SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934
For quarterly period ended July 1, 2000
Commission File Number 1-7724
SNAP-ON INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 39-0622040
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10801 Corporate Drive, Pleasant Prairie, Wisconsin 53158-1603
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (262) 656-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at July 29, 2000
- -------------------------- ----------------------------
Common stock, $1 par value 58,766,771 shares
SNAP-ON INCORPORATED
INDEX
Page
----
Part I. Financial Information
Consolidated Statements of Earnings -
Thirteen and Twenty-six Weeks Ended
July 1, 2000 and July 3, 1999 3
Consolidated Balance Sheets -
July 1, 2000 and January 1, 2000 4-5
Consolidated Statements of Cash Flows -
Twenty-six Weeks Ended
July 1, 2000 and July 3, 1999 6
Notes to Consolidated Unaudited Financial Statements 7-12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Part II. Other Information 19
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net sales $ 563,201 $ 473,153 $1,107,546 $ 925,738
Cost of goods sold (298,982) (247,888) (594,882) (481,572)
Operating expenses (195,354) (174,482) (392,588) (356,711)
Net finance income 10,479 13,141 22,150 34,133
Restructuring and other non-recurring charges - (7,037) (353) (8,970)
Interest expense (10,573) (5,417) (20,898) (10,098)
Other income (expense) - net 817 (12,406) 1,900 (13,239)
---------- ---------- ---------- ----------
Earnings before income taxes 69,588 39,064 122,875 89,281
Income tax provision 25,399 14,065 44,842 32,041
---------- ---------- ---------- ----------
Net earnings $ 44,189 $ 24,999 $ 78,033 $ 57,240
========== ========== ========== ==========
Earnings per weighted average
common share - basic $ .75 $ .43 $ 1.33 $ .98
========== ========== ========== ==========
Earnings per weighted average
common share - diluted $ .75 $ .42 $ 1.33 $ .97
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 58,640 58,384 58,598 58,477
Effect of dilutive options 183 420 184 420
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 58,823 58,804 58,782 58,897
========== ========== ========== ==========
Dividends declared per common share $ .47 $ .45 $ .70 $ .67
========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
3
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
July 1, January 1,
2000 2000
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 8,055 $ 17,617
Accounts receivable, less allowances 642,398 617,645
Inventories
Finished stock 433,361 418,490
Work in process 48,264 47,869
Raw materials 85,167 81,856
Excess of current cost over LIFO cost (90,136) (93,374)
---------- ----------
Total inventory 476,656 454,841
Prepaid expenses and other assets 113,454 116,238
---------- ----------
Total current assets 1,240,563 1,206,341
Property and equipment
Land 26,186 26,753
Buildings and improvements 203,849 207,959
Machinery and equipment 479,756 454,089
---------- ----------
709,791 688,801
Accumulated depreciation (355,198) (326,203)
---------- ----------
Total property and equipment 354,593 362,598
Deferred income tax benefits 54,960 54,652
Intangibles 454,577 453,293
Other assets 73,596 72,938
---------- ----------
Total assets $2,178,289 $2,149,822
========== ==========
The accompanying notes are an integral part of these statements.
4
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
July 1, January 1,
2000 2000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 155,989 $ 146,422
Notes payable and current maturities of long-term debt 28,378 22,349
Dividends payable 14,101 -
Accrued compensation 51,157 57,540
Dealer deposits 40,676 48,251
Deferred subscription revenue 47,643 42,056
Other accrued liabilities 148,167 136,131
------------ ------------
Total current liabilities 486,111 452,749
Long-term debt 579,908 607,476
Deferred income taxes 28,032 26,989
Retiree health care benefits 93,212 91,391
Pension liability 92,806 96,238
Other long-term liabilities 36,350 49,718
------------ ------------
Total liabilities 1,316,419 1,324,561
SHAREHOLDERS' EQUITY
Preferred stock - authorized 15,000,000 shares
of $1 par value; none outstanding - -
Common stock - authorized 250,000,000 shares
of $1 par value; issued - 66,761,756 and
66,729,457 shares 66,762 66,729
Additional paid-in capital 63,243 62,292
Retained earnings 994,755 957,763
Accumulated other comprehensive income (loss) (41,311) (35,814)
Grantor stock trust at fair market value - 6,506,756
and 6,677,450 shares (173,243) (177,373)
Treasury stock at cost - 1,505,339 and 1,505,339 shares (48,336) (48,336)
------------ ------------
Total shareholders' equity 861,870 825,261
------------ ------------
Total liabilities and shareholders' equity $2,178,289 $2,149,822
============ ============
The accompanying notes are an integral part of these statements.
5
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Twenty-six Weeks Ended
----------------------
July 1, July 3,
2000 1999
------------ ------------
OPERATING ACTIVITIES
Net earnings $ 78,033 $ 57,240
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 26,907 19,183
Amortization of intangibles 9,002 5,650
Deferred income tax provision 2,869 9,920
Gain on sale of assets (1,592) (995)
Loss on currency hedge for purchase
price commitment, net of tax - 8,700
Changes in operating assets and liabilities:
(Increase) decrease in receivables (27,331) 52,874
(Increase) in inventories (25,017) (18,584)
(Increase) decrease in prepaid and other assets (11,747) 9,042
Increase (decrease) in accounts payable 10,458 (9,251)
Increase (decrease) in accruals and other liabilities (5,889) 15,467
------------ ------------
Net cash provided by operating activities 55,693 149,246
INVESTING ACTIVITIES
Capital expenditures (25,897) (19,991)
Acquisitions of businesses - net of cash acquired (6,187) (70,257)
Disposal of property and equipment 4,639 3,650
------------ ------------
Net cash used in investing activities (27,445) (86,598)
FINANCING ACTIVITIES
Payment of long-term debt (1,028) (335)
Increase in long-term debt 7,073 6,356
Decrease in short-term borrowings - net (21,863) (33,461)
Purchase of treasury stock - net - (14,714)
Proceeds from stock plans 5,113 6,594
Cash dividends paid (26,938) (25,760)
------------ ------------
Net cash used in financing activities (37,643) (61,320)
Effect of exchange rate changes on cash (167) (705)
------------ ------------
Increase (decrease) in cash and cash equivalents (9,562) 623
Cash and cash equivalents at beginning of period 17,617 15,041
------------ ------------
Cash and cash equivalents at end of period $ 8,055 $ 15,664
============ ============
The accompanying notes are an integral part of these statements.
6
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. This report should be read in conjunction with the consolidated financial
statements and related notes included in Snap-on Incorporated's Annual
Report on Form 10-K for the year ended January 1, 2000.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments and adjustments related to restructuring and other
non-recurring charges) necessary to a fair statement of financial condition
and results of operations for the thirteen and twenty-six weeks ended July
1, 2000, have been made. Management also believes that the results of
operations for the thirteen and twenty-six weeks ended July 1, 2000, are
not necessarily indicative of the results to be expected for the full year.
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. On September 30, 1999, Snap-on Incorporated (the "Corporation") acquired
Sandvik Saws and Tools, formerly a wholly owned operating unit of Sandvik
AB. The Sandvik Saws and Tools business now operates as the Bahco Group AB
("Bahco"). Bahco is a manufacturer and supplier of professional tool
products.
The acquisition is being accounted for as a purchase and the results of
Bahco have been included in the accompanying consolidated financial
statements since the date of the acquisition. A preliminary goodwill
allocation in accordance with the criteria established under Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations," has been
performed. The cost of the acquisition has been allocated on the basis of
the fair market value of the assets acquired and the liabilities assumed.
This allocation, to be finalized in 2000, resulted in preliminary goodwill
of $219 million being recorded.
The following unaudited pro forma summary gives effect to the acquisition
of Bahco as if the acquisition had occurred on January 1, 1998, after
giving effect to certain adjustments for depreciation, amortization,
interest expense and income taxes associated with the purchase method of
accounting as performed at the time of the acquisition. The unaudited pro
forma summary is based on historical financial data and on assumptions and
adjustments that may be inherently subject to significant uncertainty and
contingencies. It can be expected that some or all of the assumptions on
which the following unaudited pro forma summary is based will prove to be
inaccurate. As a result, the unaudited pro forma summary does not purport
to represent what the Corporation's results of operations would have been
if the acquisition of Bahco had occurred on January 1, 1998, and is not
intended to project the Corporation's results of operations for any future
period.
7
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
Thirteen Twenty-six
Weeks Ended Weeks Ended
(Amounts in thousands except per share data) July 3, 1999 July 3, 1999
------------ ------------
Net sales:
As reported $ 473,153 $ 925,738
Pro forma (unaudited) 547,110 1,079,380
Net earnings:
As reported $ 24,999 $ 57,240
Pro forma (unaudited) 23,673 57,025
Earnings per share - basic:
As reported $ .43 $ .98
Pro forma (unaudited) .41 .98
Earnings per share - diluted:
As reported $ .42 $ .97
Pro forma (unaudited) .40 .97
3. The Corporation normally declares and pays in cash four regular, quarterly
dividends. However, the third quarter dividend in each year is declared in
June, giving rise to two regular quarterly dividends appearing in the
second quarter and, correspondingly, three regular quarterly dividends
appearing in the first twenty-six weeks' statements.
4. Income tax paid for the twenty-six week period ended July 1, 2000 and July
3, 1999 was $20.5 million and $8.7 million. Interest paid for the
twenty-six week period ended July 1, 2000 and July 3, 1999 was $21.0
million and $13.4 million.
5. In the third quarter of 1998, the Corporation's Board of Directors approved
Project Simplify, a broad program of internal rationalizations,
consolidations and reorganizations intended to make the Corporation's
business operations simpler and more effective. Project Simplify was
essentially completed and fully provided for at 1999 year end. The
initiative's savings goal was to reduce annual costs by approximately $60
million, with one-half of the savings realized in 1999, which has been
achieved.
The Corporation met its original targets of closing 60 facilities,
eliminating 1,100 positions and discontinuing more than 12,000 stock
keeping units, along with the consolidation of certain business units.
Total charges for Project Simplify, which were composed of restructuring
charges and other non-recurring charges, amounted to $187.4 million. This
amount consists of $67.1 million of restructuring charges and $120.3
million of other non-recurring charges.
8
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
During the second quarter of 2000 there were no non-recurring charges
recorded and as of July 1, 2000 all initiatives under Project Simplify have
been completed. For the first six months of 2000, the Corporation recorded
$0.3 million in pre-tax, non-recurring charges relating to relocation
costs. For the second quarter of 1999, the Corporation recorded $7.0
million of pre-tax, non-recurring charges comprised of employee incentives
($0.7 million), relocation costs ($3.2 million) and professional services
($3.1 million). For the first six months of 1999, the Corporation recorded
$9.0 million of pre-tax, non-recurring charges comprised of employee
incentives ($0.9 million), relocation costs ($3.7 million) and professional
services ($4.4 million). The above non-recurring charges did not qualify
for restructuring treatment and were therefore expensed as incurred.
6. Earnings per share calculations were computed by dividing net earnings by
the corresponding weighted average common shares outstanding for the
period. The dilutive effect of the potential exercise of outstanding
options to purchase shares of common stock is calculated using the treasury
stock method.
7. In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137
defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. The Corporation is
currently evaluating the impact of this pronouncement.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which provides guidance on applying generally
accepted accounting principles for recognizing revenue. The SEC
subsequently issued SAB 101B which defers the effective date to no later
than the fourth quarter of fiscal years beginning after December 15, 1999.
The Corporation is currently evaluating the impact, if any, of adopting
this pronouncement.
8. Total comprehensive income for the thirteen and twenty-six week periods
ended July 1, 2000, and July 3, 1999, was as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
July 1, July 3, July 1, July 3,
(Amounts in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
Net earnings $ 44,189 $ 24,999 $ 78,033 $ 57,240
Foreign currency translation (2,609) (2,521) (5,497) (9,227)
-------- -------- -------- ---------
Total comprehensive income $ 41,580 $ 22,478 $ 72,536 $ 48,013
======== ======== ======== ========
9
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
9. The Corporation uses derivative instruments to manage well-defined interest
rate and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. The criteria used to determine
if hedge accounting treatment is appropriate are (i) the designation of the
hedge to an underlying exposure, (ii) whether or not overall risk is being
reduced, and (iii) if there is a correlation between the value of the
derivative instrument and the underlying obligation.
Interest Rate Derivative Instruments: The Corporation enters into interest
rate swap agreements to manage interest costs and risks associated with
changing interest rates. The differentials paid or received on interest
rate agreements are accrued and recognized as adjustments to interest
expense. Gains and/or losses realized upon settlement of these agreements
are deferred and amortized to interest expense over a period relevant to
the agreement if the underlying hedged instrument remains outstanding, or
immediately if the underlying hedged instrument is settled.
Foreign Currency Derivative Instruments: The Corporation has operations in
a number of countries and has intercompany transactions among them and, as
a result, is exposed to changes in foreign currency exchange rates. The
Corporation manages most of these exposures on a consolidated basis, which
allows the netting of certain exposures to take advantage of any natural
offsets. To the extent the net exposures are hedged, forward contracts are
used. Gains and/or losses on these foreign currency hedges are included in
income in the period in which the exchange rates change. Gains and/or
losses have not been material to the consolidated financial statements.
10. In April 1996, the Corporation filed a complaint against SPX Corporation
("SPX") alleging infringement of the Corporation's patents and asserting
claims relating to SPX's hiring of the former president of Sun Electric.
SPX filed a counterclaim, alleging infringement of certain SPX patents.
Upon the Corporation's request for re-examination, the U.S. Patent and
Trademark Office initially rejected SPX's patents as invalid, but recently
reconfirmed them. Neither the complaint nor the counterclaim contains
specific allegations of damages; however, the parties' claims could involve
multiple millions of dollars. It is not possible at this time to assess the
outcome of any of the claims.
The Corporation is involved in other various legal matters that are being
defended and handled in the ordinary course of business. Although it is not
possible to predict the outcome of these other matters, management believes
that the results will not have a material impact on the Corporation's
financial statements.
11. The Corporation created a Grantor Stock Trust ("GST") in 1998 that was
subsequently amended. In connection with the formation of the GST, the
Corporation sold 7.1 million shares of treasury stock to the GST. The sale
of these shares had no net impact on shareholders' equity or the
Corporation's Consolidated Statements of Earnings. The GST is a funding
mechanism for certain benefit programs and compensation arrangements,
including the incentive stock program and employee and franchised dealer
stock purchase plans. The Northern Trust Company, as trustee of the GST,
will vote the common stock held by the GST based on the terms set forth in
the GST Agreement as amended. The GST is recorded as Grantor Stock Trust at
Fair Market Value on the accompanying Consolidated Balance Sheets. Shares
owned by the GST are accounted for as a reduction to shareholders' equity
until used in connection with employee benefits. Each period, the shares
owned by the GST are valued at the closing market price, with corresponding
changes in the GST balance reflected in additional paid-in capital.
10
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
12. The Corporation's segments are based on the organization structure used by
management for making operating and investment decisions and for assessing
performance. Based on this management approach, the Corporation has two
reportable segments: Global Transportation and Global Operations. The
Global Transportation segment consists of the Corporation's business
operations serving the dealer van channel worldwide. The Global Operations
segment consists of the business operations serving the direct sales and
distributor channels worldwide. These two segments derive revenues
primarily from the sale of tools and equipment.
The Corporation evaluates the performance of its operating segments based
on segment net sales and pretax earnings. The Corporation accounts for
intersegment sales and transfers based primarily on standard costs
established between the segments. The Corporation allocates shared service
expenses to those segments that utilize the services based on their
percentage of revenues from external sources. Restructuring and other
non-recurring charges are not allocated to the reportable segments.
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- --------------------------
Financial data by segment: July 1, July 3, July 1, July 3,
(Amounts in thousands) 2000 1999 2000 1999
--------- --------- ---------- ---------
Net sales from external customers:
Global Transportation $ 280,998 $ 269,158 $ 545,271 $ 526,652
Global Operations 282,203 203,995 562,275 399,086
--------- --------- ---------- ---------
Total from reportable segments $ 563,201 $ 473,153 $1,107,546 $ 925,738
========= ========= ========== =========
Intersegment sales:
Global Transportation $ 1 $ 6 $ 7 $ 11
Global Operations 97,237 109,713 187,947 219,514
--------- --------- ---------- ---------
Total from reportable segments 97,238 109,719 187,954 219,525
Elimination of intersegment sales (97,238) (109,719) (187,954) (219,525)
--------- --------- ---------- ---------
Total consolidated intersegment sales $ - $ - $ - $ -
========= ========= ========== =========
Earnings:
Global Transportation $ 42,644 $ 32,260 $ 75,406 $ 57,155
Global Operations 26,221 18,523 44,670 30,300
--------- --------- ---------- ---------
Total from reportable segments 68,865 50,783 120,076 87,455
Net finance income 10,479 13,141 22,150 34,133
Restructuring and other
non-recurring charges - (7,037) (353) (8,970)
Interest expense (10,573) (5,417) (20,898) (10,098)
Other income (expense) - net 817 (12,406) 1,900 (13,239)
--------- --------- ---------- ---------
Total consolidated earnings before taxes $ 69,588 $ 39,064 $ 122,875 $ 89,281
========= ========= ========== =========
11
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
Financial data by segment as of: July 1, January 1,
(Amounts in thousands) 2000 2000
--------- ----------
Total assets:
Global Transportation $ 772,175 $ 789,201
Global Operations 1,322,455 1,308,365
---------- ----------
Total from reportable segments 2,094,630 2,097,566
Financial Services 103,544 97,267
Elimination of intersegment receivables (19,885) (45,011)
---------- ----------
Total consolidated assets $2,178,289 $2,149,822
========== ==========
12
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- -------------
RESULTS OF OPERATIONS
Overview: The Corporation posted record sales, net earnings and earnings per
share for the second quarter and first six months of 2000. Net sales increased
19.0% to $563.2 million for the second quarter and increased 19.6% to $1.1
billion for the first six months of 2000 as compared to the comparable 1999
periods of $473.2 million and $925.7 million. The increase in net sales in both
the second quarter and first six months of 2000 reflects continued solid gains
in franchised dealer sales and the contribution from Bahco Group AB ("Bahco,"
formerly Sandvik Saws and Tools), which was acquired September 30, 1999. Organic
sales growth was 8% in the second quarter of 2000, excluding the 15%
contribution from Bahco, the negative 2% impact from currency translation and
the negative 2% impact from discontinued product lines. Organic sales growth for
the first six months of 2000 was 7%, excluding the 16% contribution from Bahco,
the negative 2% impact from currency translation and the negative 1% impact from
discontinued product lines.
Net earnings for the second quarter and first six months of 2000 were $44.2
million and $78.0 million as compared to $25.0 million and $57.2 million in the
comparable prior-year periods. Diluted earnings per share for the second quarter
and first six months of 2000 were $0.75 and $1.33 per share, as compared to
$0.42 and $0.97 per share in the comparable prior-year periods. Net earnings for
the second quarter and first six months of 2000 were driven by an increase in
operating profit (segment earnings before the contribution of net finance
income) of 35.6% for the second quarter and 37.3% for the six-month period. The
improvement in operating profit was due to savings generated by Project Simplify
and the increase in organic sales, partially offset by the expected decline in
net finance income for both periods and higher interest expense as a result of
the Bahco acquisition.
Net earnings for the second quarter of 1999, excluding other non-recurring
charges related to Project Simplify of $4.5 million after-tax and the negative
impact of the forward currency hedge on the US$400 million equivalent purchase
price commitment for the Bahco acquisition of $8.7 million after-tax
("non-recurring items"), were $38.2 million. Net earnings for the first six
months of 1999, excluding other non-recurring charges of $5.7 million after-tax
and the negative impact of the above mentioned Bahco currency hedge, were $71.6
million. Diluted earnings per share for the 1999 second quarter excluding
non-recurring items were $0.65. For the first six months of 1999, diluted
earnings per share, excluding non-recurring items were $1.22.
The Corporation's simplification initiative, Project Simplify, which began in
the third quarter of 1998 and was essentially completed and fully provided for
at 1999 year end, was a broad program of internal rationalizations,
consolidations and reorganizations intended to make the Corporation's business
operations simpler and more effective. The initiative's savings goal, which was
to reduce annual costs by approximately $60 million, with one-half of the
savings realized in 1999, has been achieved. There were no non-recurring charges
in the second quarter of 2000 and Project Simplify was completed. For the first
six months of 2000, the Corporation recorded $0.3 million in pre-tax,
non-recurring charges relating to relocation costs. For the second quarter of
1999, the Corporation recorded $7.0 million of pre-tax, non-recurring charges
comprised of employee incentives ($0.7 million), relocation costs ($3.2 million)
and professional services ($3.1 million).
13
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
For the first six months of 1999, the Corporation recorded $9.0 million of
pre-tax, non-recurring charges comprised of employee incentives ($0.9 million),
relocation costs ($3.7 million) and professional services ($4.4 million). The
above non-recurring pre-tax charges did not qualify for restructuring treatment
and were therefore expensed as incurred.
Segment Results: In the worldwide dealer van channel segment, Global
Transportation, sales for the second quarter were up 4.4% over the prior year to
$281.0 million, driven by strong dealer activity in North America, Japan and
Europe. Second quarter sales, excluding the emissions-testing equipment were up
8% compared with $269.2 million in the second quarter of 1999. Transportation
earnings increased 32.2% quarter-over-quarter, benefiting from strong organic
sales growth and continued savings being delivered from Simplify activities. As
a result, the operating profit margin increased to 15.2% in the second quarter
from 12.0% in the comparable prior-year period. For the six-month period, sales
were up 3.5% to $545.3 million, driven also by strong dealer activity in North
America, Japan and Europe. Year-to-date sales, excluding emissions were up 6%
compared with the first six months of 1999. Transportation earnings increased
31.9% over the prior-year period, benefiting from strong organic sales growth
and continued savings being delivered from Project Simplify activities. As a
result, the operating profit margin increased to 13.8% for the first six months
of 2000 from 10.9% in the comparable prior-year period.
In the Corporation's commercial and industrial tool, diagnostics and equipment
business segment, Global Operations, organic growth (excluding Bahco and the
impact of currency translation) increased 8% for the second quarter of 2000
compared with the second quarter of 1999. Sales grew to $282.2 million in the
second quarter of 2000 from $204.0 million during the second quarter of 1999.
Incremental sales to new-vehicle dealerships, under distribution facilitation
agreements with car manufacturers, were partially offset by a negative impact
from European currency translation, as well as the continued soft market for
diagnostics and emissions-testing equipment in Europe. Industrial sales were up
in the second quarter year-over-year. Reported sales increased 38.3%
quarter-over-quarter. Earnings increased 41.6% quarter-over-quarter, benefiting
from organic growth, the addition of Bahco, and improvement in operating
profitability in Europe. The operating profit margin increased to 9.3% from 9.1%
in the prior year, as growth in Industrial and improving margins in Europe were
partially offset by the business shift from the addition of Bahco and the
incremental growth in the facilitation business. For the six months ended July
1, 2000, sales grew to $562.3 million from $399.1 million in the comparable 1999
period. Organic growth (excluding Bahco and the currency translation impact)
increased 8% for the six months ended July 1, 2000, versus the comparable 1999
period. Earnings increased 47.4% year-over-year, benefiting from organic growth,
the addition of Bahco, and improvement in operating profitability in Europe. The
operating profit margin increased to 7.9% from 7.6% in the prior year,
reflecting improving margins in Europe that were partially offset by the
business shift from the addition of Bahco and the incremental growth in the
facilitation business.
Gross margins were 46.9% and 46.3% for the second quarter and first six months
of 2000 compared to 47.6% and 48.0% in the comparable prior-year periods. For
both periods, the continued benefits from Project Simplify activities,
particularly in Europe, and improved productivity were more than offset by lower
margins from the addition of Bahco and the incremental growth in the
facilitation business. The decrease in gross margin for the second quarter
reflects the consolidation of Bahco which caused a 190 basis point negative
shift in gross margin. This is primarily because Bahco sells its products
through distributors.
14
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
As a consequence, Bahco's gross margin and operating expense as a percent of
sales are substantially lower than the Corporation's previous business mix. The
incremental growth of the distribution facilitation business (equipment sales to
new vehicle dealerships under facilitation agreements such as the Ford Rotunda
program) also reduced gross margin by 150 basis points from the prior-year
second quarter. Savings being delivered by Project Simplify and other
productivity enhancing actions improved gross margin for the second quarter by
270 basis points. The decrease in gross margin for the six-month period reflects
a 180 basis point negative shift in gross margin from the acquisition of Bahco
and the incremental growth of the distribution facilitation business, which
further reduced the gross margin by 150 basis points. The gross margin on the
core business improved 160 basis points due to the savings being delivered by
Project Simplify and other productivity enhancing actions.
Operating expenses as a percentage of net sales decreased to 34.7% in the second
quarter of 2000 from 36.9% in the prior-year period. For the six-month period,
operating expenses as a percentage of net sales decreased to 35.4% in 2000 from
38.5% in the prior-year period. The declines in operating expenses as a
percentage of net sales for both periods reflects a shift in the business mix,
principally from the addition of Bahco and the incremental growth of the
distribution facilitation business.
Net finance income was $10.5 million and $22.2 million for the second quarter
and first six months of 2000, a decline from $13.1 million and $34.1 in the
comparable 1999 periods. The declines in net finance income are largely a result
of difficult comparisons to 1999 and the adverse effect of higher interest
rates. In 1999, credit receivables were sold that generated a gain as a result
of the establishment of the financial services joint venture with Newcourt
Financial USA Inc. (now CIT) in January 1999 to leverage the infrastructure and
new product development capabilities of a strong financial products partner and
enhance financial return. As the Corporation made its transition to an
"origination fee" business model from what had essentially been an
"interest-rate-spread" business, the domestic credit receivables portfolio was
sold and generated incremental gains. During the second quarter and first six
months of 2000, origination of extended credit receivables grew at a high
single-digit rate. Originations also benefited from the addition of new
financing products. The increase in interest rates reduced the premium received
on the originated loans faster than corresponding changes could be made to the
rates extended to customers.
Interest expense for the second quarter of 2000 was $10.6 million, up from $5.4
million in the second quarter of 1999. For the first six months of 2000,
interest expense increased to $20.9 million from $10.1 million in the comparable
1999 period. The increase is mainly due to the financing of the Bahco
acquisition and overall higher interest rates.
Other income (expense)-net was $0.8 million for the second quarter and $1.9
million for the first six months of 2000 as compared to ($12.4) million and
($13.2) million in the comparable 1999 periods. This line item includes all
non-operating items such as interest income, minority interests, disposal of
fixed assets, foreign exchange transaction gains and losses, and other
non-significant miscellaneous items. The results for the 1999 periods include
the negative impact of $13.6 million related to a forward currency hedge on the
US$400 million equivalent purchase price commitment for the Bahco acquisition.
15
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The effective tax rate was 36.5% in the second quarter and first six months of
2000, and 36.0% and 35.9% in the comparable prior-year periods. The increase in
2000 is due primarily to goodwill amortization from the Bahco acquisition.
FINANCIAL CONDITION
Liquidity: Cash and cash equivalents were $8.1 million at the end of the second
quarter down from $17.6 million at the end of 1999. Net cash provided by
operating activities decreased to $55.7 million for the first six months of
2000, as compared to $149.2 million in the comparable prior-year period
primarily due to the sale of receivables to CIT during the first quarter of
1999. Working capital of $754.5 million at the end of second quarter was
essentially flat compared to $753.6 million at the end of 1999.
Total-debt-to-total-capital ratio at the end of the second quarter was 41.4%
compared to 43.3% at year-end 1999.
The Corporation has a shelf registration that allows for the issuance from time
to time of up to $300.0 million of unsecured indebtedness. As of July 1, 2000,
$100.0 million aggregate principal amount of notes have been issued. The notes
require payment of interest on a semiannual basis at a rate of 6.625% and mature
on October 1, 2005.
The Corporation believes it has sufficient sources of liquidity to support
working capital requirements, finance capital expenditures and pay dividends.
Accounts receivable, less allowances: Net receivables increased 4.0% to $642.2
million at the end of the second quarter as compared with $617.6 million at the
end of 1999, primarily due to sales growth and an increase in dealer finance
receivables, partially offset by improved collection of receivables.
Inventories: Inventories were $476.7 million at July 1, 2000, versus $454.8
million at year-end.
Liabilities: Total short-term and long-term debt was $608.3 million at the end
of the second quarter as compared with $629.8 million at the end of 1999.
Average shares outstanding: Average shares outstanding for diluted and basic
earnings per share in the second quarter of 2000 were 58.8 million and 58.6
million shares versus 58.8 million and 58.4 million in last year's second
quarter. Average shares outstanding for diluted and basic earnings per share in
the first six months of 2000 were 58.8 million and 58.6 million shares versus
58.9 million and 58.5 million in the comparable prior-year periods.
Share repurchase: The Corporation has undertaken stock repurchases from time to
time to prevent dilution created by shares issued for employee and dealer stock
purchase plans, stock options and other corporate purposes, as well as to
repurchase shares when market conditions are favorable. At its January 1999
meeting, the Board of Directors authorized the repurchase of up to $50.0 million
of the Corporation's common stock. This action followed the board's
authorization in 1998 to repurchase up to $100.0 million of common stock and its
authorization in 1997 for up to $100.0 million of common stock. At the end of
1999, all of the 1999 authorization and substantially all of the 1998
authorization remained available. The Corporation repurchased 492,800 shares of
its common stock in 1999, 2,279,400 shares in 1998 and 986,333 shares in 1997.
Since 1995, the Corporation has repurchased 8,570,083 shares.
16
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Foreign currency: The Corporation operates in a number of countries and, as a
result, is exposed to changes in foreign currency exchange rates. Most of these
exposures are managed on a consolidated basis to take advantage of natural
offsets. To the extent that net exposures are hedged, forward contracts are
used. Refer to Note 9 for a discussion of the Corporation's accounting policies
for the use of derivative instruments.
Euro conversion: On January 1, 1999, certain member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the euro. The euro trades on
currency exchanges and may be used in business transactions. Beginning in
January 2002, the new euro-denominated bills and coins will be used, and legacy
currencies will be withdrawn from circulation. The Corporation's operating
subsidiaries affected by the euro conversion are developing plans to address the
systems and business issues affected by the euro currency conversion. These
issues include, among others, (i) the need to adapt computer and other business
systems and equipment to accommodate euro-denominated transactions, and (ii) the
competitive impact of cross-border price transparency, which may affect pricing
strategies. The Corporation does not expect this conversion to have a material
impact on its financial condition or results of operations.
Outlook: The Corporation believes that the overall business outlook for the
remainder of the year is sound. Bahco is generally performing to the
Corporation's expectations and offers a solid platform to reach new professional
tool users in North America. The Corporation's Internet activities are on track
with a redesigned web site and a new dealer portal ready for launch during the
third quarter of 2000. The Corporation's investments in technology, systems,
products and processes are producing solid benefits.
The Corporation has a number of new, innovative, high-value-added products that
will be introduced throughout the remainder of the year, which are expected to
contribute to further growth. Higher interest rates and unfavorable currency
effects are likely to remain, somewhat tempering optimism for the remainder of
the year. Overall, the Corporation expects to achieve continued strong results
in the second half of the year, with diluted earnings per share in the second
half increasing approximately 15% on a year-over-year basis, excluding
non-recurring items.
Safe Harbor: Statements in this document that are not historical facts,
including statements (i) that include the words "believes," "expects,"
"anticipates," or "estimates," or similar words with reference to the
Corporation or management; (ii) specifically identified as forward-looking; or
(iii) describing the Corporation's or management's future plans, objectives or
goals, are forward-looking statements. The Corporation or its representatives
may also make similar forward-looking statements from time to time orally or in
writing. The Corporation cautions the reader that these statements are subject
to risks, uncertainties or other factors that could cause (and in some cases
have caused) actual results to differ materially from those described in any
such statement. Those important factors include the timing and progress with
which the Corporation can continue to achieve higher productivity and attain
further cost reductions; the Corporation's ability to retain and attract
dealers, to successfully integrate the Bahco acquisition, to realize benefits in
growth and efficiencies from e-business investments and to withstand external
negative factors including changes in trade, monetary and fiscal policies, laws
and regulations, or other activities of governments or their agencies, as well
as the absence of significant changes in the current competitive environment,
inflation, currency fluctuations or the material worsening of economic and
political situations around the world. These factors may not constitute all
factors that could cause actual results to differ materially from those
discussed in any forward-looking statement. The Corporation operates in a
continually changing business environment and
17
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
new factors emerge from time to time. The Corporation cannot predict such
factors nor can it assess the impact, if any, of such factors on the Corporation
or its results. Accordingly, forward-looking statements should not be relied
upon as a prediction of actual results. The Corporation disclaims any
responsibility to update any forward-looking statement provided in this
document.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The Corporation uses derivative instruments to manage well-defined interest rate
and foreign currency exposures and to limit the impact of interest rate and
foreign currency rate changes on earnings and cash flows. The Corporation does
not use derivative instruments for trading purposes.
Value at Risk: The Corporation utilizes a "Value-at-Risk" ("VAR") model to
determine the potential one-day loss in the fair value of its interest rate and
foreign exchange-sensitive financial instruments from adverse changes in market
factors. The VAR model estimates are made assuming normal market conditions and
a 95% confidence level. The Corporation's computations are based on the
inter-relationships among movements in various currencies and interest rates
(variance/co-variance technique). These inter-relationships were determined by
observing interest rate and foreign currency market changes over the preceding
quarter.
The Corporation has operations in a number of countries and has intercompany
transactions among them and, as a result, is exposed to changes in foreign
currency exchange rates. The Corporation manages most of these exposures on a
consolidated basis, which allows netting certain exposures to take advantage of
any natural offsets. To the extent the net exposures are hedged, forward
contracts are used. The Corporation also enters into interest rate swap
agreements to manage interest costs and risks associated with changing interest
rates.
The estimated maximum potential one-day loss in fair value, calculated using the
VAR model, at July 1, 2000, was $0.3 million on interest rate-sensitive
financial instruments, and $2.1 million on foreign currency-sensitive financial
instruments.
The VAR model is a risk management tool and does not purport to represent actual
losses in fair value that will be incurred by the Corporation, nor does it
consider the potential effect of favorable changes in market factors.
18
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Corporation held its Annual Meeting of Shareholders on April 28, 2000. The
following is a summary of the matters voted on in that meeting. There were
65,228,771 outstanding shares eligible to vote.
a) The shareholders elected four members of the Corporation's Board of
Directors, whose terms were up for reelection, to serve until the 2003
Annual Meeting. The persons elected to the Corporation's Board of
Directors, the number of votes cast for and the number of votes withheld
with respect to each of these persons were as follows:
Director For Withheld Term
-------- --- -------- ----
Bruce S. Chelberg 55,932,268 763,447 2003
Arthur L. Kelly 55,989,422 706,293 2003
Roxanne J. Decyk 55,926,820 768,895 2003
Jack D. Michaels 55,932,305 763,410 2003
Branko M. Beronja 2002
Richard F. Teerlink 2002
Donald W. Brinckman 2002
George W. Mead 2002
Leonard A. Hadley 2001
Robert A. Cornog 2001
Edward H. Rensi 2001
Item 6: Exhibits and Reports on Form 8-K
- ----------------------------------------
Item 6(a): Exhibits
- ---------------------
Exhibit 27 Financial Data Schedule
Exhibit 99 Acquisition Schedule
Item 6(b): Reports on Form 8-K Filed During the Reporting Period
- ----------------------------------------------------------------
Date Filed Date of Report Item
---------- -------------- ----
During the second quarter of 2000, the Corporation reported on Form 8-K the
following:
April 4, 2000 March 17, 2000 Item 5. The Corporation filed a report
relating to amendments to the
Corporation's Benefit Trust Agreement
relating to the grantor stock ownership
program.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Snap-on
Incorporated has duly caused this report to be signed on its behalf by the
undersigned duly authorized persons.
SNAP-ON INCORPORATED
Date: August 11, 2000 /s/ R. A. Cornog
--------------- -------------------------------------------------
R. A. CORNOG
(Chairman, President and Chief Executive Officer)
Date: August 11, 2000 /s/ N. T. Smith
--------------- -------------------------------------------------
N. T. SMITH
(Principal Accounting Officer and Controller)
20
EXHIBIT INDEX
-------------
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
99 Acquisition Schedule
21