Question

Disaggregate RNOA into profitability and asset turnover components (NOPM and NOAT, respectively). Remember to include both net sales and financial services revenue in total revenue. What explains the year-over-year change in RNOA?

Compute net nonoperating expenses (NNE) for 2013 and 2012. Assume that combined federal and state statutory tax rate is 37% for both fiscal years.

Compute net nonoperating obligations (NNO) for 2013 and 2012.

Compute Spread for 2013 and 2012. Return on net operating assets is 14.5% and 14.3% in 2013 and 2012, respectively. In 2011, net nonoperating obligations were $798.5 million.

Compute FLEV for 2013 and 2012. In 2011, net nonoperating obligations were $798.5 million and total shareholders’ equity was $1,547.3 million.

Calculate return on equity (ROE) for both years. Show that ROE = RNOA + (FLEV × Spread) x NCI ratio. Interpret the year-over-year change in ROE. In 2011, shareholders’ equity attributable to Snap-On was $1,530.9. Hint: consider the changes in both FLEV and Spread) Snap-On Incorporated Consolidated Statements of Earnings (Amounts in millions) For the fiscal year ended 2013 2012 Net sales $3,056.50 $2,937.90 Cost of goods sold -1,583.60 -1,547.90 Gross profit 1,472.90 1,390.00 Operating expenses -1,012.40 -980.3 Operating earnings before financial services 460.5 409.7 Financial services revenue 181 161.3 Financial services expenses -55.3 -54.6 Operating income from financial services 125.7 106.7 Operating earnings 586.2 516.4 Interest expense -56.1 -55.8 Other income (expense) -- net -3.9 -0.4 Earnings before income taxes and equity earnings 526.2 460.2 Income tax expense -166.7 -148.2 Earnings before equity earnings 359.5 312 Equity earnings, net of tax 0.2 2.6 Net earnings 359.7 314.6 Net earnings attributable to noncontrolling interests -9.4 -8.5 Net earnings attributable to Snap-on Incorporated $350.30 $306.10 Snap-On Incorporated Consolidated Balance Sheets Fiscal Year End (Amounts in millions) 2013 2012 Cash and cash equivalents $217.60 $214.50 Trade and other accounts receivable - net 531.6 497.9 Finance receivables - net 374.6 323.1 Contract receivables - net 68.4 62.7 Inventories - net 434.4 404.2 Deferred income tax assets 85.4 81.8 Prepaid expenses and other assets 84.2 84.8 Total current assets 1,796.20 1,669.00 Property and equipment - net 392.5 375.2 Deferred income tax assets 57.1 110.4 Long-term finance receivables - net 560.6 494.6 Long-term contract receivables - net 217.1 194.4 Goodwill 838.8 807.4 Other intangibles - net 190.5 187.2 Other assets 57.2 64.1 Total assets $4,110.00 $3,902.30 Notes payable and current maturities of long-term debt $113.10 $5.20 Accounts payable 155.6 142.5 Accrued benefits 48.1 50.6 Accrued compensation 95.5 88.3 Franchisee deposits 59.4 54.7 Other accrued liabilities 243.7 247.9 Total current liabilities 715.4 589.2 Long-term debt 858.9 970.4 Deferred income tax liabilities 143.8 127.1 Retiree health care benefits 41.7 48.4 Pension liabilities 135.8 260.7 Other long-term liabilities 84 87.5 Total liabilities 1,979.60 2,083.30 Preferred stock – – Common stock 67.4 67.4 Additional paid-in capital 225.1 204.6 Retained earnings 2,324.10 2,067.00 Accumulated other comprehensive income (loss) -44.8 -124.2 Treasury stock at cost -458.6 -412.7 Total shareholders’ equity attributable to Snap-on Inc. 2,113.20 1,802.10 Noncontrolling interests 17.2 16.9 Total shareholders’ equity 2,130.40 1,819.00 Total liabilities and shareholders’ equity $4,110.00 $3,902.30

Answer 1

Since, there are multiple subparts to the question, I have answered the first four with complete details. Some of the data has not been provided in the question. I was able to locate the complete question online and have provided the answers accordingly.

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Part 1)

The NOPM and NOAT is calculated as below:

NOPM

	2013	2012
Income from Operations	586.2	516.4
Equity in Earnings (Losses) of Affiliates	0.2	2.6
Less Provision for Income Taxes	-166.7	-148.2
Tax Shelter on Non Operating Items	-22.2	-20.8
NOPAT (A)	397.5	350
Net Sales	3056.5	2937.9
Financial Services Revenue	181	161.3
Total Revenue (B)	3,237.5	3,099.2
NOPM (A/B)	12.3%	11.3%

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NOAT

	2013	2012
Operating Assets (Total Assets - Cash and Cash Equivalents)	3,892.4	3,687.8
Total Liabilities	1,979.6	2,083.3
Less Non Operating Liabilities	972	975.6
Operating Liabilities	1,007.6	1,107.7
NOA	2,884.8	2,580.1
Average Net Operating Assets (C)	2,732.45	2,454.85
Net Sales	3,056.5	2,937.9
Financial Services Revenue	181	161.3
Total Revenue (D)	3,237.5	3,099.2
NOAT (D/C)	1.18	1.26

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The increase in RNOA was on account of increase in NOPM (Net Operating Profit Margin) from 11.3% in 2012 to 12.3% in 2013. While the company was more profitable in 2013, it was not as efficient as it was in 2012.

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Part 2)

The value of net nonoperating expenses (NNE) for 2013 and 2012 is arrived as below:

	2013	2012
Interest Expense	56.1	55.8
Other Expense (Income), Net	3.9	0.4
Non Operating Expense, Before Tax	60	56.2
Less Tax on Nonoperating Expense	-22.2 (60*37%)	-20.8 (56.2*30%)
Net Nonoperating Expenses (NNE)	$37.8	$35.4

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Part 3)

The value of net nonoperating obligations for each year is arrived as follows:

	2013	2012
Notes Payable and Current Maturities of Long Term Debt	113.1	5.2
Long Term Debt	858.9	970.4
Less Non Operating Assets (Cash and Cash Equivalents)	-217.6	-214.5
Net Nonoperating Obligations	$754.4	$761.1

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Part 4)

The value of spread for each year is calculated as below:

RNOA	14.5%	14.3%
Net Nonoperating Expenses (NNE)	37.8	35.41
Average Net Nonoperating Obligations	757.8 [(754.4 + 761.1)/2]	779.8 [(761.1 + 798.5)/2]
Spread (RNOA - Net Nonoperating Expenses/Average Net Nonoperating Obligations]	9.5%	9.8%