SNAP-ON INCORPORATED Management Overview We believe our 2019 operating results demonstrate our commitment to providing repeatability and reliability to a wide range of professional customers performing critical tasks in workplaces of consequence, while managing headwinds in certain end markets and geographies, particularly inEurope . Leveraging capabilities already demonstrated in the automotive repair arena, our "coherent growth" strategy focuses on developing and expanding our professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high. Snap-on's value proposition of making work easier for serious professionals is an ongoing strength as we move forward along our runways for coherent growth: •Enhancing the franchise network, where we continued to focus on helping our franchisees extend their reach through innovative selling processes and productivity initiatives that break the traditional time and space barriers inherent in a mobile van; •Expanding with repair shop owners and managers, where we continued to make progress in connecting with customers and translating the resulting insights into innovation that solves specific challenges in the repair facility; •Further extending to critical industries, where we continued to grow our lines of products customized for specific industries, including through further integration of acquisitions; and •Building in emerging markets, where we continued to build manufacturing capacity, focused product lines and distribution capability. Our strategic priorities and plans for 2020 involve continuing to build on our Snap-on Value Creation Processes - our suite of strategic principles and processes we employ every day designed to create value, and employed in the areas of safety, quality, customer connection, innovation and rapid continuous improvement ("Rapid Continuous Improvement" or "RCI"). We expect to continue to deploy these processes in our existing operations as well as into our recently acquired businesses. Snap-on's RCI initiatives employ a structured set of tools and processes across multiple businesses and geographies intended to eliminate waste and improve operations. Savings from Snap-on's RCI initiatives reflect benefits from a wide variety of ongoing efficiency, productivity and process improvements, including savings generated from product design cost reductions, improved manufacturing line set-up and change-over practices, lower-cost sourcing initiatives and facility consolidations. Unless individually significant, it is not practicable to disclose each RCI activity that generated savings and/or segregate RCI savings embedded in sales volume increases. Our global financial services operations continue to serve a significant strategic role in offering financing options to our franchisees, to their customers, and to customers in other parts of our business. We expect that our global financial services business, which includes bothSnap-on Credit LLC ("SOC") inthe United States and our other international finance subsidiaries, will continue to be a meaningful contributor to our operating earnings going forward. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations. Recent Acquisitions OnAugust 7, 2019 , Snap-on acquiredCognitran Limited ("Cognitran") for a preliminary cash purchase price of$30.4 million (or$29.4 million , net of cash acquired). The preliminary purchase price is subject to change based upon finalization of a working capital adjustment that is expected to be completed in the first quarter of 2020. Cognitran, based inChelmsford, U.K. , 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 the OEM dealers and connected vehicle platforms. The acquisition of Cognitran 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. OnApril 2, 2019 , Snap-on acquiredPower Hawk Technologies, Inc. ("Power Hawk") for a cash purchase price of$7.9 million . Power Hawk, based inRockaway, New Jersey , designs, manufactures and distributes rescue tools and related equipment for a variety of military, governmental, fire and 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. 26SNAP-ON INCORPORATED -------------------------------------------------------------------------------- OnJanuary 25, 2019 , Snap-on acquired substantially all of the assets ofTMB GeoMarketing Limited ("TMB") for a cash purchase price of$1.3 million . TMB, based in Dorking,U.K. , 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. OnJanuary 31, 2018 , Snap-on acquired substantially all of the assets ofGeorge A. Sturdevant, Inc. (d/b/aFastorq ) for a cash purchase price of$3.0 million .Fastorq , based inNew Caney, Texas , designs, assembles and distributes hydraulic torque and hydraulic tensioning products for use in critical industries. The acquisition of theFastorq product line complemented and increased Snap-on's existing torque product offering and broadened its established capabilities in serving in critical industries. For segment reporting purposes, the results of operations and assets of Cognitran and TMB have been included in theRepair Systems & Information Group since the respective acquisition dates, and the results of operations and assets of Power Hawk andFastorq have been included in theCommercial & Industrial Group since the respective acquisition dates. Pro forma financial information has not been presented for any of these acquisitions as the net effects, individually and collectively, were neither significant nor material to Snap-on's results of operations or financial position.
Fiscal 2018 as Compared to Fiscal 2017
A discussion regarding our financial condition and results of operations for fiscal 2018 compared to fiscal 2017 can be found under "Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on the Form 10-K for the fiscal year endedDecember 29, 2018 , which was filed with theSEC onFebruary 14, 2019 , and is available on theSEC's website at www.sec.gov as well as in the "Investors" section of our corporate website at www.snapon.com. Non-GAAP Measures References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "organic sales" refer to sales from continuing operations calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), excluding acquisition-related sales and the impact of foreign currency translation. Management evaluates the company's sales performance based on organic sales growth, which primarily reflects growth from the company's existing businesses as a result of increased output, customer base and geographic expansion, new product development and/or pricing, and excludes sales contributions from acquired operations the company did not own as of the comparable prior-year reporting period. The company's organic sales disclosures also exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying growth trends in our businesses and facilitating comparisons of our sales performance with prior periods. Summary of Consolidated Performance Consolidated net sales of$3,730.0 million in 2019 decreased$10.7 million , or 0.3%, from 2018 levels, reflecting a$45.4 million , or 1.2%, increase in organic sales and$7.5 million of acquisition-related sales, more than offset by$63.6 million of unfavorable foreign currency translation. Operating earnings before financial services of$716.4 million in 2019, including$18.5 million of unfavorable foreign currency effects and an$11.6 million benefit from the settlement of a patent-related litigation matter that was being appealed (the "2019 legal settlement"), decreased$9.6 million , or 1.3%, as compared to$726.0 million last year. Fiscal 2018 results included a$4.3 million benefit related to a legal settlement in an employment-related litigation matter that was being appealed (the "2018 legal settlement"). As a percentage of net sales, operating earnings before financial services of 19.2% in 2019 compared to 19.4% last year. Operating earnings of$962.3 million in 2019, including$19.8 million of unfavorable foreign currency effects and an$11.6 million benefit for the 2019 legal settlement, increased$6.2 million , or 0.6% from$956.1 million last year. In 2018, operating earnings included a$4.3 million benefit from the 2018 legal settlement. As a percentage of revenues, operating earnings of 23.7% compared to 23.5% last year. 2019 ANNUAL REPORT 27
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Net earnings attributable to Snap-on in 2019 of$693.5 million , or$12.41 per diluted share, increased$13.6 million , or$0.54 per diluted share, from$679.9 million , or$11.87 per diluted share, in 2018. In 2019, net earnings attributable to Snap-on included$8.7 million , or$0.15 per diluted share, for the after-tax benefit related to the 2019 legal settlement. Net earnings attributable to Snap-on in 2018 included$3.2 million , or$0.06 per diluted share, for the after-tax benefit related to the 2018 legal settlement, as well as a$4.1 million , or$0.07 per diluted share, after-tax net gain associated with a treasury lock settlement of$10.0 million related to the issuance of debt, partially offset by$5.9 million of expense related to the early extinguishment of debt (collectively, the "net debt items"), partially offset by$3.9 million , or$0.07 per diluted share, of tax expense for guidance associated with theU.S. Tax Cuts and Jobs Act (the "Tax Act") or ("tax charge"). Impact of the Tax Act OnDecember 22, 2017 , theU.S. government passed the Tax Act. The Tax Act made broad and complex changes to theU.S. tax code, including, but not limited to: (i) reducing theU.S. federal corporate tax rate to 21 percent; (ii) requiring companies to pay a one-time transition tax on certain unremitted earnings of foreign subsidiaries; and (iii) bonus depreciation that will allow for full expensing of qualified property. The Tax Act also established new tax laws that include, but are not limited to: (i) the reduction of theU.S. federal corporate tax rate discussed above; (ii) a general elimination ofU.S. federal income taxes on dividends from foreign subsidiaries; (iii) a new provision designed to tax global intangible low-taxed income ("GILTI"); (iv) the repeal of the domestic production activity deductions; (v) limitations on the deductibility of certain executive compensation; (vi) limitations on the use of foreign tax credits to reduce theU.S. income tax liability; and (vii) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income ("FDII").The Securities and Exchange Commission staff issued Staff Accounting Bulletin ("SAB") 118, which provided guidance on accounting for the tax effects of the Tax Act, for the company's year endedDecember 30, 2017 .SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the related accounting under Accounting Standards Codification ("ASC") 740, Accounting for Income Taxes. In accordance withSAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company's accounting for a certain income tax effect of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The company's accounting for certain elements of the Tax Act was incomplete as ofDecember 30, 2017 . However, the company was able to make reasonable estimates of the effects and, therefore, recorded provisional estimates for these items. In connection with its initial analysis of the impact of the Tax Act, the company recorded a provisional discrete net tax expense of$7.0 million in the fiscal year endedDecember 31, 2017 . This provisional estimate consisted of a net expense of$13.7 million for the one-time transition tax and a net benefit of$6.7 million related to revaluation of deferred tax assets and liabilities, caused by the new lower corporate tax rate. To determine the transition tax, the company determined the amount of post-1986 accumulated earnings and profits of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. While the company was able to make a reasonable estimate of the transition tax for 2017, it continued to gather additional information to more precisely compute the final amount reported on its 2017 U.S. federal tax return which was filed inOctober 2018 . The actual transition tax was$8.3 million greater than the company's initial estimate and was included in income tax expense for 2018. Likewise, while the company was able to make a reasonable estimate of the impact of the reduction to the corporate tax rate, it was affected by other analyses related to the Tax Act, including, but not limited to, the state tax effect of adjustments made to federal temporary differences. During 2018, the company recorded additional net tax benefits of$4.4 million attributable to pension contributions made in 2018 that were deductible for 2017 at the higher 35% federal tax rate and other changes to the 2017 tax provision related to the Tax Act and subsequently-issued tax guidance. Due to the complexity of the new GILTI tax rules, the company continued to evaluate this provision of the Tax Act and the application of ASC 740 throughout 2018. Under GAAP, the company is allowed to make an accounting policy choice to either: (i) treat taxes due on futureU.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or (ii) factor in such amounts into a company's measurement of its deferred taxes (the "deferred method"). The company selected to apply the "period cost method" to account for the new GILTI tax, and treated it as a current-period expense for 2019 and 2018. 28SNAP-ON INCORPORATED
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Summary of Segment PerformanceThe Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, "critical industries"), primarily through direct and distributor channels. Segment net sales of$1,345.7 million in 2019 increased$2.4 million , or 0.2%, from 2018 levels, reflecting a$32.2 million , or 2.5%, organic sales gain and$3.1 million of acquisition-related sales, mostly offset by$32.9 million of unfavorable foreign currency translation. The organic sales increase primarily includes a high single-digit gain in the segment's power tools operations, a mid single-digit gain in the specialty tools business and a low single-digit gain in sales to customers in critical industries. Operating earnings of$188.7 million in 2019, decreased$10.6 million , or 5.3%, from 2018 levels, primarily due to$3.3 million of unfavorable foreign currency effects, increased sales in lower gross margin businesses and higher material and other costs, partially offset by benefits from the company's RCI initiatives.
•Continuing to invest in emerging market growth initiatives; •Expanding our business with existing customers and reaching new customers in critical industries and other market segments; •Broadening our product offering designed particularly for critical industry segments; •Increasing our customer-connection-driven understanding of work across multiple industries; •Investing in innovation that, guided by that understanding of work, delivers an ongoing stream of productivity-enhancing custom engineered solutions; and •Continuing to reduce structural and operating costs, as well as improve efficiencies, through RCI initiatives.The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company's worldwide mobile tool distribution channel. Segment net sales of$1,612.9 million in 2019 decreased$0.9 million , or 0.1%, from 2018 levels, reflecting a$14.7 million , or 0.9%, organic sales gain, more than offset by$15.6 million of unfavorable foreign currency translation. The organic sales increase reflects a low single-digit increase in the segment'sU.S. franchise operations, partially offset by a low single-digit decline in the segment's international operations. Operating earnings of$245.8 million in 2019 decreased$18.4 million , or 7.0%, from 2018 levels primarily due to$11.3 million of unfavorable foreign currency effects and higher field support investments. While sales challenges existed in certain geographies throughout 2019, theSnap-on Tools Group remained focused on its fundamental, strategic initiatives to strengthen the franchise network and enhance franchisee profitability. In 2020, theSnap-on Tools Group intends to continue these initiatives, with specific focus on the following: •Continuing to improve franchisee satisfaction, productivity, profitability and commercial health; •Developing new programs and products to expand market coverage, reaching new technician customers and increasing penetration with existing customers; •Increasing investment in new product innovation and development; and •Increasing customer service levels and productivity in back office support functions, manufacturing and the supply chain through RCI initiatives and investment. By focusing on these areas, we believe that Snap-on, as well as its franchisees, will have the opportunity to continue to serve customers more effectively, more profitably and with improved satisfaction.The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships through direct and distributor channels. Segment net sales of$1,334.5 million in 2019 compared to$1,334.4 million in 2018, reflecting a$15.1 million , or 1.1%, organic sales gain and$4.4 million of acquisition-related sales, mostly offset by$19.4 million of unfavorable foreign currency translation. The organic sales increase primarily includes low single-digit gains in sales to OEM dealerships and in sales of diagnostic and repair information products to independent repair shop owners and managers. Operating earnings of$342.7 million in 2019, including$3.9 million of unfavorable foreign currency effects, increased$0.1 million from 2018 levels.
2019 ANNUAL REPORT 29
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Expanding the product offering with new products and services, thereby providing more to sell to repair shop owners and managers; •Continuing software and hardware upgrades to further improve functionality, performance and efficiency; •Leveraging integration of software solutions; •Continuing productivity advancements through RCI initiatives and leveraging of resources; and •Increasing penetration in geographic markets, including emerging markets. Financial Services revenue was$337.7 million in 2019 and$329.7 million in 2018; originations of$1,031.8 million in 2019 decreased$25.7 million , or 2.4%, from 2018 levels. In 2019, operating earnings from financial services of$245.9 million , including$1.3 million of unfavorable foreign currency effects, increased$15.8 million , or 6.9%, from$230.1 million last year, primarily reflecting the growth of the portfolio and improved portfolio performance, which resulted in lower provisions for credit losses. In recent years, Snap-on has grown its financial services portfolio by providing financing for new finance and contract receivables originated by our global financial services operations. Financial Services intends to focus on the following strategic priorities in 2020: •Delivering financial products and services that attract and sustain profitable franchisees and support Snap-on's strategies for expanding market coverage and penetration; •Improving productivity levels and ensuring high quality in all financial products and processes through the use of RCI initiatives; and •Maintaining healthy portfolio performance levels. Cash Flows Net cash provided by operating activities of$674.6 million in 2019 decreased$89.9 million from$764.5 million in 2018. The$89.9 million decrease is primarily due to$110.8 million from net changes in operating assets and liabilities, partially offset by$15.0 million of higher net earnings.
Net cash used by investing activities of
Net cash used by financing activities of$409.4 million in 2019 included$238.4 million for the repurchase of 1,495,000 shares of Snap-on's common stock and$216.6 million for dividend payments to shareholders, partially offset by$51.4 million of proceeds from stock purchase and option plan exercises and$17.6 million of net proceeds from other short-term borrowings. Net cash used by financing activities of$502.2 million in 2018 included repayments of$250 million of the unsecured 4.25% notes, dueJanuary 16, 2018 (the "2018 Notes"), at maturity, and$200 million of the unsecured 6.70% notes that were scheduled to mature onMarch 1, 2019 (the "2019 Notes"), as well as a$7.8 million loss on early extinguishment of debt. These amounts were partially offset by Snap-on's sale, onFebruary 20, 2018 , of$400 million of the unsecured 4.10% notes that mature onMarch 1, 2048 (the "2048 Notes") at a discount, from which Snap-on received$395.4 million of net proceeds, reflecting$3.5 million of transaction costs. Net cash used by financing activities in 2018 also included$284.1 million for the repurchase of 1,769,000 shares of Snap-on's common stock, and$192.0 million for dividend payments to shareholders, partially offset by$55.5 million of proceeds from stock purchase and option plan exercises and$4.9 million of proceeds from a net increase in notes payable and other short-term borrowings. Fiscal Year Snap-on's fiscal year ends on the Saturday that is on or nearest toDecember 31 . Unless otherwise indicated, references in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "fiscal 2019" or "2019" refer to the fiscal year endedDecember 28, 2019 ; references to "fiscal 2018" or "2018" refer to the fiscal year endedDecember 29, 2018 ; and references to "fiscal 2017" or "2017" refer to the fiscal year endedDecember 30, 2017 . References in this document to 2019, 2018 and 2017 year end refer toDecember 28, 2019 ,December 29, 2018 , andDecember 30, 2017 , respectively. Snap-on's 2019, 2018 and 2017 fiscal years each contained 52 weeks of operating results. 30SNAP-ON INCORPORATED
-------------------------------------------------------------------------------- Results of Operations 2019 vs. 2018 Results of operations for 2019 and 2018 are as follows: (Amounts in millions) 2019 2018 Change Net sales$ 3,730.0 100.0 %$ 3,740.7 100.0 %$ (10.7) (0.3) % Cost of goods sold (1,886.0) (50.6) % (1,870.7) (50.0) % (15.3) (0.8) % Gross profit 1,844.0 49.4 % 1,870.0 50.0 % (26.0) (1.4) % Operating expenses (1,127.6) (30.2) % (1,144.0) (30.6) % 16.4 1.4 % Operating earnings before financial services 716.4 19.2 % 726.0 19.4 % (9.6) (1.3) % Financial services revenue 337.7 100.0 % 329.7 100.0 % 8.0 2.4 % Financial services expenses (91.8) (27.2) % (99.6) (30.2) % 7.8 7.8 % Operating earnings from financial services 245.9 72.8 % 230.1 69.8 % 15.8 6.9 % Operating earnings 962.3 23.7 % 956.1 23.5 % 6.2 0.6 % Interest expense (49.0) (1.2) % (50.4) (1.2) % 1.4 2.8 % Other income (expense) - net 8.8 0.2 % 4.2 0.1 % 4.6 NM Earnings before income taxes and equity earnings 922.1 22.7 % 909.9 22.4 % 12.2 1.3 % Income tax expense (211.8) (5.2) % (214.4) (5.3) % 2.6 1.2 % Earnings before equity earnings 710.3 17.5 % 695.5 17.1 % 14.8 2.1 % Equity earnings, net of tax 0.9 - 0.7 - 0.2 28.6 % Net earnings 711.2 17.5 % 696.2 17.1 % 15.0 2.2 % Net earnings attributable to noncontrolling interests (17.7) (0.5) % (16.3) (0.4) % (1.4) (8.6) % Net earnings attributable to Snap-on Inc.$ 693.5 17.0 %$ 679.9 16.7 %$ 13.6 2.0 % NM: Not meaningful Percentage Disclosure: All income statement line item percentages below "Operating earnings from financial services" are calculated as a percentage of the sum of Net sales and Financial services revenue. Net sales in 2019 decreased$10.7 million , or 0.3%, from 2018 levels, reflecting a$45.4 million , or 1.2%, organic sales gain and$7.5 million of acquisition-related sales, more than offset by$63.6 million of unfavorable foreign currency translation. Gross profit in 2019 decreased$26.0 million from 2018. Gross margin (gross profit as a percentage of net sales) of 49.4% in 2019 decreased 60 basis points (100 basis points ("bps") equals 1.0 percent) from 50.0% last year primarily due to 20 bps of unfavorable foreign currency effects, increased sales in lower gross margin businesses and higher material and other costs, partially offset by benefits from the company's RCI initiatives. Operating expenses in 2019, including an$11.6 million benefit from the 2019 legal settlement in the first quarter, decreased$16.4 million compared to 2018. Fiscal 2018 operating expenses included a$4.3 million benefit in the fourth quarter from the 2018 legal settlement. The operating expense margin (operating expenses as a percentage of net sales) of 30.2% in 2019 improved 40 bps from 30.6% last year primarily due to a net 20 bps incremental benefit from the legal settlements and savings from RCI initiatives. Operating earnings before financial services in 2019, including$18.5 million of unfavorable foreign currency effects and an$11.6 million benefit from the 2019 legal settlement, decreased$9.6 million , or 1.3%, as compared to last year, which included a$4.3 million benefit from the 2018 legal settlement. As a percentage of net sales, operating earnings before financial services of 19.2%, including 20 bps of unfavorable foreign currency effects, compared to 19.4% last year. Financial services revenue in 2019 increased$8.0 million from last year. Financial services operating earnings, including$1.3 million of unfavorable foreign currency effects in 2019, increased$15.8 million , or 6.9%, as compared to last year. 2019 ANNUAL REPORT 31
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Operating earnings in 2019, including$19.8 million of unfavorable foreign currency effects and an$11.6 million benefit from the 2019 legal settlement, increased$6.2 million , or 0.6%, from last year. Fiscal 2018 results included a$4.3 million benefit from the 2018 legal settlement. As a percentage of revenues, operating earnings of 23.7%, including 10 bps of unfavorable foreign currency effects, compared to 23.5% last year. Interest expense in 2019 decreased$1.4 million from last year. See Note 9 to the 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. Other income (expense) - net in fiscal 2018 also includes a net gain of$5.5 million for the net debt items. See Note 17 to the Consolidated Financial Statements for information on other income (expense) - net. Snap-on's effective income tax rate on earnings attributable to Snap-on was 23.4% in 2019 as compared to 24.0% in 2018, which included 50 bps for the tax charge related to the implementation of the Tax Act. See Note 8 to the Consolidated Financial Statements for information on income taxes. Net earnings attributable to Snap-on in 2019 of$693.5 million , or$12.41 per diluted share, increased$13.6 million , or$0.54 per diluted share, from$679.9 million , or$11.87 per diluted share, in 2018. In 2019, net earnings attributable to Snap-on included an$8.7 million , or$0.15 per diluted share, after-tax benefit related to the 2019 legal settlement. In 2018, net earnings attributable to Snap-on included a$3.2 million , or$0.06 per diluted share, after-tax benefit related to the 2018 legal settlement, as well as a$4.1 million , or$0.07 per diluted share, benefit from the after-tax net debt items, and$3.9 million , or$0.07 per diluted share, for the tax charge. 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) theCommercial & Industrial Group ; (ii) theSnap-on Tools Group ; (iii) theRepair Systems & Information Group ; and (iv) Financial Services.The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments, primarily through direct and distributor channels.The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company's worldwide mobile tool distribution channel.The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships through direct and distributor channels. Financial Services consists of the business operations of Snap-on's finance subsidiaries. Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment's operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on's consolidated financial results.Commercial & Industrial Group (Amounts in millions) 2019 2018 Change External net sales$ 1,038.2 77.1 %$ 1,051.6 78.3 %$ (13.4) (1.3) % Intersegment net sales 307.5 22.9 % 291.7 21.7 % 15.8 5.4 % Segment net sales 1,345.7 100.0 % 1,343.3 100.0 % 2.4 0.2 % Cost of goods sold (833.8) (62.0) % (817.7) (60.9) % (16.1) (2.0) % Gross profit 511.9 38.0 % 525.6 39.1 % (13.7) (2.6) % Operating expenses (323.2) (24.0) % (326.3) (24.3) % 3.1 1.0 % Segment operating earnings$ 188.7 14.0 %$ 199.3 14.8 %$ (10.6) (5.3) % Segment net sales in 2019 increased$2.4 million , or 0.2%, from 2018 levels, reflecting a$32.2 million , or 2.5%, organic sales gain and$3.1 million of acquisition-related sales, mostly offset by$32.9 million of unfavorable foreign currency translation. The organic sales increase primarily includes a high single-digit gain in the segment's power tools operations, a mid single-digit gain in the specialty tools business and a low single-digit gain in sales to customers in critical industries. 32 SNAP-ON INCORPORATED -------------------------------------------------------------------------------- Segment gross margin of 38.0% in 2019 declined 110 bps from 39.1% last year primarily due to increased sales in lower gross margin businesses and higher material and other costs, partially offset by benefits from the company's RCI initiatives. Segment operating expense margin of 24.0% in 2019 improved 30 bps from 24.3% last year. As a result of these factors, segment operating earnings in 2019, including$3.3 million of unfavorable foreign currency effects, decreased$10.6 million from 2018 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for theCommercial & Industrial Group was 14.0% in 2019 compared to 14.8% in 2018. Snap-on Tools Group (Amounts in millions) 2019 2018 Change Segment net sales$ 1,612.9 100.0 %$ 1,613.8 100.0 %$ (0.9) (0.1) % Cost of goods sold (914.3) (56.7) % (910.8) (56.4) % (3.5) (0.4) % Gross profit 698.6 43.3 % 703.0 43.6 % (4.4) (0.6) % Operating expenses (452.8) (28.1) % (438.8) (27.2) % (14.0) (3.2) % Segment operating earnings$ 245.8 15.2 %$ 264.2 16.4 %$ (18.4) (7.0) % Segment net sales in 2019 decreased$0.9 million , or 0.1%, from 2018 levels, reflecting a$14.7 million , or 0.9%, organic sales gain, more than offset by$15.6 million of unfavorable foreign currency translation. The organic sales increase reflects a low single-digit increase in the segment'sU.S. franchise operations, partially offset by a low single-digit decline in the segment's international operations. Segment gross margin in 2019 of 43.3%, including 50 bps of unfavorable foreign currency effects, declined 30 bps from 43.6% last year. Segment operating expense margin of 28.1% in 2019 increased 90 bps from 27.2% last year primarily due to higher field support investments. As a result of these factors, segment operating earnings in 2019, including$11.3 million of unfavorable foreign currency effects, decreased$18.4 million from 2018 levels. Operating margin for theSnap-on Tools Group of 15.2% in 2019, including 60 bps of unfavorable foreign currency effects, compared to 16.4% last year.Repair Systems & Information Group (Amounts in millions) 2019 2018 Change External net sales$ 1,078.9 80.8 %$ 1,075.3 80.6 %$ 3.6 0.3 % Intersegment net sales 255.6 19.2 % 259.1 19.4 % (3.5) (1.4) % Segment net sales 1,334.5 100.0 % 1,334.4 100.0 % 0.1 - Cost of goods sold (701.0) (52.5) % (693.0) (51.9) % (8.0) (1.2) % Gross profit 633.5 47.5 % 641.4 48.1 % (7.9) (1.2) % Operating expenses (290.8) (21.8) % (298.8) (22.4) % 8.0 2.7 % Segment operating earnings$ 342.7 25.7 %$ 342.6 25.7 %$ 0.1 - Segment net sales in 2019 increased$0.1 million from 2018, reflecting a$15.1 million , or 1.1%, organic sales gain and$4.4 million of acquisition-related sales, mostly offset by$19.4 million of unfavorable foreign currency translation. The organic sales increase primarily includes low single-digit gains in sales to OEM dealerships and in sales of diagnostic and repair information products to independent repair shop owners and managers. Segment gross margin of 47.5% in 2019 declined 60 bps from 48.1% last year, primarily due to increased sales in lower gross margin businesses and higher material and other costs, partially offset by savings from RCI initiatives. Segment operating expense margin of 21.8% in 2019 improved 60 bps from 22.4% last year primarily due to higher volumes in lower expense businesses and savings from RCI initiatives. As a result of these factors, segment operating earnings in 2019, including$3.9 million of unfavorable foreign currency effects, increased$0.1 million from 2018 levels. Operating margin for theRepair Systems & Information Group was 25.7% in both 2019 and 2018.
2019 ANNUAL REPORT 33
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial Services (Amounts in millions) 2019 2018 Change Financial services revenue$ 337.7 100.0 %$ 329.7 100.0 %$ 8.0 2.4 % Financial services expenses (91.8) (27.2) % (99.6) (30.2) % 7.8 7.8 % Segment operating earnings$ 245.9 72.8 %$ 230.1 69.8 %$ 15.8 6.9 % Financial services revenue in 2019 increased$8.0 million , or 2.4%, from last year, primarily reflecting$9.9 million of higher revenue as a result of growth of the company's financial services portfolio, partially offset by$1.9 million of decreased revenue from lower average yields on finance and contract receivables. In 2019 and 2018, the respective average yields on finance receivables were 17.6% and 17.7%, and the respective average yields on contract receivables were 9.1% and 9.2%. Originations of$1,031.8 million in 2019 decreased$25.7 million , or 2.4%, from 2018 levels. Financial services expenses primarily include personnel-related and other general and administrative costs, as well as expenses for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses in 2019 decreased$7.8 million from last year primarily due to decreases in the provisions for credit losses as well as lower variable compensation and other costs. As a percentage of the average financial services portfolio, financial services expenses were 4.3% and 4.9% in 2019 and 2018, respectively. Financial services operating earnings in 2019, including$1.3 million of unfavorable foreign currency effects, increased$15.8 million , or 6.9%, from 2018 levels. See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services. Corporate Snap-on's general corporate expenses in 2019 of$60.8 million decreased$19.3 million from$80.1 million last year. The year-over-year decrease in general corporate expenses primarily reflects an$11.6 million benefit from the 2019 legal settlement as well as lower performance-based compensation and other costs. Fiscal 2018 results included a$4.3 million benefit from the 2018 legal settlement. 34 SNAP-ON INCORPORATED
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Fourth Quarter
Results of operations for the fourth quarters of 2019 and 2018 are as follows:
Fourth Quarter
(Amounts in millions) 2019 2018 Change
Net sales $ 955.2 100.0 % $ 952.5 100.0 % $ 2.7 0.3 %
Cost of goods sold (504.7) (52.8) % (495.1) (52.0) % (9.6) (1.9) %
Gross profit 450.5 47.2 % 457.4 48.0 % (6.9) (1.5) %
Operating expenses (279.1) (29.3) % (275.3) (28.9) % (3.8) (1.4) %
Operating earnings before financial
services 171.4 17.9 % 182.1 19.1 % (10.7) (5.9) %
Financial services revenue 83.9 100.0 % 82.7 100.0 % 1.2 1.5 %
Financial services expenses (21.7) (25.9) % (26.6) (32.2) % 4.9 18.4 %
Operating earnings from financial
services 62.2 74.1 % 56.1 67.8 % 6.1 10.9 %
Operating earnings 233.6 22.5 % 238.2 23.0 % (4.6) (1.9) %
Interest expense (12.1) (1.2) % (12.4) (1.2) % 0.3 2.4 %
Other income (expense) - net 2.4 0.2 % 3.0 0.3 % (0.6) (20.0) %
Earnings before income taxes and equity
earnings 223.9 21.5 % 228.8 22.1 % (4.9) (2.1) %
Income tax expense (48.9) (4.7) % (49.5) (4.8) % 0.6 1.2 %
Earnings before equity earnings 175.0 16.8 % 179.3 17.3 % (4.3) (2.4) %
Equity earnings, net of tax - - - - - -
Net earnings 175.0 16.8 % 179.3 17.3 % (4.3) (2.4) %
Net earnings attributable to
noncontrolling interests (4.4) (0.4) % (4.3) (0.4) % (0.1) (2.3) %
Net earnings attributable to Snap-on Inc. $ 170.6 16.4 % $ 175.0 16.9 % $ (4.4) (2.5) %
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 in the fourth quarter of 2019 increased $2.7 million , or 0.3%, from
2018 levels, reflecting a $5.5 million , or 0.6%, organic sales gain and $3.5
million of acquisition-related sales, partially offset by $6.3 million of
unfavorable foreign currency translation.
Gross profit in the fourth quarter declined $6.9 million , or 1.5%, from 2018.
Gross margin of 47.2% in the quarter decreased 80 bps from 48.0% last year
primarily due to increased sales in lower gross margin businesses, 10 bps of
unfavorable foreign currency effects and higher material and other costs. These
decreases in gross margin were partially offset by savings from the company's
RCI initiatives.
Operating expenses in the fourth quarter of 2019 increased $3.8 million from
last year, as 2018 included a $4.3 million benefit from the 2018 legal
settlement. The operating expense margin of 29.3% in the quarter increased 40
bps from 28.9% last year primarily due to 40 bps of benefit in the prior year
from the 2018 legal settlement.
Operating earnings before financial services in the fourth quarter of 2019,
including $2.5 million of unfavorable foreign currency effects, decreased
$10.7 million , or 5.9%, as compared to last year, which included a $4.3 million
benefit for the 2018 legal settlement. As a percentage of net sales, operating
earnings before financial services of 17.9% in the quarter compared to 19.1%
last year.
Financial services revenue in the fourth quarter of 2019 increased $1.2 million ,
or 1.5% compared to last year. Financial services operating earnings in the
fourth quarter of 2019, including $0.1 million of unfavorable foreign currency
effects, increased $6.1 million , or 10.9%, as compared to last year.
2019 ANNUAL REPORT 35
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Operating earnings in the fourth quarter of 2019, including$2.6 million of unfavorable foreign currency effects, decreased$4.6 million , or 1.9%, from last year, as 2018 included a$4.3 million benefit from the 2018 legal settlement. As a percentage of revenues, operating earnings of 22.5% in the quarter compared to 23.0% last year. Interest expense in the fourth quarter of 2019 decreased$0.3 million from last year. See Note 9 to the 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 Consolidated Financial Statements for information on other income (expense) - net. Snap-on's fourth quarter effective income tax rate on earnings attributable to Snap-on was 22.3% in 2019 compared to 22.0% in 2018. See Note 8 to the Consolidated Financial Statements for information on income taxes. Net earnings attributable to Snap-on in the fourth quarter of 2019 of$170.6 million , or$3.08 per diluted share, decreased$4.4 million , or$0.01 per diluted share, from$175.0 million , or$3.09 per diluted share, in 2018. The fourth quarter of 2018 included$3.2 million , or$0.06 per diluted share, for the after-tax benefit associated with the 2018 legal settlement. Segment ResultsCommercial & Industrial Group Fourth Quarter (Amounts in millions) 2019 2018 Change External net sales$ 268.7 76.1 %$ 270.0 78.6 %$ (1.3) (0.5) % Intersegment net sales 84.2 23.9 % 73.7 21.4 % 10.5 14.2 % Segment net sales 352.9 100.0 % 343.7 100.0 % 9.2 2.7 % Cost of goods sold (227.5) (64.5) % (211.3) (61.5) % (16.2) (7.7) % Gross profit 125.4 35.5 % 132.4 38.5 % (7.0) (5.3) % Operating expenses (80.4) (22.7) % (81.6)
(23.7) % 1.2 1.5 %
Segment operating earnings
Segment net sales in the fourth quarter of 2019 increased$9.2 million , or 2.7%, from 2018 levels, reflecting an$11.8 million , or 3.5%, organic sales gain and$0.9 million of acquisition-related sales, partially offset by$3.5 million of unfavorable foreign currency translation. The organic sales increase primarily includes a double-digit gain in the segment's power tools operations, a mid single-digit gain inAsia Pacific operations and a low single-digit gain in sales to customers in critical industries. These increases were partially offset by a low single-digit decrease in sales in the segment's European-based hand tools business. Segment gross margin of 35.5% in the fourth quarter of 2019 declined 300 bps from 38.5% last year primarily due to increased sales in lower gross margin businesses and higher material and other costs, partially offset by benefits from the company's RCI initiatives. Segment operating expense margin of 22.7% in the fourth quarter of 2019 improved 100 bps from 23.7% last year primarily due to the benefits from sales volume leverage, including higher volumes in lower expense businesses. As a result of these factors, segment operating earnings in the fourth quarter of 2019, including$0.6 million of unfavorable foreign currency effects, decreased$5.8 million from 2018 levels. Operating margin for theCommercial & Industrial Group of 12.8% in the fourth quarter of 2019 compared to 14.8% last year.Snap-on Tools Group Fourth Quarter (Amounts in millions) 2019 2018 Change Segment net sales$ 411.7 100.0 %$ 407.4 100.0 %$ 4.3 1.1 % Cost of goods sold (246.3) (59.8) % (243.7) (59.8) % (2.6) (1.1) % Gross profit 165.4 40.2 % 163.7 40.2 % 1.7 1.0 % Operating expenses (111.1) (27.0) % (106.7)
(26.2) % (4.4) (4.1) %
Segment operating earnings
36SNAP-ON INCORPORATED
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Segment net sales in the fourth quarter of 2019 increased$4.3 million , or 1.1%, from 2018 levels, reflecting a$5.3 million , or 1.3%, organic sales increase, partially offset by$1.0 million of unfavorable foreign currency translation. The organic sales increase reflects a low single-digit gain in the segment'sU.S. franchise operations, partially offset by a low single-digit decline in the segment's international operations. Segment gross margin in the fourth quarter of 2019, including 40 bps of unfavorable foreign currency effects, of 40.2% was unchanged from the fourth quarter of 2018. Segment operating expense margin of 27.0% in the fourth quarter of 2019 increased 80 bps from 26.2% last year primarily due to higher field support investments. As a result of these factors, segment operating earnings in the fourth quarter of 2019, including$1.7 million of unfavorable foreign currency effects, decreased$2.7 million from 2018 levels. Operating margin for theSnap-on Tools Group of 13.2% in the fourth quarter of 2019 compared to 14.0% last year.Repair Systems & Information Group Fourth Quarter (Amounts in millions) 2019 2018 Change External net sales$ 274.8 82.0 %$ 275.1 80.9 %$ (0.3) (0.1) % Intersegment net sales 60.2 18.0 % 64.8 19.1 % (4.6) (7.1) % Segment net sales 335.0 100.0 % 339.9 100.0 % (4.9) (1.4) % Cost of goods sold (175.3) (52.3) % (178.6) (52.5) % 3.3 1.8 % Gross profit 159.7 47.7 % 161.3 47.5 % (1.6) (1.0) % Operating expenses (72.5) (21.7) % (73.9)
(21.8) % 1.4 1.9 %
Segment operating earnings
Segment net sales in the fourth quarter of 2019 decreased$4.9 million , or 1.4%, from 2018 levels, reflecting a$5.2 million , or 1.5%, organic sales decline and$2.3 million of unfavorable foreign currency translation, partially offset by$2.6 million of acquisition-related sales. The organic sales decrease includes a high single-digit decline in sales to OEM dealerships, partially offset by low single-digit increases in sales of undercar equipment, and in sales of diagnostic and repair information products to independent repair shop owners and managers. Segment gross margin of 47.7% in the fourth quarter of 2019 improved 20 bps from 47.5% last year. Segment operating expense margin for the fourth quarter of 2019 of 21.7% improved 10 bps from 21.8% last year. As a result of these factors, segment operating earnings in the fourth quarter of 2019, including$0.2 million of unfavorable foreign currency effects, decreased$0.2 million from 2018 levels. Operating margin for theRepair Systems & Information Group of 26.0% in the fourth quarter of 2019 compared to 25.7% last year. Financial Services Fourth Quarter (Amounts in millions) 2019 2018 Change Financial services revenue$ 83.9 100.0 %$ 82.7 100.0 %$ 1.2 1.5 % Financial services expenses (21.7) (25.9) % (26.6) (32.2) % 4.9 18.4 % Segment operating earnings$ 62.2 74.1 %$ 56.1 67.8 %$ 6.1 10.9 % Financial services revenue in the fourth quarter of 2019 increased$1.2 million , or 1.5%, compared to last year, primarily reflecting$2.1 million of higher revenue as a result of growth in the company's financial services portfolio, partially offset by$0.9 million of decreased revenue from lower average yields on finance receivables. In the fourth quarters of 2019 and 2018, the respective average yields on finance receivables were 17.5% and 17.7%, and the average yields on contract receivables was 9.2% in both periods. Originations of$262.4 million in the fourth quarter of 2019 decreased$4.7 million , or 1.8%, from 2018 levels. Financial services expenses in the fourth quarter of 2019 decreased$4.9 million from last year primarily due to decreases in the provisions for credit losses as well as lower variable compensation and other costs. As a percentage of the average financial services portfolio, financial services expenses were 1.0% and 1.3% for the fourth quarters of 2019 and 2018, respectively.
2019 ANNUAL REPORT 37
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial services operating earnings of$62.2 million in the fourth quarter of 2019, including$0.1 million of unfavorable foreign currency effects, increased$6.1 million , or 10.9%, from 2018 levels. See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services. Corporate Snap-on's fourth quarter 2019 general corporate expenses of$15.1 million increased$2.0 million from$13.1 million last year. The year-over-year increase in general corporate expenses primarily reflects a$4.3 million benefit from the 2018 legal settlement recorded in the fourth quarter of 2018, partially offset by lower performance-based compensation and other costs in 2019.
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's 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'sU.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 theU.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the Consolidated Financial Statements. 38SNAP-ON INCORPORATED
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Non-GAAP Supplemental Consolidating Data - Supplemental Statements of Earnings information for 2019, 2018 and 2017 is as follows:
Operations* Financial Services
(Amounts in millions) 2019 2018 2017 2019 2018 2017
Net sales $ 3,730.0 $ 3,740.7 $ 3,686.9 $ - $ - $ -
Cost of goods sold (1,886.0) (1,870.7) (1,861.0) - - -
Gross profit 1,844.0 1,870.0 1,825.9 - - -
Operating expenses (1,127.6) (1,144.0) (1,161.3) - - -
Operating earnings before financial
services 716.4 726.0 664.6 - - -
Financial services revenue - - - 337.7 329.7 313.4
Financial services expenses - - - (91.8) (99.6) (95.9)
Operating earnings from financial services - - - 245.9 230.1 217.5
Operating earnings 716.4 726.0 664.6 245.9 230.1 217.5
Interest expense (48.8) (50.1) (52.1) (0.2) (0.3) (0.3)
Intersegment interest income (expense) -
net 70.5 69.7 70.8 (70.5) (69.7) (70.8)
Other income (expense) - net 8.9 4.1 (7.8) (0.1) 0.1 -
Earnings before income taxes and equity
earnings 747.0 749.7 675.5 175.1 160.2 146.4
Income tax expense (166.6) (173.1) (196.8) (45.2) (41.3) (54.1)
Earnings before equity earnings 580.4 576.6 478.7 129.9 118.9 92.3
Financial services - net earnings attributable to Snap-on 129.9 118.9 92.3 - - - Equity earnings, net of tax 0.9 0.7 1.2 - - - Net earnings 711.2 696.2 572.2 129.9 118.9 92.3 Net earnings attributable to noncontrolling interests (17.7) (16.3) (14.5) - - - Net earnings attributable to Snap-on$ 693.5 $ 679.9 $ 557.7 $ 129.9 $ 118.9 $ 92.3
* Snap-on with Financial Services on the equity method.
2019 ANNUAL REPORT 39
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-GAAP Supplemental Consolidating Data - Supplemental Balance Sheet Information as of 2019 and 2018 year end is as follows:
Operations* Financial Services
(Amounts in millions) 2019 2018 2019 2018
ASSETS
Current assets:
Cash and cash equivalents $ 184.4 $ 140.5 $ 0.1 $ 0.4
Intersegment receivables 14.2 15.1 - -
Trade and other accounts receivable - net 693.5 692.1 1.1 0.5
Finance receivables - net - - 530.1 518.5
Contract receivables - net 6.8 6.6 93.9 91.7
Inventories - net 760.4 673.8 - -
Prepaid expenses and other assets 111.8 100.2 7.0 0.5
Total current assets 1,771.1 1,628.3 632.2 611.6
Property and equipment - net 519.8 493.5 1.7 1.6
Operating lease right-of-use assets 52.9 - 2.7 -
Investment in Financial Services 340.5 329.5 - -
Deferred income tax assets 32.7 45.8 19.6 18.9
Intersegment long-term notes receivable 755.5 701.3 - -
Long-term finance receivables - net - - 1,103.5 1,074.4
Long-term contract receivables - net 16.0 11.9 344.1 333.0
Goodwill 913.8 902.2 - -
Other intangibles - net 243.9 232.9 - -
Other assets 73.0 51.9 0.2 0.1
Total assets $ 4,719.2 $ 4,397.3 $ 2,104.0 $ 2,039.6 * Snap-on with Financial Services on the equity method.
40SNAP-ON INCORPORATED
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Non-GAAP Supplemental Consolidating Data - Supplemental Balance Sheet
Information (continued):
Operations* Financial Services
(Amounts in millions) 2019 2018 2019 2018
LIABILITIES AND EQUITY
Current liabilities:
Notes payable $ 202.9 $ 186.3 $ - $ -
Accounts payable 197.3 199.6 1.2 1.5
Intersegment payables - - 14.2 15.1
Accrued benefits 53.2 52.0 0.1 -
Accrued compensation 52.2 66.8 1.7 4.7
Franchisee deposits 68.2 67.5 - -
Other accrued liabilities 353.7 355.4 25.7 26.1
Total current liabilities 927.5 927.6 42.9 47.4
Long-term debt and intersegment long-term debt - - 1,702.4 1,647.3
Deferred income tax liabilities 69.3 41.4 - -
Retiree health care benefits 33.6 31.8 - -
Pension liabilities 122.1 171.3 - -
Operating lease liabilities 34.5 - 3.0 -
Other long-term liabilities 101.4 106.6 15.2 15.4
Total liabilities 1,288.4 1,278.7 1,763.5 1,710.1
Total shareholders' equity attributable to
Snap-on 3,409.1 3,098.8 340.5 329.5
Noncontrolling interests 21.7 19.8 - -
Total equity 3,430.8 3,118.6 340.5 329.5
Total liabilities and equity $ 4,719.2 $ 4,397.3 $ 2,104.0 $ 2,039.6 * Snap-on with Financial Services on the equity method.
2019 ANNUAL REPORT 41
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Management's Discussion and Analysis of Financial Condition and Results of Operations (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 onFebruary 7, 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 byStandard & Poor's ; and A and F1 by Fitch Ratings. Snap-on believes that its current credit arrangements are sound and that the strength of its balance sheet affords the company the financial flexibility, including through access to financial markets for potential new financing, to respond to both internal growth opportunities and those available through acquisitions. However, Snap-on cannot provide any assurances of the availability of future financing or the terms on which it might be available, or that its debt ratings may not decrease. The following discussion focuses on information included in the accompanying Consolidated Balance Sheets. As of 2019 year end, working capital (current assets less current liabilities) of$1,432.9 million increased$168.0 million from$1,264.9 million as of 2018 year end primarily as a result of other net changes in working capital discussed below. The following represents the company's working capital position as of 2019 and 2018 year end: (Amounts in millions) 2019 2018 Cash and cash equivalents$ 184.5 $ 140.9 Trade and other accounts receivable - net 694.6 692.6 Finance receivables - net 530.1 518.5 Contract receivables - net 100.7 98.3 Inventories - net 760.4 673.8 Prepaid expenses and other assets 110.2 92.8 Total current assets 2,380.5 2,216.9 Notes payable (202.9) (186.3) Accounts payable (198.5) (201.1) Other current liabilities (546.2) (564.6) Total current liabilities (947.6) (952.0) Working capital$ 1,432.9 $ 1,264.9 Cash and cash equivalents of$184.5 million as of 2019 year end increased$43.6 million from 2018 year-end levels primarily due to: (i)$754.3 million of cash from collections of finance receivables; (ii)$674.6 million of cash generated from operations, net of$40.0 million of discretionary cash contributions to the company's domestic pension plans; (iii)$51.4 million of cash proceeds from stock purchase and option plan exercises; and (iv)$17.6 million of net proceeds from other short-term borrowings. These increases in cash and cash equivalents were partially offset by: (i) the funding of$841.9 million of new finance receivables; (ii) the repurchase of 1,495,000 shares of the company's common stock for$238.4 million ; (iii) dividend payments to shareholders of$216.6 million ; (iv) the funding of$99.4 million of capital expenditures; and (v) the funding of$38.6 million for acquisitions. Of the$184.5 million of cash and cash equivalents as of 2019 year end,$166.8 million was held outside ofthe United States . Snap-on maintains non-U.S. funds in its foreign operations to: (i) provide adequate working capital; (ii) satisfy various regulatory requirements; and/or (iii) take advantage of business expansion opportunities as they arise. Although the Tax Act generally eliminatesU.S. federal taxation on dividends from foreign subsidiaries, such dividends may still be subject to state income taxation and foreign withholding taxes. Snap-on periodically evaluates its cash held outsidethe United States and may pursue opportunities to repatriate certain foreign cash amounts to the extent that it can be accomplished in a tax efficient manner. Trade and other accounts receivable - net of$694.6 million as of 2019 year end increased$2.0 million from 2018 year-end levels primarily due to a total of$3.2 million of receivables related to the Power Hawk and Cognitran acquisitions, partially offset by$1.1 million of unfavorable foreign currency translation. Days sales outstanding (trade and other accounts receivable - net as of the respective period end, divided by the respective trailing 12 months sales, times 360 days) was 67 days at both 2019 and 2018 year ends. 42 SNAP-ON INCORPORATED -------------------------------------------------------------------------------- The current portions of net finance and contract receivables of$630.8 million as of 2019 year end compared to$616.8 million at 2018 year end. The long-term portions of net finance and contract receivables of$1,463.6 million as of 2019 year end compared to$1,419.3 million at 2018 year end. The combined$58.3 million increase in net current and long-term finance and contract receivables over 2018 year-end levels is primarily due to continued growth of the company's financial services portfolio and$4.4 million of foreign currency translation. Inventories - net of$760.4 million as of 2019 year end increased$86.6 million from 2018 year-end levels primarily due to continued support for higher customer demand and new product introductions, as well as a total of$0.6 million of inventories related to the Power Hawk acquisition, partially offset by$3.0 million of foreign currency translation. As of 2019 and 2018 year end, inventory turns (trailing 12 months of cost of goods sold, divided by the average of the beginning and ending inventory balance for the trailing 12 months) were 2.6 turns and 2.9 turns, respectively. Inventories accounted for using the first-in, first-out ("FIFO") method as of 2019 and 2018 year end approximated 58% and 61%, respectively, of total inventories. All other inventories are accounted for using the last-in, first-out ("LIFO") method. The company's LIFO reserve was$84.5 million and$78.4 million at 2019 and 2018 year end, respectively. Notes payable of$202.9 million as of 2019 year end included$193.6 million of commercial paper borrowings and$9.3 million of other notes. Notes payable of$186.3 million as of 2018 year end consisted of$177.1 million of commercial paper borrowings and$9.2 million of other notes. Average notes payable outstanding, including commercial paper borrowings, were$175.0 million and$167.7 million in 2019 and 2018, respectively. The 2019 year-end weighted-average interest rate on such borrowings of 2.87% compared with 2.84% at 2018 year end. Average commercial paper borrowings were$162.2 million and$154.9 million in 2019 and 2018, respectively, and the weighted-average interest rate on such borrowings of 2.27% in 2019 increased from 2.03% last year. At 2019 year end, the weighted-average interest rate on outstanding notes payable of 2.23% compared with 3.21% at 2018 year end. The 2019 year-end rate decreased primarily due to lower rates on commercial borrowings.
Accounts payable of
Other accrued liabilities of$370.8 million as of 2019 year end decreased$2.8 million from 2018 year-end levels primarily due to lower income tax accruals and$0.7 million of foreign currency translation. Long-term debt of$946.9 million as of 2019 year end consisted of: (i)$250.0 million of unsecured 6.125% notes that mature in 2021; (ii)$300.0 million of the unsecured 3.25% notes that mature onMarch 1, 2027 (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. OnSeptember 16, 2019 , Snap-on entered into a five-year,$800 million multi-currency revolving credit facility that terminates onSeptember 16, 2024 (the "Credit Facility"); no amounts were outstanding under the Credit Facility as ofDecember 28, 2019 . The Credit Facility amended and restated in its entirety Snap-on's previous$700 million multi-currency revolving credit facility that was set to terminate onDecember 15, 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 ofDecember 28, 2019 , the company's actual ratios of 0.20 and 0.92 respectively, were both within the permitted ranges set forth in this financial covenant. Snap-on generally issues commercial paper to fund its financing needs on a short-term basis and uses the Credit Facility as back-up liquidity to support such commercial paper issuances. Snap-on's Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2019 year end, Snap-on was in compliance with all covenants of its Credit Facility and other debt agreements.
2019 ANNUAL REPORT 43
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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. Snap-on manages its aggregate short-term borrowings so as not to exceed its availability under the revolving Credit Facility. Snap-on believes that it can access short-term debt markets, predominantly through commercial paper issuances and existing lines of credit, to fund its short-term requirements and to ensure near-term liquidity. Snap-on regularly monitors the credit and financial markets and may take advantage of what it believes are favorable market conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include scheduled debt payments, payments of interest and dividends, funding to support new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise. Snap-on intends to make contributions of$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 additional 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 use of commercial paper, additional fixed-term debt and/or securitizations. The following discussion focuses on information included in the accompanying Consolidated Statements of Cash Flows. Operating Activities Net cash provided by operating activities of$674.6 million in 2019 decreased$89.9 million from$764.5 million in 2018. The$89.9 million decrease is primarily due to$110.8 million from net changes in operating assets and liabilities, partially offset by$15.0 million of higher net earnings. Depreciation expense was$70.1 million in 2019 and$68.8 million in 2018. Amortization expense was$22.3 million in 2019 and$25.3 million in 2018. See Note 7 to the Consolidated Financial Statements for information on goodwill and other intangible assets. Investing Activities Net cash used by investing activities of$222.1 million in 2019 included additions to finance receivables of$841.9 million , partially offset by collections of$754.3 million . Net cash used by investing activities of$210.2 million in 2018 included additions to finance receivables of$865.6 million , partially offset by collections of$747.7 million . 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, diagnostic and equipment products on an extended-term payment plan, generally with average payment terms of approximately four years. Net cash used by investing activities in 2019 also included a total of$38.6 million (net of$1.0 million of cash acquired) for the acquisitions of TMB, Power Hawk and Cognitran. Net cash used by investing activities in 2018 included a total of$3.0 million for the acquisition ofFastorq . See Note 3 to the Consolidated Financial Statements for information on acquisitions. Capital expenditures in 2019 and 2018 totaled$99.4 million and$90.9 million , respectively. Capital expenditures in both years included continued investments related to the company's execution of its strategic growth initiatives and Value Creation Processes. The company also invested in: (i) new product, efficiency, safety and cost reduction initiatives that are intended to expand and improve its manufacturing and distribution capabilities worldwide; (ii) new production and machine tooling to enhance manufacturing operations, as well as ongoing replacements of manufacturing and distribution equipment, particularly inthe United States ; (iii) the ongoing replacement and enhancement of the company's global enterprise resource planning (ERP) management information systems; and (iv) a new expanded facility for the company's repair information business inSan Diego, California . Snap-on believes that its cash generated from operations, as well as its available cash on hand and funds available from its credit facilities will be sufficient to fund the company's capital expenditure requirements in 2020. Financing Activities Net cash used by financing activities of$409.4 million in 2019 included net proceeds from other short-term borrowings of$17.6 million . Net cash used by financing activities of$502.2 million in 2018 included repayments of$250 million of the 2018 Notes at maturity and$200 million of the 2019 Notes prior to maturity, as well as a$7.8 million loss on early extinguishment of debt. These amounts were partially offset by Snap-on's sale, onFebruary 20, 2018 , of$400 million of the 2048 Notes at a discount, from which Snap-on received$395.4 million of net proceeds, reflecting$3.5 million of transaction costs, and$4.9 million of proceeds from the net increase in notes payable and other short-term borrowings. 44SNAP-ON INCORPORATED
-------------------------------------------------------------------------------- Proceeds from stock purchase and option plan exercises totaled$51.4 million in 2019 and$55.5 million in 2018. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, stock options and other corporate purposes. In 2019, Snap-on repurchased 1,495,000 shares of its common stock for$238.4 million under its previously announced share repurchase programs. As of 2019 year end, Snap-on had remaining availability to repurchase up to an additional$359.6 million in common stock pursuant to its Board of Directors' (the "Board") authorizations. The purchase of Snap-on common stock is at the company's discretion, subject to prevailing financial and market conditions. Snap-on repurchased 1,769,000 shares of its common stock for$284.1 million in 2018. Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities, will be sufficient to fund the company's share repurchases, if any, in 2020. Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2019 and 2018 totaled$216.6 million and$192.0 million , respectively. OnNovember 8, 2019 , the company announced that its Board increased the quarterly cash dividend by 13.7% to$1.08 per share ($4.32 per share annualized). Quarterly dividends in 2019 were$1.08 per share in the fourth quarter and$0.95 per share in the first three quarters ($3.93 per share for the year). Quarterly dividends in 2018 were$0.95 per share in the fourth quarter and$0.82 per share in the first three quarters ($3.41 per share for the year). 2019 2018 Cash dividends paid per common share $
3.93
5.1 % 5.1 %
Snap-on believes that its cash generated from operations, available cash on hand
and funds available from its credit facilities will be sufficient to pay
dividends in 2020.
Off-Balance-Sheet Arrangements
Except as included below in the section labeled "Contractual Obligations and
Commitments" and Note 15 to the Consolidated Financial Statements, the company
had no off-balance-sheet arrangements as of 2019 year end.
Contractual Obligations and Commitments
A summary of Snap-on's future contractual obligations and commitments as of 2019
year end are as follows:
2025 and
(Amounts in millions) Total 2020 2021-2022 2023-2024 thereafter
Contractual obligations:
Notes payable $ 202.9 $ 202.9 $ - $ - $ -
Long-term debt 946.9 - 250.0 - 696.9
Interest on fixed rate debt 557.3 41.5 62.5 52.3 401.0
Operating leases 60.0 20.6 26.4 10.3 2.7
Finance leases 13.8 3.2 5.8 4.6 0.2
Purchase obligations 59.0 53.4 5.3 0.2 0.1
Total $ 1,839.9 $ 321.6 $ 350.0 $ 67.4 $ 1,100.9
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 additional
discretionary cash contributions to its pension plans in 2020. Snap-on has not
presented estimated pension and postretirement funding contributions in the
table above as the funding can vary from year to year based on changes in the
fair value of the plan assets and actuarial assumptions; see Note 11 and Note 12
to the Consolidated Financial Statements for information on the company's
benefit plans and payments.
Due to the uncertainty of the timing of settlements with taxing authorities,
Snap-on is unable to make reasonably reliable estimates of the period of cash
settlement of unrecognized tax benefits for its remaining uncertain tax
liabilities. As a result, $10.3 million of unrecognized tax benefits have been
excluded from the table above; see Note 8 to the Consolidated Financial
Statements for information on income taxes.
2019 ANNUAL REPORT 45
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Environmental Matters Snap-on is subject to various federal, state and local government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Snap-on's policy is to comply with these requirements and the company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with its business. Some risk of environmental damage is, however, inherent in some of Snap-on's operations and products, as it is with other companies engaged in similar businesses. Snap-on is and has been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous or toxic by one or more regulatory agencies. Snap-on believes that, as a general matter, its handling, manufacture, use and disposal of these substances are in accordance with environmental laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question the company's handling, manufacture, use or disposal of these substances. New Accounting Standards See Note 1 to the Consolidated Financial Statements for information on new accounting standards. Critical Accounting Policies and Estimates The Consolidated Financial Statements and related notes contain information that is pertinent to management's discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates. In addition to the company's significant accounting policies described in Note 1 to the Consolidated Financial Statements, Snap-on considers the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company's consolidated financial statements and the uncertainties that could impact the company's financial position, results of operations and cash flows. Impairment ofGoodwill and Other Indefinite-lived Intangible Assets:Goodwill and other indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the company in the second quarter of each year using information available as of April month end. Snap-on evaluates the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. Estimated cash flows and related goodwill are grouped at the reporting unit level. The company has determined that its reporting units for testing goodwill impairment are its operating segments or components of an operating segment that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. Within its four reportable operating segments, the company has identified 11 reporting units. 46SNAP-ON INCORPORATED
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Snap-on evaluates the recoverability of goodwill by utilizing an income approach that estimates the fair value of the future discounted cash flows of the reporting units to which the goodwill relates. The future projections, which are based on both past performance and the projections and assumptions used in the company's operating plans, are subject to change as a result of changing economic and competitive conditions. This approach reflects management's internal outlook at the reporting units, which management believes provides the best determination of value due to management's insight and experience with the reporting units. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, working capital levels, expected benefits from RCI initiatives, and a weighted-average cost of capital that reflects the specific risk profile of the reporting unit being tested. The company's methodologies for valuing goodwill are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2019 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the reporting units' projections of future operating results and cash flows and replicates how market participants would value the company's reporting units in an orderly transaction. In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the company would then record an impairment charge based on the excess of a reporting units carrying amount over its fair value. Snap-on also evaluates the recoverability of its indefinite-lived trademarks by utilizing an income approach that estimates the fair value of the future discounted cash flows of each of its trademarks. The future projections, which are based on both past performance and the projections and assumptions used in the company's operating plans, are subject to change as a result of changing economic and competitive conditions. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth and royalty rates, expected synergies, and a weighted-average cost of capital that reflects the specific risk profile of the trademark being tested. The company's methodologies for valuing trademarks are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2019 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the trademarks' projected future cash flows and replicates how market participants would value the company's trademarks in an orderly transaction. Inherent in fair value determinations are significant judgments and estimates, including material assumptions about future revenue, profitability and cash flows, the company's operational plans and its interpretation of current economic indicators. Should the operations of the businesses with which goodwill or other indefinite-lived intangible assets are associated incur significant declines in profitability and cash flow due to significant and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including effects from the sale or disposal of a reporting unit, some or all of the recorded goodwill or other indefinite-lived intangible assets could be subject to impairment and could result in a material adverse effect on Snap-on's financial position or results of operations. Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2019, which did not result in any impairment. As of 2019 year end, the company has no accumulated impairment losses. Although the company consistently uses the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results. In performing its annual impairment testing the company performed a sensitivity analysis on the material assumptions used in the discounted cash flow valuation models for each of its 11 reporting units. Based on the company's second quarter 2019 impairment testing, and assuming a hypothetical 10% decrease in the estimated fair values of each of its 11 reporting units, the hypothetical fair value of each of the company's 11 reporting units would have been greater than its carrying value. See Note 7 to the Consolidated Financial Statements for further information about goodwill and other intangible assets. Pension Benefits: The pension benefit obligation and related pension expense are calculated in accordance with GAAP and are impacted by certain actuarial assumptions. Changes in these assumptions are primarily influenced by factors outside of Snap-on's control, such as changes in economic conditions, and can have a significant effect on the amounts reported in the financial statements. Snap-on believes that the two most critical assumptions are (i) the expected return on plan assets; and (ii) the assumed discount rate. Snap-on's domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. In 2019, the long-term investment performance objective for Snap-on's domestic plans' assets was to achieve net of expense returns that met or exceeded the 7.45% domestic expected return on plan assets assumption. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its domestic plans' assets. As of 2019 year end, Snap-on's domestic pension plans' assets comprised approximately 87% of the company's worldwide pension plan assets.
2019 ANNUAL REPORT 47
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Based on forward-looking capital market expectations, Snap-on selected an expected return on plan assets assumption for itsU.S. pension plans of 7.25%, a decrease of 20 bps from 2019, to be used in determining pension expense for 2020. In estimating the domestic expected return on plan assets, Snap-on utilizes a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a "building block" approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums, calculated using the geometric mean, are then adjusted based on current relative valuation levels, macro-economic conditions, and the expected alpha related to active investment management. The asset return assumption is also adjusted by an implicit expense load for estimated administrative and investment-related expenses. Since asset allocation is a key determinant of expected investment returns, the current and expected mix of plan assets are also considered when setting the assumption. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected rate of return assumption for Snap-on's domestic pension plans' assets by 50 bps would have increased Snap-on's 2019 domestic pension expense by approximately$5.6 million . The objective of Snap-on's discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The domestic discount rate as of 2019 and 2018 year end was selected based on a cash flow matching methodology developed by the company's outside actuaries and which incorporates a review of current economic conditions. This methodology matches the plans' yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody's Investors Service orStandard & Poor's credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans' projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate. The selection of the 3.4% weighted-average discount rate for Snap-on's domestic pension plans as of 2019 year end (compared to 4.4% as of 2018 year end) represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on's domestic discount rate assumption by 50 bps would have increased Snap-on's 2019 domestic pension expense and projected benefit obligation by approximately$4.3 million and$74.2 million , respectively. As of 2019 year end, Snap-on's domestic projected benefit obligation comprised approximately 83% of Snap-on's worldwide projected benefit obligation. The weighted-average discount rate for Snap-on's foreign pension plans of 2.1% (compared to 3.0% as of 2018 year end) represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on's foreign discount rate assumption by 50 bps would have increased Snap-on's 2019 foreign pension expense and projected benefit obligation by approximately$1.6 million and$26.8 million , respectively. Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. Prior service costs and credits resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. To determine the 2020 net periodic benefit cost, Snap-on is using weighted-average discount rates for its domestic and foreign pension plans of 3.4% and 2.1%, respectively, and an expected return on plan assets for its domestic pension plans of 7.25%. The expected returns on plan assets for foreign pension plans ranged from 1.3% to 5.7% as of 2019 year end. The net change in these two key assumptions from those used in 2019 is expected to increase pension expense in 2020. Other factors, such as changes in plan demographics and discretionary contributions, may further increase or decrease pension expense in 2020. See Note 11 to the Consolidated Financial Statements for further information on pension plans. 48SNAP-ON INCORPORATED
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Allowance for Doubtful Accounts on Finance Receivables: The allowance for doubtful accounts on finance receivables is maintained at a level management believes is adequate to cover probable losses inherent in Snap-on's finance receivables portfolio as of the reporting date. The allowance represents management's estimate of the losses inherent in the company's receivables portfolio based on ongoing assessments and evaluations of collectability and historical loss experience. Determination of the proper level of the allowance requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the expense for credit losses and, as a result, net earnings. The allowance takes into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, loss migration, delinquency trends, collection experience, current economic conditions and credit risk characteristics. Some of these factors are influenced by items such as the customers' financial condition, debt-servicing ability, past payment experience, credit bureau and proprietary Snap-on credit model information, as well as the value of the underlying collateral. Changes in economic conditions and assumptions, including the resulting credit quality metrics relative to the performance of the finance receivable portfolio create uncertainty and could result in a change to both the allowance for doubtful accounts and expense for credit losses. Management utilizes established policies and procedures in an effort to ensure the estimates and assumptions are well controlled, reviewed and consistently applied. As ofDecember 28, 2019 , the ratio of the allowance for doubtful accounts for finance receivables was 3.65%. As ofDecember 29, 2018 , the allowance ratio was 3.71%. While management believes it exercises prudent judgment and applies reasonable assumptions in establishing its estimate for the allowance for finance receivables, there can be no assurance that changes in economic conditions or other factors would not adversely impact the financial health of our customers and result in changes to the estimates used in the allowance calculation. For reference, a 100 bps increase in the allowance ratio for finance receivables as ofDecember 28, 2019 , would have increased Snap-on's 2019 expense for credit losses and related allowance for doubtful accounts by approximately$16.9 million . For additional information on Snap-on's allowances for credit losses, see Note 1 and Note 4 to the Consolidated Financial Statements. Outlook Snap-on expects to make continued progress in 2020 along its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive repair arena and developing and expanding its professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including extending in critical industries, where the cost and penalties for failure can be high. In pursuit of these initiatives, Snap-on expects that capital expenditures in 2020 will be in a range of$90 million to$100 million . Snap-on currently anticipates that its full year 2020 effective income tax rate will be in the range of 23% to 24%.
2019 ANNUAL REPORT 49
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