Management's Discussion and Analysis
Snap-on Incorporated ("Snap-on") is a leading global innovator, manufacturer and
marketer of high-quality tool, diagnostic and equipment solutions for
professional tool and equipment users. Snap-on's mission is to delight its
customers - professional tool and equipment users worldwide - by providing
innovative, productivity-enhancing products, services and solutions. Product
lines include hand and power tools, tool storage, shop equipment, saws and
cutting tools, pruning tools, under-hood diagnostics equipment, under-car
equipment, safety-testing equipment, collision repair equipment, vehicle service
information, business management systems, repair services, and other solutions
for vehicle service, industrial, government and agricultural customers, and
commercial applications, including construction and electrical. Snap-on's
customers include professional automotive technicians, shop owners, franchised
and chain vehicle service centers, vehicle and equipment manufacturers and other
industrial, agricultural, and commercial tool and equipment users worldwide.
Snap-on has two business segments: the Snap-on Dealer Group, which serves the
worldwide dealer van channel, and the Commercial and Industrial Group, which
serves the non-dealer tool and equipment products businesses. In addition to its
manufacturing, marketing and distribution operations, Snap-on also offers
extended-credit financing for the purchase of its products through its wholly
owned credit facilities and through a 50%-owned financial services joint
venture.
Snap-on markets its products through multiple distribution channels and under
various brands worldwide. Products are primarily sold through Snap-on's dealer
van, company-direct and distributor sales channels and the Internet. Snap-on
began selling product via the Internet in 2000 as part of its "Store Without
Walls" vision, which offers both current and prospective customers online,
around-the-clock access to purchase Snap-on(R) products.
Snap-on: Driven to Deliver(TM)
In 2001, Dale F. Elliott succeeded Robert A. Cornog as president and chief
executive officer of Snap-on and introduced a new message of Driven to
Deliver(TM) as a catalyst to respond to marketplace changes - including economic
factors, market consolidation, the impact of technology and changing customer
expectations. The Driven to Deliver(TM) process, which builds on the strong
foundation already created through the partnering efforts of Snap-on employees
and dealers worldwide, provides a business management framework for all
employees to take action, produce improvements and contribute to building a
stronger Snap-on. Through the balance of three strategic principles - Quality
People, Operational Fitness and Profitable Growth - Snap-on has set a course of
action that it believes will better position the company by further
strengthening the foundation for value and by setting the stage for continued
expansion and growth.
The Driven to Deliver(TM) principle of "Quality People" means employees
throughout the company are encouraged to anticipate and take appropriate action
to achieve Snap-on's goals. The "Operational Fitness" principle means that the
businesses and functions of Snap-on are striving toward a high level of
operating effectiveness and that a planning and process-driven approach is used.
Operational Fitness is not a short-term objective - it does not translate into
simply cutting costs - it means building continuous improvement as a mindset
among all employees and applying it to every aspect of the business. The
"Profitable Growth" principle means growing the company while delivering a
measurable increase in financial performance. At Snap-on, this will be
accomplished through the rationalization of businesses not earning acceptable
financial returns and through a continuous stream of innovative,
productivity-enhancing new products.
The Driven to Deliver(TM) business process prompted Snap-on to take significant
action during 2001 to reduce costs companywide in response to the slower sales
environment and improve operating performance in businesses not earning
acceptable financial returns. These initiatives, including the consolidation or
closure of 35 facilities, coupled with a planned reduction in worldwide
headcount of 796, or 6%, are expected to enhance financial returns and support
investment initiatives that will deliver future profitable growth. Snap-on
expects to achieve $40 million in pretax savings in 2002 from its restructuring
and cost control activities, with approximately one-half of the savings targeted
to support growth initiatives.
Consolidated Results of Operations
Snap-on's Global Presence: In recent years, Snap-on had product sales in the
following geographic regions:
- -------------------------------------------------------------------------------
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
United States $1,360.0 $1,367.1 $1,306.7
Europe 537.5 587.5 434.3
All other 198.2 221.1 204.6
- -------------------------------------------------------------------------------
Total net sales $2,095.7 $2,175.7 $1,945.6
- -------------------------------------------------------------------------------
NET SALES: Net sales in 2001 were $2.096 billion, down 3.7% from the $2.176
billion posted in 2000. In the Snap-on Dealer Group, worldwide net sales
declined 1.9% from 2000 levels as a decrease in sales of big-ticket equipment
and diagnostics products was partially offset by the success of new product
introductions and continued demand for tools and tool storage. In the Commercial
and Industrial Group, worldwide net sales declined 5.4% for the year. The
slowing economy in 2001 depressed demand for big-ticket capital goods equipment
throughout the year, while the demand for professional tools in the
manufacturing and industrial marketplace weakened in the second half. Despite
adverse economic conditions in 2001, Snap-on strengthened its business through
successful new product introductions and further investment in the expansion of
the U.S. dealer base under its "More Feet on the Street" initiative.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 17
Management's Discussion and Analysis (continued)
Overall, the year-over-year decline in net sales of 3.7% reflects a 2%
deterioration from unfavorable currency translation and a 1.7% decline in
organic sales. Organic sales exclude the impact of acquisitions, divestitures
and currency translation. The combined net impact on 2001 sales from
acquisitions and divestitures, including the impact of Snap-on's decision in
December 2000 to exit an unprofitable segment of the emissions-testing business,
was minimal.
Net sales in 2000 were a record $2.176 billion, up 12% over the $1.946 billion
posted in 1999 and the ninth consecutive year of higher sales for Snap-on.
Acquisition sales growth contributed 11%, primarily attributable to the
full-year contribution of Bahco Group AB ("Bahco"). Acquired by Snap-on on
September 30, 1999, Bahco is a leading manufacturer and supplier of professional
hand tools, including saws and other cutting implements, files, wrenches,
pliers, screwdrivers and pruning tools. Sales of BAHCO(R) products in 2000
totaled $283 million, as compared to $75 million for the three-month period in
1999. Organic sales growth contributed 5% over 1999 levels led by solid dealer
sales growth in North America and Europe and incremental sales of equipment to
new-car dealerships under facilitation contracts, in which Snap-on provides
product procurement, distribution and administrative support to customers for
their dealerships' equipment programs ("the facilitation business"). These
increases in net sales were partially offset by a 3% deterioration from
unfavorable currency translation and a 1% decline from discontinued activities.
Net sales in 1999 increased 10% to $1.946 billion over the $1.773 billion posted
in 1998. Organic sales grew 5%, driven primarily by increased unit volumes in
the Snap-on Dealer Group and in the North American region of the Commercial and
Industrial Group. Acquisitions contributed an additional 7%, partially offset by
a 1% decline from lower sales of emissions-testing equipment and a 1% decline
from unfavorable currency translation.
- -------------------------------------------------------------------------------
(Amounts in millions
except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------
Net sales $2,095.7 $2,175.7 $1,945.6
Net earnings 19.0 148.5 127.2
Net earnings per share:
Basic .33 2.54 2.18
Diluted .33 2.53 2.16
- -------------------------------------------------------------------------------
Snap-on recognizes revenues at the time that products are shipped or services
are performed, and accrues for estimated future returns in the period in which
the sale is recorded. Franchise fee revenue is recognized as the fees are earned
and was not material in any year. Subscription revenue is deferred and
recognized over the life of the subscription.
EARNINGS: Snap-on reported net earnings of $19.0 million in 2001, as compared to
net earnings of $148.5 million in 2000. Diluted earnings per share were $.33 in
2001, as compared to $2.53 in 2000. In the second quarter of 2001, Snap-on
announced that it was taking significant action to (i) reduce costs companywide
to adjust to the slower sales environment and (ii) improve operational
performance in businesses not earning acceptable financial returns. Snap-on
incurred pretax charges of $120.4 million ($85.2 million after tax or $1.47 per
diluted share) in implementing these and other actions in 2001, including $62.0
million for restructuring and non-recurring charges and $58.4 million for other
non-comparable items, including $47.0 million for the resolution of an
arbitration matter and related legal costs. In addition to these charges, the
decline in 2001 net earnings also reflects the impact of lower sales of
higher-margin products, increased operating expenses for new product development
and higher training and recruiting costs associated with the More Feet on the
Street initiative.
Net earnings in 2001 included a one-time net charge of $2.5 million, or $.04 per
diluted share, for the cumulative effect of adopting Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities."
Snap-on's net earnings were $148.5 million in 2000, as compared to net earnings
of $127.2 million in 1999. Diluted earnings per share were $2.53 in 2000, as
compared to $2.16 in 1999. The year-over-year increase in earnings was primarily
driven by organic sales growth, the full-year impact of Bahco and benefits from
ongoing streamlining initiatives, partially offset by lower finance income,
reduced gross profit margins, higher interest expense and adverse currency
impacts. In 2000, net earnings included pretax charges totaling $21.8 million
($14.2 million after tax or $.24 per diluted share) for restructuring and other
non-recurring items, and pretax charges of $16.8 million ($10.5 million after
tax or $.18 per diluted share) for certain legal and other costs.
Net earnings in 2000 also included a one-time gain of $41.3 million ($25.4
million after tax or $.43 per diluted share) resulting from the cumulative
effect of a change in accounting for pensions. This change, recommended by
Snap-on's outside actuarial firm, did not result in any
MARGIN ANALYSIS
1997 - $1,672 Net Sales in millions
- 50.5% Gross Profit Margin
- 11.6% Segment Operating Margin
1998 - $1,773 Net Sales in millions
- 43.1% Gross Profit Margin
- 6.7% Segment Operating Margin
1999 - $1,946 Net Sales in millions
- 46.1% Gross Profit Margin
- 9.7% Segment Operating Margin
2000 - $2,176 Net Sales in millions
- 45.8% Gross Profit Margin
- 9.8% Segment Operating Margin
2001 - $2,096 Net Sales in millions
- 45.3% Gross Profit Margin
- 7.5% Segment Operating Margin
18 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
cash flow into or out of the plan, and better reflects the market-related value
of benefit plan assets for financial reporting purposes. The impact of this
change on 2000 operating results was to reduce pension expense by $9.7 million.
In 1999, Snap-on reported net earnings of $127.2 million, or $2.16 per diluted
share, including non-recurring charges totaling $37.2 million ($23.3 million
after tax or $.40 per diluted share) for restructuring and other non-recurring
items associated with Snap-on's Project Simplify restructuring initiative.
Project Simplify, a broad program of internal rationalizations, consolidations
and reorganizations intended to make the Snap-on business operations simpler and
more effective, began in the third quarter of 1998 and was essentially completed
at the end of 1999.
COSTS AND PROFIT MARGINS: Gross profit margin was $949.0 million in 2001, down
4.8% from $996.8 million in 2000. As a percent of net sales, gross profit margin
was 45.3% in 2001 versus 45.8% in 2000. Effective price discipline, improved
productivity and the success of new product introductions in 2001 partially
offset the underabsorption of manufacturing costs from the lower-than-planned
sales. In addition, Snap-on recorded charges of $12.6 million and $9.5 million
in 2001 and 2000 for non-recurring inventory write-downs and warranty costs
associated with its restructuring activities. These charges are included in
"Cost of goods sold - non-recurring charges" on the accompanying Consolidated
Statements of Earnings.
Gross profit margin increased to $996.8 million in 2000, up 11.2% from $896.2
million in 1999, largely driven by increased sales volumes, including the
full-year impact of Bahco. As a percent of net sales, gross profit margin was
45.8% in 2000, down from 46.1% in 1999, reflecting the impact of a planned shift
in product mix to include higher volumes of lower margin sales associated with
the facilitation and Bahco businesses. Bahco primarily sells its products
through distributors, resulting in lower gross margins when compared to
Snap-on's historical business mix. Unfavorable currency translation also
adversely affected gross profit margin. The decline in gross profit margin was
somewhat offset by operating improvements and streamlining benefits.
Operating expenses were $848.7 million, or 40.5% of net sales, in 2001, as
compared to $792.6 million, or 36.4%, in 2000. The year-over-year increase
primarily reflects the impact of incremental costs incurred in 2001 for certain
non-comparable legal and other costs, increased costs for new product
development and higher spending for dealer expansion, training and recruitment
under the More Feet on the Street initiative, and increased bad debt provisions.
In 2001, Snap-on incurred charges totaling $56.9 million for certain legal and
other costs, including $44.0 million for the resolution of a long-standing
arbitration matter with SPX Corporation ("SPX") that includes patents and $3.0
million for related legal costs; $5.9 million for costs related to the
termination of a European supplier relationship; and $4.0 million for
emissions-related bad debts. These cost increases were partially offset by
savings generated from the company's focus on Operational Fitness, including
benefits realized from its cost-reduction and restructuring initiatives.
OPERATING EXPENSES AS A PERCENT OF NET SALES
- --------------------------------------------
1997 - 38.9
1998 - 39.8
1999 - 37.2
2000 - 36.4
2001 - 40.5
RESEARCH & ENGINEERING (in $ millions)
- ----------------------
1997 - 47
1998 - 49
1999 - 50
2000 - 51
2001 - 55
Operating expenses were $792.6 million in 2000, compared to $723.7 million in
1999. The increase in year-over-year operating expenses primarily reflects the
impact of higher sales volumes and the full-year addition of Bahco, as well as
the inclusion of $16.8 million for certain non-comparable legal and other costs.
Operating expenses improved from 37.2% of net sales in 1999 to 36.4% in 2000,
primarily due to the planned shift in business mix associated with Bahco and
higher sales in the facilitation business, as well as lower pension expense and
benefits from Project Simplify activities. These improvements were partially
offset by higher costs for recruiting and training for the dealer expansion
initiative and by increased bad debt provisions and higher energy-driven freight
costs.
Research and engineering costs for the development of new and improved products
and process improvements are included in operating expenses. In 2001, Snap-on
filed 132 new patent applications in conjunction with its development
activities, resulting in a total of 1,343 active or pending patents at year end.
Research and engineering expenses totaled $54.6 million, $50.6 million and $50.2
million in 2001, 2000 and 1999. In 2001, Snap-on introduced such new and
improved products as the handheld, Color Graphing Scanner,(TM) the air-powered
Crud Thug(TM) material-removing tool, productivity-enhancing wheel balancers and
aligners, and new BAHCO(R) hand tools. These new product introductions
contributed incremental sales in 2001 and enhanced Snap-on's leadership position
in the marketplace.
SEGMENT RESULTS: Snap-on's business segments include the Snap-on Dealer Group
and the Commercial and Industrial Group. Snap-on defines operating earnings for
segment reporting purposes as net sales, less cost of goods sold and operating
expenses, excluding restructuring and non-recurring charges. Had it been
Snap-on's policy to allocate restructuring and other non-recurring charges to
its reportable segments, such charges of $62.0 million, $21.8 million and $37.2
million for 2001, 2000 and 1999 would have been allocated to the segments as
follows: Snap-on Dealer Group - $14.3 million, $11.5 million and $8.9 million
for 2001, 2000 and 1999; Commercial and Industrial Group - $47.7 million, $10.3
million and $28.3 million for 2001, 2000 and 1999. In 2001, the $44.0 million
cost for the resolution of patent arbitration was not allocated to the
reportable segments.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 19
Management's Discussion and Analysis (continued)
Snap-on reported segment net sales and operating earnings of $2.096 billion and
$156.9 million in 2001, as compared to net sales and operating earnings of
$2.176 billion and $213.7 million in 2000. The following discussion focuses on
Snap-on's reported net sales and operating earnings by segment. For supplemental
segment information, refer to Note 17.
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Net sales
Snap-on Dealer Group $1,048.8 $1,068.7 $1,050.9
Commercial and
Industrial Group 1,046.9 1,107.0 894.7
- -------------------------------------------------------------------------------
Total net sales $2,095.7 $2,175.7 $1,945.6
- -------------------------------------------------------------------------------
Operating earnings
Snap-on Dealer Group $ 116.8 $ 127.3 $ 120.0
Commercial and
Industrial Group 40.1 86.4 69.1
- -------------------------------------------------------------------------------
Total operating earnings $ 156.9 $ 213.7 $ 189.1
- -------------------------------------------------------------------------------
Snap-on Dealer Group
Worldwide net sales in the Snap-on Dealer Group were $1.049 billion in 2001,
down 1.9% from $1.069 billion in 2000, reflecting lower sales of big-ticket
equipment and diagnostic products and adverse currency impacts, partially offset
by the success of new products and the continued demand for tools and tool
storage. During 2001, Snap-on continued to focus resources on expanding its U.S.
dealer network through its More Feet on the Street program of second vans and
second franchises. This initiative, introduced in 2000, provides new expansion
opportunities for successful existing franchised Snap-on dealers. The addition
of second vans and second franchises under this program also facilitates better
market penetration and service to Snap-on customers. In 2001, a net addition of
203 dealers in the United States was achieved, and in 2000, Snap-on added 137
net new dealers as part of this expansion initiative. Based on the success of
its dealer expansion efforts to date, Snap-on will continue to invest in adding
more second vans and new franchise dealers in 2002 under this program.
Organic sales in the Snap-on Dealer Group were flat year over year. Sales to
U.S. dealers, which account for approximately 78% of Snap-on Dealer Group sales,
were flat with 2000 levels. Despite the difficult economies, however, 2001 sales
in the U.S. dealer business, excluding sales of big-ticket equipment and
diagnostics products sold through the company's tech rep organization, were up
3% over the prior year and international dealer sales were up 4% in local
currencies.
Organic sales in the Snap-on Dealer Group grew 4% in 2000 from 1999 levels.
Sales to U.S. dealers grew 4% and, in local currencies, international dealer
sales were up 2% over the prior year.
Operating earnings decreased 8.2% to $116.8 million in 2001, as compared to
$127.3 million in 2000. The decrease reflects the negative operating leverage
experienced during the first half of the year on the lower-than-planned sales,
higher training and recruiting costs related to expanding the dealer base and
increased bad debt provisions.
Operating earnings increased 6.1% to $127.3 million in 2000, as compared to
$120.0 million in 1999. This increase primarily resulted from enhanced dealer
sales, improved customer service and market penetration as a result of the net
increase in dealers. The year-over-year growth in organic sales and continued
cost savings from ongoing streamlining initiatives, as well as the elimination
of discontinued business activities, all had a positive impact on segment
operating earnings. Higher costs for recruiting and training as part of the More
Feet on the Street initiative, as well as increased bad debt provisions and
higher energy-driven freight costs, partially offset the year-over-year
improvement in operating earnings.
Commercial and Industrial Group
Worldwide net sales in the Commercial and Industrial Group decreased 5.4% to
$1.047 billion in 2001 from $1.107 billion in 2000, largely due to a decline in
industrial tool sales, continued softness in the diagnostics and equipment
markets and unfavorable currency translation. Organic sales decreased 3%,
reflecting a decline in industrial sales, as well as declines in equipment and
diagnostic sales in both North America and Europe. An erosion in consumer
confidence and weaker economic conditions affected many industrial sectors, such
as automotive, electronics and aerospace. The slowing economy also depressed
demand for diagnostics and equipment throughout the year, while the demand for
tools in many industrial sectors, such as manufacturing, weakened in the second
half. Sales in Europe declined 9%, with approximately one-half due to
unfavorable currency translation. In conjunction with the Driven to Deliver(TM)
business process, equipment operations are being consolidated in North America
with a clear focus toward achieving an improved operating profit. And in Europe,
the diagnostics business is progressing toward a pan-European "build-to-order"
supply process. New product introductions - such as productivity-enhancing wheel
balancers and aligners, and ergonomic BAHCO(R) hand tools - improved Snap-on's
marketplace position.
Net sales in the Commercial and Industrial Group were $1.107 billion in 2000, up
23.7% as compared to 1999 sales of $894.7 million. The year-over-year increase
in net sales was primarily due to the full-year contribution of Bahco,
incremental growth in the facilitation business, increased commercial tool sales
in Europe and higher sales to industrial customers worldwide. These increases
were partially offset by soft market conditions for equipment and diagnostics
and by negative currency impacts.
20 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Operating earnings were $40.1 million in 2001 compared with $86.4 million in
2000. The decline in operating earnings reflects the lower sales in 2001, as
well as the impact of non-comparable charges incurred during the year. These
charges include additional asset write-downs related to the December 2000
announced exiting of an unprofitable segment of the emissions-testing business
and charges related to the second-quarter 2001 termination of a European
supplier agreement.
Operating earnings increased 25.0% to $86.4 million in 2000, as compared to
$69.1 million in 1999. The increase primarily resulted from the full-year
contribution of Bahco and incremental growth in the facilitation business,
partially offset by the decline in equipment sales. Margin enhancements and
improved profitability in Europe, along with savings generated from actions
taken under Project Simplify, also added to the year-over-year improvement in
operating earnings.
Snap-on's Commercial and Industrial Group includes a Bahco hand-tool
manufacturing facility in Argentina with net assets of approximately $11.7
million as of December 29, 2001, including reserves for restructuring charges
incurred in 2001. Due to the economic instability in Argentina, Snap-on resized
its operations there, shifting a portion of its manufacturing to other existing
Snap-on facilities. The Bahco Argentina facility will continue to operate with
about one-half of its previous workforce, manufacturing product at a level to
support its local market. Snap-on will continue to assess Argentina's economic
situation to determine if any future actions or impairment write-downs are
warranted.
NET FINANCE INCOME: Net finance income was $35.7 million in 2001, down from
$38.1 million in 2000. The year-over-year decline in net finance income is a
result of a 1% decline in loan originations related to the soft demand for
capital-type equipment and diagnostics products, partially offset by the effects
of a more favorable interest-rate environment. The decrease also reflects the
impact of gains realized in 2000 on the sale of installment receivables
associated with the formation of the financial services joint venture in 1999.
Snap-on utilizes various financing programs to facilitate the sales of its
products. To reduce asset intensity from financing activities, Snap-on
established a joint venture in January 1999 with Newcourt Financial USA Inc.
("Newcourt"), now CIT Group, Inc., which was subsequently acquired by Tyco
International Ltd. The joint venture, Snap-on Credit LLC ("the LLC"), is a
50%-owned joint venture that provides financial services to Snap-on's U.S.
dealer and customer network and to its industrial and other customers. As a
result of establishing the joint venture, Snap-on effectively outsourced to the
LLC its domestic captive credit function that was previously managed by a wholly
owned subsidiary.
In conjunction with the establishment of the LLC, Snap-on repurchased $337.0
million of its previously securitized installment receivables and $68.3 million
of its previously securitized dealer finance loan receivables. Upon repurchase,
these receivables were sold to Newcourt. In a separate transaction, Snap-on also
sold to Newcourt its remaining on-balance-sheet portfolio of U.S. installment
receivables, including existing extended credit, equipment lease and dealer loan
receivables, for an aggregate
sale price of $141.1 million, resulting in a pretax gain of approximately $40
million. Since Newcourt had the right to put back to Snap-on the unpaid portion
of the extended credit installment receivable portfolio based on the same
pricing formula, this gain was recognized over a two-year period. For additional
information on the LLC, refer to Note 7.
Net finance income was $38.1 million in 2000, as compared to $60.5 million in
1999. The year-over-year decline was largely due to reduced gains on the sale of
installment receivables and the adverse effect of higher interest rates in 2000,
partially offset by an increase in loan originations. In 2000, originations grew
15% over prior-year levels, influenced by growth in extended credit, dealer
finance and van leasing programs.
RESTRUCTURING AND NON-RECURRING CHARGES: As a result of its Driven to
Deliver(TM) business process, Snap-on announced in the second quarter of 2001
that it was taking significant action to (i) reduce costs companywide to adjust
to the slower sales environment and (ii) improve operational performance in
businesses not earning acceptable financial returns. As a result of selective
rationalization and consolidation actions, Snap-on recorded $62.0 million in
pretax restructuring and other non-recurring charges in 2001 for actions that
include the consolidation or closure of 35 facilities, asset write-downs and
severance costs to effect a 6% reduction in workforce. The $62.0 million charge
includes restructuring charges of $40.3 million and non-recurring charges of
$21.7 million. On the accompanying Consolidated Statements of Earnings,
"Restructuring and other non-recurring charges" of $49.4 million includes
restructuring charges of $40.3 million and other non-recurring charges of $9.1
million, and "Cost of goods sold - non-recurring charges" includes $12.6 million
for certain inventory write-downs and warranty costs. Approximately 45% of the
charges recorded in 2001 were non-cash, with the remaining costs requiring cash
outflows from operations and borrowings under Snap-on's existing credit
facilities.
The 2001 restructuring charges are for the consolidation or closure of 35
facilities, comprised of nine manufacturing or distribution facilities and 26
sales or administrative offices. The $40.3 million charge includes $27.1 million
for severance costs associated with the planned elimination of 796 salaried and
hourly positions, $6.0 million for non-cancelable lease agreements, $5.9 million
for facility asset write-downs, and $1.3 million for exit-related legal and
professional services. Non-recurring charges of $9.1 million include $8.4
million for management transition costs associated with the April 2001
retirement of Snap-on's president and chief executive officer and the
appointment of Dale F. Elliott as successor to this position and $.7 million for
non-recurring transition costs related to equipment and employee relocation
associated with the facility consolidations. The non-recurring charges of $12.6
million in "Cost of goods sold - non-recurring charges" are comprised of $2.3
million for restructuring-related inventory write-downs and $10.3 million for
additional inventory write-downs and warranty costs associated with Snap-on's
exiting of an unprofitable segment of the emissions-testing business.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 21
Management's Discussion and Analysis (continued)
Snap-on recorded charges for expected losses on the disposition of discontinued
inventory, extended warranty costs and other asset impairments related to this
exit plan in December 2000. During 2001, Snap-on experienced higher than
expected emissions-related warranty costs and, as a result, Snap-on revised its
cost estimate relative to the emissions exit plan and recorded $10.3 million of
additional non-recurring charges in 2001.
The composition of Snap-on's restructuring reserve activity for the year ended
December 29, 2001, was as follows:
Restructuring
Reserve as of
(Amounts in millions) Provisions Usage Dec. 29, 2001
- -------------------------------------------------------------------------------
Severance costs $27.1 $ (6.0) $21.1
Facility consolidation
or closure costs 7.3 (5.3) 2.0
Loss on asset write-downs 5.9 (5.9) -
- -------------------------------------------------------------------------------
Total restructuring reserves $40.3 $(17.2) $23.1
- -------------------------------------------------------------------------------
As of December 29, 2001, restructuring reserve usage of $17.2 million represents
$6.0 million for severance payments related to the separation of 272 of the 796
identified employees, $5.3 million for facility consolidation or closure costs
and $5.9 million for the write-down of assets. Snap-on believes that the
restructuring reserve balance of $23.1 million as of December 29, 2001, is
adequate to complete all announced activities and anticipates that all actions
will be completed by the end of 2002.
Snap-on expects to fund the cash requirements of its 2001 restructuring
activities with cash flows from operations and borrowings under the company's
existing credit facilities. The specific restructuring measures and estimated
costs were based on management's best business judgment under prevailing
circumstances. Snap-on also expects to incur an estimated $7 million to $8
million in restructuring-related transition costs in the first half of 2002.
Transition costs do not qualify for restructuring accrual treatment and are
therefore expensed when incurred.
In 2000, Snap-on recorded restructuring and non-recurring charges totaling $21.8
million pretax, primarily for various exit-related costs and impairment
write-downs. These costs were comprised of a $4.2 million restructuring charge
and $17.2 million in non-recurring charges. The restructuring charge relates to
the closure of a small, underperforming vehicle-service business in the
Asia/Pacific region and includes costs related to severance, lease terminations
and write-offs of intangible assets. The non-recurring charges primarily relate
to Snap-on's decision, prompted by continued changes in technology and emissions
regulations at both the state and federal levels, to exit an unprofitable
segment of the emissions-testing business. The non-recurring charges consist of
$5.6 million for expected losses on the disposition of discontinued inventory,
$3.9 million for extended warranty costs and $7.7 million
for other asset impairments. Additionally, Snap-on incurred $.4 million in
non-recurring charges for relocation, severance and facilities consolidation
costs.
On the accompanying Consolidated Statements of Earnings, the $9.5 million of
non-recurring charges for emissions-related inventory write-downs and warranty
costs in 2000 have been reported as "Cost of goods sold - non-recurring
charges." The $12.3 million in "Restructuring and other non-recurring charges"
includes non-recurring charges of $7.7 million for emissions-related asset
impairments and $.4 million for other relocation, severance and facilities
consolidation costs. Also included in "Restructuring and other non-recurring
charges" was $4.2 million in restructuring costs for severance and exit costs
related to the closure of a vehicle-service business. The restructuring actions
initiated in 2000 were completed during the first half of 2001.
In 1999, Snap-on recorded $37.2 million in restructuring and non-recurring
charges related to its Project Simplify initiative. Project Simplify, a broad
program of internal rationalizations, consolidations and reorganizations to make
Snap-on's business operations simpler and more effective, was implemented in the
third quarter of 1998. The 18-month program included the cost of closing
facilities, employee severance associated with a reduction in staffing, impaired
asset write-downs, costs to revalue discontinued stock keeping units ("SKUs"),
legal matters and other non-recurring costs. Of the $37.2 million in charges
recorded, $16.6 million was reflected in the Consolidated Statements of Earnings
as "Cost of goods sold - non-recurring charges," and $20.6 million was included
in "Restructuring and other non-recurring charges." The $16.6 million in
non-recurring charges reflects the discontinuance of an emissions-testing
equipment line as part of Snap-on's refocus on high-volume products. The $20.6
million of non-recurring charges represents employee incentives of $1.5 million,
relocation costs of $10.9 million, professional services of $9.1 million and
$4.8 million for the discontinuance of SKUs. These costs were partially offset
by the reversal of $5.1 million of excess warranty reserves and the reversal of
$.6 million of excess severance costs.
Snap-on achieved its Project Simplify objectives of consolidating certain
business units, closing 60 facilities, eliminating approximately 1,100 positions
and discontinuing more than 12,000 SKUs. Total charges incurred for Project
Simplify were $187.5 million, and were comprised of $67.1 million of
restructuring charges and $120.4 million of other non-recurring charges. Project
Simplify was essentially completed as of year-end 1999.
INTEREST EXPENSE: Interest expense for 2001 was $35.5 million, compared with
$40.7 million in 2000 and $27.4 million in 1999. The $5.2 million decrease in
year-over-year interest expense reflects the impact of lower debt levels and
lower average interest rates in 2001. In 2000, the $13.3 million increase in
year-over-year interest expense was primarily due to higher average debt levels
from the financing of the Bahco acquisition and higher interest rates.
22 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
OTHER INCOME (EXPENSE): "Other income (expense) - net" includes the impact of
all non-operating items such as interest income, license fees, minority
interests, disposals of fixed assets, hedging and exchange rate transaction
gains and losses, and other miscellaneous items. In 2001, other expense was $3.5
million, as compared to income of $3.3 million in 2000, largely due to exchange
losses and lower interest income in 2001. In 1999, other income totaled $12.9
million and primarily included a gain on the sale of an interest in a Snap-on
subsidiary and a net gain on a currency hedge for the purchase of Bahco.
INCOME TAXES: Snap-on's effective income tax rate, before cumulative effect,
restructuring, non-recurring and other non-comparable items, was 36.5% in 2001.
The effective tax rate on 2001 restructuring, non-recurring and other
non-comparable items was 29.3%. Snap-on's reported effective income tax rate was
56.3% in 2001, 36.5% in 2000 and 35.7% in 1999. The 2001 tax rate was adversely
impacted by the 2001 restructuring, non-recurring and other non-comparable items
where certain expenses in various foreign jurisdictions were not tax benefited.
For additional income tax information, refer to Note 9.
FOURTH QUARTER: Net sales in the fourth quarter of 2001 were $534.6 million, a
3.9% decline from $556.3 million in the comparable prior-year period. Sales in
the fourth quarter of 2001 were adversely impacted by continued difficult
economic conditions. Sales declines in the worldwide industrial sector and in
equipment for the vehicle repair market in North America and Europe offset
increased U.S. dealer sales of tools and tool storage.
The fourth quarter 2001 net loss was $17.4 million, compared with net earnings
of $13.7 million in 2000. Loss per diluted share was $.30, compared with
earnings of $.24 per share in the prior year. The decline in 2001 earnings is
largely due to the recording of $48.3 million of charges ($31.2 million after
tax or $.54 per diluted share), including $44.0 million for the resolution of an
arbitration matter and $3.0 million in related legal costs, as well as $1.3
million for a revised estimate of costs related to the termination of a European
supplier relationship. These charges have been reported in "Operating expenses"
on the accompanying Consolidated Statements of Earnings.
In the fourth quarter of 2001, Snap-on also incurred pretax restructuring and
non-recurring charges totaling $17.2 million ($16.3 million after tax or $.28
per diluted share) for the consolidation or closure of nine facilities,
including related severance costs and asset write-downs. Restructuring charges
of $16.6 million include $13.6 million for severance costs associated with the
elimination of 340 identified positions,
$2.4 million for non-cancelable lease agreements and related facility asset
write-downs, and $.6 million for exit-related legal and professional services.
Non-recurring charges of $.6 million include $.2 million in "Cost of goods sold
- - non-recurring charges" for inventory write-downs and $.4 million of other
equipment and employee relocation costs related to the facility consolidations.
The $16.6 million in restructuring costs, as well as the $.4 million in other
non-recurring charges, have been reported in "Restructuring and other
non-recurring charges" on the accompanying Consolidated Statements of Earnings.
The year-over-year decline in fourth-quarter 2001 net earnings also reflects the
impact of lower sales volumes, lower absorption of manufacturing costs as a
result of inventory reduction efforts, increased spending for new product
introductions and dealer expansion initiatives, and exchange losses from the
decline of the euro and Swedish krona against the U.S. dollar. These declines
were partially offset by the initial benefits of tighter cost controls under
Operational Fitness, reduced interest expense and increased finance income.
Fourth quarter net finance income was $8.0 million in 2001, up from $7.5 million
in 2000, as the effects of a more favorable interest-rate environment offset
lower loan originations caused by the soft demand for big-ticket equipment and
diagnostics in 2001.
In the fourth quarter of 2000, net earnings of $13.7 million included pretax
charges of $21.4 million ($14.0 million after tax or $.24 per diluted share) for
restructuring and non-recurring charges, including $9.5 million for inventory
write-downs and warranty costs and $7.7 million for asset impairment write-downs
related to the exit of a segment of the emissions-testing business, and $4.2
million in severance and exit costs for a vehicle-service business in the
Asia/Pacific region. In 2000, Snap-on also reserved $16.8 million ($10.5 million
after tax or $.18 per diluted share) for certain legal and other costs,
including $13.6 million primarily for the aggressive defense and assertion of
Snap-on's intellectual property rights and $3.2 million for emissions-related
asset write-downs.
Financial Condition
Snap-on's financial condition continues to be strong, and Snap-on believes it
has the resources necessary to meet future anticipated funding needs. Growth has
historically been supported by a combination of cash provided by operating
activities and debt financing.
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Net cash provided by
operating activities $163.7 $190.2 $235.6
Net increase (decrease) in debt (68.7) (86.5) 290.1
- -------------------------------------------------------------------------------
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 23
Management's Discussion and Analysis (continued)
NET CASH PROVIDED BY OPERATING ACTIVITIES (in $ millions)
- ---------------------------------------------------------
1997 - 195
1998 - 75
1999 - 236
2000 - 190
2001 - 164
AVERAGE WORKING CAPITAL AS A PERCENT OF NET SALES (in percent)
- --------------------------------------------------------------
1997 - 40.2
1998 - 36.4
1999 - 35.3
2000 - 32.2
2001 - 29.5
Net cash provided by operating activities was $163.7 million in 2001, $190.2
million in 2000 and $235.6 million in 1999. In 2001, the year-over-year decline
in net cash provided by operating activities is primarily due to lower earnings,
partially offset by working capital reductions. In 2001, Snap-on used its cash
flow principally to fund cash requirements of its restructuring activities,
internal growth opportunities, stock repurchases, dividend payments and debt
repayments. Net debt levels decreased by $68.7 million to $474.6 million in
2001, as compared to $543.3 million in 2000, as a result of Snap-on's strong
cash flow and reduced working capital. At year-end 2001, the ratio of total debt
to total capital was 38.0%, as compared to 39.2% at the end of 2000.
In 2000, Snap-on reduced its year-over-year net debt levels by $86.5 million. At
year-end 2000, the ratio of total debt to total capital had improved to 39.2%
from 43.3% at the prior year end. In 1999, net debt levels increased largely due
to the financing of the Bahco acquisition in September 1999.
LIQUIDITY: Snap-on's working capital at the end of 2001 was $590.0 million, down
$58.4 million from $648.4 million in 2000. Snap-on's focus on improving working
capital turns, particularly for inventory and receivables, contributed to the
working capital reduction. In 2000, working capital was $648.4 million, down
$105.2 million from year-end 1999 levels due to higher inventory turns and an
increase in current liabilities.
The ratio of current assets to current liabilities at year-end 2001 was 2.1 to
1, compared with 2.2 to 1 at year-end 2000 and 2.7 to 1 at year-end 1999. Cash
and cash equivalents were $6.7 million at December 29, 2001, compared to $6.1
million and $17.6 million at year-end 2000 and 1999.
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Current assets $1,139.4 $1,186.4 $1,206.3
Current liabilities 549.4 538.0 452.7
- -------------------------------------------------------------------------------
Working capital $ 590.0 $ 648.4 $ 753.6
- -------------------------------------------------------------------------------
Accounts receivable at the end of 2001 were $615.2 million, down $29.3 million
compared with year-end 2000, primarily due to lower sales volumes. In 2000,
accounts receivable were up $26.8 million to $644.5 million, as compared with
year-end 1999, largely due to higher sales and an increase in dealer financing
receivables. In 1999, accounts receivable increased principally as a result of
acquiring Bahco. Bad debt write-offs in 2001 represented 4.9% of average
accounts receivable, compared with 2.2% in 2000 and 1.9% in 1999. The increase
in bad debt write-offs in 2001 was primarily due to write-offs resulting from
the exiting of a segment of the emissions-testing business and the termination
of a European supplier relationship.
Inventories at year-end 2001 were $375.2 million, down $43.7 million from
year-end 2000. The decrease in year-over-year inventory levels reflects improved
inventory turns, despite the slower sales environment, from the company's focus
on working capital and the effect of currency translation. In 2000, inventories
of $418.9 million were down $35.9 million from year-end 1999, reflecting
increased inventory turns and currency translation impacts. In 1999, inventories
increased by $79.4 million, primarily due to the Bahco acquisition.
Notes payable and current maturities of long-term debt totaled $29.1 million at
the end of 2001 compared with $70.3 million at year-end 2000. Current maturities
of long-term debt were $2.6 million and $4.9 million at year-end 2001 and 2000.
At the end of 2001 and 2000, Snap-on had $142.2 million and $365.5 million in
outstanding short-term commercial notes that were classified as long term, as it
is Snap-on's intent, and it has the ability (supported by its long-term
revolving credit facilities), to refinance this debt on a long-term basis.
At December 29, 2001, Snap-on had $458 million of multi-currency revolving
credit facilities to support its commercial paper programs. Snap-on has a $208
million revolving credit facility that is effective for a five-year term and
terminates on August 20, 2005, and a $250 million credit facility that is a
364-day facility with a one-year term-out option that terminates on August 19,
2002. The term-out option allows Snap-on to elect to borrow under the credit
facility for an additional year after the termination date. At the end of 2001
and 2000, Snap-on was in compliance with all covenants of the revolving credit
facilities and there were no borrowings under either revolving credit
commitment. The most restrictive covenant requires Snap-on to maintain a total
debt to total capital percentage of 60% or better.
Average commercial paper and bank notes outstanding were $389.2 million in 2001
and $529.1 million in 2000. The weighted-average interest rate on these
instruments was 4.3% in 2001 and 5.9% in 2000. As of December 29, 2001, and
December 30, 2000, commercial paper and bank notes outstanding had a
weighted-average interest rate of 2.1% and 6.1%.
In August 2001, Snap-on issued $200 million of unsecured notes pursuant to a
$300 million shelf registration statement filed with the Securities and Exchange
Commission in 1994. In October 1995, Snap-on issued $100 million of unsecured
notes to the public under this shelf registration. The August 2001 notes require
semiannual interest payments at a rate of 6.25% and mature in their entirety on
August 15, 2011. The October 1995 notes require semiannual interest payments at
a rate
24 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
TOTAL DEBT AS A PERCENT OF TOTAL CAPITAL (in percent)
- -----------------------------------------------------
1997 - 16.4
1998 - 30.8
1999 - 43.3
2000 - 39.2
2001 - 38.0
TOTAL CAPITAL* (in $ millions)
- -----------------------------
1997 - 1,067
1998 - 1,102
1999 - 1,455
2000 - 1,387
2001 - 1,250
* Total debt plus shareholders' equity
of 6.625% and mature in their entirety on October 1, 2005. The proceeds from
these issuances were used to repay a portion of Snap-on's outstanding commercial
paper and for working capital and general corporate purposes.
Snap-on believes that its sources of borrowings, coupled with cash from
operations, are sufficient to support its working capital requirements, finance
capital expenditures and restructuring activities, make acquisitions, repurchase
common stock and pay dividends. Due to Snap-on's credit rating over the years,
external funds have been available at a reasonable cost. At the end of 2001,
Snap-on's long-term debt and commercial paper was rated A1 and P-1 by Moody's
Investors Service and A+ and A-1 by Standard & Poor's. Snap-on believes that the
strength of its balance sheet affords the company the financial flexibility to
respond to both internal growth opportunities and those available through
acquisition.
CAPITAL EXPENDITURES: Capital expenditures in 2001 were $53.6 million, as
compared to $57.6 million in 2000 and $35.4 million in 1999. The year-over-year
decrease in 2001 reflects greater spending discipline in light of the weaker
economy. Investments for the year primarily included ongoing replacements and
upgrades of manufacturing and distribution facilities and equipment, and
restructuring-related capital investments. The impact of full-year capital
expenditures at Bahco drove the year-over-year increase in 2000 capital spending
over 1999 levels. Snap-on anticipates that 2002 capital expenditures will
approximate $50 million to $55 million.
CAPITAL EXPENDITURES (in $ millions)
- ------------------------------------
1997 - 55
1998 - 47
1999 - 35
2000 - 58
2001 - 54
DEPRECIATION AND AMORTIZATION (in $ millions)
- ---------------------------------------------
1997 - 38
1998 - 45
1999 - 55
2000 - 66
2001 - 68
DEPRECIATION AND AMORTIZATION: Depreciation in 2001 was $50.4 million, compared
with $48.4 million in 2000 and $41.3 million in 1999. Amortization expense for
goodwill and intangibles was $17.6 million in 2001, $17.8 million in 2000 and
$14.1 million in 1999. Acquisitions and the amortization of resulting goodwill
and intangibles accounted for the higher expense in 2000 over 1999.
Snap-on will adopt SFAS No. 142, "Goodwill and Other Intangible Assets," at the
beginning of its 2002 fiscal year. Snap-on currently estimates that the
annualized pretax impact of discontinuing goodwill amortization, as required
under SFAS No. 142, will approximate $13.9 million ($11.9 million after tax or
$.20 per diluted share). For additional information on Snap-on's adoption of
SFAS No. 142, refer to the section entitled "Accounting Pronouncements."
DIVIDENDS: During 2001, Snap-on paid dividends of $.96 per share. Snap-on has
paid consecutive quarterly cash dividends since 1939.
(Amounts in millions
except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------
Cash dividends paid $55.6 $55.0 $52.6
Cash dividends paid per
common share .96 .94 .90
Cash dividends paid as
a percent of prior-year
retained earnings 5.3% 5.7% 6.0%
- -------------------------------------------------------------------------------
STOCK REPURCHASE PROGRAM: Snap-on 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. Snap-on repurchased
400,000 shares in 2001, following the repurchase of 1,019,500 shares in 2000 and
492,800 shares in 1999. Since 1997, Snap-on's board of directors has authorized
the repurchase of up to $250 million of Snap-on's common stock. As of the end of
2001, Snap-on has remaining availability to repurchase up to an additional $133
million in common stock pursuant to the board's authorizations. The purchase of
Snap-on common stock is at the company's discretion, subject to prevailing
financial and market conditions. Since 1995, Snap-on has repurchased 9,989,583
shares.
Market, Credit and Economic Risks
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. Snap-on is exposed to market risk
from changes in both foreign currency exchange rates and interest rates. Snap-on
monitors its exposure to these risks and manages the underlying economic
exposures through the use of financial instruments such as forward exchange
contracts and interest rate swap agreements. Snap-on does not use derivative
instruments for speculative or trading purposes. Snap-on's broad-based business
activities help to reduce the impact that volatility in any particular area or
related areas may have on its operating earnings as a whole. Snap-on's
management takes an active role in the risk management process and has developed
policies and procedures that require specific administrative and business
functions to assist in the identification, assessment and control of various
risks.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 25
Management's Discussion and Analysis (continued)
FOREIGN CURRENCY RISK MANAGEMENT: Snap-on has significant international
operations. Foreign exchange risk exists to the extent that Snap-on has payment
obligations or receipts denominated in currencies other than the functional
currency. To manage these exposures, Snap-on identifies naturally offsetting
positions and then purchases hedging instruments to protect the residual net
anticipated exposures. For additional information, refer to Note 10.
INTEREST RATE RISK MANAGEMENT: Snap-on's interest rate risk management policies
are designed to reduce the potential volatility of earnings that could arise
from changes in interest rates. Through the use of interest rate swaps, Snap-on
aims to stabilize funding costs by managing the exposure created by the
differing maturities and interest rate structures of Snap-on's assets and
liabilities. For additional information, refer to Note 10.
Snap-on 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 were made assuming normal market conditions and a 95%
confidence level. Snap-on'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 estimated maximum potential one-day loss in fair value, calculated using the
VAR model, at December 29, 2001, was $1.9 million on interest rate-sensitive
financial instruments and $2.4 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 Snap-on, nor does
it consider the potential effect of favorable changes in market factors.
CREDIT RISK: Credit risk is the possibility of loss from a customer's failure to
make payments according to contract terms. Prior to granting a loan, each
customer is evaluated, taking into consideration the borrower's financial
condition, collateral, debt-servicing capacity, past payment experience, credit
bureau information and numerous other financial and qualitative factors that may
affect the borrower's ability to repay. Specific credit reviews and standard
industry credit scoring models are used in performing this evaluation. Loans
that have been granted are typically monitored through an asset-quality-review
process that closely monitors past due accounts and initiates collection actions
when appropriate. In addition to credit risk exposure from its on-balance-sheet
receivables, Snap-on also has credit risk exposure for certain loan originations
with recourse provisions from the LLC. At December 29, 2001, $46.3 million of
loans originated by the LLC have a recourse provision to Snap-on if the
receivables become more than 90 days past due. In addition, there were $27.1
million of dealers' customer-originated loans that have a primary recourse
provision directly to the dealer, with secondary recourse to Snap-on in the
event of dealer default. For additional information, refer to Note 7.
ECONOMIC RISK: Economic risk is the possibility of loss resulting from economic
instability in certain areas of the world. Economic instability from time to
time may cause Snap-on to react to such market conditions. The economic
uncertainty in Argentina prompted Snap-on to resize its operations there in
2001, shifting a portion of its manufacturing to other existing Snap-on
facilities. The Bahco Argentina facility will continue to operate with about
one-half of its previous workforce, manufacturing product at a level to support
its local market. Snap-on will continue to assess Argentina's economic situation
to determine if any future actions or impairment write-downs are warranted.
Other Matters
ACQUISITIONS: During 2001, Snap-on incurred acquisition costs of $.9 million
related to the finalization of its fiscal 2000 acquisitions. During 2000,
Snap-on acquired full ownership of two business operations. The aggregate cash
purchase price plus costs related to the finalization of 1999 acquisitions was
$11.9 million. Each of the acquisitions provided Snap-on with a complementary
product line, new customer relationships, access to additional distribution
and/or an extended geographic reach.
On September 30, 1999, Snap-on acquired Bahco Group AB for $391 million in a
cash purchase transaction. Also during 1999, Snap-on acquired the remaining 40%
of Mitchell Repair Information Company, LLC ("MRIC") and full ownership of three
businesses for an aggregate cash purchase price of $73.9 million.
DIVESTITURES: During 2000, Snap-on divested Windsor Forestry Tools Inc.
("Windsor"), which was acquired as part of the Bahco acquisition. As Windsor was
accounted for as "held for sale" in accordance with Accounting Principles Board
Opinion No. 16, it had no impact on Snap-on's Consolidated Statements of
Earnings. The sale of Windsor resulted in cash proceeds of $15.5 million and an
adjustment to goodwill.
During the fourth quarter of 1999, Snap-on sold a 15% interest in MRIC to
Genuine Parts Company ("GPC") in support of an alliance to enhance and expand
the e-business efforts of both companies. The combined effort unites the
replacement-parts catalog and online order interface and procurement
capabilities of GPC's Automotive Parts Group with the online repair information,
"voice and view" diagnostics help, labor rates and shop management capabilities
of MRIC.
ACCOUNTING PRONOUNCEMENTS: In 2001, Snap-on adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138.
The adoption of this standard resulted in the recording of a cumulative effect
transition adjustment to decrease reported net income in the first quarter of
2001 by $2.5 million after tax related to a hedge strategy that did not qualify
for hedge accounting under SFAS No. 133. Snap-on also recorded in the first
quarter of 2001 a transition adjustment of $1.2 million after tax to recognize
previously deferred net gains on derivatives designated as cash flow hedges that
qualify for hedge accounting under SFAS No. 133. The $1.2 million transition
adjustment was recorded in "Accumulated other comprehensive income (loss)" on
the accompanying Consolidated Balance Sheets.
26 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires all business combinations initiated after June
30, 2001, to be accounted for under the purchase method, prohibiting the use of
the pooling-of-interests approach, and includes criteria for the recognition of
intangible assets separately from goodwill. SFAS No. 142 requires the periodic
testing of goodwill and indefinite-lived intangible assets for impairment, as
compared to the current method of amortizing such assets to expense over their
estimated useful lives. Snap-on will adopt SFAS No. 142 at the beginning of its
2002 fiscal year and estimates that, on an annualized basis, the pretax impact
of discontinuing goodwill amortization will approximate $13.9 million ($11.9
million after tax or $.20 per diluted share). Goodwill, net of accumulated
amortization, was $331.2 million and $360.0 million at the end of 2001 and 2000.
The FASB also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in June 2001. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets. The statement requires that the fair value of a liability for an asset's
retirement obligation be recognized in the period in which it is incurred and
capitalized as part of the carrying amount of the long-lived asset. The
statement will be effective for fiscal years beginning after June 15, 2002.
Snap-on is currently evaluating the impact these new accounting standards may
have on Snap-on's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The statement provides a single accounting model for long-lived assets to
be disposed of. Snap-on will adopt SFAS No. 144 at the beginning of its 2002
fiscal year. The effect of this change in accounting is not material to
Snap-on's financial position or results of operations.
OUTLOOK: Snap-on believes that the long-term underlying fundamental trends that
influence its business remain sound. In 2002, Snap-on will continue its efforts
to incorporate the Driven to Deliver(TM) business process into its
organizational culture. The strengths and potential of Snap-on's businesses will
continue to be examined, and appropriate actions to drive improvement in
operational metrics will be a focus. As these changes are implemented, Snap-on
will ensure that its near-term efforts on enhancing profitability are balanced
with a disciplined review of longer-term profitable growth investments. Snap-on
also expects further progress on working capital to lead to improvements in cash
flow.
Snap-on expects that the current weak economic conditions will continue to
challenge sales growth and profitability, particularly in the first half of
2002. With $40 million in pretax savings targeted in 2002 from its restructuring
and cost-control activities. Snap-on plans to invest approximately one-half of
those savings to support the further devel-
opment of innovative products and other profitable growth initiatives, such as
the continued expansion of the Snap-on dealer network. Continued emphasis on
inventory reduction, coupled with the weak economic conditions, will limit
Snap-on's ability to benefit from restructuring savings in the first quarter of
2002; however, beginning in the second quarter, Snap-on expects that improved
seasonal volumes and benefits from Operational Fitness will lead to earnings per
share growth over 2001 levels.
The Snap-on(R) brand is the leading brand preferred by professional technicians.
High quality, product performance, exacting standards, customer service, strong
relationships and innovation remain the guiding principles throughout Snap-on.
In 2002, emphasis will remain on supporting Snap-on's traditional growth
drivers: developing new, innovative products and services, enhancing the
delivery of value to its customers, and reinforcing its strong brands worldwide.
SAFE HARBOR: Statements in this document that are not historical facts,
including statements (i) that include the words "expects," "targets,"
"believes," "anticipates," "estimates," or similar words that reference Snap-on
or its management; (ii) specifically identified as forward-looking; or (iii)
describing Snap-on's or management's future outlook, plans, objectives or goals,
are forward-looking statements. Snap-on or its representatives may also make
similar forward-looking statements from time to time orally or in writing.
Snap-on 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.
Some of these factors are discussed below, as a well as elsewhere in this
document, and in Snap-on's Securities and Exchange Commission filings. These
important factors include the validity of assumptions set forth above and the
timing and progress with which Snap-on can continue to achieve further cost
reductions and savings from its restructuring initiatives; Snap-on's ability to
retain and attract dealers and to withstand external negative factors, including
terrorist disruptions on business, changes in trade, monetary and fiscal
policies, laws and regulations, or other activities of governments or their
agencies; the timing, speed or ability with which Snap-on can realize the
benefits of the Driven to Deliver(TM) initiatives; and the absence of
significant changes in the current competitive environment, inflation, energy
supply or pricing, legal proceedings, supplier disruptions, 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. Snap-on operates in a continually changing business environment and
new factors emerge from time to time. Snap-on cannot predict such factors, nor
can it assess the impact, if any, of such factors on Snap-on's financial
position or its results of operations. Accordingly, forward-looking statements
should not be relied upon as a prediction of actual results. Snap-on disclaims
any responsibility to update any forward-looking statement provided in this
document.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 27
Consolidated Statements of Earnings
(Amounts in millions except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 2,095.7 $ 2,175.7 $ 1,945.6
Cost of goods sold (1,134.1) (1,169.4) (1,032.8)
Cost of goods sold - non-recurring charges (12.6) (9.5) (16.6)
Operating expenses (848.7) (792.6) (723.7)
Net finance income 35.7 38.1 60.5
Restructuring and other non-recurring charges (49.4) (12.3) (20.6)
Interest expense (35.5) (40.7) (27.4)
Other income (expense) - net (3.5) 3.3 12.9
- -------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 47.6 192.6 197.9
- -------------------------------------------------------------------------------------------------------------------
Income taxes on earnings from continuing operations 26.1 69.5 70.7
- -------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of a change in accounting principle 21.5 123.1 127.2
Cumulative effect of a change in accounting principle
for derivatives in 2001 (net of tax benefit of $1.6 million)
and for pensions in 2000 (net of tax of $15.9 million) (2.5) 25.4 -
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 19.0 $ 148.5 $ 127.2
- -------------------------------------------------------------------------------------------------------------------
Net earnings per share - basic:
Earnings before cumulative effect of a change in
accounting principle $ .37 $ 2.11 $ 2.18
Cumulative effect of a change in accounting
principle, net of tax (.04) .43 -
- -------------------------------------------------------------------------------------------------------------------
Net earnings per share - basic $ .33 $ 2.54 $ 2.18
- -------------------------------------------------------------------------------------------------------------------
Net earnings per share - diluted:
Earnings before cumulative effect of a change in
accounting principle $ .37 $ 2.10 $ 2.16
Cumulative effect of a change in accounting
principle, net of tax (.04) .43 -
- -------------------------------------------------------------------------------------------------------------------
Net earnings per share - diluted $ .33 $ 2.53 $ 2.16
- -------------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding:
Basic 57.9 58.4 58.5
Effect of dilutive options .2 .2 .4
- -------------------------------------------------------------------------------------------------------------------
Diluted 58.1 58.6 58.9
- -------------------------------------------------------------------------------------------------------------------
Pro forma amounts of a change in accounting for pensions:
Net earnings $ 19.0 $ 123.1 $ 133.3
Net earnings per share - basic .33 2.11 2.28
Net earnings per share - diluted .33 2.10 2.26
- -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
28 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Consolidated Balance Sheets
(Amounts in millions except share data) December 29, 2001 December 30, 2000
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 6.7 $ 6.1
Accounts receivable - net of allowances 615.2 644.5
Inventories 375.2 418.9
Prepaid expenses and other assets 142.3 116.9
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 1,139.4 1,186.4
Property and equipment - net 327.7 345.1
Deferred income tax benefits 27.7 33.0
Intangibles - net 60.7 64.6
Goodwill - net 331.2 360.0
Other assets 87.6 80.0
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,974.3 $2,069.1
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 141.2 $ 161.0
Notes payable and current maturities of long-term debt 29.1 70.3
Accrued compensation 58.7 56.3
Dealer deposits 42.0 39.8
Deferred subscription revenue 45.0 44.9
Accrued restructuring reserves 23.1 -
Other accrued liabilities 210.3 165.7
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 549.4 538.0
Long-term debt 445.5 473.0
Deferred income taxes 24.7 24.7
Retiree health care benefits 92.7 92.2
Pension liability 54.5 60.1
Other long-term liabilities 31.7 37.1
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,198.5 1,225.1
- --------------------------------------------------------------------------------------------------------------------------
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 66,847,107 and 66,789,090 shares 66.8 66.8
Additional paid-in capital 108.0 71.6
Retained earnings 1,014.7 1,051.3
Accumulated other comprehensive income (loss) (120.6) (87.2)
Grantor stock trust at fair market value - 5,984,145 and 6,443,033 shares (203.0) (179.6)
Treasury stock at cost - 2,923,435 and 2,523,435 shares (90.1) (78.9)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 775.8 844.0
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,974.3 $2,069.1
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 29
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated
Additional Other Grantor Total
Common Paid-in Retained Comprehensive Stock Treasury Shareholders'
(Amounts in millions except share data) Stock Capital Earnings Income (Loss) Trust Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 1999 $66.7 $117.4 $ 883.2 $ (30.2) $(241.0) $(33.7) $762.4
Comprehensive income:
Net earnings for 1999 127.2
Foreign currency translation (5.4)
Minimum pension liability (.2)
Total comprehensive income 121.6
Cash dividends - $.90 per share (52.6) (52.6)
Dividend reinvestment plan - 38,809 shares 1.2 1.2
Stock plans - 5,479 shares .4 .4
Grantor stock trust - 246,569 shares 6.9 6.9
Share repurchase, net of
reissuance - 489,115 shares (14.6) (14.6)
Adjustment of grantor stock trust
to fair market value (56.7) 56.7 -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 66.7 62.3 957.8 (35.8) (177.4) (48.3) 825.3
Comprehensive income:
Net earnings for 2000 148.5
Foreign currency translation (52.0)
Minimum pension liability .6
Total comprehensive income 97.1
Cash dividends - $.94 per share (55.0) (55.0)
Dividend reinvestment plan - 50,725 shares .1 1.3 1.4
Stock plans - 8,908 shares .3 .3
Grantor stock trust - 234,417 shares 5.5 5.5
Share repurchase, net of
reissuance - 1,018,096 shares (30.6) (30.6)
Adjustment of grantor stock trust
to fair market value 7.7 (7.7) -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 2000 66.8 71.6 1,051.3 (87.2) (179.6) (78.9) 844.0
Comprehensive income:
Net earnings for 2001 19.0
Foreign currency translation (29.9)
Mark to market for cash flow hedges,
net of tax of $.7 million (2.0)
Minimum pension liability (1.5)
Total comprehensive income (14.4)
Cash dividends - $.96 per share (55.6) (55.6)
Dividend reinvestment plan - 47,650 shares 1.3 1.3
Stock plans - 10,367 shares .3 .3
Grantor stock trust - 458,888 shares 10.4 10.4
Share repurchase - 400,000 shares (11.2) (11.2)
Tax benefit from certain stock options 1.0 1.0
Adjustment of grantor stock trust
to fair market value 33.8 (33.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 2001 $66.8 $108.0 $1,014.7 $(120.6) $(203.0) $(90.1) $775.8
- -----------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
30 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Consolidated Statements of Cash Flows
(Amounts in millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Operating activities
Net earnings $ 19.0 $ 148.5 $ 127.2
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Cumulative effect of a change in accounting principle, net of tax 2.5 (25.4) -
Depreciation 50.4 48.4 41.3
Amortization of intangibles 3.7 3.3 2.6
Amortization of goodwill 13.9 14.5 11.5
Deferred income tax provision 5.4 9.7 16.3
Gain on sale of assets (.1) (1.5) (1.3)
Gain on dispositions of businesses - - (4.4)
Gain on mark to market for cash flow hedges (2.0) - -
Restructuring and other non-recurring charges, net of tax 46.1 14.2 23.3
Changes in operating assets and liabilities,
net of effects of acquisitions:
(Increase) decrease in receivables 18.2 (50.2) 21.6
(Increase) decrease in inventories 18.9 9.0 (5.7)
(Increase) decrease in prepaid and other assets (19.8) (12.9) 42.0
Increase (decrease) in accounts payable (13.2) 17.9 7.4
Increase (decrease) in accruals and other liabilities 20.7 14.7 (46.2)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 163.7 190.2 235.6
Investing activities
Capital expenditures (53.6) (57.6) (35.4)
Acquisitions of businesses - net of cash acquired (.9) (11.9) (440.7)
Dispositions of businesses - 15.5 21.3
Disposals of property and equipment 6.9 11.7 6.5
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (47.6) (42.3) (448.3)
Financing activities
Payment of long-term debt (6.4) (8.0) (48.7)
Increase in long-term debt 200.4 6.3 6.8
Increase (decrease) in short-term borrowings - net (255.1) (77.9) 316.2
Purchase of treasury stock (11.2) (30.6) (14.6)
Proceeds from stock purchase and option plans 13.0 7.1 8.5
Cash dividends paid (55.6) (55.0) (52.6)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (114.9) (158.1) 215.6
Effect of exchange rate changes on cash (.6) (1.3) (.3)
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents .6 (11.5) 2.6
Cash and cash equivalents at beginning of year 6.1 17.6 15.0
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6.7 $ 6.1 $ 17.6
- --------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash paid for interest $ 32.3 $ 40.8 $ 27.4
Cash paid for income taxes 27.4 54.0 26.4
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 31
Notes to Consolidated Financial Statements
> NOTE 1 Nature of Operations
Snap-on Incorporated ("Snap-on"), a Delaware corporation, is a leading global
innovator, manufacturer and marketer of tool, diagnostic and equipment solutions
for professional tool and equipment users. Product lines include hand and power
tools, diagnostics and shop equipment, tool storage, diagnostics software and
other solutions for vehicle-service, industrial, government and agricultural
customers, and commercial applications, including construction and electrical.
Products are sold through its dealer van, company-direct and distributor sales
channels and the Internet.
> NOTE 2 Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The consolidated financial
statements include the accounts of Snap-on and its majority-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Snap-on Credit LLC ("the LLC"), a 50%-owned joint venture with Tyco
International Ltd., is recorded using the equity method. Certain prior-year
amounts have been reclassified to conform with the current-year presentation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FISCAL YEAR ACCOUNTING PERIOD: Snap-on's fiscal year ends on the Saturday
nearest December 31. The 2001, 2000 and 1999 fiscal years each contained 52
weeks and ended on December 29, 2001, December 30, 2000, and January 1, 2000.
REVENUE RECOGNITION: Snap-on recognizes revenues at the time that products are
shipped or services are performed, and accrues for estimated future returns in
the period in which the sale is recorded. Franchise fee revenue is recognized as
the fees are earned and was not material in any year. Subscription revenue is
deferred and recognized over the life of the subscription.
CASH EQUIVALENTS: Snap-on considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
INVENTORIES: Inventories consist of manufactured products and merchandise for
resale and are stated at the lower of cost or market. Manufactured products
include the costs of materials, labor and manufacturing overhead. Inventories
accounted for using the first-in, first-out ("FIFO") method approximated 65% and
63% of total inventories as of year-end 2001 and 2000. All other inventories are
accounted for using the last-in, first-out ("LIFO") cost method. For additional
inventory information, refer to Note 4.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over estimated useful lives. Accelerated
depreciation methods are used for income tax purposes. Major repairs that extend
the useful life of an asset are capitalized, while routine maintenance and
repairs are expensed as incurred. Capitalized software included in property and
equipment reflects costs related to internally developed or purchased software
for internal use that are capitalized and amortized on a straight-line basis
over their estimated useful lives. Development costs for computer software to be
sold, leased or otherwise marketed externally are capitalized once technological
feasibility has been achieved and are amortized on a straight-line basis over
their estimated useful lives. Capitalized software is subject to an ongoing
assessment of recoverability based upon anticipated future revenues and
identified changes in hardware and software technologies. For additional
property and equipment information, refer to Note 5.
GOODWILL AND INTANGIBLES: Goodwill and other intangibles are being amortized
over 13 to 40 years on a straight-line basis. Goodwill, net of accumulated
amortization, was $331.2 million and $360.0 million at the end of 2001 and 2000.
Pretax goodwill amortization was $13.9 million, $14.5 million and $11.5 million
for 2001, 2000 and 1999. Accumulated amortization of goodwill was $55.6 million
and $41.7 million at the end of 2001 and 2000. Snap-on continually evaluates the
existence of goodwill impairment on the basis of whether the goodwill is fully
recoverable from projected, undiscounted net cash flows of the related business
unit. Patents and trademarks totaling $60.7 million and $64.6 million at
year-end 2001 and 2000 are being amortized over their estimated useful lives.
Accumulated amortization of patents and trademarks was $12.2 million and $9.6
million at the end of 2001 and 2000. At the beginning of its 2002 fiscal year,
Snap-on will adopt Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 requires the periodic
testing of goodwill and indefinite-lived intangible assets for impairment, as
compared to the current method of amortizing such assets to expense over their
estimated useful lives.
SHIPPING AND HANDLING: Snap-on adopted Emerging Issues Task Force Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs," which requires that
amounts billed to customers for shipping and handling be included as a component
of sales. The impact of implementing this statement was not significant to any
periods presented. Shipping and handling costs are included as a component of
both "Cost of goods sold" and "Operating expenses" on the accompanying
Consolidated Statements of Earnings. In 2001, 2000 and 1999, costs of $11.2
million, $11.1 million and $12.6 million were recorded in "Cost of goods sold,"
while costs of $41.9 million, $41.9 million and $35.5 million were recorded in
"Operating expenses."
RESEARCH AND ENGINEERING: Research and engineering costs are charged to expense
in the year incurred except for certain software development costs that qualify
for capitalization. For 2001, 2000 and 1999, these costs were $54.6 million,
$50.6 million and $50.2 million.
32 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
INCOME TAXES: Deferred income taxes are provided for temporary differences
arising from differences in bases of assets and liabilities for tax and
financial reporting purposes. Deferred income taxes are recorded on temporary
differences at the tax rate expected to be in effect when the temporary
differences reverse. For detailed tax information, refer to Note 9.
FOREIGN CURRENCY TRANSLATION: The financial statements of Snap-on's foreign
subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52,
"Foreign Currency Translation." Assets and liabilities of foreign subsidiaries
are translated at current rates of exchange, and income and expense items are
translated at the average exchange rate for the year. The resulting translation
adjustments are recorded directly into "Accumulated other comprehensive income
(loss)" in the accompanying Consolidated Balance Sheets. Foreign exchange
transactions resulted in pretax losses of $6.5 million in 2001, gains of $4.1
million in 2000 and gains of $2.5 million in 1999, and are reported in "Other
income (expense) - net" on the accompanying Consolidated Statements of Earnings.
NET FINANCE INCOME: Net finance income consists of royalty and management fees
paid by the LLC based on the volume of receivables originated by the LLC and 50%
of any residual profit or loss of the LLC after operating expenses, including
royalty and management fees, interest costs and credit loss provisions. Net
finance income also consists of installment contract income and dealer start-up
loan receivable income, net of administrative expenses, derived from Snap-on's
wholly owned international credit operations. Net finance income includes gains
on the sale of receivables when applicable.
ADVERTISING AND PROMOTION: Production costs of future media advertising are
deferred until the advertising occurs. All other advertising and promotion costs
are generally expensed when incurred. For 2001, 2000 and 1999, advertising and
promotion expense totaled $47.6 million, $47.3 million and $36.2 million.
WARRANTIES: Snap-on provides product warranties for specific product lines and
accrues for estimated future warranty costs in the period in which the sale is
recorded.
DERIVATIVES: Snap-on utilizes derivative financial instruments, including
interest rate swaps and foreign exchange contracts, to manage its exposure to
interest rate and foreign currency exchange rate risks. Snap-on accounts for its
derivatives in accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138. The adoption of
this standard in 2001 resulted in a cumulative effect transition adjustment that
decreased reported net income in 2001 by $2.5 million after tax related to a
hedge strategy that did not qualify for hedge accounting under SFAS No. 133.
Snap-on also recorded in 2001 a transition adjustment of $1.2 million after tax
in "Accumulated other comprehensive income (loss)" to recognize previously
deferred net gains on derivatives designated as cash flow hedges that qualify
for hedge accounting under SFAS No. 133. Snap-on does not hold or issue
financial instruments for speculative or trading purposes. For detailed
financial instrument information, refer to Note 10.
ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001, to be accounted for under the
purchase method, prohibiting the use of the pooling-of-interests approach, and
includes criteria for the recognition of intangible assets separately from
goodwill. SFAS No. 142 requires the periodic testing of goodwill and
indefinite-lived intangible assets for impairment, as compared to the current
method of amortizing such assets to expense over their estimated useful lives.
Snap-on will adopt SFAS No. 142 at the beginning of its 2002 fiscal year, and
estimates that the pretax impact of discontinuing goodwill amortization will
approximate $13.9 million ($11.9 million after tax) on an annualized basis.
Snap-on is currently evaluating what additional impact the adoption of SFAS No.
142 may have on Snap-on's financial position or results of operations.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets. The statement requires that the fair value of a liability for an asset's
retirement obligation be recognized in the period in which it is incurred and
capitalized as part of the carrying amount of the long-lived asset. The
statement will be effective for fiscal years beginning after June 15, 2002.
Snap-on is currently evaluating the impact this new accounting standard may have
on Snap-on's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The statement provides a single accounting model for long-lived assets to
be disposed of. Snap-on will adopt SFAS No. 144 at the beginning of its 2002
fiscal year. The effect of this change in accounting is not material to
Snap-on's financial position or results of operations.
PER SHARE DATA: Basic earnings per share calculations were computed by dividing
net earnings by the corresponding weighted-average number of common shares
outstanding for the period. The dilutive effect of the potential exercise of
outstanding options to purchase common shares is calculated using the treasury
stock method. Snap-on had dilutive shares as of year-end 2001, 2000 and 1999 of
241,557 shares, 175,155 shares and 383,200 shares.
> NOTE 3 Acquisitions and Divestitures
During 2001, Snap-on incurred acquisition costs of $.9 million related to the
finalization of its fiscal 2000 acquisitions. During 2000, Snap-on acquired full
ownership of two business operations. The aggregate cash purchase price plus
costs related to the finalization of 1999 acquisitions was $11.9 million. Pro
forma financial information has not been presented, as the effects of these
businesses, individually and in the aggregate, were not material.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 33
Notes to Consolidated Financial Statements (continued)
On September 30, 1999, Snap-on acquired Bahco Group AB ("Bahco") for $391
million in a cash purchase transaction. Also during 1999, Snap-on acquired the
remaining 40% of Mitchell Repair Information Company, LLC ("MRIC") and full
ownership of three businesses for an aggregate cash purchase price of $73.9
million. During the fourth quarter of 1999, Snap-on sold a 15% interest in MRIC
to Genuine Parts Company.
During 2000, Snap-on divested Windsor Forestry Tools Inc. ("Windsor"), which was
acquired as part of the Bahco acquisition. As Windsor was accounted for as "held
for sale" in accordance with Accounting Principles Board ("APB") Opinion No. 16,
it had no impact on Snap-on's Consolidated Statements of Earnings. The sale of
Windsor resulted in cash proceeds of $15.5 million and an adjustment to
goodwill.
> NOTE 4 Inventories
The components of Snap-on's inventories were as follows:
(Amounts in millions) 2001 2000
- -------------------------------------------------------------------
Finished goods $351.4 $386.0
Work in process 41.5 45.1
Raw materials 77.2 79.7
Excess of current cost over LIFO cost (94.9) (91.9)
- -------------------------------------------------------------------
Total inventories $375.2 $418.9
- -------------------------------------------------------------------
> NOTE 5 Property and Equipment
Snap-on's property and equipment values, which are carried at cost, were as
follows:
(Amounts in millions) 2001 2000
- -------------------------------------------------------------------
Land $ 23.4 $ 24.3
Buildings and improvements 195.5 204.8
Machinery and equipment 501.3 477.2
- -------------------------------------------------------------------
720.2 706.3
Less: accumulated depreciation (392.5) (361.2)
- -------------------------------------------------------------------
Property and equipment - net $ 327.7 $ 345.1
- -------------------------------------------------------------------
The estimated service lives of property and equipment are principally as
follows:
- -------------------------------------------------------------------
Buildings and improvements 3 to 50 years
Machinery and equipment 2 to 15 years
Computer software 2 to 7 years
Vehicles 2 to 6 years
- -------------------------------------------------------------------
> NOTE 6 Accounts Receivable
Accounts receivable include trade and installment receivables. At the end of
2001 and 2000, the allowance for doubtful accounts was $39.6 million and $40.9
million. Trade accounts receivable of $26.0 million with extended credit terms
are due beyond one year from the end of 2001. There were no trade accounts
receivable due beyond one year as of year-end 2000.
Gross installment receivables amounted to $85.0 million and $89.7 million at the
end of 2001 and 2000, and include $13.4 million and $15.0 million of unearned
finance charges at the end of 2001 and 2000. Gross installment receivables of
$42.4 million and $41.3 million are due beyond one year from the end of 2001 and
2000.
> NOTE 7 Snap-on Credit LLC Joint Venture
Snap-on Credit LLC ("the LLC") was established on January 3, 1999, as a 50/50
joint venture between Snap-on and Newcourt Financial USA Inc. ("Newcourt"). The
LLC provides a broad range of financial services to Snap-on's U.S. dealer and
customer network and to Snap-on's industrial and other customers. As a result of
establishing the LLC, Snap-on effectively outsourced to the LLC its domestic
captive credit function, which was previously managed by Snap-on's wholly owned
subsidiary, Snap-on Credit Corporation. On November 15, 1999, Newcourt was
acquired by The CIT Group, Inc. ("CIT") and was subsequently acquired by Tyco
International Ltd. on June 1, 2001. Snap-on also provides extended-term
financing internationally through its wholly owned credit subsidiaries.
Snap-on receives royalty and management fee income from the LLC based on the
volume of receivables originated by the LLC and also shares with CIT ratably in
any residual net profit or loss of the joint venture after operating expenses,
including royalty and management fees, interest costs and credit loss
provisions. These amounts are included in net finance income. At December 29,
2001, Snap-on's equity investment in the LLC was $.3 million.
The LLC originates extended-term receivables on sales of Snap-on product sold
through the U.S. dealer and customer network and to Snap-on's industrial and
other customers. The LLC then sells substantially all of these receivables
(through asset-securitization transactions) to CIT and pays
securitization-related fees to CIT in conjunction with its purchase of the
receivables.
The LLC originates loans primarily in three ways. Extended-term contracts are
offered to technicians to enable them to purchase tools and equipment on an
extended-term payment plan, generally with an average term of 32 months. Lease
financing is offered to shop owners, both independents and national chains, who
purchase equipment items. The duration of lease contracts is often two to five
years. Financing options are also made available to dealers to meet a number of
financing needs, including van and truck leases, working capital loans, and
loans to enable new dealers to fund the purchase of the franchise. The duration
of these contracts can be up to 10 years. The above receivables are secured by
the underlying tools or equipment financed and other dealer assets.
34 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Financial information regarding LLC loan originations and reserves was as
follows:
2001 2000 1999
- -------------------------------------------------------------------------------
Originations (Amounts in millions)
Extended-credit receivables $ 343.6 $ 328.9 $ 301.7
Equipment leases 47.7 81.0 65.9
Dealer financing 73.4 61.4 44.1
- -------------------------------------------------------------------------------
Total originations $ 464.7 $ 471.3 $ 411.7
- -------------------------------------------------------------------------------
Number of accounts outstanding
Extended-credit receivables 177,484 178,461 176,056
Equipment leases 16,765 19,051 18,377
Dealer financing 2,781 2,430 1,917
- -------------------------------------------------------------------------------
Total 197,030 199,942 196,350
- -------------------------------------------------------------------------------
Average account balance (Amounts in dollars)
Extended-credit receivables $ 1,936 $ 1,843 $ 1,714
Equipment leases 2,845 4,252 3,586
Dealer financing 26,393 25,267 23,005
- -------------------------------------------------------------------------------
Reserves
Net reserves (Amounts in millions) $ 8.1 $ 8.6 $ 12.1
Net reserves as % of originations 1.7% 1.8% 2.9%
- -------------------------------------------------------------------------------
The LLC establishes a credit reserve for all receivables sold to CIT, and the
LLC's credit losses on the sold receivables are limited to the extent of the
reserve. In addition, certain loans originated by the LLC have a recourse
provision to Snap-on. At December 29, 2001, $46.3 million of loans originated by
the LLC have a recourse provision to Snap-on if the receivables become more than
90 days past due. In 2001, $6.2 million of such receivables were purchased by
Snap-on under the recourse provision. In addition, at December 29, 2001, there
were $27.1 million of dealers' customer-originated loans that have a primary
recourse provision directly to the dealer, with secondary recourse to Snap-on in
the event of dealer default. In 2001, the amount of such receivables purchased
by Snap-on under the recourse provision was not material. The LLC also
establishes a prepayment reserve to cover amounts due to CIT as a result of
early prepayment by customers on loans sold.
The LLC maintains a $25 million bank line of credit for working capital
purposes, of which Snap-on is a 60% guarantor and CIT is a 40% guarantor.
Borrowings under this facility totaled $22.0 million at both December 29, 2001,
and December 30, 2000. The average amount outstanding under this facility was
$11.9 million in 2001 and $14.3 million in 2000. The weighted-average interest
rate for 2001 and 2000 was 4.2% and 6.9%. As of December 29, 2001, and December
30, 2000, the weighted-average interest rate was 2.5% and 7.8%.
In conjunction with the establishment of the LLC, Snap-on repurchased $337.0
million of its previously securitized installment receivables and $68.3 million
of its previously securitized dealer-finance loan receivables. Upon repurchase,
these receivables were sold to Newcourt. In a separate transaction, Snap-on
Credit Corporation also sold to Newcourt its remaining on-balance-sheet
portfolio of U.S. installment receivables, including existing extended term,
equipment lease and dealer loan
receivables, for an aggregate sale price of $141.1 million, resulting in a
pretax gain of approximately $40 million. Since Newcourt had the right to put
back to Snap-on the unpaid portion of the extended-term installment receivable
portfolio based on the same pricing formula, this gain was recognized by Snap-on
over a two-year period. These transactions were recorded as sales of accounts
receivable with the gains on these sales included in "Net finance income" on the
accompanying Consolidated Statements of Earnings.
> NOTE 8 Short-term and Long-term Debt
Notes payable to banks under bank lines of credit totaled $26.5 million and
$65.4 million at the end of 2001 and 2000.
Commercial paper totaled $142.2 million at the end of 2001 and $365.5 million at
the end of 2000. At the end of 2001, Snap-on had commercial paper outstanding in
U.S. dollars of $135.0 million and Japanese yen of $7.2 million. At the end of
2000, Snap-on had commercial paper outstanding in U.S. dollars of $316.6
million, Swedish kronor of $28.8 million, euros of $14.0 million and Japanese
yen of $6.1 million. These amounts have been classified as long term, as it is
Snap-on's intent, and it has the ability (supported by its long-term revolving
credit facilities), to refinance this debt on a long-term basis.
At December 29, 2001, Snap-on had $458 million of multi-currency revolving
credit facilities to support its commercial paper programs. Snap-on has a $208
million revolving credit facility that is effective for a five-year term and
terminates on August 20, 2005, and a $250 million credit facility that is a
364-day facility with a one-year term-out option that terminates on August 19,
2002. The term-out option allows Snap-on to elect to borrow under the credit
facility for an additional year after the termination date. At the end of 2001
and 2000, Snap-on was in compliance with all covenants of the revolving credit
facilities and there were no borrowings under either revolving credit
commitment. The most restrictive covenant requires Snap-on to maintain a total
debt to total capital percentage of 60% or better.
Average commercial paper and bank notes outstanding were $389.2 million in 2001
and $529.1 million in 2000. The weighted-average interest rate on these
instruments was 4.3% in 2001 and 5.9% in 2000. As of December 29, 2001, and
December 30, 2000, commercial paper and bank notes outstanding had a
weighted-average interest rate of 2.1% and 6.1%.
In August 2001, Snap-on issued $200 million of unsecured notes pursuant to a
$300 million shelf registration statement filed with the Securities and Exchange
Commission in 1994. In October 1995, Snap-on issued $100 million of unsecured
notes to the public under this shelf registration. The August 2001 notes require
semiannual interest payments at a rate of 6.25% and mature in their entirety on
August 15, 2011. The October 1995 notes require semiannual interest payments at
a rate of 6.625% and mature in their entirety on October 1, 2005. The proceeds
from these issuances were used to repay a portion of Snap-on's outstanding
commercial paper and for working capital and general corporate purposes.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 35
Notes to Consolidated Financial Statements (continued)
Snap-on's long-term debt consisted of the following:
(Amounts in millions) 2001 2000
- -------------------------------------------------------------------------------
Senior unsecured indebtedness $300.0 $100.0
Borrowings under commercial paper programs 142.2 365.5
Other long-term debt 5.9 12.4
- -------------------------------------------------------------------------------
448.1 477.9
Less: current maturities (2.6) (4.9)
- -------------------------------------------------------------------------------
Total long-term debt $445.5 $473.0
- -------------------------------------------------------------------------------
The annual maturities of Snap-on's long-term debt due in the next five years are
$2.6 million in 2002, $2.7 million in 2003, $.2 million in 2004 and $242.5
million in 2005, with no maturities of long-term debt in 2006.
> NOTE 9 Income Taxes
Earnings before income taxes consisted of the following:
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
United States $20.7 $175.2 $171.5
Foreign 22.8 58.7 26.4
- -------------------------------------------------------------------------------
Total earnings before income taxes $43.5 $233.9 $197.9
- -------------------------------------------------------------------------------
The provision (benefit) for income taxes consisted of the following:
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Current:
Federal $ 21.8 $42.9 $38.2
Foreign 13.3 19.7 13.9
State 3.7 4.6 5.4
- -------------------------------------------------------------------------------
Total current 38.8 67.2 57.5
- -------------------------------------------------------------------------------
Deferred:
Federal (8.1) 11.8 9.8
Foreign (1.3) 4.0 1.4
State (4.9) 2.4 2.0
- -------------------------------------------------------------------------------
Total deferred (14.3) 18.2 13.2
- -------------------------------------------------------------------------------
Total income tax provision $ 24.5 $85.4 $70.7
- -------------------------------------------------------------------------------
A reconciliation of Snap-on's effective income tax rate to the statutory federal
tax rate follows:
2001 2000 1999
- -------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax
rate resulting from:
State income taxes,
net of federal benefit 3.2 2.0 2.4
Foreign sales corporation
tax benefit (1.6) (1.4) (1.2)
Restructuring and other
non-recurring charges 19.8 - (.3)
Change in valuation allowance (.1) 1.0 .2
Non-deductible goodwill
amortization 1.8 1.4 .1
Foreign rate difference (.8) (1.0) (.5)
Other (1.0) (.5) -
- -------------------------------------------------------------------------------
Effective tax rate 56.3% 36.5% 35.7%
- -------------------------------------------------------------------------------
Snap-on's reported effective income tax rate was 56.3% for 2001, 36.5% for 2000
and 35.7% for 1999. The 2001 tax rate was adversely impacted by the 2001
restructuring, non-recurring and other non-comparable charges where certain
expenses in various foreign jurisdictions were not tax benefited.
Temporary differences that give rise to the net deferred tax benefit were as
follows:
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Current deferred income tax benefits:
Inventories $ 26.4 $ 20.6 $ 18.4
Accruals and reserves not
currently deductible 19.0 17.2 32.8
Restructuring and other
non-recurring accruals 31.5 19.3 3.4
Other 3.3 3.5 5.0
- -------------------------------------------------------------------------------
Total current (included in
prepaid expenses) 80.2 60.6 59.6
- -------------------------------------------------------------------------------
Long-term deferred income
tax benefits (liabilities):
Employee benefits 46.8 45.1 66.7
Net operating losses 26.3 27.9 27.6
Depreciation (37.5) (39.0) (41.6)
Restructuring and other
non-recurring accruals - - (3.0)
Snap-on Credit LLC
securitizations (10.2) (1.8) -
Other 3.9 3.3 2.2
Valuation allowance (26.3) (27.2) (24.2)
- -------------------------------------------------------------------------------
Total long-term 3.0 8.3 27.7
- -------------------------------------------------------------------------------
Net deferred income tax benefit $ 83.2 $ 68.9 $ 87.3
- -------------------------------------------------------------------------------
At December 29, 2001, Snap-on had tax net operating loss carryforwards totaling
$87.6 million as follows:
(Amounts in millions) United States Foreign Total
- -------------------------------------------------------------------------------
Year of expiration:
2002 - 2004 $ - $ 8.0 $ 8.0
2005 - 2008 10.5 12.2 22.7
2009 - 2013 - 1.6 1.6
Indefinite - 55.3 55.3
- -------------------------------------------------------------------------------
$10.5 $77.1 $87.6
- -------------------------------------------------------------------------------
A valuation allowance totaling $26.3 million, $27.2 million and $24.2 million in
2001, 2000 and 1999 has been established for deferred income tax benefits
related to certain subsidiary loss carryforwards that may not be realized.
Included in this valuation allowance is $2.4 million that relates to the
deferred tax assets recorded from acquisitions. Any tax benefits subsequently
recognized for these deferred tax assets will be allocated to goodwill.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Although realization is not assured,
management believes it is more likely than not that the net deferred tax assets
will be realized. The amount of the net deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
36 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
The undistributed earnings of all subsidiaries totaled $159.1 million, $146.7
million and $112.8 million at the end of 2001, 2000 and 1999. Snap-on does not
expect that additional income taxes will be incurred on future distributions of
such earnings, and no deferred income taxes have been provided for the
distribution of these earnings to the parent company.
> NOTE 10 Financial Instruments
Snap-on accounts for its hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138.
These standards require that all derivative instruments be reported in the
consolidated financial statements at fair value. Changes in the fair value of
derivatives are to be recorded each period in earnings or "Accumulated other
comprehensive income (loss)," depending on the type of hedged transaction and
whether the derivative is designated and effective as part of a hedged
transaction. Gains or losses on derivative instruments reported in "Accumulated
other comprehensive income (loss)" must be reclassified as earnings in the
period in which earnings are affected by the underlying hedged item, and the
ineffective portion of all hedges must be recognized in earnings in the current
period.
In accordance with the provisions of SFAS No. 133, Snap-on recorded a transition
adjustment on December 31, 2000, the beginning of Snap-on's 2001 fiscal year, to
recognize its derivative instruments at fair value and to recognize the
difference between the carrying values and fair values of related hedged assets
and liabilities upon adoption of these standards. The cumulative effect of this
transition adjustment was to decrease reported net income in the first quarter
of 2001 by $2.5 million after tax related to a hedge strategy that did not
qualify for hedge accounting under SFAS No. 133. Snap-on also recorded in the
first quarter of 2001 a transition adjustment of $1.2 million after tax in
"Accumulated other comprehensive income (loss)" on the accompanying Consolidated
Balance Sheets to recognize previously deferred net gains on derivatives
designated as cash flow hedges that qualify for hedge accounting under SFAS No.
133.
Snap-on uses derivative instruments to manage well-defined interest rate and
foreign currency exposures. Snap-on does not use derivative instruments for
speculative or 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. Upon adoption of the new derivative accounting
requirements, on the date a derivative contract is entered into, Snap-on
designates the derivative as either a fair value hedge, a cash flow hedge, a
hedge of a net investment in a foreign operation or a natural hedging instrument
whose change in fair value is recognized as an economic hedge against changes in
the values of the hedged item.
FOREIGN CURRENCY DERIVATIVE INSTRUMENTS: Snap-on has operations in a number of
countries that have transactions outside their functional currencies and, as a
result, is exposed to changes in foreign currency exchange rates. In addition,
Snap-on hedges the anticipated repayment of intercompany loans to foreign
subsidiaries denominated in foreign currencies. Snap-on manages most of these
exposures on a consolidated
basis, which allows for netting of certain exposures to take advantage of
natural offsets. To the extent the net exposures are hedged, forward exchange
contracts are used. Gains and/or losses on these foreign currency hedges are
intended to offset losses and/or gains on the hedged transaction in an effort to
reduce the earnings volatility resulting from fluctuating foreign currency
exchange rates.
At December 29, 2001, Snap-on had net outstanding foreign exchange forward
contracts totaling $191.3 million comprised of buy contracts of $55.1 million in
Swedish kronor and sell contracts of $113.6 million in euros, $73.8 million in
British pounds, $31.2 million in Canadian dollars, $8.8 million in Singapore
dollars, $4.9 million in Danish kronor, $4.4 million in Australian dollars and
$9.7 million in other currencies. At December 30, 2000, Snap-on had outstanding
foreign exchange forward contracts totaling $168.9 million comprised of
contracts to sell $65.4 million in euros, $61.1 million in British pounds, $26.4
million in Canadian dollars, $12.6 million in Swedish kronor and $3.4 million in
other currencies.
Snap-on's foreign exchange forward contracts generally do not qualify for hedge
accounting treatment under SFAS No. 133 and are excluded from the assessment of
effectiveness. The fair value changes of these contracts are reported in
earnings as foreign exchange gain or loss, which is included in "Other income
(expense) - net" on the accompanying Consolidated Statements of Earnings. Those
forward exchange contracts that qualify for hedge accounting treatment are
accounted for as cash flow hedges where the effective portion of the changes in
fair value of the derivative is recorded in "Accumulated other comprehensive
income (loss)." When the hedged item is realized in income, the gain or loss
included in "Accumulated other comprehensive income (loss)" is reclassified to
income in the same financial statement caption as the hedged item. The
ineffective portion of changes in fair value of the cash flow hedges are
reported in earnings as foreign exchange gain or loss, which is included in
"Other income (expense) - net" and which were not material. Forward points on
forward exchange contracts are recognized as interest expense.
NON-DERIVATIVE INSTRUMENTS USED IN HEDGING RELATIONSHIPS: Snap-on uses non-U.S.
dollar financing transactions as net investment hedges of long-term investments
in the corresponding foreign currency. Hedges that meet the effectiveness
requirements are accounted for under net investment hedging rules. The effective
portion of the net investment hedge of a foreign operation is recorded in
"Accumulated other comprehensive income (loss)" as a cumulative translation
adjustment. When applicable, the ineffective portion of the net investment hedge
is recorded in earnings as foreign exchange gain or loss, which is included in
"Other income (expense) - net" and which were not material. At December 29,
2001, net gains of $11.4 million arising from effective hedges of net
investments have been reflected in the cumulative translation adjustment account
as a component of "Accumulated other comprehensive income (loss)."
INTEREST RATE SWAP AGREEMENTS: Snap-on enters into interest rate swap agreements
to manage interest costs and risks associated with changing interest rates,
specifically the future issuance of commercial paper. Snap-on has interest rate
swap agreements that effectively exchange floating rate payments for fixed rate
payments. Interest rate swap agreements are accounted for as cash flow hedges.
The differentials paid or received
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 37
Notes to Consolidated Financial Statements (continued)
on interest rate swap agreements are accrued and recognized as adjustments to
interest expense. The effective portion of the change in fair value of the
derivative is recorded in "Accumulated other comprehensive income (loss)," while
any ineffective portion is recorded as an adjustment to interest expense. At
December 29, 2001, and December 30, 2000, the notional principal amounts
outstanding of these agreements were $25 million and $100 million, respectively.
For all derivatives qualifying for hedge accounting under SFAS No. 133, the net
accumulated derivative loss at December 29, 2001, was $2.0 million after tax and
is reflected in "Accumulated other comprehensive income (loss)." At December 29,
2001, the maximum maturity date of any cash flow hedge was approximately 39
months. During the next 12 months, Snap-on expects to reclassify into earnings
net losses from "Accumulated other comprehensive income (loss)" of approximately
$1.1 million after tax at the time the underlying hedged transactions are
realized.
During 2001, cash flow hedge ineffectiveness was not material. However, there
were pretax derivative losses totaling $.8 million in 2001 that were excluded
from the assessment of effectiveness and, as a result, were recorded in
"Interest expense" and "Other income (expense) - net."
CREDIT CONCENTRATIONS: Snap-on is exposed to credit losses in the event of
non-performance by the counterparties to its interest rate swap and foreign
exchange contracts. Snap-on does not obtain collateral or other security to
support financial instruments subject to credit risk, but monitors the credit
standing of the counterparties and enters into agreements only with financial
institution counterparties with a credit rating of A- or better. Snap-on does
not anticipate non-performance by its counterparties.
Snap-on's accounts receivable do not represent significant concentrations of
credit risk because of the diversified portfolio of individual customers and
geographic areas.
FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments," requires Snap-on to disclose the fair value of
financial instruments for both on- and off-balance-sheet assets and liabilities
for which it is practicable to estimate that value. The following methods and
assumptions were used in estimating the fair value of financial instruments:
Installment contracts: A discounted cash flow analysis was performed over the
average life of a contract using a discount rate currently available to Snap-on
adjusted for credit quality, cost and profit factors. As of December 29, 2001,
and December 30, 2000, the fair value was approximately $82 million and $85
million versus a book value of $71.6 million and $74.7 million.
Long-term debt: The fair value of long-term debt including current maturities
was estimated using a discounted cash flow analysis based on quoted market rates
for similar instruments. As of December 29, 2001, and December 30, 2000, the
fair value was approximately $452 million and $479 million versus a book value
of $448.1 million and $477.9 million.
Other financial instruments: The carrying amounts of all other financial
instruments approximate fair value based on quoted market prices or discounted
cash flow analysis for cash equivalents, interest rate swaps, forward exchange
contracts and other financial instruments.
> NOTE 11 Pension Plans
Snap-on has several non-contributory pension plans covering most U.S. employees
and certain employees in foreign countries. Snap-on also has foreign
contributory plans covering certain foreign employees. Retirement benefits are
generally provided based on employees' years of service and average earnings or
stated amounts for years of service. Normal retirement age is 65, with
provisions for earlier retirement. Snap-on recognizes retirement plan expenses
in accordance with SFAS No. 87, "Employers' Accounting for Pensions," and
contributes to the plans based on actuarial computations. In certain defined
retirement benefit plans, these computations include the amortization of past
service cost over a maximum of 30 years. Plan assets primarily consist of
corporate equities and various debt securities.
In 2001, Snap-on amended certain of its U.S. pension plans and began offering a
non-contributory account-based pension plan with a 401(k) match to certain U.S.
salaried employees ("the 401(k) Plan"). Eligible participants were allowed to
elect the 401(k) Plan, while new hires as of January 1, 2001, are automatically
enrolled under this plan. Under the 401(k) Plan, Snap-on matches 50% of the
first 6% of the employee's annual pretax contributions in Snap-on common stock,
which is funded through the Grantor Stock Trust. Employees have the opportunity
to diversify this match as they approach retirement. For 2001, Snap-on
contributed $.4 million of Snap-on common stock to the 401(k) Plan.
Snap-on utilizes the market-related approach to value its plan assets. During
the fourth quarter of 2000, Snap-on changed its method of valuing its plan
assets from a five-year averaging method to a three-year averaging method. The
impact of this change is reported as a change in accounting principle for
pensions, with a cumulative, pretax effect of $41.3 million recorded as of
January 2, 2000. The impact on 2000 operating results was to reduce pension
expense by $9.7 million.
Snap-on's net pension expense (income) included the following components:
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Service cost - benefits earned
during the year $ 15.8 $ 15.8 $ 18.7
Interest cost on projected benefits 38.9 35.6 34.0
Less: actual loss (return) on
plan assets 1.6 (33.1) (37.2)
Curtailment gain - (.6) (3.3)
Net amortization and deferral:
Actual return on plan assets in
excess of projected return (57.2) (20.2) (.6)
Amortization of net
assets at transition (1.3) (1.3) (1.2)
Other (4.1) (3.7) 1.3
- -------------------------------------------------------------------------------
Net pension expense (income) $ (6.3) $ (7.5) $ 11.7
- -------------------------------------------------------------------------------
38 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
The status of Snap-on's pension plans was as follows:
(Amounts in millions) 2001 2000
- -------------------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $490.6 $ 491.4
Service cost 15.8 15.8
Interest cost 38.9 35.6
Plan participants' contributions .8 .6
Benefits paid (26.4) (24.1)
Curtailment gain - (.6)
Plan amendments 6.9 .7
Actuarial loss (gain) 31.2 (31.2)
Foreign currency impact (2.8) (3.9)
Effect of business acquisitions 7.0 7.9
Effect of settlements - (1.6)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $562.0 $ 490.6
- -------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $545.8 $ 526.7
Actual return (loss) on plan assets (1.6) 33.1
Plan participants' contributions .8 .6
Employer contributions 5.4 5.2
Benefits paid (26.4) (24.1)
Foreign currency impact (1.8) (1.8)
Effect of business acquisitions 7.5 8.0
Effect of settlements - (1.9)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $529.7 $545.8
- -------------------------------------------------------------------------------
Funded status $ (32.3) $ 55.4
Unrecognized net assets at year-end (2.9) (4.0)
Change in unrecognized net gain from
revaluation of market-related value of assets - 41.3
Unrecognized net loss (gain) from
experience different than assumed .1 (136.4)
Unrecognized prior service cost 14.8 10.5
- -------------------------------------------------------------------------------
Net amount recognized $ (20.3) $ (33.2)
- -------------------------------------------------------------------------------
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 31.6 $ 27.5
Accrued benefit liability (56.2) (63.1)
Other assets .7 .3
Accumulated other comprehensive income (loss) 3.6 2.1
- -------------------------------------------------------------------------------
Net amount recognized $(20.3) $ (33.2)
- -------------------------------------------------------------------------------
The prepaid benefit cost is included in "Other assets" with the current portion
in "Prepaid expenses and other assets" on the accompanying Consolidated Balance
Sheets, while the accrued benefit liability is included in "Pension liability,"
with the current portion in "Other accrued liabilities."
The weighted-average rate assumptions used in determining pension costs and the
projected benefit obligation were as follows:
2001 2000
- -------------------------------------------------------------------------------
Discount rate used to determine
present value of projected benefit
obligation at end of year 7.4% 7.9%
Expected long-term rate of return
on plan assets for the year 9.6% 9.7%
Expected rate of increase in future
compensation levels 4.6% 4.9%
- -------------------------------------------------------------------------------
Snap-on has pension plans in which the accumulated benefit obligation exceeds
the fair value of plan assets. At the end of 2001 and 2000, Snap-on had three
such plans, including certain non-U.S. plans, with an aggregate accumulated
benefit obligation of $30.0 million and $25.3 million with no plan assets.
> NOTE 12 Retiree Health Care
Snap-on provides certain health care benefits for most retired U.S. employees.
The majority of Snap-on's U.S. employees become eligible for those benefits if
they reach early retirement age while working for Snap-on; however, the age and
service requirements for eligibility under the plans have been increased for
certain employees hired on and after specified dates since 1992. Generally, most
plans pay stated percentages of covered expenses after a deductible is met.
There are several plan designs, with more recent retirees being covered under a
comprehensive major medical plan. In determining benefits, the plans take into
consideration payments by Medicare and other coverages.
For employees retiring under the comprehensive major medical plans,
contributions are required, and these plans contain provisions allowing for
benefit and coverage changes. The plans require retirees to contribute either
the full cost of the coverage or amounts estimated to exceed a capped
per-retiree annual cost commitment by Snap-on. Most employees hired since 1994
are required to pay the full cost. Snap-on does not fund the retiree health care
plans.
Snap-on recognizes postretirement health care expense in accordance with SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions."
Snap-on's net postretirement health care benefits expense included the following
components:
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Service cost - benefits attributed
to service during the year $ 1.1 $1.3 $2.0
Interest cost on accumulated
postretirement benefit obligation 5.5 5.6 5.9
Curtailment gain - - (.2)
Amortization of unrecognized
net gain (1.4) (.9) (.1)
- -------------------------------------------------------------------------------
Net postretirement health
care benefit expense $ 5.2 $6.0 $7.6
- -------------------------------------------------------------------------------
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 39
Notes to Consolidated Financial Statements (continued)
The status of Snap-on's U.S. postretirement plans was as follows:
(Amounts in millions) 2001 2000
- -------------------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 75.0 $ 83.2
Service cost 1.1 1.3
Interest cost 5.5 5.6
Plan participants' contributions 2.2 1.6
Benefits paid (6.8) (6.8)
Actuarial gain (1.7) (9.9)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 75.3 $ 75.0
- -------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ - $ -
Plan participants' contributions 2.2 1.6
Employer contributions 4.6 5.2
Benefits paid (6.8) (6.8)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $ - $ -
- -------------------------------------------------------------------------------
Unfunded status $(75.3) $(75.0)
Unrecognized actuarial gain (22.2) (22.2)
- -------------------------------------------------------------------------------
Postretirement liability $(97.5) $(97.2)
- -------------------------------------------------------------------------------
The accumulated postretirement benefit obligation at the end of 2001 consists of
a current liability of $4.8 million and a long-term liability of $92.7 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at the end of 2001 and 8.0% at the
end of 2000. The actuarial calculation assumes a health care trend rate of 6.2%
in 2002, decreasing gradually to 4.5% in 2006 and thereafter.
As of December 29, 2001, a one-percentage-point increase in the health care cost
trend rate for future years would increase the accumulated postretirement
benefit obligation by $1.0 million and the service cost and interest cost
components by $.1 million. Conversely, a one-percentage-point decrease in the
health care cost trend rate for future years would decrease the accumulated
postretirement benefit obligation by $.9 million and the service cost and
interest cost components by $.1 million.
> NOTE 13 Stock Option and Purchase Plans
Snap-on has stock option plans for directors, officers and key employees, with
expiration dates on the options ranging from 2002 to 2011 and vesting periods
ranging from immediate to three years. The plans provide that options be granted
at exercise prices equal to market value on the date the option is granted. On
April 27, 2001, Snap-on's shareholders approved the 2001 Incentive Stock and
Awards Plan. The 2001 Plan reserves five million shares of common stock for
issuance.
Non-employee directors receive a mandatory minimum of 50% and an elective
maximum of up to 100% of their fees and retainer in shares of Snap-on stock.
Directors may elect to defer receipt of all or part of these shares. For 2001,
2000 and 1999, issuances under the Directors' Fee Plan totaled 10,367 shares,
8,908 shares and 5,479 shares. Additionally,
receipt of 15,043 shares, 11,670 shares and 6,886 shares was deferred in 2001,
2000 and 1999. At December 29, 2001, shares reserved for issuance to directors
under this plan totaled 200,328 shares.
Employees of Snap-on are eligible to participate in an employee stock purchase
plan. The employee purchase price of the common stock is the lesser of the mean
of the high and low price of the stock on the beginning date (May 15) or ending
date (May 14) of each plan year. For 2001, 2000 and 1999, issuances under the
employee stock purchase plan totaled 57,231 shares, 55,322 shares and 53,082
shares. At December 29, 2001, shares reserved for issuance to employees under
this plan totaled 543,856, and Snap-on held employee contributions of
approximately $1.2 million for the purchase of common stock.
Franchised dealers are eligible to participate in a dealer stock purchase plan.
The dealer purchase price of the common stock is the lesser of the mean of the
high and low price of the stock on the beginning date (May 15) or ending date
(May 14) of each plan year. For 2001, 2000 and 1999, issuances under the dealer
stock purchase plan totaled 78,440 shares, 78,165 shares and 65,630 shares. At
December 29, 2001, shares reserved for issuance to franchised dealers under this
plan totaled 290,924, and Snap-on held dealer contributions of approximately
$1.3 million for the purchase of common stock.
Under the dividend reinvestment and stock purchase plan, participating
shareholders may invest the cash dividends from all or a portion of their common
stock to buy additional shares. The program also permits new investors and
current shareholders to make additional cash contributions. For 2001, 2000 and
1999, issuances under the dividend reinvestment and stock purchase plan totaled
47,650 shares, 50,725 shares and 38,809 shares. At December 29, 2001, shares
available for purchase under this plan totaled 1,808,286 shares.
Snap-on accounts for its stock-based compensation plans in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and, as a result, no
compensation expense for stock options was recognized. For disclosure purposes
only under SFAS No. 123, "Accounting for Stock-Based Compensation," the fair
value of each option grant was estimated as of the date of grant using the
Black-Scholes option pricing model.
Pro forma net income and earnings per share, and the assumptions used therein,
assuming the fair value of accounting for stock-based compensation as prescribed
under SFAS No. 123, were as follows:
(Amounts in millions except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------
Net earnings:
As reported $19.0 $148.5 $127.2
Pro forma 13.0 141.3 122.8
Net earnings per share - diluted:
As reported .33 2.53 2.16
Pro forma .22 2.41 2.09
Weighted-average assumptions
under Black-Scholes:
Risk-free interest rate 4.9% 6.7% 4.7%
Dividend yield 2.8% 2.5% 2.5%
Expected stock price volatility 38.7% 28.2% 32.1%
Expected option life (in years) 5.6 5.6 5.6
- -------------------------------------------------------------------------------
40 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Stock option activity was as follows:
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
Options Exercise Price* Options Exercise Price* Options Exercise Price*
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 4,526,481 $29.44 2,977,467 $30.83 2,398,136 $29.21
Granted 1,227,707 28.95 1,735,600 26.37 785,800 34.41
Exercised (375,756) 21.83 (118,681) 20.42 (132,254) 22.27
Canceled (189,286) 30.14 (67,905) 28.16 (74,215) 31.86
- -------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,189,146 $29.83 4,526,481 $29.44 2,977,467 $30.83
- -------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 3,447,146 $30.65 2,887,281 $30.21 1,982,416 $28.31
Available for grant at end of year 4,349,388 387,809 2,056,504
- -------------------------------------------------------------------------------------------------------------------------------
*Weighted-average
As calculated using the Black-Scholes option pricing model, the weighted-average
fair value of options granted during the years ended 2001, 2000 and 1999 were
$9.37, $7.55 and $9.64. The following table summarizes information about stock
options outstanding as of December 29, 2001:
2001 Options Outstanding 2001 Options Exercisable
---------------------------------------------------------------------------------------------
Remaining
Contractual
Range of Exercise Prices Options Life (Years)* Exercise Price* Options Exercise Price*
- -------------------------------------------------------------------------------------------------------------------------------
$19 to $25 610,823 2.2 $21.39 610,823 $21.39
$25 to $31 2,889,377 8.6 27.60 1,147,377 26.68
$31 to $38 1,166,239 6.4 35.30 1,166,239 35.30
$38 to $46 522,707 6.1 39.96 522,707 39.96
- -----------------------------------------------------------------------------------------------------------------
Totals 5,189,146 7.1 $29.83 3,447,146 $30.65
- -----------------------------------------------------------------------------------------------------------------
*Weighted-average
As of December 29, 2001, Snap-on had 460,850 performance units granted to
certain officers and key employees with an average grant price of $29.60 per
unit.
> NOTE 14 Capital Stock
Snap-on 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. Snap-on repurchased 400,000 shares in 2001,
following the repurchase of 1,019,500 shares in 2000 and 492,800 shares in 1999.
Since 1997, Snap-on's board of directors has authorized the repurchase of up to
$250 million of Snap-on's common stock. As of the end of 2001, Snap-on has
remaining availability to repurchase up to an additional $133 million in common
stock pursuant to the board's authorizations. The purchase of Snap-on common
stock is at the company's discretion, subject to prevailing financial and market
conditions. Since 1995, Snap-on has repurchased 9,989,583 shares.
The board of directors declared on August 22, 1997, a dividend distribution of
one preferred stock purchase right for each share of Snap-on's outstanding
common stock. The rights are exercisable only if a person or group acquires 15%
or more of Snap-on's common stock ("Acquiring Person") or publicly announces a
tender offer to become an Acquiring Person. Each right may then be exercised to
purchase one one-hundred-and-fiftieth of a share of Series A Junior Preferred
Stock for $190, but if a person or group becomes an Acquiring Person, then each
right entitles the holder (other than an Acquiring Person) to acquire common
stock of Snap-on having a market value equivalent to two times the current
purchase price. If Snap-on is acquired in a merger or other business combination
not approved by the board of directors, then each holder of a right will be
entitled to purchase common stock of the surviving company having a market value
equivalent to two times the current purchase price. The effect of the rights is
to cause ownership dilution to a person or group attempting to acquire Snap-on
without approval of Snap-on's board of directors. The rights expire on November
3, 2007, and may be redeemed by Snap-on at a price of $.01 per right under
certain circumstances.
Snap-on created a Grantor Stock Trust ("GST") in 1998 that was subsequently
amended. In conjunction with the formation of the GST, Snap-on sold 7.1 million
shares of treasury stock to the GST. The sale of these shares had no net impact
on shareholders' equity or on Snap-on'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 dealer
stock purchase plans. The Northern Trust Company, as trustee of the GST, votes
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. At December 29, 2001, the GST
held 5,984,145 shares of common stock.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 41
Notes to Consolidated Financial Statements (continued)
> NOTE 15 Commitments and Contingencies
Snap-on leases facilities and office equipment under non-cancelable operating
leases that extend for varying amounts of time.
Snap-on's future minimum lease commitments under these leases, net of
sub-leases, were as follows:
Year Ending (Amounts in millions)
- --------------------------------------------------------------------
2002 $27.4
2003 19.9
2004 13.4
2005 10.3
2006 8.4
2007 and thereafter 22.5
- --------------------------------------------------------------------
Rent expense, net of sub-lease rental income, for worldwide facilities and
office equipment was $32.1 million, $35.3 million and $26.7 million in 2001,
2000 and 1999.
In 1996, Snap-on filed a complaint against SPX Corporation ("SPX") alleging
infringement of Snap-on's patents and asserting claims relating to SPX's hiring
of the former president of Sun Electric, a subsidiary of Snap-on acquired in
1992. SPX filed a counterclaim alleging infringement of certain SPX patents.
These patents, which related to engine analyzer products first introduced in the
1980s, have expired. In 2001, both companies agreed to a binding arbitration
process. The arbitrator ruled in favor of SPX, and Snap-on will pay $44.0
million in damages to SPX. This obligation, which will be paid in January 2002,
has been recorded in "Other accrued liabilities" on the accompanying
Consolidated Balance Sheets and in "Operating expenses" on the accompanying
Consolidated Statements of Earnings.
Snap-on is involved in various other legal matters that are being defended and
handled in the ordinary course of business, and Snap-on maintains accruals for
such costs that are expected to be incurred. Although it is not possible to
predict the outcome of these matters, management believes that the results will
not have a material impact on Snap-on's financial statements.
> NOTE 16 Restructuring and Non-recurring Charges
Snap-on announced in the second quarter of 2001 that it was taking significant
action to (i) reduce costs companywide to adjust to the slower sales environment
and (ii) improve operational performance in businesses not earning acceptable
financial returns. As a result of selective rationalization and consolidation
actions, Snap-on recorded $62.0 million in pretax restructuring and other
non-recurring charges in 2001 for actions that include the consolidation or
closure of 35
facilities, asset write-downs and severance costs to effect a 6% reduction in
workforce. The $62.0 million charge includes restructuring charges of $40.3
million and non-recurring charges of $21.7 million. On the accompanying
Consolidated Statements of Earnings, "Restructuring and other non-recurring
charges" of $49.4 million includes restructuring charges of $40.3 million and
other non-recurring charges of $9.1 million, and "Cost of goods sold -
non-recurring charges" includes $12.6 million for certain inventory write-downs
and warranty costs. Approximately 45% of the charges recorded in 2001 were
non-cash, with the remaining costs requiring cash outflows from operations and
borrowings under Snap-on's existing credit facilities.
The 2001 restructuring charges are for the consolidation or closure of 35
facilities, comprised of nine manufacturing or distribution facilities and 26
sales or administrative offices. The $40.3 million charge includes $27.1 million
for severance costs associated with the planned elimination of 796 salaried and
hourly positions, $6.0 million for non-cancelable lease agreements, $5.9 million
for facility asset write-downs, and $1.3 million for exit-related legal and
professional services. Non-recurring charges of $9.1 million include $8.4
million for management transition costs associated with the April 2001
retirement of Snap-on's president and chief executive officer and the
appointment of Dale F. Elliott as successor to this position and $.7 million for
non-recurring transition costs related to equipment and employee relocation
associated with the facility consolidations. The non-recurring charges of $12.6
million in "Cost of goods sold - non-recurring charges" are comprised of $2.3
million for restructuring-related inventory write-downs and $10.3 million for
additional inventory write-downs and warranty costs associated with Snap-on's
exiting of an unprofitable segment of the emissions-testing business. Snap-on
recorded charges for expected losses on the disposition of discontinued
inventory, extended warranty costs and other asset impairments related to this
exit plan in December 2000. During 2001, Snap-on experienced higher than
expected emissions-related warranty costs and, as a result, Snap-on revised its
cost estimate relative to the emissions exit plan and recorded $10.3 million of
additional non-recurring charges in 2001.
The composition of Snap-on's restructuring reserve activity for the year ended
December 29, 2001, was as follows:
Restructuring
Reserve as of
(Amounts in millions) Provisions Usage Dec. 29, 2001
- ------------------------------------------------------------------------------
Severance costs $27.1 $ (6.0) $21.1
Facility consolidation
or closure costs 7.3 (5.3) 2.0
Loss on asset write-downs 5.9 (5.9) -
- ------------------------------------------------------------------------------
Total restructuring reserves $40.3 $(17.2) $23.1
- ------------------------------------------------------------------------------
42 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
As of December 29, 2001, restructuring reserve usage of $17.2 million represents
$6.0 million for severance payments related to the separation of 272 of the 796
identified employees, $5.3 million for facility consolidation or closure costs
and $5.9 million for the write-down of assets. Snap-on believes that the
restructuring reserve balance of $23.1 million as of December 29, 2001, is
adequate to complete all announced activities and anticipates that all actions
will be completed by the end of 2002.
Snap-on expects to fund the cash requirements of its 2001 restructuring
activities with cash flows from operations and borrowings under the company's
existing credit facilities. The specific restructuring measures and estimated
costs were based on management's best business judgment under prevailing
circumstances. Snap-on also expects to incur an estimated $7 million to $8
million in restructuring-related transition costs in the first half of 2002.
Transition costs do not qualify for restructuring accrual treatment and are
therefore expensed when incurred.
In 2000, Snap-on recorded restructuring and non-recurring charges totaling $21.8
million pretax, primarily for various exit-related costs and impairment
write-downs. These costs were comprised of a $4.2 million restructuring charge
and $17.2 million in non-recurring charges. The restructuring charge relates to
the closure of a small, underperforming vehicle-service business in the
Asia/Pacific region and includes costs related to severance, lease terminations
and write-offs of intangible assets. The non-recurring charges primarily relate
to Snap-on's decision, prompted by continued changes in technology and emissions
regulations at both the state and federal levels, to exit an unprofitable
segment of the emissions-testing business. The non-recurring charges consist of
$5.6 million for expected losses on the disposition of discontinued inventory,
$3.9 million for extended warranty costs and $7.7 million for other asset
impairments. Additionally, Snap-on incurred $.4 million in non-recurring charges
for relocation, severance and facilities consolidation costs.
On the accompanying Consolidated Statements of Earnings, the $9.5 million of
non-recurring charges for emissions-related inventory write-downs and warranty
costs in 2000 have been reported as "Cost of goods sold - non-recurring
charges." The $12.3 million in "Restructuring and other non-recurring charges"
includes non-recurring charges of $7.7 million for emissions-related asset
impairments and $.4 million for other relocation, severance and facilities
consolidation costs. Also included in "Restructuring and other non-recurring
charges" was $4.2 million in restructuring costs for severance and exit costs
related to the closure of a vehicle-service business. The restructuring actions
initiated in 2000 were completed during the first half of 2001.
In 1999, Snap-on recorded $37.2 million in restructuring and non-recurring
charges related to its Project Simplify initiative. Project Simplify, a broad
program of internal rationalizations, consolidations and reorganizations to make
Snap-on's business operations simpler and more effective, was implemented in the
third quarter of 1998. The 18-month program included the cost of closing
facilities, employee severance associated with a reduction in staffing, impaired
asset write-downs, costs to revalue discontinued stock keeping units ("SKUs"),
legal matters and other non-
recurring costs. Of the $37.2 million in charges recorded, $16.6 million was
reflected in the Consolidated Statements of Earnings as "Cost of goods sold -
non-recurring charges," and $20.6 million was included in "Restructuring and
other non-recurring charges." The $16.6 million in non-recurring charges
reflects the discontinuance of an emissions-testing equipment line as part of
Snap-on's refocus on high-volume products. The $20.6 million of non-recurring
charges represents employee incentives of $1.5 million, relocation costs of
$10.9 million, professional services of $9.1 million and $4.8 million for the
discontinuance of SKUs. These costs were partially offset by the reversal of
$5.1 million of excess warranty reserves and the reversal of $.6 million of
excess severance costs.
Snap-on achieved its Project Simplify objectives of consolidating certain
business units, closing 60 facilities, eliminating approximately 1,100 positions
and discontinuing more than 12,000 SKUs. Total charges incurred for Project
Simplify were $187.5 million, and were comprised of $67.1 million of
restructuring charges and $120.4 million of other non-recurring charges. Project
Simplify was essentially completed as of year-end 1999.
> NOTE 17 Segments
Snap-on has two reportable segments: the Snap-on Dealer Group and the Commercial
and Industrial Group. These segments are based on the organization structure
used by management for making operating and investment decisions and for
assessing performance. The Snap-on Dealer Group consists of Snap-on's business
operations serving the worldwide dealer van channel. The Commercial and
Industrial Group consists of the business operations serving the worldwide
non-dealer tool and equipment products businesses. These two segments derive
revenues primarily from the sale of tools and equipment.
The accounting policies described in Note 2 are applicable to the reportable
segments. Snap-on evaluates the performance of its operating segments based on
segment net sales and operating earnings. Snap-on accounts for intersegment
sales and transfers based primarily on standard costs established between the
segments. Snap-on allocates shared services 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. Had it been Snap-on's policy to allocate restructuring and
other non-recurring charges to its reportable segments, such charges of $62.0
million, $21.8 million and $37.2 million for 2001, 2000 and 1999 would have been
allocated to the segments as follows: Snap-on Dealer Group - $14.3 million,
$11.5 million and $8.9 million for 2001, 2000 and 1999; Commercial and
Industrial Group - $47.7 million, $10.3 million and $28.3 million for 2001, 2000
and 1999. In 2001, the $44.0 million cost for the resolution of patent
arbitration as described in Note 15 was not allocated to the reportable
segments.
Neither Snap-on nor any of its segments depends on any single customer, small
group of customers or government for more than 10% of its sales.
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 43
Notes to Consolidated Financial Statements (continued)
Financial data by segment was as follows:
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Net sales from external customers
Snap-on Dealer Group $1,048.8 $1,068.7 $1,050.9
Commercial and Industrial Group 1,046.9 1,107.0 894.7
- -------------------------------------------------------------------------------
Total net sales $2,095.7 $2,175.7 $1,945.6
- -------------------------------------------------------------------------------
Intersegment sales
Snap-on Dealer Group $ .1 $ .1 $ -
Commercial and Industrial Group 381.4 361.5 414.8
- -------------------------------------------------------------------------------
Total intersegment sales 381.5 361.6 414.8
Elimination of intersegment sales (381.5) (361.6) (414.8)
- -------------------------------------------------------------------------------
Total consolidated
intersegment sales $ - $ - $ -
- -------------------------------------------------------------------------------
Earnings
Snap-on Dealer Group $ 116.8 $ 127.3 $ 120.0
Commercial and Industrial Group 40.1 86.4 69.1
- -------------------------------------------------------------------------------
Segment operating earnings 156.9 213.7 189.1
Net finance income 35.7 38.1 60.5
Restructuring and other
non-recurring charges (62.0) (21.8) (37.2)
Arbitration resolution (44.0) - -
Interest expense (35.5) (40.7) (27.4)
Other income (expense) - net (3.5) 3.3 12.9
- -------------------------------------------------------------------------------
Earnings from continuing
operations before income taxes $ 47.6 $ 192.6 $ 197.9
- -------------------------------------------------------------------------------
Assets
Snap-on Dealer Group $ 823.3 $ 805.3 $ 772.3
Commercial and Industrial Group 1,120.6 1,220.2 1,321.2
- -------------------------------------------------------------------------------
Total from reportable segments 1,943.9 2,025.5 2,093.5
Financial Services 82.0 96.2 97.2
Elimination of intersegment
receivables (51.6) (52.6) (29.8)
- -------------------------------------------------------------------------------
Total assets $1,974.3 $2,069.1 $2,160.9
- -------------------------------------------------------------------------------
(Amounts in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Capital expenditures
Snap-on Dealer Group $ 14.7 $ 13.0 $ 16.2
Commercial and Industrial Group 38.9 44.6 19.2
- -------------------------------------------------------------------------------
Total from reportable segments 53.6 57.6 35.4
Financial Services - - -
- -------------------------------------------------------------------------------
Total capital expenditures $ 53.6 $ 57.6 $ 35.4
- -------------------------------------------------------------------------------
Depreciation and amortization
Snap-on Dealer Group $ 21.4 $ 20.3 $ 20.5
Commercial and Industrial Group 46.6 45.9 34.9
- -------------------------------------------------------------------------------
Total from reportable segments 68.0 66.2 55.4
Financial Services - - -
- -------------------------------------------------------------------------------
Total depreciation and amortization $ 68.0 $ 66.2 $ 55.4
- -------------------------------------------------------------------------------
Geographic data was as follows:
(Amounts in millions) 2001 2000 1999
- ------------------------------------------------------------------------------
Net sales*
United States $1,360.0 $1,367.1 $1,306.7
Europe 537.5 587.5 434.3
All other 198.2 221.1 204.6
- ------------------------------------------------------------------------------
Total net sales $2,095.7 $2,175.7 $1,945.6
- ------------------------------------------------------------------------------
Long-lived assets
United States $ 189.1 $ 199.0 $ 218.8
Europe 114.0 121.7 117.8
All other 24.6 24.4 26.0
- ------------------------------------------------------------------------------
Total long-lived assets $ 327.7 $ 345.1 $ 362.6
- ------------------------------------------------------------------------------
* Net sales are attributed to countries based on the origin of the sale.
PRODUCTS AND SERVICES: Snap-on derives revenue from a broad line of products and
complementary services that can be divided into two groups: tools and equipment.
The following table shows the consolidated sales of these product groups in the
last three years:
(Amounts in millions) 2001 2000 1999
- ------------------------------------------------------------------------------
Tools $1,291.1 $1,343.5 $1,149.3
Equipment 804.6 832.2 796.3
- ------------------------------------------------------------------------------
Total $2,095.7 $2,175.7 $1,945.6
- ------------------------------------------------------------------------------
44 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Quarterly Financial Information (Unaudited)
(Amounts in millions except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------
Net sales
First quarter $ 527.4 $ 544.3 $ 452.6
Second quarter 525.6 563.2 473.1
Third quarter 508.1 511.9 453.2
Fourth quarter 534.6 556.3 566.7
- -------------------------------------------------------------------------------
$2,095.7 $2,175.7 $1,945.6
- -------------------------------------------------------------------------------
Net earnings (loss)
First quarter* $ 26.9 $ 60.7 $ 32.2
Second quarter 8.9 45.7 25.0
Third quarter .6 28.4 42.6
Fourth quarter (17.4) 13.7 27.4
- -------------------------------------------------------------------------------
$ 19.0 $ 148.5 $ 127.2
- -------------------------------------------------------------------------------
Earnings (loss) per share - basic
First quarter* $ .47 $ 1.03 $ .55
Second quarter .15 .78 .43
Third quarter .01 .48 .73
Fourth quarter (.30) .25 .47
- -------------------------------------------------------------------------------
$ .33 $ 2.54 $ 2.18
- -------------------------------------------------------------------------------
Earnings (loss) per share - diluted
First quarter* $ .47 $ 1.03 $ .55
Second quarter .15 .78 .42
Third quarter .01 .48 .72
Fourth quarter (.30) .24 .47
- -------------------------------------------------------------------------------
$ .33 $ 2.53 $ 2.16
- -------------------------------------------------------------------------------
Cash dividends paid per share
First quarter $ .24 $ .23 $ .22
Second quarter .24 .23 .22
Third quarter .24 .24 .23
Fourth quarter .24 .24 .23
- -------------------------------------------------------------------------------
$ .96 $ .94 $ .90
- -------------------------------------------------------------------------------
* The first quarter of 2001 includes a pretax loss of $4.1 million ($2.5 million
after tax or $.04 per basic and diluted share) for the cumulative effect of a
change in accounting principle for derivatives. The first quarter of 2000
includes a pretax gain of $41.3 million ($25.4 million after tax or $.43 per
basic and diluted share) for the cumulative effect of a change in accounting
principle for pensions.
NET SALES (in $ millions)
- -------------------------
1997 - 1,672
1998 - 1,773
1999 - 1,946
2000 - 2,176
2001 - 2,096
NET EARNINGS (LOSS) (in $ millions)
- -----------------------------------
1997 - 150
1998 - (5)
1999 - 127
2000 - 149
2001 - 19
SHAREHOLDERS' EQUITY PER SHARE (in dollars)
- -------------------------------------------
1997 - 14.74
1998 - 12.98
1999 - 14.10
2000 - 14.60
2001 - 13.40
CASH DIVIDENDS PAID PER SHARE (in dollars)
- ------------------------------------------
1997 - .82
1998 - .86
1999 - .90
2000 - .94
2001 - .96
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 45
Six-year Data
(Amounts in millions except per share data) 2001 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Summary of operations
Net sales $2,095.7 $2,175.7 $1,945.6 $1,772.6 $1,672.2 $1,485.3
Gross profit 949.0 996.8 896.2 763.2 843.8 750.8
Operating expenses 848.7 792.6 723.7 705.8 650.2 594.5
Net finance income 35.7 38.1 60.5 65.9 71.9 64.3
Interest expense 35.5 40.7 27.4 21.2 17.6 12.7
Earnings from continuing operations 47.6 192.6 197.9 10.8 238.7 208.7
Income taxes 26.1 69.5 70.7 15.6 88.3 77.2
Cumulative effect, net of taxes (2.5) 25.4 - - - -
Net earnings (loss) 19.0 148.5 127.2 (4.8) 150.4 131.5
- ----------------------------------------------------------------------------------------------------------------------------------
Financial position
Accounts receivable - net $ 615.2 $ 644.5 $ 617.7 $ 554.7 $ 539.6 $ 651.7
Inventories 375.2 418.9 454.8 375.4 373.2 269.8
Current assets 1,139.4 1,186.4 1,206.3 1,079.8 1,021.7 1,017.3
Accounts payable 141.2 161.0 146.4 89.4 91.6 89.3
Current liabilities 549.4 538.0 452.7 458.0 352.5 341.4
Working capital 590.0 648.4 753.6 621.8 669.2 675.9
Working investment 849.2 902.4 926.1 840.7 821.2 832.2
Total capital 1,250.4 1,387.3 1,455.1 1,102.0 1,067.2 1,001.2
Property and equipment - net 327.7 345.1 362.6 272.0 265.8 245.3
Total assets 1,974.3 2,069.1 2,160.9 1,674.9 1,641.4 1,520.8
Long-term debt 445.5 473.0 607.5 246.6 151.0 149.8
Total debt 474.6 543.3 629.8 339.7 175.1 173.0
Total shareholders' equity 775.8 844.0 825.3 762.4 892.1 828.2
- ----------------------------------------------------------------------------------------------------------------------------------
Common share summary
Net earnings (loss) per share - diluted $ .33 $ 2.53 $ 2.16 $ (.08) $ 2.44 $ 2.13
Cash dividends paid per share .96 .94 .90 .86 .82 .76
Shareholders' equity per share 13.40 14.60 14.10 12.98 14.74 13.62
Common stock price range 34.21-21.65 32.44-20.88 37.81-26.44 46.44-25.50 46.31-34.25 38.25-27.33
Year-end share price 33.93 27.88 26.56 34.81 42.38 36.38
Average shares outstanding - diluted 58.1 58.6 58.9 59.2 61.7 61.6
- ----------------------------------------------------------------------------------------------------------------------------------
Other financial statistics
Cash dividends paid $ 55.6 $ 55.0 $ 52.6 $ 51.0 $ 49.9 $ 46.3
Net cash provided by operating activities 163.7 190.2 235.6 75.0 194.9 136.4
Capital expenditures 53.6 57.6 35.4 46.8 55.4 52.3
Depreciation and amortization 68.0 66.2 55.4 45.0 38.4 31.9
Percent of total debt to total capital 38.0% 39.2% 43.3% 30.8% 16.4% 17.3%
Return on average shareholders' equity 2.3% 17.8% 16.0% (.6)% 17.5% 16.7%
- ----------------------------------------------------------------------------------------------------------------------------------
2001 results include $62.0 million of pretax restructuring and other
non-recurring charges ($46.1 million after tax or $.80 per diluted share) and a
$4.1 million pretax loss ($2.5 million after tax or $.04 per diluted share) for
the cumulative effect of a change in accounting principle for derivatives.
2000 results include $21.8 million of pretax restructuring and other
non-recurring charges ($14.2 million after tax or $.24 per diluted share) and a
$41.3 million pretax gain ($25.4 million after tax or $.43 per diluted share)
for the cumulative effect of a change in accounting principle for pensions.
1999 results include $37.2 million of pretax restructuring and other
non-recurring charges ($23.3 million after tax or $.40 per diluted share).
1998 results include $149.9 million of pretax restructuring and other
non-recurring charges ($107.6 million after tax or $1.82 per diluted share).
For financial definitions see Glossary of Financial Terms on inside back cover.
46 SNAP-ON INCORPORATED 2001 ANNUAL REPORT
Management's Responsibility
for Financial Reporting
The management of Snap-on Incorporated is responsible for the preparation and
integrity of all financial statements and other information contained in this
Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include amounts
based on judgments and estimates by management. Snap-on maintains internal
control systems designed to provide reasonable assurance that Snap-on's
financial records reflect the transactions of Snap-on and that its assets are
protected from loss or unauthorized use. A staff of internal auditors conducts
operational and financial audits to evaluate the adequacy of internal controls
and accounting practices.
Snap-on's consolidated financial statements have been audited by Arthur Andersen
LLP, independent public accountants. As part of their audit of Snap-on's
consolidated financial statements, Arthur Andersen LLP considered Snap-on's
system of internal control to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests. Management has made available to
Arthur Andersen LLP Snap-on's financial records and related data.
The audit committee of the board of directors is responsible for
reviewing and evaluating the overall performance of Snap-on's financial
reporting and accounting practices. The committee meets periodically and
independently with management, internal auditors and the independent public
accountants to discuss Snap-on's internal accounting controls, auditing and
financial reporting matters. The internal auditors and independent public
accountants have unrestricted access to the audit committee.
/s/ Dale F. Elliott
Dale F. Elliott
President and Chief Executive Officer
/s/ Donald S. Huml
Donald S. Huml
Senior Vice President - Finance and Chief Financial Officer
Report of Independent
Public Accountants
To the Board of Directors and
Shareholders of Snap-on Incorporated:
We have audited the accompanying consolidated balance sheets of Snap-on
Incorporated (a Delaware Corporation) and subsidiaries as of December 29, 2001,
and December 30, 2000, and the related consolidated statements of earnings,
shareholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended December 29, 2001. These consolidated financial
statements are the responsibility of Snap-on's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Snap-on Incorporated and subsidiaries as of December 29, 2001, and
December 30, 2000, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 29, 2001, in conformity
with accounting principles generally accepted in the United States.
As explained in Note 10 to the financial statements, effective
December 31, 2000, Snap-on Incorporated changed its method of accounting for
derivatives.
As explained in Note 11 to the financial statements, effective
January 2, 2000, Snap-on Incorporated changed its method of accounting for
pensions.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Chicago, Illinois
January 29, 2002
SNAP-ON INCORPORATED 2001 ANNUAL REPORT 47