52.7) % 64.2 18.0 %
Gross profit 266.9 47.7 % 319.9 47.3 % (53.0) (16.6) %
Operating expenses (139.0) (24.8) % (147.7) (21.9) % 8.7 5.9 %
Segment operating earnings $ 127.9 22.9 % $ 172.2 25.4 % $ (44.3) (25.7) %
Segment net sales of $559.6 million in the first six months of 2020, reflecting
a $114.3 million , or 17.1%, organic sales decrease and $8.0 million of
unfavorable foreign currency translation, partially offset by $5.1 million from
acquisition-related sales, compared to $676.8 million in the first six months of
2019. The organic sales decrease primarily reflects an approximately 20%
decrease in both sales to OEM dealerships and of undercar equipment, as well as
a mid single-digit decrease in sales of diagnostic and repair information
products to independent repair shop owners and managers.
Segment gross margin in the first six months of 2020 of 47.7% increased 40 bps
from last year, primarily due to the impact of reduced sales in lower gross
margin businesses and savings from RCI initiatives, partially offset by 10 bps
from $0.7 million of costs related to restructuring actions in Europe and 10 bps
of direct COVID-19-related costs.
Segment operating expense margin in the first six months of 2020 of 24.8%
increased 290 bps from last year primarily due to the impact of lower sales
volumes and 70 bps from $3.8 million of costs from restructuring actions in
Europe , partially offset by savings from cost containment actions and RCI
initiatives.
As a result of these factors, segment operating earnings of $127.9 million in
the first six months of 2020, including $4.5 million of costs related to
restructuring actions, $0.8 million of direct costs associated with COVID-19 and
$1.5 million of unfavorable foreign currency effects, compared to $172.2 million
in 2019. Operating margin for the Repair Systems & Information Group of 22.9% in
the first six months of 2020 compared to 25.4% last year.
Financial Services
Three Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
Financial services revenue$ 84.6 100.0 %$ 84.1 100.0 %$ 0.5 0.6 % Financial services expenses (27.0) (31.9) % (23.5) (27.9) % (3.5) (14.9) % Segment operating earnings$ 57.6 68.1 %$ 60.6 72.1 %$ (3.0) (5.0) % Financial services revenue in the second quarter of 2020 increased$0.5 million , or 0.6%, from 2019, primarily due to$1.5 million of higher revenue as a result of growth of the company's financial services portfolio, partially offset by$1.0 million of decreased revenue from lower average yields on contract receivables. In the second quarters of both 2020 and 2019, the average yields on finance receivables were 17.6%. In the second quarters of 2020 and 2019, the respective average yields on contract receivables were 8.2% and 9.1%. The lower yield on contract receivables in the second quarter of 2020 primarily reflects the impact of business operation support loans to franchisees in the COVID-19 environment. Originations of$255.8 million in the second quarter of 2020 decreased$7.6 million , or 2.9%, from 2019 levels. 50
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Financial services expenses primarily include personnel-related and other
general and administrative costs, as well as provisions for credit losses. These
expenses are generally more dependent on changes in the size of the financial
services portfolio than they are on the revenue of the segment. Financial
services expenses in the second quarter of 2020 increased primarily due to
higher provisions for credit losses and from non-recurring favorable loss
experience in the second quarter of 2019. As a percentage of the average
financial services portfolio, financial services expenses were 1.3% in the
second quarter of 2020 and 1.1% in 2019.
Financial services operating earnings in the second quarter of 2020, including
$0.3 million of unfavorable foreign currency effects, decreased $3.0 million , or
5.0%, from 2019 levels.
Six Months Ended
(Amounts in millions) June 27, 2020 June 29, 2019 Change
Financial services revenue $ 170.5 100.0 % $ 169.7 100.0 % $ 0.8 0.5 %
Financial services expenses (56.0) (32.8) % (47.0) (27.7) % (9.0) (19.1) %
Segment operating earnings $ 114.5 67.2 % $ 122.7 72.3 % $ (8.2) (6.7) %
Financial services revenue in the first six months of 2020 increased $0.8
million , or 0.5%, from 2019, primarily due to $2.3 million of higher revenue as
a result of growth of the company's financial services portfolio, partially
offset by $1.5 million of decreased revenue from lower average yields on
contract receivables. In the first six months of 2020 and 2019, the average
yields on finance receivables were each 17.7%. In the first six months of 2020
and 2019 the respective average yields on contract receivables were 8.6% and
9.1%. The lower yield on contract receivables in the first six months of 2020
primarily reflects the impact of business operation support loans to franchisees
in the COVID-19 environment. Originations of $511.4 million in the first six
months of 2020 decreased $4.5 million , or 0.9%, from 2019 levels.
Financial services expenses in the first six months of 2020 increased primarily
due to higher provisions for credit losses related to the company's fiscal year
2020 adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic
326), and $2.6 million , recorded in the first quarter of 2020, of higher credit
reserve requirements associated with the COVID-19 pandemic. As a percentage of
the average financial services portfolio, financial services expenses were 2.6%
in the first six months of 2020 and 2.2% in 2019.
Financial services operating earnings in the first six months of 2020, including
$0.5 million of unfavorable foreign currency effects, decreased $8.2 million , or
6.7%, from 2019 levels.
See Note 4 to the Condensed Consolidated Financial Statements for further
information on financial services.
Corporate
Snap-on's second quarter 2020 general corporate expenses of $20.8 million
increased $1.9 million from $18.9 million last year. Snap-on's general corporate
expenses in the first six months of 2020 of $39.3 million increased $10.5
million from $28.8 million last year. The year-over-year increase in general
corporate expenses for the first six months of 2020 primarily reflects an $11.6
million non-recurring benefit from the legal settlement recorded in the first
quarter of 2019.
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(continued)
Non-GAAP Supplemental Data
The following non-GAAP supplemental data is presented for informational purposes
to provide readers with insight into the information used by management for
assessing the operating performance of Snap-on Incorporated's ("Snap-on")
non-financial services ("Operations") and "Financial Services" businesses.
The supplemental Operations data reflects the results of operations and
financial position of Snap-on's tools, diagnostic and equipment products,
software and other non-financial services operations with Financial Services on
the equity method. The supplemental Financial Services data reflects the results
of operations and financial position of Snap-on's U.S. and international
financial services operations. The financing needs of Financial Services are met
through intersegment borrowings and cash generated from Operations; Financial
Services is charged interest expense on intersegment borrowings at market rates.
Income taxes are charged to Financial Services on the basis of the specific tax
attributes generated by the U.S. and international financial services
businesses. Transactions between the Operations and Financial Services
businesses were eliminated to arrive at the Condensed Consolidated Financial
Statements.
Non-GAAP Supplemental Consolidating Data - Supplemental Condensed Statements of
Earnings information for the three months ended June 27, 2020 , and June 29,
2019 , is as follows:
Operations* Financial Services
June 27, June 29, June 27, June 29,
(Amounts in millions) 2020 2019 2020 2019
Net sales $ 724.3 $ 951.3 $ - $ -
Cost of goods sold (383.1) (477.5) - -
Gross profit 341.2 473.8 - -
Operating expenses (250.1) (283.9) - -
Operating earnings before financial services 91.1 189.9 - -
Financial services revenue - - 84.6 84.1
Financial services expenses - - (27.0) (23.5)
Operating earnings from financial services - - 57.6 60.6
Operating earnings 91.1 189.9 57.6 60.6
Interest expense (13.4) (12.3) - (0.1)
Intersegment interest income (expense) - net 16.5 17.8 (16.5) (17.8)
Other income (expense) - net 2.0 2.1 - -
Earnings before income taxes and equity earnings 96.2 197.5 41.1 42.7
Income tax expense (21.3) (44.5) (10.6) (11.1)
Earnings before equity earnings 74.9 153.0 30.5 31.6
Financial services - net earnings attributable to
Snap-on 30.5 31.6 - -
Equity earnings, net of tax 0.5 0.3 - -
Net earnings 105.9 184.9 30.5 31.6
Net earnings attributable to noncontrolling
interests (4.7) (4.5) - -
Net earnings attributable to Snap-on $ 101.2 $
180.4
* Snap-on with Financial Services on the equity method.
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(continued)
Non-GAAP Supplemental Consolidating Data - Supplemental Condensed Statements of
Earnings information for the six months ended June 27, 2020 , and June 29, 2019 ,
is as follows:
Operations* Financial Services
June 27, June 29, June 27, June 29,
(Amounts in millions) 2020 2019 2020 2019
Net sales $ 1,576.5 $ 1,873.0 $ - $ -
Cost of goods sold (813.7) (927.6) - -
Gross profit 762.8 945.4 - -
Operating expenses (532.8) (568.1) - -
Operating earnings before financial services 230.0 377.3 - -
Financial services revenue - - 170.5 169.7
Financial services expenses - - (56.0) (47.0)
Operating earnings from financial services - - 114.5 122.7
Operating earnings 230.0 377.3 114.5 122.7
Interest expense (24.7) (24.8) (0.1) (0.1)
Intersegment interest income (expense) - net 34.6 35.5 (34.6) (35.5)
Other income (expense) - net 3.5 3.6 - -
Earnings before income taxes and equity
earnings 243.4 391.6 79.8 87.1
Income tax expense (55.1) (89.9) (20.7) (22.6)
Earnings before equity earnings 188.3 301.7 59.1 64.5
Financial services - net earnings
attributable to Snap-on 59.1 64.5 - -
Equity earnings, net of tax 0.5 0.8 - -
Net earnings 247.9 367.0 59.1 64.5
Net earnings attributable to noncontrolling
interests (9.5) (8.7) - -
Net earnings attributable to Snap-on
* Snap-on with Financial Services on the equity method.
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(continued)
Non-GAAP Supplemental Consolidating Data - Supplemental Condensed Balance Sheet
information as of
Operations* Financial Services
June 27, December 28, June 27, December 28,
(Amounts in millions) 2020 2019 2020 2019
ASSETS
Current assets:
Cash and cash equivalents $ 685.9 $ 184.4 $ 0.3 $ 0.1
Intersegment receivables 13.6 14.2 - -
Trade and other accounts receivable - net 562.7 693.5 0.8 1.1
Finance receivables - net - - 508.5 530.1
Contract receivables - net 7.0 6.8 90.7 93.9
Inventories - net 784.0 760.4 - -
Prepaid expenses and other assets 132.3 111.8 9.2 7.0
Total current assets 2,185.5 1,771.1 609.5 632.2
Property and equipment - net 507.8 519.8 1.6 1.7
Operating lease right-of-use assets 47.7 52.9 2.5 2.7
Investment in Financial Services 340.9 340.5 - -
Deferred income tax assets 24.6 32.7 22.5 19.6
Intersegment long-term notes receivable 267.8 755.5 - -
Long-term finance receivables - net - - 1,140.3 1,103.5
Long-term contract receivables - net 14.3 16.0 352.6 344.1
Goodwill 924.5 913.8 - -
Other intangibles - net 241.0 243.9 - -
Other assets 73.5 73.0 0.2 0.2
Total assets $ 4,627.6 $ 4,719.2 $ 2,129.2 $ 2,104.0 * Snap-on with Financial Services on the equity method.
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(continued)
Non-GAAP Supplemental Consolidating Data - Condensed Balance Sheets Information
(continued):
Operations* Financial Services
June 27, December 28, June 27, December 28,(Amounts in millions) 2020 2019 2020 2019 LIABILITIES AND EQUITY Current liabilities: Notes payable$ 12.1 $ 202.9 $ - $ - Accounts payable 184.7 197.3 1.5 1.2 Intersegment payables - - 13.6 14.2 Accrued benefits 48.5 53.2 - 0.1 Accrued compensation 61.1 52.2 2.8 1.7 Franchisee deposits 83.3 68.2 - - Other accrued liabilities 396.7 353.7 47.7 25.7 Total current liabilities 786.4 927.5 65.6 42.9 Long-term debt and intersegment long-term debt - - 1,704.5 1,702.4 Deferred income tax liabilities 67.5 69.3 - - Retiree health care benefits 32.2 33.6 - - Pension liabilities 109.0 122.1 - - Operating lease liabilities 30.7 34.5 2.7 3.0 Other long-term liabilities 93.2 101.4 15.5 15.2 Total liabilities 1,119.0 1,288.4 1,788.3 1,763.5 Total shareholders' equity attributable to Snap-on Inc. 3,486.7 3,409.1 340.9 340.5 Noncontrolling interests 21.9 21.7 - - Total equity 3,508.6 3,430.8 340.9 340.5 Total liabilities and equity$ 4,627.6 $ 4,719.2 $ 2,129.2 $ 2,104.0
* Snap-on with Financial Services on the equity method.
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(continued)
Liquidity and Capital Resources
Snap-on's growth has historically been funded by a combination of cash provided
by operating activities and debt financing. Snap-on believes that its cash from
operations and collections of finance receivables, coupled with its sources of
borrowings and available cash on hand, are sufficient to fund its currently
anticipated requirements for scheduled debt repayments, payments of interest and
dividends, new receivables originated by our financial services businesses,
capital expenditures, working capital, the funding of pension plans, and funding
for share repurchases and acquisitions, if and as they arise.
Due to Snap-on's credit rating over the years, external funds have been
available at an acceptable cost. As of the close of business on July 24, 2020 ,
Snap-on's long-term debt and commercial paper were rated, respectively, A2 and
P-1 by Moody's Investors Service; A- and A-2 by Standard & Poor's ; and A and F1
by Fitch Ratings. Snap-on believes that its current credit arrangements are
sound and that the strength of its balance sheet affords the company the
financial flexibility, including through access to financial markets for
potential new financing, to respond to both internal growth opportunities and
those available through acquisitions. However, based on current macroeconomic
conditions resulting from the on-going uncertainty caused by COVID-19, Snap-on
cannot provide any assurances of the availability of future financing or the
terms on which it might be available, or that its debt ratings may not decrease.
The following discussion focuses on information included in the accompanying
Condensed Consolidated Balance Sheets.
As of June 27, 2020 , working capital (current assets less current liabilities)
of $1,943.0 million increased $510.1 million from $1,432.9 million as of
December 28, 2019 (fiscal 2019 year-end) primarily as a result of the net
changes discussed below.
The following represents the company's working capital position as of June 27,
2020 , and December 28, 2019 :
June 27, December 28,
(Amounts in millions) 2020 2019
Cash and cash equivalents $ 686.2 $ 184.5
Trade and other accounts receivable - net 563.5 694.6
Finance receivables - net 508.5 530.1
Contract receivables - net 97.7 100.7
Inventories - net 784.0 760.4
Prepaid expenses and other assets 132.5 110.2
Total current assets 2,772.4 2,380.5
Notes payable (12.1) (202.9)
Accounts payable (186.2) (198.5)
Other current liabilities (631.1) (546.2)
Total current liabilities (829.4) (947.6)
Total working capital $ 1,943.0 $ 1,432.9
Cash and cash equivalents of $686.2 million as of June 27, 2020 , increased
$501.7 million from 2019 year-end levels primarily due to: (i) $489.9 million of
net proceeds from the April 30, 2020 issuance of $500 million of unsecured 3.10%
notes that mature on May 1, 2050 (the "2050 Notes"); (ii) $467.0 million of cash
generated from operations; (iii) $357.5 million of cash from collections of
finance receivables; and (iv) $13.8 million of cash proceeds from stock purchase
and option plan exercises. These increases in cash and cash equivalents were
partially offset by: (i) the funding of $414.6 million of new finance
receivables; (ii) $190.0 million of net repayments on other short-term
borrowings; (iii) dividend payments to shareholders of $117.7 million ; (iv) the
repurchase of 349,000 shares of the company's common stock for $50.5 million ;
(v) the funding of $29.0 million of capital expenditures; and (vi) the funding
of $6.1 million for acquisitions.
Of the $686.2 million of cash and cash equivalents as of June 27, 2020 ,
$181.7 million was held outside of the United States . Snap-on maintains non-U.S.
funds in its foreign operations to: (i) provide adequate working capital;
(ii) satisfy various regulatory requirements; and/or (iii) take advantage of
business expansion opportunities as they arise. Although the Tax Cuts and Jobs
Act ("Tax Act") generally eliminated U.S. federal taxation of dividends from
foreign subsidiaries, such dividends may still be subject to state income
taxation and foreign withholding taxes. Snap-on periodically evaluates its cash
held outside the United States and may pursue opportunities to repatriate
certain foreign cash amounts to the extent that it does not incur unfavorable
net tax consequences.
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Trade and other accounts receivable - net of $563.5 million as of June 27, 2020 ,
decreased $131.1 million from 2019 year-end levels, primarily due to the impact
of lower sales volume as a result of the COVID-19 pandemic, collections and $8.2
million of foreign currency translation. Days sales outstanding (trade and other
accounts receivable - net as of the respective period end, divided by the
respective trailing 12 months sales, times 360 days) was 59 days at June 27,
2020 , and 67 days at December 28, 2019 .
The current portions of net finance and contract receivables of $606.2 million
as of June 27, 2020 , compared to $630.8 million at 2019 year end. The long-term
portions of net finance and contract receivables of $1,507.2 million as of
June 27, 2020 , compared to $1,463.6 million at 2019 year end. The combined
$19.0 million increase in net current and long-term finance and contract
receivables over 2019 year-end levels is primarily due to the continued growth
of the company's financial services portfolio, partially offset by $7.5
million of foreign currency translation, $8.1 million of provision charges
resulting from the company's fiscal year 2020 adoption of ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326) and $2.6 million of higher
credit reserve requirements as a result of the economic uncertainty associated
with the COVID-19 pandemic.
Inventories - net of $784.0 million as of June 27, 2020 , increased $23.6 million
from 2019 year-end levels primarily to support critical industries, partially
offset by $6.1 million of foreign currency translation. Inventory turns
(trailing 12 months of cost of goods sold, divided by the average of the
beginning and ending inventory balance for the trailing 12 months) were 2.3
turns and 2.6 turns as of June 27, 2020 , and December 28, 2019 , respectively.
Inventories accounted for using the first-in, first-out ("FIFO") method
approximated 58% of total inventories as of both June 27, 2020 , and December 28,
2019 , respectively. All other inventories are accounted for using the last-in,
first-out ("LIFO") method. The company's LIFO reserve was $84.5 million as of
both June 27, 2020 , and December 28, 2019 .
Notes payable of $12.1 million as of June 27, 2020 , represented other notes.
There were no commercial paper borrowings outstanding as of June 27, 2020 . As of
2019 year end, notes payable of $202.9 million included $193.6 million of
commercial paper borrowings and $9.3 million of other notes.
Accounts payable of $186.2 million as of June 27, 2020 , decreased $12.3 million
from 2019 year-end levels primarily due to the timing of payments and $0.3
million of foreign currency translation.
Other accrued liabilities of $435.4 million as of June 27, 2020 , increased $64.6
million from 2019 year-end levels primarily due to higher income tax accruals,
for which the payment due date was extended as a result of COVID-19, partially
offset by $1.8 million of foreign currency translation.
Long-term debt of $1,436.7 million as of June 27, 2020 , consisted of: (i)
$250 million of unsecured 6.125% notes that mature in 2021 (the "2021 Notes");
(ii) $300 million of unsecured 3.25% notes that mature in 2027 (the "2027
Notes"); (iii) $400 million of unsecured 4.10% notes that mature in 2048 (the
"2048 Notes"); and (iv) $500 million of the 2050 Notes, partially offset by
$13.3 million from the net effects of debt amortization costs and fair value
adjustments of interest rate swaps. Long-term debt of $946.9 million as of 2019
year end consisted of: (i) $250 million of the 2021 Notes; (ii) $300 million of
the 2027 Notes; and (iii) $400 million of the 2048 Notes, partially offset by
$3.1 million from the net effects of debt amortization costs and fair value
adjustments of interest rate swaps.
Snap-on has an $800 million multi-currency revolving credit facility that
terminates on September 16, 2024 (the "Credit Facility"); no amounts were
outstanding under the Credit Facility as of June 27, 2020 . Borrowings under the
Credit Facility bear interest at varying rates based on either: (i) Snap-on's
then-current, long-term debt ratings; or (ii) Snap-on's then-current ratio of
consolidated debt net of certain cash adjustments ("Consolidated Net Debt") to
earnings before interest, taxes, depreciation, amortization and certain other
adjustments for the preceding four fiscal quarters then ended (the "Consolidated
Net Debt to EBITDA Ratio"). 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 to the sum of Consolidated
Net Debt plus total equity and less accumulated other comprehensive income or
loss (the "Leverage Ratio"); or (ii) a Consolidated Net Debt to EBITDA Ratio not
greater than 3.50 to 1.00. Snap-on may, up to two times during any five-year
period during the term of the Credit Facility (including any extensions
thereof), elect to increase the maximum Leverage Ratio to 0.65 to 1.00 and/or
increase the maximum Consolidated Net Debt to EBITDA Ratio to 4.00 to 1.00 for
four consecutive fiscal quarters in connection with certain material
acquisitions (as defined in the related credit agreement). As of June 27, 2020 ,
the company's actual ratios of 0.17 and 0.86 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.
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SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Snap-on believes it has sufficient available cash and access to both committed
and uncommitted credit facilities to cover its expected funding needs on both a
short-term and long-term basis, however, it is continuing to monitor the impact
of the COVID-19 pandemic on its business and the credit and financial markets.
Snap-on manages its aggregate short-term borrowings so as not to exceed its
availability under the Credit Facility. Snap-on believes that it can access
short-term debt markets, predominantly through commercial paper issuances and
existing lines of credit, to fund its short-term requirements and to ensure
near-term liquidity. Snap-on regularly monitors the credit and financial markets
and, if it believes conditions are favorable, it may take advantage of such
conditions to issue long-term debt to further improve its liquidity and capital
resources. Near-term liquidity requirements for Snap-on include scheduled debt
payments, payments of interest and dividends, funding to support new receivables
originated by our financial services businesses, capital expenditures, working
capital, the funding of pension plans, and funding for share repurchases and
acquisitions, if and as they arise. Snap-on intends to make contributions of
$8.7 million to its foreign pension plans and $2.9 million to its domestic
pension plans in 2020, as required by law. Depending on market and other
conditions, Snap-on may make discretionary cash contributions to its pension
plans in 2020.
Snap-on's long-term financing strategy is to maintain continuous access to the
debt markets to accommodate its liquidity needs, including the potential use of
commercial paper, additional fixed-term debt and/or securitizations.
The following discussion focuses on information included in the accompanying
Condensed Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided by operating activities was $467.0 million and $346.8 million
in the first six months of 2020 and 2019, respectively. The $120.2 million
year-over-year increase in net cash provided by operating activities primarily
reflects an increase of $247.8 million from net changes in operating assets and
liabilities, partially offset by a $119.1 million decrease in net earnings.
Investing Activities
Net cash used by investing activities of $95.4 million in the first six months
of 2020 included additions to finance receivables of $414.6 million , partially
offset by collections of $357.5 million . Net cash used by investing activities
of $103.9 million in the first six months of 2019 included additions to finance
receivables of $431.1 million , partially offset by collections of
$383.5 million . Finance receivables are comprised of extended-term installment
payment contracts to both technicians and independent shop owners (i.e.,
franchisees' customers) to enable them to purchase tools and diagnostic and
equipment products on an extended-term payment plan, generally with payment
terms of approximately four years.
Net cash used by investing activities in the respective first six months of 2020
and 2019 also included $6.1 million and $9.3 million for acquisitions. See Note
3 to the Consolidated Financial Statements for information about acquisitions.
Capital expenditures were $29.0 million and $48.2 million in the first six
months of 2020 and 2019, respectively. Capital expenditures in both years
included continued investments related to the company's execution of its
strategic Value Creation Processes around safety, quality, customer connection,
innovation and RCI. The lower capital spending as compared to the prior year was
a result of decreased expenditures as a result of the economic uncertainty
related to the COVID-19 pandemic.
Financing Activities
Net cash provided by financing activities of $132.4 million in the first six
months of 2020 included Snap-on's sale, on April 30, 2020 , of $500 million of
the 2050 Notes at a discount, from which Snap-on received $489.9 million of net
proceeds, reflecting $4.4 million of transactions costs, partially offset by
repayments of notes payable and other short-term borrowings of $190.0 million .
Net cash used by financing activities of $220.7 million in the first six months
of 2019 included repayments of notes payable and other short-term borrowings of
$18.2 million .
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SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
Proceeds from stock purchase and option plan exercises totaled $13.8 million and
$24.6 million in the first six months of 2020 and 2019, respectively. Snap-on
has undertaken stock repurchases from time to time to offset dilution created by
shares issued for employee and franchisee stock purchase plans, as well as stock
options, and for other corporate purposes. In the first six months of 2020,
Snap-on repurchased 349,000 shares of its common stock for $50.5 million under
its previously announced share repurchase programs. In the first six months of
2019, Snap-on repurchased 660,000 shares of its common stock for $107.5 million
under its previously announced share repurchase programs. As of June 27, 2020 ,
Snap-on had remaining availability to repurchase up to an additional
$330.4 million in common stock pursuant to its Board's authorizations. The
purchase of Snap-on common stock is at the company's discretion, subject to
prevailing financial and market conditions. Snap-on believes that its cash
generated from operations, available cash on hand, and funds available from its
credit facilities, will be sufficient to fund the company's additional share
repurchases, if any.
Snap-on has paid consecutive quarterly cash dividends, without interruption or
reduction, since 1939. Cash dividends totaled $117.7 million and $105.3 million
in the first six months of 2020 and 2019, respectively. On November 8, 2019 , the
Board increased the quarterly cash dividend by 13.7% to $1.08 per share ($4.32
per share annualized). Snap-on believes that its cash generated from operations,
available cash on hand, and funds available from its credit facilities, will be
sufficient to pay dividends.
Off-Balance Sheet Arrangements
The company had no off-balance sheet arrangements as of June 27, 2020 .
Critical Accounting Policies and Estimates
Snap-on's disclosures of its critical accounting policies, which are contained
in its Annual Report on Form 10-K for the fiscal year ended December 28, 2019 ,
and on Form 10-Q for the period ended March 28, 2020 , have not materially
changed since those reports were filed.
Outlook
COVID-19 has spread across the globe during 2020 and is impacting economic
activity worldwide. Snap-on experienced improving trends in the second quarter
as our operations learned to accommodate the risks and safely pursue
opportunities in the COVID-19 environment. In the near term, the company
believes there will be continued sequential improvements, reflecting increasing
levels of accommodations to the virus-related turbulence, though it cannot
provide assurances on the rate of progress due to the uncertain and evolving
nature and duration of the pandemic.
Snap-on is responding to the global macroeconomic challenges by deepening its
RCI, sourcing and other cost reduction initiatives. Snap-on recorded $4.0
million and $11.5 million of costs related to restructuring actions in the
second quarter and first six months of 2020, respectively. Snap-on will continue
to manage its cash flows and balance its capital allocation priorities,
including investments and the need for further cost reduction actions; the
COVID-19 pandemic makes it difficult to presently predict this balance as the
company continually adjusts to the changing environment. Snap-on expects that
capital expenditures in 2020 will be in a range of $75 million to $85 million ,
of which $29.0 million was incurred in the first six months of the year.
Despite near term uncertainty, Snap-on expects to maintain focus on its defined
runways for coherent growth, leveraging capabilities already demonstrated in the
automotive repair arena and developing and expanding its professional customer
base, not only in automotive repair, but in adjacent markets, additional
geographies and other areas, including extending in critical industries, where
the cost and penalties for failure can be high.
Snap-on currently anticipates that its full year 2020 effective income tax rate will be in the range of 23% to 25%.
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