Six-year Data
(Amounts in millions except per share data) 2002 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Net sales $2,109.1 $2,095.7 $2,175.7 $1,945.6 $1,772.6 $1,672.2
Gross profit 964.9 949.0 996.8 896.2 763.2 843.8
Operating expenses 799.2 848.7 792.6 723.7 705.8 650.2
Net finance income 37.7 35.7 38.1 60.5 65.9 71.9
Operating earnings 198.3 86.6 230.0 212.4 34.1 265.5
Interest expense 28.7 35.5 40.7 27.4 21.2 17.6
Earnings from continuing operations 161.2 47.6 192.6 197.9 10.8 238.7
Income taxes 58.0 26.1 69.5 70.7 15.6 88.3
Cumulative effect, net of taxes 2.8 (2.5) 25.4 -- -- --
Net earnings (loss) 106.0 19.0 148.5 127.2 (4.8) 150.4
- ---------------------------------------------------------------------------------------------------------------
Financial position
Accounts receivable current--net $ 556.2 $572.8 $ 603.2 $ 573.8 $ 538.2 $ 524.0
Inventories 369.9 375.2 418.9 454.8 375.4 373.2
Current assets 1,051.0 1,097.0 1,145.1 1,162.4 1,063.3 1,006.1
Accounts payable 170.9 141.2 161.0 146.4 89.4 91.6
Current liabilities 552.4 549.4 538.0 452.7 458.0 352.5
Property and equipment--net 330.2 327.7 345.1 362.6 272.0 265.8
Total assets 1,994.1 1,974.3 2,069.1 2,160.9 1,674.9 1,641.4
Long-term debt 304.3 445.5 473.0 607.5 246.6 151.0
Total shareholders' equity 830.4 775.8 844.0 825.3 762.4 892.1
Working capital 498.6 547.6 607.1 709.7 605.3 653.6
Working investment 755.2 806.8 861.1 882.2 824.2 805.6
Total net debt 342.3 467.9 537.2 612.2 324.7 149.4
Total invested capital 1,172.7 1,243.7 1,381.2 1,437.5 1,087.1 1,041.5
- ---------------------------------------------------------------------------------------------------------------
Common share summary
Net earnings (loss) per share--basic $ 1.82 $ .33 $ 2.54 $ 2.18 $ (.08) $ 2.47
Net earnings (loss) per share--diluted 1.81 .33 2.53 2.16 (.08) 2.44
Cash dividends paid per share .97 .96 .94 .90 .86 .82
Shareholders' equity per share 14.27 13.40 14.60 14.10 12.98 14.74
Fiscal year-end share price 27.72 33.93 27.88 26.56 34.81 42.38
Average shares outstanding--diluted 58.5 58.1 58.6 58.9 59.2 61.7
- ---------------------------------------------------------------------------------------------------------------
Other financial statistics
Cash dividends paid $ 56.5 $ 55.6 $ 55.0 $ 52.6 $ 51.0 $ 49.9
Net cash provided by operating activities 224.1 163.7 190.2 235.6 75.0 194.9
Capital expenditures 45.8 53.6 57.6 35.4 46.8 55.4
Depreciation and amortization 51.7 68.0 66.2 55.4 45.0 38.4
Total net debt to total invested capital 29.2% 37.6% 38.9% 42.6% 29.9% 14.3%
Return on average shareholders' equity 13.2% 2.3% 17.8% 16.0% (.6)% 17.5%
- ---------------------------------------------------------------------------------------------------------------
2002 results included $5.1 million of restructuring and other non-recurring charges ($3.3 million after tax or
$.05 per diluted share) and a $2.8 million gain ($2.8 million after tax or $.05 per diluted share) for the
cumulative effect of a change in accounting principle for goodwill. Snap-on ceased amortizing goodwill and
certain other intangible assets in 2002 in accordance with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
2001 results included $62.0 million of restructuring and other non-recurring charges ($46.1 million after tax
or $.80 per diluted share), of which $12.6 million was included in cost of goods sold, and a $4.1 million loss
($2.5 million after tax or $.04 per diluted share) for the cumulative effect of a change in accounting
principle for derivatives. Goodwill amortization in 2001 totaled $13.9 million pretax.
2000 results included $21.8 million of restructuring and other non-recurring charges ($14.2 million after tax
or $.24 per diluted share) and a $41.3 million gain ($25.4 million after tax or $.43 per diluted share) for
the cumulative effect of a change in accounting principle for pensions. Goodwill amortization in 2000 totaled
$14.5 million pretax.
1999 results included $37.2 million of restructuring and other non-recurring charges ($23.3 million after tax
or $.40 per diluted share). Goodwill amortization in 1999 totaled $11.8 million pretax.
1998 results included $149.9 million of restructuring and other non-recurring charges ($107.6 million after
tax or $1.82 per diluted share). Goodwill amortization in 1998 totaled $8.5 million pretax.
1997 results included goodwill amortization of $6.9 million pretax.
Snap-On Incoporated
20
Management's Discussion and Analysis
Snap-on Incorporated ("Snap-on" or "the company") was incorporated under the
laws of the state of Wisconsin in 1920 and reincorporated under the laws of the
state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer
and marketer of high-quality tool, diagnostic and equipment solutions for
professional tool and equipment users. Product lines include a broad range of
hand and power tools, tool storage, saws and cutting tools, pruning tools,
vehicle service diagnostics equipment, vehicle service equipment, including
wheel service, safety testing and collision repair equipment, vehicle service
information, business management systems, equipment repair services, and other
tool and equipment solutions. Snap-on's customers include automotive
technicians, vehicle service centers, manufacturers, industrial tool and
equipment users and those involved in commercial applications such as
construction, electrical and agriculture.
Snap-on's business segments are based on the organizational structure used
by management for making operating and investment decisions and for assessing
performance. Snap-on previously reported two business segments: the Snap-on
Dealer Group, which represented the worldwide franchised dealer van channel, and
the Commercial and Industrial Group, which included all of Snap-on's non-dealer
businesses. Reflecting growth opportunities in the diagnostics and information
businesses, Snap-on realigned its management organization structure and, as a
result, changed its reportable business segments in 2002 to the following: (i)
the Snap-on Dealer Group; (ii) the Commercial and Industrial Group; and (iii)
the Diagnostics and Information Group. The Snap-on Dealer Group consists of
Snap-on's business operations serving the worldwide franchised dealer van
channel. The Commercial and Industrial Group consists of the business operations
providing tools and equipment products to a broad range of industrial and
commercial customers worldwide through direct, distributor and other
non-franchised distribution channels. The Diagnostics and Information Group
consists of the business operations providing diagnostics equipment, vehicle
service information, business management systems, equipment repair services and
other solutions for customers in the worldwide vehicle service and repair
marketplace.
Snap-on's products are known for their quality workmanship, superior
performance and exceptional service, and customers readily recognize and prefer
the Snap-on family of brand names. Innovation, marketplace knowledge and
customer relationships are Snap-on competencies that support its position as a
leading provider of professional tool and equipment solutions. Snap-on's mission
is to delight its customers--professional tool and equipment users worldwide--by
providing innovative, productivity-enhancing products, services and solutions.
During the past several years, Snap-on has taken actions, through both
internal development and acquisition, to grow its served customer base, pursue
new marketplace opportunities and improve its operating performance. Affirming
its commitment to deliver high-quality products and service and to deliver
improved cash flow and earnings, Snap-on is implementing its Driven to
Deliver(TM) framework throughout the company. The Snap-on Business Process is
based on the balanced application of three strategic principles: Quality People,
Operational Fitness and Profitable Growth. This framework builds on the solid
foundation created through the strategic partnering efforts of Snap-on employees
and dealers and provides a business environment in which all employees
contribute toward building a stronger company.
The principle of Quality People means having the right people with the
right skills in the right situation to deliver positive results. Snap-on wants
to ensure that employees are stimulated and supported to anticipate and take
appropriate actions to achieve the company's goals.
Operational Fitness emphasizes the need for continuous improvement,
streamlining processes and reducing waste to ensure that Snap-on remains a
leader in providing exceptional customer service and high-quality products that
offer value to its customers and profitability for its shareholders.
With a focus on Quality People and Operational Fitness, Snap-on is building
a strong foundation for Profitable Growth. Profitable Growth means growing the
company while delivering a measurable increase in financial performance. Through
innovation in internal development and a disciplined approach to marketplace
opportunities, Snap-on is committed to anticipating and meeting its customers'
changing needs and building stronger cash flows that will continue to support
its business, while enhancing shareholder value.
RESULTS OF OPERATIONS
Snap-on's results of operations for the fiscal years ended December 28, 2002,
December 29, 2001, and December 30, 2000, are as follows:
(Amounts in millions
except per share data) 2002 2001 2000
- ------------------------------------------------------
Net sales $2,109.1 $2,095.7 $2,175.7
Net earnings 106.0 19.0 148.5
Net earnings per share:
Basic 1.82 .33 2.54
Diluted 1.81 .33 2.53
- ------------------------------------------------------
NET SALES: Net sales in 2002 were $2.109 billion, up 0.6% from the $2.096
billion reported in 2001. The increase in year-over-year net sales is
attributable to a 0.8% favorable currency translation, partially offset by a
0.2% decline in organic sales, reflecting the continued weakened economic
conditions in 2002. Snap-on defines organic sales growth as the change in
year-over-year sales, excluding the impact of acquisitions, divestitures and
currency translation. The impact of acquisitions on 2002 net sales was minimal.
2002 Annual Report
21
Management's Discussion and Analysis(continued)
Net sales in 2001 were $2.096 billion, down 3.7% from the $2.176 billion
posted in 2000. The decline in year-over-year net sales was attributable to a
2.0% unfavorable currency translation and a 1.7% decline in organic sales, which
primarily resulted from the slowing economy in 2001 depressing demand for
big-ticket capital goods equipment and, in the second half of the year,
professional tools in the manufacturing and industrial marketplace. 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.
Snap-on had product sales in the following geographic regions:
(Amounts in millions) 2002 2001 2000
- ------------------------------------------------------
United States $1,358.7 $1,360.0 $1,367.1
Europe 547.0 537.5 587.5
All other 203.4 198.2 221.1
- ------------------------------------------------------
Total net sales $2,109.1 $2,095.7 $2,175.7
======================================================
EARNINGS: Snap-on reported net earnings of $106.0 million in 2002, compared to
net earnings of $19.0 million in 2001. Diluted earnings per share were $1.81 in
2002, compared to $.33 in 2001. Snap-on recorded a cumulative effect of a change
in accounting principle transition adjustment that increased net earnings in
2002 by $2.8 million, or $.05 per diluted share, from the recognition of
negative goodwill as required by Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." For information on
Snap-on's adoption of SFAS No. 142, refer to Note 8 of the Consolidated
Financial Statements.
Snap-on's operating earnings in 2002 were $198.3 million, compared to $86.6
million in 2001. In 2002, Snap-on incurred $5.1 million for restructuring and
other non-recurring charges. In 2001, Snap-on incurred $62.0 million for such
costs, of which $12.6 million was included in cost of goods sold. Since the
second quarter of 2001, Snap-on has closed or consolidated 32 facilities
worldwide and realized an 8.4% reduction in its global workforce. In 2002,
Snap-on achieved $44.7 million in year-over-year savings from its restructuring
and other Operational Fitness actions. Of these savings, $24.3 million was
reinvested to support new product development and other Profitable Growth
initiatives, including higher spending for the company's "More Feet on the
Street" dealer expansion and enhancement initiative. Operating earnings in 2002
include a net year-over-year benefit of $66.3 million from higher sales of new
products and $17.3 million from favorable net pricing, partially offset by $65.0
million from the impact of lower sales, including the continued weak demand for
big-ticket diagnostics, equipment products and industrial tools worldwide.
Snap-on incurred higher costs of $47.8 million for actions to adjust to the
lower production volumes associated with improving inventory turns and the lower
second-half sales to dealers as they better managed their working capital, as
well as for general cost increases. Additionally, in 2002, Snap-on incurred
higher year-over-year net pension expense of $6.2 million and Snap-on also
incurred, in the first quarter of 2002, $2.6 million in bad debt expense for the
write-down of a receivable related to the closure of auto service centers
associated with a major retailer's bankruptcy. The year-over-year operating
earnings comparison benefited from the absence of $47.0 million in costs
incurred in 2001 that included $44.0 million principally for the resolution of a
patent arbitration matter and $3.0 million for related legal costs. Operating
earnings in 2002 also reflects a net benefit of $4.6 million that included $10.8
million for the favorable resolution of a patent infringement matter, net of
related legal expenses incurred in 2002, partially offset by a $6.2 million
provision for certain contractual matters. Also contributing to the increased
operating earnings in 2002 were higher year-over-year net finance income of $2.0
million and $15.1 million from the elimination in 2002 of goodwill and certain
other intangible amortization.
Snap-on's net earnings in 2001 were adversely impacted by pretax charges of
$120.4 million ($85.2 million after tax or $1.47 per diluted share) including
$62.0 million for restructuring and non-recurring charges and $58.4 million for
certain other items that included the $47.0 million for the resolution of an
arbitration matter and related legal costs, $7.4 million for costs related to
the termination of a European supplier relationship and $4.0 million for
emissions-related bad debts. In addition to these charges, the decline in 2001
net earnings compared to 2000 also reflected 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 net charge of $2.5 million, or $.04 per
diluted share, for the cumulative effect of adopting SFAS No. 133, "Accounting
for Derivative and Hedging Activities." For information on Snap-on's adoption of
SFAS No. 133, refer to Note 11 of the Consolidated Financial Statements.
Net earnings in 2000 of $148.5 million included a gain of $25.4 million, or
$.43 per diluted share, resulting from the cumulative
Margin Analysis
- ------------------------------------------------------
1998 - $1,773 Net Sales (in millions)
- 43.1% Gross Profit Margin*
- 1.9% Operating Earnings Margin*
1999 - $1,946 Net Sales (in millions)
- 46.1% Gross Profit Margin*
- 10.9% Operating Earnings Margin*
2000 - $2,176 Net Sales (in millions)
- 45.8% Gross Profit Margin*
- 10.6% Operating Earnings Margin*
2001 - $2,096 Net Sales (in millions)
- 45.3% Gross Profit Margin*
- 4.1% Operating Earnings Margin*
2002 - $2,109 Net Sales (in millions)
- 45.8% Gross Profit Margin*
- 9.4% Operating Earnings Margin*
*As a percent of net sales
Snap-On Incoporated
22
effect of a change in accounting for pensions. This change did not result in any
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 pretax pension expense by $9.7
million. For additional information on Snap-on's pension plans, refer to Note 13
of the Consolidated Financial Statements.
COSTS AND GROSS PROFIT: Gross profit was $964.9 million in 2002, up 1.7%
compared with $949.0 million in 2001. As a percentage of sales, gross profit
margin was 45.7%, compared to 45.3% in 2001. Gross profit in 2002 benefited from
the success of new product introductions, favorable net pricing and the
company's restructuring and Operational Fitness activities, including cost
controls and improvements in manufacturing operations. The unfavorable impact of
cost increases and lower production volumes associated with improving inventory
turns in a slow sales environment offset the impact of these improvements.
Additionally, gross profit in 2001 was negatively impacted by $1.5 million for
inventory write-downs related to the termination of the European supplier
relationship and by $12.6 million in charges that included $2.3 million for
inventory write-downs associated with restructuring activities and $10.3 million
for inventory write-downs and warranty costs associated with the exiting of a
segment of the emissions testing business.
Gross profit was $949.0 million in 2001, down 4.8% from $996.8 million in
2000. As a percentage of net sales, gross profit margin was 45.3% in 2001,
compared to 45.8% in 2000. Improved productivity, favorable net pricing and the
success of new product introductions in 2001 were more than offset by the
underabsorption of manufacturing costs from the lower-than-planned sales and the
effect of the $12.6 million of charges incurred for inventory write-downs and
warranty costs as compared to the prior year.
Operating expenses were $799.2 million, or 37.9% of net sales, in 2002
compared to $848.7 million, or 40.5%, in 2001. The improvement in year-over-year
operating expenses included $15.1 million from the elimination of goodwill and
certain other intangible asset amortization and the elimination of $56.9 million
in charges incurred in 2001 that included the $47.0 million for the resolution
of an arbitration matter and related legal costs, $5.9 million in operating
expenses for costs related to the termination of a European supplier
relationship and $4.0 million for emissions-related bad debts. Operating
expenses in 2002 also included a net $4.6 million benefit from the favorable
resolution of a patent infringement matter partially offset by a provision for
certain contractual matters. In addition, Snap-on realized savings in 2002 from
its fiscal 2001 restructuring actions, reduced discretionary spending and other
cost-reduction initiatives. These decreases to operating expenses were more than
offset by increased expenses for the More Feet on the Street initiative, higher
net pension costs and higher spending for new product development and other
Profitable Growth initiatives.
Operating Expenses as a
Percent of Net Sales Research and Engineering
- -------------------------------------- -------------------------------------
in percent in $ millions
1998 - 39.8 1998 - 49
1999 - 37.2 1999 - 50
2000 - 36.4 2000 - 51
2001 - 40.5 2001 - 55
2002 - 37.9 2002 - 57
Operating expenses were $848.7 million, or 40.5% of net sales, in 2001,
compared to $792.6 million, or 36.4%, in 2000. The year-over-year increase
primarily reflects the impact of higher costs incurred in 2001 for charges
totaling $56.9 million for certain legal and other costs, including the $47.0
million for the resolution of an arbitration matter and 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. In 2001, Snap-on
also incurred higher year-over-year costs for new product development, increased
spending for dealer expansion, training and recruitment under the More Feet on
the Street initiative, and increased bad debt provisions. These cost increases
were partially offset by cost savings generated from the company's focus on
improving Operational Fitness, including benefits realized from its aggressive
cost-reduction and restructuring initiatives.
Research and engineering costs for the development of new and improved
products and process improvements are included in operating expenses and do not
include certain software development costs that qualify for capitalization. In
2002, Snap-on filed 156 new patent applications in connection with its
development activities, resulting in a total of 1,592 active or pending patents
at year end. Research and engineering expenses totaled $57.1 million, $54.6
million and $50.6 million in 2002, 2001 and 2000. In 2002, Snap-on introduced
such new and improved products as the MODIS(TM) modular diagnostic information
system, new tool storage units--including the largest roll cab on the market, a
variety of new, productivity-enhancing power and hand tools, and a new versatile
mid-rise lift and multi-fluid exchanger. New product sales, defined as sales
from products introduced during the last three years, contributed approximately
$492 million, or 23%, of total 2002 net sales compared with approximately $304
million, or 15%, of net sales in 2001.
SEGMENT RESULTS: Snap-on's business segments include the Snap-on Dealer Group,
the Commercial and Industrial Group and the Diagnostics and Information Group.
Segment net sales are defined as total net sales, including both net sales to
external customers and intersegment sales, before elimination of intersegment
activity.
2002 Annual Report
23
Management's Discussion and Analysis (continued)
Segment operating earnings are defined as segment net sales less cost of goods
sold and operating expenses. Snap-on accounts for intersegment sales and
transfers based primarily on standard costs with reasonable mark-ups established
between the segments. Snap-on allocates shared services expenses to those
segments that utilize the services based on a percentage of either cost of goods
sold or segment net sales, as appropriate.
Snap-on reported total net segment sales and operating earnings of $2.418
billion and $165.7 million in 2002 compared to total net segment sales and
operating earnings of $2.388 billion and $156.9 million in 2001. The following
discussion focuses on Snap-on's reported segment net sales and operating
earnings. For additional segment information, refer to Note 18 of the
Consolidated Financial Statements.
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------
Total net sales
Snap-on Dealer Group $1,055.1 $1,050.8 $1,108.8
Commercial and
Industrial Group 1,028.3 1,015.7 1,060.0
Diagnostics and
Information Group 334.4 321.2 295.0
- ----------------------------------------------------------
Segment net sales $2,417.8 $2,387.7 $2,463.8
Intersegment eliminations (308.7) (292.0) (288.1)
- ----------------------------------------------------------
Total net sales $2,109.1 $2,095.7 $2,175.7
==========================================================
The following is a reconciliation of Snap-on's segment operating earnings
to earnings before income taxes:
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------
Operating earnings
Snap-on Dealer Group $ 91.9 $ 122.9 $ 136.3
Commercial and
Industrial Group 50.5 25.7 62.3
Diagnostics and
Information Group 23.3 8.3 15.1
- ----------------------------------------------------------
Segment operating
earnings $ 165.7 $ 156.9 $ 213.7
Net finance income 37.7 35.7 38.1
Restructuring and other
non-recurring charges (5.1) (62.0) (21.8)
Arbitration resolution -- (44.0) --
Interest expense (28.7) (35.5) (40.7)
Other income
(expense)--net (8.4) (3.5) 3.3
- ----------------------------------------------------------
Earnings before
income taxes $ 161.2 $ 47.6 $ 192.6
==========================================================
Snap-on does not allocate restructuring and other non-recurring charges
(credits) to its reportable segments. Had it been Snap-on's policy to allocate
these items to its reportable segments, such amounts would have been allocated
as follows:
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------
Restructuring and other
non-recurring
charges (credits)
Snap-on Dealer Group $ 1.9 $14.2 $13.3
Commercial and
Industrial Group 4.9 22.4 .7
Diagnostics and
Information Group (1.7) 25.4 7.8
- ----------------------------------------------------------
Total restructuring
and other
non-recurring charges $ 5.1 $62.0 $21.8
==========================================================
In 2001, the $44.0 million cost incurred for the resolution of an
arbitration matter was not allocated to the reportable segments.
SNAP-ON DEALER GROUP
In 2002, Snap-on began focusing its dealers on the importance of better working
capital management, including improving inventory turns and tightening of credit
terms. Dealers' sales to end-use customers showed steady growth in 2002. A
near-term consequence of dealers actively working to reduce their inventory
levels, however, has been constrained sales of Snap-on products to dealers. The
improved working capital position of its dealers reflects Snap-on's continued
focus on enhancing the business proposition for, and the strength of, its
dealers under the More Feet on the Street initiative.
Worldwide segment net sales in the Snap-on Dealer Group were $1.055 billion
in 2002, up slightly from $1.051 billion in 2001. Steady U.S. demand for tools
by automotive technicians in 2002, along with the successful launch of new
products, including new handheld diagnostics equipment, was offset by weak
demand for big-ticket diagnostics and equipment sales through the company's
technical representatives ("tech rep") organization and the efforts by Snap-on,
beginning in 2002, to improve inventory turns of its dealers, which curtailed
U.S. dealer sales growth in the second half of 2002. As a result, sales to U.S.
dealers, which approximated 75% of total Snap-on Dealer Group sales in each of
the last three years, were essentially flat year over year, as an increase in
sales in the first half of 2002 was offset by a decrease in sales in the second
half of the year. Sales increases in the U.K., Mexico, Japan and Australia more
than offset a sales decline in Canada. Currency translation had a negligible
impact on 2002 sales.
In 2002, Snap-on experienced increased service and marketplace coverage as
a result of the More Feet on the Street dealer expansion and enhancement
initiative. This initiative, which was launched nationally in the United States
in 2000, provides new opportunities through net additions of dealers and
provides a means of enhancement for successful existing Snap-on dealers
Snap-On Incoporated
24
through second vans and second franchises. A net increase of 193 dealers was
achieved in the U.S. dealer business in 2002, primarily through the addition of
second vans and second franchises. Over the last two years, the net number of
dealers in the United States increased 10.4%. 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 2003 under this program.
Worldwide segment net sales in the Snap-on Dealer Group were $1.051 billion
in 2001, down 5.2% from $1.109 billion in 2000, reflecting lower sales of
big-ticket equipment and diagnostics products, partially offset by the success
of new products and the continued demand for tools and tool storage units.
Organic sales in the Snap-on Dealer Group were down 3.8% year over year. Segment
sales in the United States in 2001 were essentially flat with prior-year levels.
Despite the difficult economic conditions, however, 2001 sales to U.S. dealers,
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. During 2001, Snap-on
continued to focus resources on expanding its U.S. dealer network through its
More Feet on the Street program. 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 dealer expansion initiative.
Segment operating earnings for the Snap-on Dealer Group were $91.9 million
in 2002 compared to $122.9 million in 2001. Segment operating earnings as a
percent of segment net sales were 8.7% for 2002 compared to 11.7% in 2001. In
2002, segment operating earnings were adversely impacted by $34.4 million
primarily as a result of lower sales of big-ticket diagnostics and equipment
products and $18.1 million related to the lower sales volumes in the second half
of the year, as well as by general cost increases of $11.0 million. Segment
operating earnings in 2002 were also adversely impacted by higher year-over-year
net pension and bad debt expense of $4.0 million and $2.8 million, as well as by
higher spending of $15.8 million for Profitable Growth initiatives, including
$11.8 million for continued investment in the dealer expansion and enhancement
initiative. The year-over-year increase in costs incurred related to the More
Feet on the Street program includes higher dealer turnover costs to remove
low-performing dealers, as well as higher costs for new dealer training,
recruiting and other dealer expansion costs. Year-over-year segment operating
earnings in 2002 included a benefit of $39.2 million from sales of new products
and $9.8 million from favorable net pricing. Productivity savings and tighter
control on discretionary spending contributed $9.3 million to operating earnings
in 2002 over prior-year levels, and operating earnings in 2002 also benefited by
$1.4 million from the elimination of goodwill and certain other intangible
amortization.
Segment operating earnings for the Snap-on Dealer Group decreased 9.8% to
$122.9 million in 2001 compared to $136.3 million in 2000. The decrease reflects
the lower-than-planned sales volumes experienced during the first half of the
year, combined with increased bad debt provisions and higher training,
recruiting, dealer turnover and other costs related to the More Feet on the
Street initiative.
COMMERCIAL AND INDUSTRIAL GROUP
In the Commercial and Industrial Group, segment net sales for 2002 increased
1.2% to $1.028 billion largely due to favorable currency translations. Sales
gains realized from new product introductions and pricing increases in 2002 were
offset by the continued weak industrial demand for tools and capital goods
worldwide, leading to the generally flat year-over-year organic sales
performance. In 2002, sales gains were realized from new product introductions,
including higher sales of equipment in Europe due to the success of new wheel
aligners, along with increased sales to new vehicle dealerships under
facilitation agreements, in which Snap-on provides product procurement,
distribution and administrative support to customers for their dealerships'
equipment programs, and higher sales of power tools to the Snap-on Dealer Group.
These increases were offset by lower sales of industrial tools worldwide and
equipment in North America.
Segment net sales in the Commercial and Industrial Group decreased 4.2% to
$1.016 billion in 2001 from $1.060 billion in 2000, largely due to a decline in
industrial tool sales, continued softness in the equipment markets and
unfavorable currency translation. Organic sales decreased 2.0%, reflecting a
decline in industrial and equipment sales in both North America and Europe
caused by erosion in consumer confidence and weaker economic conditions
affecting many industrial sectors such as automotive, electronics and aerospace.
The slowing economy depressed demand for equipment throughout 2001, while the
demand for tools in many industrial sectors, such as manufacturing, weakened in
the second half of the year.
Segment operating earnings for the Commercial and Industrial Group were
$50.5 million in 2002 compared to $25.7 million in 2001. The operating margin
improved to 4.9% from 2.5% a year ago, primarily due to benefits of $24.6
million realized in 2002 from the company's restructuring and Operational
Fitness activities. In conjunction with its Driven to Deliver framework, Snap-on
began consolidating its equipment operations in North America in 2001 with a
focus toward achieving improved operating margin. Segment operating earnings in
2002 also benefited from the elimination of $9.3 million in goodwill and other
intangible amortization, favorable net pricing of $4.8 million, $21.3 million
from higher sales of new products, favorable currency impacts of $5.2 million
and the absence of $1.9 million in 2001 for the write-off of receivables and the
incurrence of legal costs associated
2002 Annual Report
25
Management's Discussion and Analysis (continued)
with the emissions testing business. These improvements in year-over-year
segment operating earnings were partially offset by cost increases of $12.5
million and by $28.7 million due to lower than anticipated sales and production
volumes and the related lower manufacturing cost absorption associated with
inventory reduction initiatives, as well as by higher costs for new product
development and growth initiatives of $2.8 million and increased net pension
expenses of $1.2 million.
Segment operating earnings for the Commercial and Industrial Group were
$25.7 million in 2001, down 58.7% from the $62.3 million reported in 2000. The
decline in operating earnings reflects the lower sales volumes and unfavorable
currency effects in 2001, as well as the impact of the $1.9 million in
non-comparable charges incurred during 2001 for asset write-downs related to the
December 2000 announced exiting of an unprofitable segment of the emissions
testing business.
DIAGNOSTICS AND INFORMATION GROUP
Total segment net sales in the Diagnostics and Information Group increased 4.1%
in 2002 to $334.4 million from $321.2 million in 2001, including 1.1% from
favorable currency translation. In 2001, segment net sales increased 8.9% from
$295.0 million in 2000, including a 1.0% unfavorable impact from currency
translation. The year-over-year sales increases for both periods were primarily
attributed to strong demand for the company's information-based products and new
handheld diagnostics equipment, such as the introduction of MODIS in 2002 and a
color-graphing scanner in 2001. In 2002, the introduction of handheld products
in the U.K. partially offset the weak market demand for big-box diagnostics
products.
Segment operating earnings for the Diagnostics and Information Group were
$23.3 million in 2002 compared to $8.3 million in 2001. Operating margin for
2002 was 7.0% versus 2.6% in 2001. The significant increase in year-over-year
segment operating earnings was largely due to benefits of $10.8 million from the
company's 2001 restructuring initiatives and other ongoing cost-reduction
efforts, and $5.8 million from higher sales of new products. Segment operating
earnings in 2002 also benefited from the absence of $7.4 million of costs
incurred in 2001 for inventory write-downs, bad debts and legal expenses related
to the termination of a European supplier relationship and the absence of $2.1
million of additional costs incurred in 2001 related to the December 2000
announced exiting of an unprofitable segment of the emissions testing business.
Segment operating earnings in 2002 were also favorably impacted by the
elimination of $4.4 million in goodwill and certain other intangible
amortization in that year. These items were partially offset by a $2.6 million
charge in 2002 for the write-down of a receivable related to the closure of auto
service centers associated with a major retailer's bankruptcy, $4.5 million in
general cost increases and $5.7 million in higher spending for new product
development and other Profitable Growth initiatives.
Segment operating earnings for the Diagnostics and Information Group were
$8.3 million in 2001 compared to $15.1 million in 2000. Operating margin for
2001 was 2.6% compared to 5.1% in 2000. The significant decrease in both segment
earnings and operating margin in 2001 reflected the impact of the $7.4 million
of charges incurred related to the termination of the European supplier
relationship and the $2.1 million of additional costs incurred related to the
exiting of a segment of the emissions testing business.
NET FINANCE INCOME: Net finance income consists of royalty and management fees
paid by Snap-on Credit LLC ("SOC"), a 50%-owned joint venture, based on the
volume of credit originated by SOC and 50% of any residual profit or loss of SOC
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.
Net finance income was $37.7 million in 2002, up $2.0 million from $35.7
million in 2001. Higher credit originations, primarily related to the U.S.
dealer business, along with improved year-over-year interest rate spreads on
originated loans, contributed to the increase. Credit originations at SOC for
2002 increased 9.0% from prior-year levels. Net finance income derived from
Snap-on's wholly owned international credit operations totaled $9.5 million in
2002 and $10.8 million in 2001.
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 was a result of a 1.4%
decline in credit originations related to the soft demand for equipment and
diagnostics products, partially offset by the effects of decreasing interest
rates during 2001. The decrease also reflected the inclusion of gains realized
in 2000 on the sale of installment receivables associated with the formation of
the credit joint venture in 1999. Net finance income derived from Snap-on's
wholly owned international credit operations totaled $10.3 million in 2000. For
information on Snap-on's credit joint venture, refer to Note 9 of the
Consolidated Financial Statements.
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 restructuring and other non-recurring
charges in 2001 for actions that included the
Snap-On Incoporated
26
consolidation or closure of 32 facilities, including facility-related asset
write-downs, and severance costs to effect a 6% reduction in workforce. The
$62.0 million charge included restructuring charges of $40.3 million and
non-recurring charges of $21.7 million. The restructuring charge of $40.3
million included $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-related asset
write-downs, and $1.3 million for exit-related legal and professional services.
The $21.7 million of other non-recurring charges included $12.6 million
(recognized in cost of goods sold) for inventory write-downs and warranty costs
primarily associated with Snap-on's exiting of an unprofitable segment of the
emissions testing business, $8.4 million for management transition costs
associated with the April 2001 retirement of Snap-on's former president and
chief executive officer, and $.7 million for equipment and employee relocation
costs associated with the facility consolidations. As of December 29, 2001,
Snap-on utilized $17.2 million of the $40.3 million of restructuring reserves
that were established for the fiscal 2001 restructuring actions.
Snap-on recorded restructuring and non-recurring charges of $5.1 million in
2002, including $3.6 million of restructuring charges in the fourth quarter of
2002 for severance costs to effect workforce reduction initiatives, and $7.9
million of restructuring-related charges to finalize its restructuring actions
that began in 2001 and for costs associated with the 2002 resignation of
Snap-on's former chief financial officer. These costs were partially offset by
the reversal of $6.4 million of restructuring reserves not utilized to finalize
the company's 2001 restructuring actions. The initial 2001 restructuring cost
estimates were based on management's best business judgment under prevailing
circumstances. The finalization of the 2001 restructuring actions and cost
estimates resulted in the fourth-quarter 2002 reversal of $6.4 million of
restructuring reserves to income, primarily as a result of lower than
anticipated severance and severance-related costs, as well as lower facility
consolidation or closure costs. As of December 28, 2002, Snap-on has finalized
its 2001 restructuring actions and all costs related to these actions have been
incurred. The 2001 restructuring initiatives resulted in the consolidation or
closure of 32 facilities and, combined with other operational activities, an
8.4% reduction in workforce.
For Snap-on's 2001 restructuring reserve activity during 2001 and 2002, see
table below.
Balance at Balance at
Provision Usage December 29, Usage Reversed December 28,
(Amounts in millions) in 2001 in 2001 2001 in 2002 in 2002 2002
- ------------------------------------------------------------------------------------------------------------
Severance costs $27.1 $ (6.0) $21.1 $(16.6) $(4.5) $--
Facility consolidation
or closure costs 7.3 (5.3) 2.0 (.1) (1.9) --
Loss on asset write-downs 5.9 (5.9) -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Total $40.3 $(17.2) $23.1 $(16.7) $(6.4) $--
============================================================================================================
The 2001 restructuring reserve usage of $16.7 million in 2002 was primarily
for severance payments related to the separation of 479 employees. The
finalization of the 2001 restructuring actions resulted in the reversal of $6.4
million of restructuring reserves not utilized that were recognized in income in
the fourth quarter of 2002.
The fourth quarter 2002 restructuring charge of $3.6 million was for
severance costs to effect further workforce reductions of 151 salaried and
hourly positions. During the fourth quarter, Snap-on eliminated 31 of the
identified positions resulting in a $.7 million usage of the recorded
restructuring reserve. Snap-on expects that the remaining restructuring reserve
of $2.9 million will be used in the first quarter of 2003, and Snap-on expects
to fund the remaining cash requirements associated with this reserve with cash
flows from operations or borrowings under the company's existing credit
facilities.
For the year ended December 28, 2002, Snap-on incurred
restructuring-related charges of $7.9 million, including $3.0 million related to
the 2002 resignation of Snap-on's former chief financial officer and $4.9
million for employee and equipment relocation costs and professional fees to
finalize the company's fiscal 2001 restructuring activities. These costs did not
qualify for restructuring accrual treatment and were expensed as incurred and
are included in "Restructuring and other non-recurring charges" on the
accompanying Consolidated Statements of Earnings.
In 2000, Snap-on recorded restructuring charges of $4.2 million and
non-recurring charges of $17.6 million. The $4.2 million restructuring charge
related to the closure of a small, underperforming vehicle service business in
the Asia-Pacific region and included costs related to severance, lease
terminations and the write-off of intangible assets. The non-recurring charges
of $17.6 million primarily related to Snap-on's decision to exit an unprofitable
segment of the emissions testing business, prompted by continued changes in
technology and emissions regulations at both the state and federal levels. The
non-recurring charges included $5.6 million for expected losses on the
disposition of discontinued inventory and $3.9 million for extended warranty
costs (both of which are included in cost of goods sold) 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.
2002 Annual Report
27
Management's Discussion and Analysis (continued)
INTEREST EXPENSE: Interest expense for 2002 was $28.7 million compared with
$35.5 million in 2001 and $40.7 million in 2000. The declines in interest
expense over the last two years reflect the impact of both lower average
interest rates and lower average debt levels due to strong cash flow from
operating activities.
OTHER INCOME (EXPENSE)--NET: This income statement line item includes the impact
of all non-operating items such as interest income, hedging and exchange rate
transaction gains and losses, other miscellaneous non-operating items, and
minority interests. In 2002, other income (expense)--net was an expense of $8.4
million compared to an expense of $3.5 million in 2001 and income of $3.3
million in 2000. Minority interests for 2002, 2001 and 2000 were $3.4 million,
$2.7 million and $.6 million.
INCOME TAXES: Snap-on's effective income tax rate was 35.4% in 2002, 56.3% in
2001 and 36.5% in 2000. The 2001 effective tax rate was increased by 19.8
percentage points as a result of approximately $25 million of restructuring and
other expenses incurred in various foreign jurisdictions that provided no tax
benefit. For income tax information, refer to Note 12 of the Consolidated
Financial Statements.
FOURTH QUARTER: Consolidated net sales in the fourth quarter of 2002 were $549.5
million, a 2.8% increase from $534.6 million in the comparable prior-year
period. Currency translation had a 2.5% favorable impact on net sales in the
fourth quarter of 2002. A 10.6% increase in segment net sales in the Commercial
and Industrial Group, including an approximate 4% favorable currency translation
impact, was partially offset by a 1.9% sales decline in the Snap-on Dealer Group
and a 6.7% decline in the Diagnostics and Information Group. Dealer segment
sales were down reflecting the lower sales to U.S. dealers as they reduced
inventory levels, as well as the continued weak demand for capital goods, such
as big-box diagnostics and equipment products sold through the company's tech
rep organization. The weak demand for big-ticket diagnostics similarly impacted
sales in the Diagnostics and Information Group. The effect of acquisitions in
either period was not material.
Net earnings for the fourth quarter of 2002 were $33.1 million compared
with a fourth-quarter 2001 loss of $17.4 million. Earnings per diluted share
were $.56 in 2002 compared with a loss of $.30 per share in the prior year.
Operating earnings for the fourth quarter were $61.3 million in 2002 compared
with a loss of $6.7 million in 2001. The increase in 2002 operating earnings was
largely due to the absence of $48.3 million of charges incurred in the fourth
quarter of 2001, including $47.0 million for the resolution of an arbitration
matter and related legal costs, as well as $1.3 million for increased costs
related to the termination of a European supplier relationship. Snap-on's
results in the fourth quarter of 2002 include a net $4.6 million benefit from
the favorable resolution of a patent infringement matter partially offset by a
provision for certain contractual matters. Operating earnings for the fourth
quarter of 2002 also include a $1.3 million benefit related to restructuring
activities, comprising a $3.6 million restructuring charge for workforce
reduction activities and $1.5 million in restructuring-related charges for
employee and equipment relocation costs offset by the reversal of $6.4 million
of restructuring reserves not utilized in finalizing the company's 2001
restructuring actions. As of December 28, 2002, Snap-on finalized its 2001
restructuring actions and all costs related to these actions have been incurred.
In the fourth quarter of 2001, Snap-on incurred $17.2 million of
restructuring-related costs, of which $.2 million is included in cost of goods
sold.
The year-over-year increase in fourth-quarter 2002 earnings also reflects
savings from restructuring and cost-reduction initiatives and lower interest
expense that were more than offset by higher spending for new product
development and the More Feet on the Street dealer expansion and enhancement
initiative, increased bad debt expense and unfavorable manufacturing cost
absorption. The adoption of SFAS No. 142 also resulted in a favorable
year-over-year comparison in the fourth quarter due to the elimination of $3.8
million of amortization that was included in 2001 operating expenses. In
addition, net finance income in 2002 was up $3.3 million from prior year due to
increased credit originations, primarily related to the U.S. dealer business,
and from a favorable interest rate environment, together with lower costs in
2002.
FINANCIAL CONDITION
LIQUIDITY: Snap-on's growth has historically been supported by a combination of
cash provided by operating activities and debt financing. Snap-on believes that
its cash from operations, coupled with its sources of borrowings, are sufficient
to support its anticipated requirements for working capital, capital
expenditures and restructuring activities, acquisitions, common stock
repurchases and dividend payments. Due to Snap-on's credit rating over the
years, external funds have been available at a reasonable cost. At the end of
2002, 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.
Snap-On Incoporated
28
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------
Net cash provided by
operating activities $224.1 $163.7 $190.2
Decrease in debt (113.9) (68.7) (86.5)
- ----------------------------------------------------------
In 2002, net cash provided by operating activities increased $60.4 million
over prior-year levels despite a $44.0 million payment ($27.9 million net of tax
benefit) in 2002 for the December 2001 resolution of an arbitration matter. The
year-over-year increase in net cash provided by operating activities in 2002 is
primarily due to higher earnings and better management of working capital
elements--particularly accounts receivable, inventories and accounts payable. In
addition to the $44.0 million payment noted above, Snap-on used its 2002 cash
flow principally to reduce outstanding debt, fund the cash requirements of its
restructuring activities and internal growth opportunities, including new
product development and the More Feet on the Street dealer expansion and
enhancement initiative, as well as for share repurchases and dividend payments.
The year-over-year decline in net cash provided by operating activities from
2000 to 2001 is primarily due to lower earnings in 2001, partially offset by
reductions in working capital. Snap-on reduced its year-over-year debt levels by
$113.9 million in 2002 from year-end 2001 levels, and also reduced debt levels
by $68.7 million in 2001 and by $86.5 million in 2000, primarily due to the
company's positive cash flow and reduced working capital.
The ratio of Snap-on's total net debt (defined as total debt less cash and
cash equivalents) to total invested capital (defined as total net debt plus
shareholders' equity) was 29.2% at December 28, 2002, compared to 37.6% at
year-end 2001, better than the company's long-term target of 30% - 35%. The
year-over-year decline in this ratio reflects lower debt levels and increased
shareholders' equity in 2002. This ratio may vary from time to time as the
company issues commercial paper to fund seasonal working capital requirements
and to the extent that the company uses debt to fund acquisitions. Total notes
payable and long-term debt was $360.7 million at the end of 2002, as compared to
$474.6
Net Cash Provided
by Operating Activities Total Net Debt
- -------------------------------------- -------------------------------------
in $ millions in $ millions
1998 - 75 1998 - 325
1999 - 236 1999 - 612
2000 - 190 2000 - 537
2001 - 164 2001 - 468
2002 - 224 2002 - 342
million at year-end 2001, reflecting the increased cash flow. Cash and cash
equivalents were $18.4 million at December 28, 2002, compared to $6.7 million
and $6.1 million at year-end 2001 and 2000. Total shareholders' equity was
$830.4 million, up $54.6 million from year-end 2001. The company's total net
debt to total invested capital ratio at year-end 2000 was 38.9%.
At the end of 2002, Snap-on had commercial paper outstanding denominated in
U.S. dollars of $25.0 million and in Japanese yen of $7.9 million compared to
commercial paper outstanding denominated in U.S. dollars of $135.0 million and
Japanese yen of $7.2 million at year-end 2001. Snap-on classified its
outstanding commercial paper as long-term debt at year-end 2001 as it was
Snap-on's intent, and it had the ability (supported by its long-term revolving
credit facilities), to refinance this debt on a long-term basis. Snap-on's
increased net earnings and improved working capital management in 2002 increased
cash provided by operating activities, and was used primarily to reduce
commercial paper borrowings. The company currently anticipates that it will
continue to have positive cash flow and debt reduction for the foreseeable
future and, as a result, commercial paper borrowings at December 28, 2002, of
$32.9 million are included in "Notes payable and current maturities of long-term
debt" on the accompanying Consolidated Balance Sheets.
At December 28, 2002, Snap-on had $408 million of multi-currency revolving
credit facilities that also serve to back its commercial paper programs,
including a $200 million, 364-day revolving credit facility with a one-year
term-out option that terminates on August 8, 2003. The term-out option allows
Snap-on to elect to borrow under the credit facility for an additional year
after the termination date. In addition, Snap-on has a five-year, $208 million
revolving credit facility that terminates on August 20, 2005. At the end of 2002
and 2001, Snap-on was in compliance with all covenants of its revolving credit
facilities and there were no borrowings under any revolving credit commitment.
The most restrictive financial covenant requires that Snap-on maintain a total
debt to total capital (defined as total debt plus shareholders' equity) ratio
that does not exceed 60%. Snap-on's total debt to total capital ratio, computed
as defined by the financial covenant, was 30.3% at December 28, 2002, and 38.0%
at December 29, 2001. At December 28, 2002, Snap-on also had an unused committed
$20 million bank line of credit that expires on August 1, 2003.
Average commercial paper and bank notes outstanding were $189.6 million in
2002 and $389.2 million in 2001. The weighted-average interest rate on these
instruments was 1.7% in 2002 and 4.3% in 2001. As of December 28, 2002, and
December 29, 2001, commercial paper and bank notes outstanding had a
weighted-average interest rate of 1.3% and 2.1%.
2002 Annual Report
29
Management's Discussion and Analysis (continued)
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 statement. The
August 2001 notes require semiannual interest payments at the 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.
At December 28, 2002, Snap-on had cash and cash equivalents of $18.4
million and approximately $395 million of unused available debt capacity under
the terms of its revolving credit facilities and committed bank line of credit.
Snap-on maintains sufficient committed lines of credit and liquidity
facilities to cover its expected funding needs on both a short-term and
long-term basis. Snap-on manages its aggregate short-term borrowings so as not
to exceed its availability under its revolving credit facilities and committed
line of credit. The company accesses short-term debt markets, predominantly
through commercial paper issuances, to fund its short-term requirements and to
ensure near-term liquidity. As funding needs are determined to be of a
longer-term nature, Snap-on could access medium- and long-term debt markets, as
appropriate, to refinance short-term borrowings and, thus, replenish its
short-term liquidity. Snap-on's long-term financing strategy is to access debt
markets as needed to accommodate its liquidity needs. Whenever necessary, funds
provided from operations are supplemented from external borrowing sources. For
additional information on Snap-on's debt and credit facilities, refer to Note 10
of the Consolidated Financial Statements.
Working capital was $498.6 million at the end of 2002, a decrease of $49.0
million from $547.6 million at year-end 2001.
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------
Current assets $1,051.0 $1,097.0 $1,145.1
Current liabilities (552.4) (549.4) (538.0)
- ----------------------------------------------------------
Working capital $498.6 $547.6 $607.1
==========================================================
The ratio of current assets to current liabilities at year-end 2002 was 1.9
to 1, compared with 2.0 and 2.1 at year-end 2001 and 2000.
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------
Accounts
receivable--current $556.2 $572.8 $603.2
Inventories 369.9 375.2 418.9
Accounts payable (170.9) (141.2) (161.0)
- ----------------------------------------------------------
Working investment $755.2 $806.8 $861.1
==========================================================
Working investment (defined as accounts receivable--current plus
inventories less accounts payable) was $755.2 million at year-end 2002, down
$51.6 million from $806.8 million at year-end 2001, and down $105.9 million from
$861.1 million at year-end 2000. The year-over-year decreases from 2000 to 2002
primarily reflect the results of Snap-on's continued efforts to reduce working
investment through improved inventory turnover and reduced days sales
outstanding. Generating strong cash flow and further strengthening of its
balance sheet will continue to be key priorities for Snap-on throughout 2003.
Accounts receivable--current at the end of 2002 were $556.2 million, down
$16.6 million ($40.6 million excluding currency effects) compared with year-end
2001, primarily due to Snap-on's emphasis on reducing days sales outstanding.
Accounts receivable--current at the end of 2001 were $572.8 million, down $30.4
million compared with year-end 2000, primarily due to lower sales volumes and
currency effects of approximately $11 million. Bad debt write-offs in 2002
represented 5.7% of total average accounts receivable, compared with 4.9% in
2001 and 2.2% in 2000, reflecting continued weak economic conditions. At the end
of 2002, Snap-on's bad debt reserve, as a percent of total accounts receivable,
was 6.4% compared to 6.0% at the end of 2001 and 2000.
Inventories at year-end 2002 were $369.9 million, down $5.3 million ($25.1
million excluding currency effects) from $375.2 million at year-end 2001, and
down $49.0 from $418.9 million at year-end 2000. The decrease in year-over-year
inventory levels in both periods is a result of improved inventory turns.
Accounts payable at year-end 2002 were $170.9 million, an increase of $29.7
million from year-end 2001 and up $9.9 million from 2000 levels.
Total shareholders' equity at December 28, 2002, was $830.4 million, an
increase of $54.6 million compared with $775.8 million at year-end 2001.
Snap-on's shareholders' equity at year-end 2002 was reduced by $60.9 million for
the excess of accumulated pension benefit obligations over the fair market value
of plan assets, of which $57.4 million was recorded in the fourth quarter of
2002. This resulted from the combination of lower-than-expected returns on plan
investments and a decrease in both the discount rate used to calculate pension
obligations and the expected long-term rate of return on plan assets. For 2003,
Snap-on lowered its assumptions companywide for the future rate of return on
plan investments to 8.2% from 9.6%, and the discount rate used to calculate
pension obligations to 6.7% from 7.4%. Snap-on currently expects that its 2003
pension expense will increase by approximately $17 million over 2002 levels, and
also expects that its required minimum pension plan contribution in 2003 will be
approximately $20 million. For additional information on Snap-on's pension plans
and assumptions, refer to Note 13 of the Consolidated Financial Statements.
Snap-On Incoporated
30
CAPTIAL EXPENDITURES: Capital expenditures in 2002 were $45.8 million compared
to $53.6 million in 2001 and $57.6 million in 2000. The decline in
year-over-year capital expenditures over the last two years reflects tighter
spending control in light of the continued weak economy. Capital expenditures in
all three years reflect new product and restructuring-related capital
investments, as well as ongoing replacements and upgrades of manufacturing and
distribution facilities and equipment. Snap-on anticipates that 2003 capital
expenditures will approximate $50 million to $55 million, of which approximately
two-thirds is expected to be used for investments relating to new products,
quality enhancement or cost reduction.
DEPRECIATION AND AMORTIZATION: Depreciation in 2002 was $49.9 million compared
with $50.4 million in 2001 and $48.4 million in 2000. Amortization expense was
$1.8 million in 2002, $17.6 million in 2001 and $17.8 million in 2000. The
decrease in 2002 amortization expense, as compared with prior-year levels,
resulted from Snap-on's adoption of SFAS No. 142 at the beginning of its 2002
fiscal year. For information on Snap-on's adoption of SFAS No. 142, refer to
Note 8 of the Consolidated Financial Statements.
DIVIDENDS: Snap-on has paid consecutive quarterly cash dividends since 1939. In
the fourth quarter of 2002, Snap-on's Board of Directors declared a $.01 per
share increase in the company's quarterly dividend on its common stock,
effective with the fourth-quarter 2002 dividend. The new quarterly dividend of
$.25 per share represents a 4.2% increase over the previous quarterly dividend
of $.24 per share. Cash dividends paid in 2002, 2001 and 2000 totaled $56.5
million, $55.6 million and $55.0 million.
2002 2001 2000
- ----------------------------------------------------------
Cash dividends paid
per common share $.97 $.96 $.94
Cash dividends paid as
a percent of prior-year
retained earnings 5.6% 5.3% 5.7%
- ----------------------------------------------------------
Dividends Paid per Share Dividend Yield*
- -------------------------------------- -------------------------------------
in dollars in percent
1998 - .86 1998 - 2.5
1999 - .90 1999 - 3.4
2000 - .94 2000 - 3.4
2001 - .96 2001 - 2.8
2002 - .97 2002 - 3.5
* Dividends paid per share as a percent of year-end share price.
STOCK REPURCHASE PROGRAM: Snap-on has undertaken repurchases of Snap-on common
stock from time to time to offset 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. During 2002,
Snap-on repurchased 405,000 shares of common stock for $12.2 million under its
previously announced share repurchase programs. In 2001 and 2000, Snap-on
repurchased 400,000 shares and 1,019,500 shares. As of the end of 2002, Snap-on
has
CONTRACTUAL OBLIGATIONS AND COMMITMENTS: A summary of Snap-on's future
contractual obligations and commitments as of December 28, 2002, is as follows:
Contractual Obligations and Commitments
- --------------------------------------------------------------------------------
Less Than 1 to 3 3 to 5 Over 5
(Amounts in millions) Total 1 Year Years Years Years
- --------------------------------------------------------------------------------
Contractual obligations
Long-term debt $305.5 $ 1.2 $100.7 $ -- $203.6
Operating leases 97.3 26.1 33.6 19.3 18.3
Other commitments
Snap-on Credit LLC bank
line of credit guarantee 15.0 15.0 -- -- --
- --------------------------------------------------------------------------------
Total $417.8 $42.3 $134.3 $19.3 $221.9
================================================================================
At December 28, 2002, $32.1 million of loans originated by Snap-on Credit
LLC have a recourse provision to Snap-on if the loans become more than 90 days
past due.
2002 Annual Report
31
Management's Discussion and Analysis (continued)
remaining availability to repurchase up to an additional $142 million in
common stock pursuant to the Board of Directors' authorizations. The purchase of
Snap-on common stock is at the company's discretion, subject to prevailing
financial and market conditions.
UNCONSOLIDATED JOINT VENTURE
Snap-on Credit LLC ("SOC") is an unconsolidated 50%-owned joint venture between
Snap-on and The CIT Group, Inc. ("CIT"). SOC was formed as a limited liability
corporation with member contributions totaling $2.0 million, and commenced
operations on January 3, 1999. SOC 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. Snap-on and CIT have identical voting and participating rights
and responsibilities in SOC. As of December 28, 2002, Snap-on's equity
investment in SOC totaled $2.7 million.
As a result of establishing SOC, Snap-on effectively outsourced to SOC its
domestic captive credit function. Snap-on provides extended-term financing
internationally through its wholly owned credit subsidiaries, the results of
which are included in Snap-on's Consolidated Financial Statements. Snap-on
receives royalty and management fee income from SOC based on the volume of
financings originated by SOC. Snap-on 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" on the
accompanying Consolidated Statements of Earnings.
SOC sells substantially all of its originated contracts (through
asset-securitization transactions) on a limited recourse basis to CIT, net of
certain fees. SOC continues to service these contracts for an estimated market
rate servicing fee. In 2002, SOC originated extended-term receivables under
these contracts totaling $506.3 million compared to $464.7 million in 2001.
Financial information regarding SOC loan originations and reserves was as
follows:
2002 2001 2000
- -------------------------------------------------------------------------
Originations (Amounts in millions)
Extended-credit
receivables $ 361.9 $ 343.6 $ 328.9
Equipment leases 40.1 47.7 81.0
Dealer financing 104.3 73.4 61.4
- -------------------------------------------------------------------------
Total originations $ 506.3 $ 464.7 $ 471.3
=========================================================================
Number of accounts outstanding
Extended-credit
receivables 181,567 177,484 178,461
Equipment leases 14,754 16,765 19,051
Dealer financing 3,214 2,781 2,430
- -------------------------------------------------------------------------
Total 199,535 197,030 199,942
=========================================================================
Average account balance
Extended-credit
receivables $ 1,993 $ 1,936 $ 1,843
Equipment leases 2,718 2,845 4,252
Dealer financing 32,452 26,393 25,267
- -------------------------------------------------------------------------
Reserves for contract receivables sold
Reserves (Amounts in millions) $ 8.3 $ 6.0 $ 8.6
Reserves as a percent
of originations 1.6% 1.3% 1.8%
- -------------------------------------------------------------------------
SOC strives to maintain strict credit standards and the contract
receivables are generally secured by the underlying tools or equipment financed
and other dealer assets. SOC establishes a reserve for all contract receivables
sold to CIT, and SOC's credit losses on the sold contract receivables are
limited to the extent of the reserve. SOC also establishes a prepayment reserve
to cover amounts due to CIT as a result of early prepayments by customers on
loans sold to CIT. Loan losses on owned contract receivables were not material
in any year. Snap-on has credit risk exposure for certain loan originations with
recourse provisions from SOC. At December 28, 2002, $32.1 million of loans
originated by SOC have a recourse provision to Snap-on if the loans become more
than 90 days past due. In 2002, $4.2 million of such loans were purchased by
Snap-on.
SOC 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 $11.0 million and $22.0 million at
December 28, 2002, and December 29, 2001. SOC's bank line of credit has an
expiration date of May 31, 2003. To date, there have been no draws upon this
guarantee.
Snap-On Incoporated
32
The maximum exposure to Snap-on as of December 28, 2002, related to SOC was
the $2.7 million equity investment plus the guarantee on SOC's line of credit
and the recourse obligations on customer financings.
Summarized financial information of SOC as of December 31, 2002 and 2001,
and for the years ended December 31, 2002, 2001 and 2000, is as follows:
At December 31,
- ----------------------------------------------------------------
(Amounts in millions) 2002 2001
- ----------------------------------------------------------------
Cash and cash equivalents $ 5.4 $ 1.5
Receivables, net of allowances 13.4 11.2
Servicing receivable 7.6 6.9
Due from members 10.9 21.3
Other assets 8.0 8.7
- ----------------------------------------------------------------
$45.3 $49.6
================================================================
Payable to members $12.4 $ 9.7
Reserves for contract receivables sold 8.3 6.0
Other accrued liabilities 8.6 11.9
Short-term borrowings 11.0 22.0
Members' equity 5.0 --
- ----------------------------------------------------------------
$45.3 $49.6
================================================================
Year Ended December 31,
- ----------------------------------------------------------------
(Amounts in millions) 2002 2001 2000
- ----------------------------------------------------------------
Revenues
Gain on sale of contract
receivables sold $55.7 $50.2 $39.6
Servicing fee income 9.0 8.3 9.2
Other income 1.3 1.9 1.4
- ----------------------------------------------------------------
Total revenues $66.0 $60.4 $50.2
- ----------------------------------------------------------------
Expenses
Royalty fees $22.8 $20.9 $21.2
Salaries and benefits 15.7 15.8 14.9
Management fees 11.2 10.3 10.5
Other 10.8 10.9 9.4
- ----------------------------------------------------------------
Total expenses 60.5 57.9 56.0
- ----------------------------------------------------------------
Net income (loss) $ 5.5 $ 2.5 $(5.8)
================================================================
The Financial Accounting Standards Board ("FASB") issued Interpretation
("FIN") No. 46, "Consolidation of Variable Interest Entities" (an interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements") in
January 2003, which becomes effective for Snap-on on June 29, 2003. FIN No. 46
provides consolidation guidance for certain variable interest entities ("VIE")
in which equity investors of the VIE do not have the characteristics of a
controlling interest or do not have sufficient equity at risk for the VIE to
finance its activities independently. FIN No. 46 requires each enterprise
involved with a special purpose entity to determine whether it provides
financial support to the special purpose entity through a variable interest.
Variable interests may arise from financial instruments, service contracts,
minority ownership interests or other arrangements. If an entity holds a
majority of the variable interests, or a significant variable interest that is
considerably more than any other party's variable interest, that entity would be
the primary beneficiary and would be required to include the assets, liabilities
and results of operations of the special purpose entity in its consolidated
financial statements.
Snap-on has not completed its evaluation of FIN No. 46 and the company has
not assessed the impact the adoption may have on Snap-on's financial position or
results of operations. If it is determined that SOC qualifies as a VIE, then
Snap-on may be required to include the assets and liabilities (or some portion
thereof) of SOC in its consolidated financial statements beginning in the third
quarter of 2003. For additional information on SOC, refer to Note 9 of the
Consolidated Financial Statements.
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 attempts to manage 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.
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 minimize the residual net
anticipated exposures. For additional information, refer to Note 11 of the
Consolidated Financial Statements.
2002 Annual Report
33
Management's Discussion and Analysis (continued)
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 11 of the Consolidated
Financial Statements.
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 28, 2002, was $1.5 million on interest rate
sensitive financial instruments and $.5 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 credit, each
customer is evaluated, taking into consideration the borrower's financial
condition, collateral, debt-servicing capacity, past payment experience, credit
bureau information, and 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 SOC. At December 28, 2002, $32.1 million of loans
originated by SOC have a recourse provision to Snap-on if the loans become more
than 90 days past due. For additional information on SOC, refer to the section
entitled "Unconsolidated Joint Venture" in this Management's Discussion and
Analysis and to Note 9 of the Consolidated Financial Statements.
ECONOMIC RISK: Economic risk is the possibility of loss resulting from economic
instability in certain areas of the world. Snap-on continually monitors its
exposure in these markets. Snap-on's Commercial and Industrial Group includes a
Bahco Group AB ("Bahco") hand tool manufacturing facility in Argentina with net
assets of $7.6 million as of December 28, 2002. Due to economic instability in
Argentina, Snap-on resized its operations there in 2001. The Bahco Argentina
facility continues to produce sockets and wrenches for both the domestic and
export markets, including Latin America and Europe, and export sales are
generally invoiced in U.S. dollars. Snap-on will continue to assess Argentina's
economic situation to determine if any future actions or impairment write-downs
are warranted.
As a result of the above market, credit and economic risks, net income and
revenues in any particular period may not be representative of full-year results
and may vary significantly from year to year and from quarter to quarter.
Inflation has not had a significant impact on the company.
OTHER MATTERS
ACQUISITIONS: In 2002, Snap-on acquired full ownership of two business
operations for $7.9 million. The purchase price paid plus the liabilities
assumed exceeded the fair value of the tangible and intangible assets acquired
by approximately $3.7 million, on a preliminary basis. The purchase accounting
for these two acquisitions will be finalized in 2003 upon completion of the
underlying asset and liability valuations. In 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. Pro forma
financial information has not been presented, as the effects of these
businesses, individually and in the aggregate, were not material.
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
("APB") Opinion No. 16, "Business Combinations," 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 a resulting adjustment to goodwill.
ACCOUNTING PRONOUNCEMENTS: In November 2002, the FASB issued FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
guarantor
Snap-On Incoporated
34
must recognize, at the inception of a guarantee, a liability for the fair value
of the obligation that it has undertaken in issuing a guarantee. FIN No. 45 also
addresses the disclosure requirements that a guarantor must include in its
financial statements for guarantees issued. The disclosure requirements in this
interpretation are effective for financial statements ending after December 15,
2002. The initial recognition and measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. Snap-on has not completed its evaluation of FIN No. 45 and
the company has not assessed the impact the adoption may have on Snap-on's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition to the
fair value method of accounting for stock-based employee compensation and also
amends the disclosure provisions of SFAS No. 123. Snap-on will continue to
account for its stock-based employee compensation under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and Snap-on has adopted the
disclosure provisions of SFAS No. 148 as of December 28, 2002. The adoption of
SFAS No. 148 had no impact on Snap-on's financial position or results of
operations. For additional information, refer to Note 15 of the Consolidated
Financial Statements.
The FASB issued FIN No. 46, "Consolidation of Variable Interest Entities"
in January 2003. For information on FIN No. 46, refer to the section entitled
"Unconsolidated Joint Venture" in this Management's Discussion and Analysis and
to Note 9 of the Consolidated Financial Statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Snap-on will adopt SFAS No. 146 at the beginning of its 2003 fiscal year.
In June 2001, the FASB 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 during which it is identified,
and be capitalized as part of the carrying amount of the long-lived asset. The
statement will be effective for Snap-on at the beginning of its 2003 fiscal
year. Snap-on believes that the effects of this pronouncement will not be
material to Snap-on's financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements and related notes contain information that
is pertinent to management's discussion and analysis. The preparation of
financial statements in conformity with 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. Snap-on considers the following policies to be the most
critical in understanding the judgments that are involved in the preparation of
the company's consolidated financial statements and the uncertainties that could
impact the company's financial position, results of operations and cash flows.
REVENUE RECOGNITION: Snap-on recognizes revenues when all of the following
conditions are satisfied: (i) persuasive evidence of an arrangement exists; (ii)
the price is fixed or determinable; (iii) collectibility is reasonably assured;
and (iv) delivery has occurred or services have been rendered. Snap-on
establishes an accrual for estimated future product returns in the period in
which the sale is recorded. Estimated returns are based upon the historic volume
of sales returns and the expected lag period, periodically adjusted for recent
actual experience. Franchise fee revenue is recognized as the fees are earned;
such revenue was not material in any year. Subscription revenue is deferred and
recognized over the life of the subscription.
ALLOWANCE FOR DOUBTFUL ACCOUNTS: Snap-on's accounts receivable are reported net
of bad debt reserves, which are regularly evaluated by management for adequacy.
The evaluations take into consideration various financial and qualitative
factors that may affect the customers' ability to pay. These factors may include
the customers' financial condition, collateral, debt-servicing capacity, past
payment experience and credit bureau information. Snap-on regularly reviews the
estimation process and adjusts the reserves as appropriate. It is possible,
however, that the accuracy of Snap-on's estimation process could be adversely
impacted if the financial condition of its customers were to deteriorate.
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. Snap-on calculates its reserve requirements based on historic warranty
loss experience that is periodically adjusted for recent actual experience.
2002 Annual Report
35
Management's Discussion and Analysis (continued)
PENSION AND OTHER POSTRETIREMENT BENEFITS: Snap-on has pension and
postretirement benefit liabilities and costs that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates, expected return on plan assets and medical trend rates. Changes in these
assumptions are primarily influenced by factors outside of Snap-on's control and
can have a significant effect on the amounts reported in the financial
statements. Snap-on reviews its actuarial valuations annually and believes that
it will experience an increase of approximately $17 million in pension expense
for 2003 due to a decrease in both the discount rate used to calculate pension
obligations and the expected long-term rate of return on plan assets. Snap-on
believes that its postretirement benefit expense for 2003 will increase by
approximately $1 million over 2002 levels.
OUTLOOK: Snap-on, in 2003, expects to continue to emphasize the consistent and
broad application of its Driven to Deliver business principles and, in
particular, the implementation of "Lean" operating practices. Snap-on expects to
achieve its long-term success by building on its strong brands, its culture of
innovation and its tradition of excellent customer service.
Executing the Driven to Deliver disciplines, Snap-on expects to better
capitalize on its available sales opportunities and improve profitability in
2003. Generating strong cash flow and further strengthening its balance sheet
will be key priorities for Snap-on throughout 2003.
At the present time, Snap-on sees continued steady tool demand by vehicle
service technicians, but little indication for general economic improvement
early in 2003. Based on this economic outlook for the industrial and capital
goods marketplace, and assuming no substantial changes in geopolitical
conditions or oil and gasoline prices, continued steady end-user demand in the
dealer business, the continued introduction of successful new products, and
ongoing savings from its restructuring and Operational Fitness initiatives,
Snap-on expects to achieve higher sales and improved profitability in 2003
leading to an approximate 10-15% increase in per share earnings for the full
year. Additionally, Snap-on's fiscal 2003 year contains 53 weeks.
The full-year earnings expectation considers that Snap-on will incur higher
expenses for retirement and insurance costs of approximately $22 million,
continue to invest in new product development and continue to incur costs to
implement business and process improvements through the adoption of Lean
operating practices and other rationalization activities. This full-year
earnings expectation also considers that Snap-on will continue to experience
U.S. dealer inventory reductions through the first half of 2003. Given that
higher year-over-year retirement, insurance and new product development expenses
are expected to be incurred at the beginning of 2003, coupled with the continued
emphasis on dealer inventory reduction, first-quarter 2003 earnings per share
could approximate a level of reported net earnings, before cumulative effect of
a change in accounting principle, similar to the $.37 per share reported in the
first quarter of 2002.
SAFE HARBOR: Statements in this document that are not historical facts,
including statements (i) that include the words "expects," "believes,"
"targets," "anticipates," or "encouraged by" 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, estimates,
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 well as
elsewhere in this document, and in Snap-on's Securities and Exchange Commission
filings.
Those important factors include the validity of the assumptions and bases
set forth above and the timing and progress with which Snap-on can continue to
achieve further cost benefits from its restructuring and other Operational
Fitness initiatives; Snap-on's capability to retain and attract dealers, and
effectively implement new programs; the capture of new business, the success of
new products and other Profitable Growth initiatives; Snap-on's ability to
withstand external negative factors including, but not limited to, terrorist
disruptions on business and the situation in Iraq; a change in regulatory
reporting requirements; changes in trade, monetary and fiscal policies, laws and
regulations, or other activities of governments or their agencies, including
war; and the absence of significant changes in inflation, the current
competitive environment, 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 Incoporated
36
Consolidated Statements of Earnings
(Amounts in millions except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------
Net sales $2,109.1 $2,095.7 $2,175.7
Cost of goods sold (1,144.2) (1,146.7) (1,178.9)
- -------------------------------------------------------------------------------
Gross profit 964.9 949.0 996.8
Operating expenses (799.2) (848.7) (792.6)
Net finance income 37.7 35.7 38.1
Restructuring and other non-recurring charges (5.1) (49.4) (12.3)
- -------------------------------------------------------------------------------
Operating earnings 198.3 86.6 230.0
Interest expense (28.7) (35.5) (40.7)
Other income (expense)--net (8.4) (3.5) 3.3
- -------------------------------------------------------------------------------
Earnings before income taxes 161.2 47.6 192.6
Income taxes 58.0 26.1 69.5
- -------------------------------------------------------------------------------
Earnings before cumulative effect of a
change in accounting principle 103.2 21.5 123.1
Cumulative effect of a change in accounting
principle, net of tax 2.8 (2.5) 25.4
- -------------------------------------------------------------------------------
Net earnings $106.0 $19.0 $148.5
===============================================================================
Net earnings per share--basic
Earnings before cumulative effect of a
change in accounting principle $1.77 $.37 $2.11
Cumulative effect of a change in accounting
principle, net of tax .05 (.04) .43
- --------------------------------------------------------------------------------
Net earnings per share--basic $1.82 $.33 $2.54
- --------------------------------------------------------------------------------
Net earnings per share--diluted
Earnings before cumulative effect of a change
in accounting principle $1.76 $.37 $2.10
Cumulative effect of a change in accounting
principle, net of tax .05 (.04) .43
- --------------------------------------------------------------------------------
Net earnings per share--diluted $1.81 $.33 $2.53
- --------------------------------------------------------------------------------
Weighted-average shares outstanding
Basic 58.2 57.9 58.4
Effect of dilutive options .3 .2 .2
- --------------------------------------------------------------------------------
Diluted 58.5 58.1 58.6
- --------------------------------------------------------------------------------
Pro forma amounts of a change in accounting
for pensions in 2000
Net earnings $106.0 $19.0 $123.1
Net earnings per share--basic 1.82 .33 2.11
Net earnings per share--diluted 1.81 .33 2.10
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
2002 Annual Report
37
Consolidated Balance Sheets
December 28, December 29,
(Amounts in millions except share data) 2002 2001
- -------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 18.4 $ 6.7
Accounts receivable--net of allowances 556.2 572.8
Inventories 369.9 375.2
Prepaid expenses and other assets 106.5 142.3
- -------------------------------------------------------------------------------
Total current assets 1,051.0 1,097.0
Property and equipment--net 330.2 327.7
Deferred income tax benefits 60.9 27.7
Goodwill--net 366.4 331.2
Other intangibles--net 65.7 60.7
Other assets 119.9 130.0
- -------------------------------------------------------------------------------
Total assets $1,994.1 $1,974.3
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 170.9 $ 141.2
Notes payable and current maturities of
long-term debt 56.4 29.1
Accrued compensation 44.4 58.7
Dealer deposits 46.1 42.0
Deferred subscription revenue 42.5 45.0
Income taxes 29.8 19.9
Other accrued liabilities 162.3 213.5
- -------------------------------------------------------------------------------
Total current liabilities 552.4 549.4
Long-term debt 304.3 445.5
Deferred income taxes 33.6 24.7
Retiree health care benefits 94.0 92.7
Pension liability 136.6 54.5
Other long-term liabilities 42.8 31.7
- -------------------------------------------------------------------------------
Total liabilities 1,163.7 1,198.5
- -------------------------------------------------------------------------------
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 66,897,506 and 66,847,107 shares 66.9 66.8
Additional paid-in capital 72.9 108.0
Retained earnings 1,064.2 1,014.7
Accumulated other comprehensive income (loss) (123.8) (120.6)
Grantor stock trust at fair market value--5,321,977
and 5,984,145 shares (147.5) (203.0)
Treasury stock at cost--3,326,462 and 2,923,435 shares (102.3) (90.1)
- -------------------------------------------------------------------------------
Total shareholders' equity 830.4 775.8
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,994.1 $1,974.3
===============================================================================
See Notes to Consolidated Financial Statements.
Snap-On Incoporated
38
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated
Common Common Additional Other Grantor Total
Stock Stock Paid-in Retained Comprehensive Stock Treasury Shareholders'
(Amounts in millions except share data) Shares Amount Capital Earnings Income (Loss) Trust Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 66,729,457 $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 .1 1.3 1.4
Stock compensation plans 8,908 .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 66,789,090 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
(unrealized holding losses of
$2.4 million net of
reclassifications to net income
of $.4 million) (2.0)
Minimum pension liability (1.5)
Total comprehensive income (14.4)
Cash dividends--$.96 per share (55.6) (55.6)
Dividend reinvestment plan 47,650 1.3 1.3
Stock compensation plans 10,367 .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 66,847,107 66.8 108.0 1,014.7 (120.6) (203.0) (90.1) 775.8
Comprehensive income:
Net earnings for 2002 106.0
Foreign currency translation 55.5
Mark to market for cash flow hedges,
net of tax of $1.0 million (unrealized
holding losses of $2.5 million net
of reclassifications to net income
of $1.2 million) (1.3)
Minimum pension liability, net of tax
of $36.8 million (57.4)
Total comprehensive income 102.8
Cash dividends--$.97 per share (56.5) (56.5)
Dividend reinvestment plan 45,649 .1 1.3 1.4
Stock compensation plans 4,750 1.4 1.4
Grantor stock trust--661,468 shares 16.1 16.1
Share repurchase, net of
reissuance--403,027 shares (12.2) (12.2)
Tax benefit from certain stock options 1.6 1.6
Adjustment of grantor stock trust to
fair market value (39.4) 39.4 --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 2002 66,897,506 $66.9 $ 72.9 $1,064.2 $(123.8) $(147.5) $(102.3) $830.4
====================================================================================================================================
See Notes to Consolidated Financial Statements.
2002 Annual Report
39
Consolidated Statements of Cash Flows
(Amounts in millions) 2002 2001 2000
- -------------------------------------------------------------------------------
Operating activities
Net earnings $ 106.0 $ 19.0 $ 148.5
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Cumulative effect of a change in accounting
principle, net of tax (2.8) 2.5 (25.4)
Depreciation 49.9 50.4 48.4
Amortization of goodwill -- 13.9 14.5
Amortization of other intangibles 1.8 3.7 3.3
Deferred income tax provision 33.5 5.4 9.7
Gain on sale of assets (.3) (.1) (1.5)
Gain on mark to market for cash flow hedges (1.3) (2.0) --
Restructuring and other non-recurring
charges, net of tax (1.8) 46.1 14.2
Changes in operating assets and liabilities,
net of effects of acquisitions:
(Increase) decrease in receivables 42.5 19.3 (52.8)
(Increase) decrease in inventories 25.8 18.9 9.0
(Increase) decrease in prepaid and other assets 33.0 (19.8) (12.9)
Increase (decrease) in accounts payable 22.1 (13.2) 17.9
Increase (decrease) in accruals and
other liabilities (84.3) 19.6 17.3
- -------------------------------------------------------------------------------
Net cash provided by operating activities 224.1 163.7 190.2
Investing activities
Capital expenditures (45.8) (53.6) (57.6)
Acquisitions of businesses--net of cash acquired (7.9) (.9) (11.9)
Disposition of businesses -- -- 15.5
Proceeds from disposal of property and equipment 6.0 6.9 11.7
- -------------------------------------------------------------------------------
Net cash used in investing activities (47.7) (47.6) (42.3)
Financing activities
Payment of long-term debt (1.9) (6.4) (8.0)
Increase in long-term debt -- 200.4 6.3
Net decrease in short-term borrowings (116.0) (255.1) (77.9)
Purchase of treasury stock (12.2) (11.2) (30.6)
Proceeds from stock purchase and option plans 20.5 13.0 7.1
Cash dividends paid (56.5) (55.6) (55.0)
- -------------------------------------------------------------------------------
Net cash used in financing activities (166.1) (114.9) (158.1)
Effect of exchange rate changes on cash 1.4 (.6) (1.3)
- -------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 11.7 .6 (11.5)
Cash and cash equivalents at beginning of year 6.7 6.1 17.6
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 18.4 $ 6.7 $ 6.1
===============================================================================
Supplemental cash flow disclosures
Cash paid for interest $ 29.9 $ 32.3 $ 40.8
Cash paid for income taxes 9.1 27.4 54.0
- -------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Snap-On Incoporated
40
Notes to Consolidated Financial Statements
NOTE 1: NATURE OF OPERATIONS
Snap-on Incorporated ("Snap-on" or "the company") was incorporated under the
laws of the state of Wisconsin in 1920 and reincorporated under the laws of the
state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer
and marketer of high-quality tool, diagnostic and equipment solutions for
professional tool and equipment users. Product lines include a broad range of
hand and power tools, tool storage, saws and cutting tools, pruning tools,
vehicle service diagnostics equipment, vehicle service equipment, including
wheel service, safety testing and collision repair equipment, vehicle service
information, business management systems, equipment repair services, and other
tool and equipment solutions. Snap-on's customers include automotive
technicians, vehicle service centers, manufacturers, industrial tool and
equipment users and those involved in commercial applications such as
construction, electrical and agriculture. Products are sold through Snap-on's
franchised dealer van, company-direct, distributor and Internet sales channels.
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 ("SOC"), a 50%-owned joint venture with The CIT Group, Inc.
("CIT"), is accounted for using the equity method. Snap-on and CIT have
identical voting and participating rights and responsibilities in SOC. Certain
prior-year amounts have been reclassified to conform to the current-year
presentation.
FISCAL YEAR ACCOUNTING PERIOD: Snap-on's fiscal year ends on the Saturday
nearest December 31. The 2002, 2001 and 2000 fiscal years each contained 52
weeks and ended on December 28, 2002, December 29, 2001, and December 30, 2000.
Snap-on's 2003 fiscal year, which ends on January 3, 2004, will contain 53
weeks.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
REVENUE RECOGNITION: Snap-on recognizes revenues when all of the following
conditions are satisfied: (i) persuasive evidence of an arrangement exists; (ii)
the price is fixed or determinable; (iii) collectibility is reasonably assured;
and (iv) delivery has occurred or services have been rendered. Snap-on
establishes an accrual for estimated future product returns in the period in
which the sale is recorded. Estimated returns are based upon the historic volume
of sales returns and the expected lag period, periodically adjusted for recent
actual experience. Franchise fee revenue is recognized as the fees are earned;
such revenue was not material in any year. Subscription revenue is deferred and
recognized over the life of the subscription.
RESEARCH AND ENGINEERING: Research and engineering costs are charged to expense
in the year incurred. For 2002, 2001 and 2000, research and engineering costs
totaled $57.1 million, $54.6 million and $50.6 million.
SHIPPING AND HANDLING: Amounts billed to customers for shipping and handling are
included as a component of sales. Costs incurred by Snap-on for shipping and
handling are generally included as a component of cost of goods sold when the
costs relate to manufacturing activities. In 2002, 2001 and 2000, Snap-on
incurred shipping and handling charges of $11.1 million, $11.2 million and $11.1
million that were recorded in "Cost of goods sold" on the accompanying
Consolidated Statements of Earnings. Shipping and handling costs incurred in
conjunction with selling or distribution activities are generally included as a
component of operating expenses. In 2002, 2001 and 2000, Snap-on incurred
shipping and handling charges of $41.0 million, $41.9 million and $41.9 million
that were recorded in operating expenses.
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 2002, 2001 and 2000, advertising and
promotion expense totaled $46.7 million, $47.6 million and $47.3 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. Refer to Note 17 for additional information.
FOREIGN CURRENCY TRANSLATION: The financial statements of Snap-on's foreign
subsidiaries are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards ("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 period. 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 $4.4 million and $6.5 million in 2002 and 2001, and gains of $4.1
million in 2000. Foreign exchange transaction gains and
2002 Annual Report
41
Notes to Consolidated Financial Statements(continued)
losses are reported in "Other income (expense)--net" in the accompanying
Consolidated Statements of Earnings.
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. Refer to Note 12 for additional information.
NET FINANCE INCOME: Net finance income consists of royalty and management fees
received from SOC based on the volume of credit originated by SOC. Snap-on also
shares with CIT ratably in any residual profit or loss of the joint venture
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, and which totaled $9.5 million in 2002, $10.8 million in 2001
and $10.3 million in 2000. Net finance income includes gains on the sale of
receivables when applicable.
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. Snap-on does
not hold or issue financial instruments for speculative or trading purposes.
Refer to Note 11 for additional information.
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 2002, 2001 and 2000, of
271,051 shares, 241,557 shares and 175,155 shares. Options to purchase 2,668,711
shares, 3,008,596 shares and 3,574,234 shares of Snap-on common stock at
year-end 2002, 2001 and 2000 were not included in the computation of diluted
earnings per share as the exercise prices of the options were greater than the
average market price of the common stock for the respective year and, as a
result, the effect on earnings per share would be anti-dilutive.
STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS: Snap-on has various stock-based
employee compensation plans. In December 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to the fair value
method of accounting for stock-based employee compensation and also amends the
disclosure provisions of SFAS No. 123. Snap-on will continue to account for its
stock-based employee compensation under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and Snap-on has
adopted the disclosure provisions of SFAS No. 148 as of December 28, 2002. The
adoption of SFAS No. 148 had no impact on Snap-on's financial position or
results of operations. Refer to Note 15 for additional information.
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 its 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.
Approximately 4,600 employees, or 35% of Snap-on's worldwide workforce, are
represented by unions and/or covered under collective bargaining agreements. Of
these, approximately 2,100 employees are covered under agreements expiring in
2003. In recent years, Snap-on has not experienced any significant work
slow-downs, stoppages or other labor disruptions.
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% of
total inventory as of year-end 2002 and 2001. All other inventories are
generally determined using the last-in, first-out (LIFO) cost method. Refer to
Note 6 for additional information.
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. Major repairs
that extend the useful life of an asset are
Snap-On Incoporated
42
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 also 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. Refer to Note 7 for additional information.
On December 30, 2001, the beginning of its 2002 fiscal year, Snap-on
adopted 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." SFAS No. 144
provides a single accounting model for long-lived assets to be disposed of. The
effect of this change in accounting principle was not material to Snap-on's
financial position or results of operations.
GOODWILL AND OTHER INTANGIBLE ASSETS: Snap-on adopted SFAS No. 142, "Goodwill
and Other Intangible Assets" at the beginning of its 2002 fiscal year. SFAS No.
142 requires the periodic testing of goodwill and indefinite-lived intangible
assets for impairment, as compared to the past method of amortizing such assets
to expense on a straight-line basis over their estimated useful lives. Snap-on
evaluates periodically, and as events arise, the existence of goodwill
impairment on the basis of whether the goodwill is fully recoverable from
projected, discounted cash flows of the related business unit. Refer to Note 8
for additional information.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES: Snap-on recorded a
cumulative effect of a change in accounting principle transition adjustment that
increased net earnings in the first quarter of 2002 by $2.8 million, on both a
pretax and after-tax basis, from the recognition of negative goodwill as
prescribed by SFAS No. 142. Refer to Note 8 for additional information.
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 ($4.1 million pretax) related to
a hedge strategy that did not qualify for hedge accounting under SFAS No. 133.
Refer to Note 11 for additional information.
During the fourth quarter of 2000, Snap-on changed its method of valuing
its pension plan assets from a five-year averaging method to a three-year
averaging method. The impact of this change was reported as a cumulative effect
of a change in accounting principle for pensions that increased net earnings in
2000 by $25.4 million ($41.3 million pretax). Refer to Note 13 for additional
information.
ACCOUNTING PRONOUNCEMENTS: In November 2002, the FASB issued Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
requires that a guarantor must recognize, at the inception of a guarantee, a
liability for the fair value of the obligation that it has undertaken in issuing
a guarantee. FIN No. 45 also addresses the disclosure requirements that a
guarantor must include in its financial statements for guarantees issued. The
disclosure requirements in this interpretation are effective for financial
statements ending after December 15, 2002. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Snap-on has not
completed its evaluation of FIN No. 45 and the company has not assessed the
impact the adoption may have on Snap-on's financial position or results of
operations. Refer to Notes 9 and 17 for additional information.
The FASB issued FIN No. 46, "Consolidation of Variable Interest Entities"
(an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements") in January 2003, which becomes effective for Snap-on on
June 29, 2003. FIN No. 46 provides consolidation guidance for certain variable
interest entities ("VIE") in which equity investors of the VIE do not have the
characteristics of a controlling interest or do not have sufficient equity at
risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it
provides financial support to the special purpose entity through a variable
interest. Variable interests may arise from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interests, or a significant variable interest
that is considerably more than any other party's variable interest, that entity
would be the primary beneficiary and would be required to include the assets,
liabilities and results of operations of the special purpose entity in its
consolidated financial statements.
Snap-on has not completed its evaluation of FIN No. 46 and the company has
not assessed the impact the adoption may have on Snap-on's financial position or
results of operations. If it is determined that SOC qualifies as a VIE, then
Snap-on may be required to include the assets and liabilities (or some portion
thereof) of SOC in its consolidated financial statements beginning in the third
quarter of 2003. Refer to Note 9 for additional information.
2002 Annual Report
43
Notes to Consolidated Financial Statements(continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. Snap-on will adopt SFAS No. 146 at the beginning of its 2003 fiscal year.
In June 2001, the FASB 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 during which it is identified,
and be capitalized as part of the carrying amount of the long-lived asset. The
statement will be effective for Snap-on at the beginning of its 2003 fiscal
year. Snap-on believes that the effects of this pronouncement will not be
material to Snap-on's financial position or results of operations.
NOTE 3: ACQUISITIONS AND DIVESTITURES
In 2002, Snap-on acquired full ownership of two business operations for $7.9
million. The purchase price paid plus the liabilities assumed exceeded the fair
value of the tangible and intangible assets acquired by approximately $3.7
million, on a preliminary basis. The purchase accounting for these two
acquisitions will be finalized in 2003 upon completion of the underlying asset
and liability valuations. In 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. Pro forma financial
information has not been presented, as the effects of these businesses,
individually and in the aggregate, were not material.
During 2000, Snap-on divested Windsor Forestry Tools Inc. ("Windsor"),
which was acquired as part of the Bahco Group AB ("Bahco") acquisition. As
Windsor was accounted for as "held for sale" in accordance with APB Opinion No.
16, "Business Combinations," 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 a resulting adjustment to goodwill.
NOTE 4: 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 restructuring and other non-recurring
charges in 2001 for actions that included the consolidation or closure of 32
facilities, including facility-related asset write-downs, and severance costs to
effect a 6% reduction in workforce. The $62.0 million charge included
restructuring charges of $40.3 million and non-recurring charges of $21.7
million. The restructuring charge of $40.3 million included $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-related asset write-downs, and $1.3 million for exit-related legal
and professional services. The $21.7 million of other non-recurring charges
included $12.6 million (recognized in cost of goods sold) for inventory
write-downs and warranty costs primarily associated with Snap-on's exiting of an
unprofitable segment of the emissions testing business, $8.4 million for
management transition costs associated with the April 2001 retirement of
Snap-on's former president and chief executive officer, and $.7 million for
equipment and employee relocation costs associated with the facility
consolidations. As of December 29, 2001, Snap-on utilized $17.2 million of the
$40.3 million of restructuring reserves that were established for the fiscal
2001 restructuring actions.
Snap-on recorded restructuring and non-recurring charges of $5.1 million in
2002, including $3.6 million of restructuring charges in the fourth quarter of
2002 for severance costs to effect workforce reduction initiatives, and $7.9
million of restructuring-related charges to finalize its restructuring actions
that began in 2001 and for costs associated with the 2002 resignation of
Snap-on's former chief financial officer. These costs were partially offset by
the reversal of $6.4 million of restructuring reserves not utilized to finalize
the company's 2001 restructuring actions. The initial 2001 restructuring cost
estimates were based on management's best business judgment under prevailing
circumstances. The finalization of the 2001 restructuring actions and cost
estimates resulted in the fourth-quarter 2002 reversal of $6.4 million of
restructuring reserves to income, primarily as a result of lower than
anticipated severance and severance-related costs, as well as lower facility
consolidation or closure costs. As of December 28, 2002, Snap-on has finalized
its 2001 restructuring actions and all costs related to these actions have been
incurred. The 2001 restructuring initiatives resulted in the consolidation or
closure of 32 facilities and, combined with other operational activities, an
8.4% reduction in workforce.
Snap-On Incoporated
44
Snap-on's 2001 restructuring reserve activity during 2001 and 2002 was as follows:
Balance at Balance at
Provision Usage in December 29, Usage in Reversed December 28,
(Amounts in millions) in 2001 2001 2001 2002 in 2002 2002
- ----------------------------------------------------------------------------------------------------------------
Severance costs $ 27.1 $ (6.0) $ 21.1 $(16.6) $ (4.5) $ --
Facility consolidation or closure costs 7.3 (5.3) 2.0 (.1) (1.9) --
Loss on asset write-downs 5.9 (5.9) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Total $ 40.3 $(17.2) $ 23.1 $(16.7) $ (6.4) $ --
================================================================================================================
The 2001 restructuring reserve usage of $16.7 million in 2002 was primarily
for severance payments related to the separation of 479 employees. The
finalization of the 2001 restructuring actions resulted in the reversal of $6.4
million of restructuring reserves not utilized that were recognized in income in
the fourth quarter of 2002.
The fourth quarter 2002 restructuring charge of $3.6 million was for
severance costs to effect further workforce reductions of 151 salaried and
hourly positions. During the fourth quarter, Snap-on eliminated 31 of the
identified positions resulting in a $.7 million usage of the recorded
restructuring reserve. Snap-on expects that the remaining restructuring reserve
of $2.9 million will be used in the first quarter of 2003, and Snap-on expects
to fund the remaining cash requirements associated with this reserve with cash
flows from operations or borrowings under the company's existing credit
facilities.
For the year ended December 28, 2002, Snap-on incurred
restructuring-related charges of $7.9 million, including $3.0 million related to
the 2002 resignation of Snap-on's former chief financial officer and $4.9
million for employee and equipment relocation costs and professional fees to
finalize the company's fiscal 2001 restructuring activities. These costs did not
qualify for restructuring accrual treatment and were expensed as incurred and
are included in "Restructuring and other non-recurring charges" on the
accompanying Consolidated Statements of Earnings.
In 2000, Snap-on recorded restructuring charges of $4.2 million and
non-recurring charges of $17.6 million. The $4.2 million restructuring charge
related to the closure of a small, underperforming vehicle service business in
the Asia-Pacific region and included costs related to severance, lease
terminations and the write-off of intangible assets. The non-recurring charges
of $17.6 million primarily related to Snap-on's decision to exit an unprofitable
segment of the emissions testing business, prompted by continued changes in
technology and emissions regulations at both the state and federal levels. The
non-recurring charges included $5.6 million for expected losses on the
disposition of discontinued inventory and $3.9 million for extended warranty
costs (both of which are included in cost of goods sold) 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.
NOTE 5: ACCOUNTS RECEIVABLE
Accounts receivable include trade accounts receivable, installment receivables
and dealer financing. At the end of 2002 and 2001, the allowance for doubtful
accounts was $41.2 million and $39.6 million. Current gross installment
receivables amounted to $49.5 million and $42.6 million at the end of 2002 and
2001, and include $8.1 million and $7.1 million of unearned finance charges.
In 2002, Snap-on reclassified the portion of accounts receivable not due
within one year from current assets to long term, and the related balances as of
year-end 2001 have been reclassified to conform to the 2002 presentation. The
long-term portion of accounts receivable is classified in "Other assets" on the
accompanying Consolidated Balance Sheets and is comprised of installment and
dealer financing receivables with credit terms that are due beyond one year.
Long-term gross installment receivables amounted to $45.2 million and $42.4
million at the end of 2002 and 2001, and include $7.9 million and $6.3 million
of unearned finance charges.
NOTE 6: INVENTORIES
The components of Snap-on's inventories were as follows:
(Amounts in millions) 2002 2001
- ---------------------------------------------------------
Finished goods $337.5 $351.4
Work in process 42.0 41.5
Raw materials 86.2 77.2
Excess of current cost over LIFO cost (95.8) (94.9)
- ---------------------------------------------------------
Total inventories $369.9 $375.2
=========================================================
2002 Annual Report
45
Notes to Consolidated Financial Statements(continued)
NOTE 7: PROPERTY AND EQUIPMENT
Snap-on's property and equipment values, which are carried at cost, were as
follows:
(Amounts in millions) 2002 2001
- ---------------------------------------------------------
Land $ 23.8 $ 23.4
Buildings and improvements 202.9 195.5
Machinery and equipment 541.8 501.3
- ---------------------------------------------------------
768.5 720.2
Accumulated depreciation (438.3) (392.5)
- ---------------------------------------------------------
Property and equipment--net $ 330.2 $ 327.7
=========================================================
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
Transportation vehicles 2 to 6 years
- ---------------------------------------------------------
NOTE 8: GOODWILL AND OTHER INTANGIBLE ASSETS
On December 30, 2001, the beginning of Snap-on's 2002 fiscal year, Snap-on
adopted SFAS No. 142. This statement applies to all goodwill and other
intangible assets recognized by Snap-on as of December 30, 2001.
Goodwill, net of accumulated amortization, was $366.4 million and $331.2
million at the end of 2002 and 2001. In 2002, amortization was discontinued on
goodwill and other indefinite-lived intangible assets in accordance with SFAS
No. 142. In 2001 and 2000, pretax goodwill amortization totaled $13.9 million
and $14.5 million. Accumulated goodwill amortization was $59.6 million at the
end of 2002 and $56.8 million at the end of 2001. Other intangible assets
include patents and trademarks of $24.7 million and $22.4 million at year-end
2002 and 2001 that are being amortized over their useful lives and
indefinite-lived trademarks of $41.0 million and $38.3 million.
The provisions of SFAS No. 142 require that (i) goodwill no longer be
amortized; (ii) negative goodwill be recognized in net earnings as a cumulative
effect of an accounting change at the date of adoption; (iii) other intangible
assets be evaluated on an annual basis to determine whether they have finite or
indefinite useful lives; and (iv) goodwill and other intangible assets deemed to
have indefinite lives be evaluated on an annual basis for impairment based on
their fair value. Intangible assets determined to have finite lives are
amortized over those estimated lives and intangible assets that have indefinite
useful lives are not amortized.
In accordance with the adoption provisions of SFAS No. 142, Snap-on
completed the initial assessment of goodwill and other intangibles as of
December 30, 2001, the results of which indicated that the carrying values of
goodwill and other intangibles were not impaired. Snap-on recorded a cumulative
effect of a change in accounting principle transition adjustment that increased
net earnings in the first quarter of 2002 by $2.8 million, on both a pretax and
after-tax basis, from the recognition of negative goodwill as prescribed by SFAS
No. 142. Snap-on completed the required annual impairment assessment during the
second quarter of 2002, the results of which indicated that goodwill and other
intangibles were not impaired.
The following is a reconciliation of earnings before cumulative effect of a
change in accounting principle and net earnings reflecting the impact of this
standard on prior-year reported results as if SFAS No. 142 had been in effect
during 2001 and 2000.
(Amounts in millions) 2002 2001 2000
- ---------------------------------------------------------------------
Earnings before cumulative
effect of a change in
accounting principle
as reported $103.2 $ 21.5 $123.1
Amortization, net of tax:
Goodwill -- 11.9 12.4
Trademark -- .8 .8
- ---------------------------------------------------------------------
Adjusted earnings before
cumulative effect item $103.2 $ 34.2 $136.3
=====================================================================
Net earnings as reported $106.0 $ 19.0 $148.5
Amortization, net of tax:
Goodwill -- 11.9 12.4
Trademark -- .8 .8
- ---------------------------------------------------------------------
Adjusted net earnings $106.0 $ 31.7 $161.7
=====================================================================
Snap-On Incoporated
46
The following reflects the impact of SFAS No. 142 on prior-year earnings
per share as if this standard had been in effect during 2001 and 2000.
2002 2001 2000
- ---------------------------------------------------------------------
Earnings per share before
cumulative effect of a
change in accounting
principle as reported:
Basic $1.77 $ .37 $2.11
Diluted 1.76 .37 2.10
Adjusted earnings per share
before cumulative effect item:
Basic $1.77 $ .59 $2.34
Diluted 1.76 .59 2.33
Net earnings per share as reported:
Basic $1.82 $ .33 $2.54
Diluted 1.81 .33 2.53
Adjusted net earnings
per share:
Basic $1.82 $ .55 $2.77
Diluted 1.81 .55 2.76
- ---------------------------------------------------------------------
The change in the carrying amount of segment goodwill for the year ended
December 28, 2002, is as follows:
Snap-on Commercial Diagnostics &
Dealer & Industrial Information
(Amounts in millions) Group Group Group Total
- ----------------------------------------------------------------------------
Beginning balance $ 14.6 $251.8 $ 64.8 $331.2
Goodwill acquired
during the year -- 1.2 2.5 3.7
Currency translation
effect -- 31.3 .2 31.5
- ----------------------------------------------------------------------------
Ending balance $ 14.6 $284.3 $ 67.5 $366.4
============================================================================
Additional disclosures related to acquired other intangible assets are as
follows:
December 28, 2002 December 29, 2001
- ------------------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(Amounts in millions) Value Amortization Value Amortization
- ------------------------------------------------------------------------------
Amortized other
intangible assets:
Trademarks $ 3.9 $ (.3) $ 1.7 $ (.2)
Patents 29.4 (8.3) 27.2 (6.3)
- ------------------------------------------------------------------------------
Total 33.3 (8.6) 28.9 (6.5)
- ------------------------------------------------------------------------------
Unamortized other
intangible assets:
Trademarks 46.0 (5.0) 42.8 (4.5)
- ------------------------------------------------------------------------------
Total other
intangible assets $ 79.3 $(13.6) $ 71.7 $(11.0)
==============================================================================
The weighted-average amortization period is 34 years for trademarks and 16
years for patents. The weighted-average amortization period for trademarks and
patents on a combined basis is 19 years.
The aggregate amortization expense for 2002 was $1.8 million. Total
estimated annual amortization expense expected for the next five fiscal years,
based on current levels of other intangible assets, is $1.9 million in 2003;
$1.6 million in 2004; and $1.5 million for each of 2005, 2006 and 2007.
NOTE 9: SNAP-ON CREDIT LLC JOINT VENTURE
Snap-on Credit LLC ("SOC") is an unconsolidated 50%-owned joint venture between
Snap-on and The CIT Group, Inc. ("CIT"). SOC was formed as a limited liability
corporation with member contributions totaling $2.0 million, and commenced
operations on January 3, 1999. As of December 28, 2002, Snap-on's equity
investment in SOC totaled $2.7 million. SOC 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. Snap-on also provides financing internationally
through its wholly owned credit subsidiaries, the results of which are included
in Snap-on's Consolidated Financial Statements.
Snap-on receives royalty and management fee income from SOC based on the
volume of financings originated by SOC. Snap-on 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. SOC sells substantially all of its originated contracts (through
asset-securitization transactions) on a limited recourse basis to CIT, net of
certain fees. SOC continues to service these contracts for an estimated market
rate servicing fee. In 2002, SOC originated $506.3 million in contract
receivables.
2002 Annual Report
47
Notes to Consolidated Financial Statements(continued)
SOC 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 and managers, both independent and national
chains, who purchase equipment items. The duration of lease contracts is often
two to five years. Financing options are also 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 contracts are
generally secured by the underlying tools or equipment financed and other dealer
assets.
SOC establishes a reserve for all contract receivables sold to CIT, and
SOC's credit losses on the sold contract receivables are limited to the extent
of the reserve. At year-end 2002, SOC's reserves for contract receivables sold
to CIT were $8.3 million, or 1.6% of contract receivables. Loan losses on owned
contract receivables were not material in any year. SOC also establishes a
prepayment reserve to cover amounts due to CIT as a result of early prepayments
by customers on loans sold to CIT. Snap-on has credit risk exposure for certain
loan originations with recourse provisions from SOC. At December 28, 2002, $32.1
million of loans originated by SOC have a recourse provision to Snap-on if the
loans become more than 90 days past due. In 2002, $4.2 million of such loans
were purchased by Snap-on.
SOC 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 $11.0 million and $22.0 million at both
December 28, 2002, and December 29, 2001. The average amount outstanding under
this facility was $16.5 million in 2002 and $11.9 million in 2001. The
weighted-average interest rate for 2002 and 2001 was 2.3% and 4.2%. As of
December 28, 2002, and December 29, 2001, the weighted-average interest rate was
2.1% and 2.5%. SOC's bank line of credit has an expiration date of May 31, 2003.
To date, there have been no draws upon this guarantee.
The maximum exposure to Snap-on as of December 28, 2002, related to SOC was
the $2.7 million equity investment plus the guarantee on SOC's line of credit
and the recourse obligations on customer financings.
Summarized financial information of SOC as of December 31, 2002, and for
the year then ended is as follows:
At December 31,
(Amounts in millions) 2002
- --------------------------------------------------------------
Cash and cash equivalents $ 5.4
Receivables, net of allowances 13.4
Servicing receivable 7.6
Due from members 10.9
Other assets 8.0
- --------------------------------------------------------------
$45.3
==============================================================
Payable to members $12.4
Reserves for contract receivables sold 8.3
Other accrued liabilities 8.6
Short-term borrowings 11.0
Members' equity 5.0
- --------------------------------------------------------------
$45.3
==============================================================
Year Ended December 31,
(Amounts in millions) 2002
- --------------------------------------------------------------
Revenues
Gain on sale of contract receivables $55.7
Servicing fee income 9.0
Other income 1.3
- --------------------------------------------------------------
Total revenues $66.0
- --------------------------------------------------------------
Expenses
Royalty fees $22.8
Salaries and benefits 15.7
Management fees 11.2
Other 10.8
- --------------------------------------------------------------
Total expenses 60.5
- --------------------------------------------------------------
Net income $ 5.5
==============================================================
The FASB issued FIN No. 46, "Consolidation of Variable Interest Entities"
in January 2003, which becomes effective for Snap-on on June 29, 2003. FIN No.
46 provides consolidation guidance for certain variable interest entities
("VIE") in which equity investors of the VIE do not have the characteristics of
a controlling interest or do not have sufficient equity at risk for the VIE to
finance its activities independently. Variable interests may arise from
arrangements such as Snap-on's SOC joint venture discussed above. Snap-on has
not completed its evaluation of FIN No. 46 and the company has not assessed the
impact the adoption may have on Snap-on's financial position or results of
operations. If it is determined that Snap-on's financial services joint venture
qualifies as a VIE, Snap-on may be required to include the assets and
liabilities (or some portion thereof) of SOC in its consolidated financial
statements beginning in the third quarter of 2003.
Snap-On Incoporated
48
NOTE 10: SHORT-TERM AND LONG-TERM DEBT
Notes payable and long-term debt at the end of 2002 totaled $360.7 million, down
$113.9 million from the $474.6 million reported at year-end 2001. Notes payable
to banks under bank lines of credit totaled $22.3 million and $26.5 million at
the end of 2002 and 2001. At the end of 2002, Snap-on had commercial paper
outstanding denominated in U.S. dollars of $25.0 million and Japanese yen of
$7.9 million compared to commercial paper outstanding denominated in U.S.
dollars of $135.0 million and Japanese yen of $7.2 million at year-end 2001.
Snap-on classified its outstanding commercial paper as long-term debt at
year-end 2001 as it was Snap-on's intent, and it had the ability (supported by
its long-term revolving credit facilities), to refinance this debt on a
long-term basis. Snap-on's increased cash provided by operating activities in
2002 was used primarily to reduce commercial paper borrowings. The company
currently anticipates that it will continue to have positive cash flow and debt
reduction for the foreseeable future and, as a result, commercial paper
borrowings at December 28, 2002, of $32.9 million are included in "Notes payable
and current maturities of long-term debt" on the accompanying Consolidated
Balance Sheets.
At December 28, 2002, Snap-on had $408 million of multi-currency revolving
credit facilities that also serve to back its commercial paper programs,
including a $200 million, 364-day revolving credit facility with a one-year
term-out option that terminates on August 8, 2003. The term-out option allows
Snap-on to elect to borrow under the credit facility for an additional year
after the termination date. In addition, Snap-on has a five-year, $208 million
revolving credit facility that terminates on August 20, 2005. At the end of 2002
and 2001, 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 financial covenant requires that Snap-on
maintain a total debt to total capital (defined as total debt plus shareholders'
equity) ratio that does not exceed 60%. Snap-on's total debt to total capital
ratio, computed as defined by the financial covenant, was 30.3% at December 28,
2002, and 38.0% at December 29, 2001. At December 28, 2002, Snap-on also had an
unused committed $20 million bank line of credit that expires on August 1, 2003.
At December 28, 2002, Snap-on had approximately $395 million of unused available
debt capacity under the terms of its revolving credit facilities and committed
bank line of credit.
Average commercial paper and bank notes outstanding were $189.6 million in
2002 and $389.2 million in 2001. The weighted-average interest rate on these
instruments was 1.7% in 2002 and 4.3% in 2001. As of December 28, 2002, and
December 29, 2001, commercial paper and bank notes outstanding had a
weighted-average interest rate of 1.3% and 2.1%.
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 the 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's long-term debt at year-end 2002 and 2001 consisted of the
following:
(Amounts in millions) 2002 2001
- --------------------------------------------------------------
Senior unsecured indebtedness $300.0 $300.0
Borrowings under commercial
paper programs -- 142.2
Other long-term debt 5.5 5.9
- --------------------------------------------------------------
305.5 448.1
Current maturities (1.2) (2.6)
- --------------------------------------------------------------
Total long-term debt $304.3 $445.5
==============================================================
The annual maturities of Snap-on's long-term debt due in the next five
years are $1.2 million in 2003, $.5 million in 2004, and $100.2 million in 2005,
with no maturities of long-term debt in 2006 and 2007.
NOTE 11: 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 on the accompanying
Consolidated Balance Sheets in "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 earnings in
the first quarter of 2001 by $2.5 million related to a hedge
2002 Annual Report
49
Notes to Consolidated Financial Statements(continued)
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)" 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. 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. Forward exchange contracts are used to
hedge the net exposures. Gains or losses on net foreign currency hedges are
intended to offset losses or gains on the underlying net exposures in an effort
to reduce the earnings volatility resulting from fluctuating foreign currency
exchange rates.
At December 28, 2002, Snap-on had net outstanding foreign exchange forward
contracts totaling $161.9 million comprised of buy contracts of $52.5 million in
Swedish kronor and sell contracts of $103.8 million in euros, $59.1 million in
British pounds, $31.2 million in Canadian dollars, $7.5 million in Singapore
dollars, $2.5 million in Australian dollars, $3.0 million in Danish kronor, $3.7
million in Mexican pesos and $3.6 million in other currencies. 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.
Snap-on classifies the majority of its forward exchange contracts as
natural hedges and therefore these contracts 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 was not material.
NON-DERIVATIVE INSTRUMENTS DESIGNATED 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 was not material. At
December 28, 2002, net losses of $.7 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.
Interest rate swap agreements are accounted for as either cash flow hedges or
fair value hedges. The differentials paid or received on interest rate swap
agreements are accrued and recognized as adjustments to interest expense. For
fair value hedges the effective portion of the change in fair value of the
derivative is recorded in "Long-term debt" while any ineffective portion is
recorded as an adjustment to interest expense. For cash flow hedges 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. The notional amount of
interest rate swaps was $50.0 million at December 28, 2002, and included $25.0
million of fair value hedges and $25.0 million of cash flow hedges. The notional
amount of interest rate swaps representing cash flow hedges was $25.0 million at
December 29, 2001.
Snap-On Incoporated
50
For all cash flow hedges qualifying for hedge accounting under SFAS No.
133, the net accumulated derivative loss at December 28, 2002, was $3.3 million
after tax and is reflected in "Accumulated other comprehensive income (loss)."
Changes in the fair value of derivative financial instruments qualifying for
hedge accounting under SFAS No. 133, are reflected as derivative assets or
liabilities with the corresponding gains or losses reflected in earnings in the
period of change. An offsetting gain or loss is also reflected in earnings based
upon the changes of the fair value of the debt instrument being hedged. For all
fair value hedges qualifying for hedge accounting under SFAS No. 133, the net
accumulated derivative gain at December 28, 2002, was $3.6 million. At December
28, 2002, the maximum maturity date of any cash flow hedge and fair value hedge
was approximately two years and nine years, respectively. During the next 12
months, Snap-on expects to reclassify into earnings net losses from "Accumulated
other comprehensive income (loss)" of approximately $1.4 million after tax at
the time the underlying hedged transactions are realized.
During the year ended December 28, 2002, cash flow hedge and fair value
hedge ineffectiveness was not material.
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 28, 2002,
and December 29, 2001, the fair value was approximately $92 million and $82
million versus a book value of $78.6 million and $71.6 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 28, 2002, and December 29, 2001, the
fair value was approximately $340 million and $452 million versus a book value
of $305.5 million and $448.1 million.
ALL OTHER FINANCIAL INSTRUMENTS: The carrying amounts of all cash equivalents,
interest rate swaps and forward exchange contracts approximate fair value based
upon quoted market prices or discounted cash flows. The fair value of trade
accounts receivable, accounts payable and other financial instruments
approximates carrying value due to their short-term nature.
NOTE 12: INCOME TAXES
Earnings before income taxes, including the pretax impact of cumulative effects
of changes in accounting principles in all years, consisted of the following:
(Amounts in millions) 2002 2001 2000
- ---------------------------------------------------
U.S. $129.2 $ 20.7 $175.2
Foreign 34.8 22.8 58.7
- ---------------------------------------------------
Total earnings
before income taxes $164.0 $ 43.5 $233.9
===================================================
The provision (benefit) for income taxes consisted of the following:
(Amounts in millions) 2002 2001 2000
- ---------------------------------------------------
Current:
Federal $ (5.0) $ 21.8 $ 42.9
Foreign 19.6 13.3 19.7
State 2.6 3.7 4.6
- ---------------------------------------------------
Total current 17.2 38.8 67.2
- ---------------------------------------------------
Deferred:
Federal 38.3 (8.1) 11.8
Foreign (.2) (1.3) 4.0
State 2.7 (4.9) 2.4
- ---------------------------------------------------
Total deferred 40.8 (14.3) 18.2
- ---------------------------------------------------
Total income tax provision $ 58.0 $ 24.5 $ 85.4
===================================================
2002 Annual Report
51
Notes to Consolidated Financial Statements(continued)
A reconciliation of the statutory federal income tax rate to Snap-on's
effective tax rate, after cumulative effect of changes in accounting principles,
is as follows:
2002 2001 2000
- -------------------------------------------------------------------
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 1.8 3.2 2.0
Extraterritorial income
exclusion/foreign sales
corporation tax benefit (1.5) (1.6) (1.4)
Restructuring and other
non-recurring charges -- 19.8 --
Change in valuation allowance 1.4 (.1) 1.0
Non-deductible goodwill
amortization -- 1.8 1.4
Foreign rate difference (.8) (.8) (1.0)
Other (.5) (1.0) (.5)
- -------------------------------------------------------------------
Effective tax rate 35.4% 56.3% 36.5%
===================================================================
Temporary differences that give rise to the net deferred tax benefit are as
follows:
(Amounts in millions) 2002 2001 2000
- -------------------------------------------------------------------
Current deferred
income tax assets:
Inventories $ 29.6 $ 26.4 $ 20.6
Accruals and reserves
not currently deductible 17.5 19.0 17.2
Restructuring and other
non-recurring accruals 1.9 31.5 19.3
Other 3.0 3.3 3.5
- -------------------------------------------------------------------
Total current (included in
prepaid expenses and
other assets and other
accrued liabilities) 52.0 80.2 60.6
Long-term deferred income
tax assets (liabilities):
Employee benefits 78.9 46.8 45.1
Net operating losses 32.8 26.3 27.9
Depreciation (40.9) (37.5) (39.0)
Snap-on Credit LLC (15.0) (10.2) (1.8)
Other .2 3.9 3.3
Valuation allowance (28.7) (26.3) (27.2)
- -------------------------------------------------------------------
Total long term 27.3 3.0 8.3
- -------------------------------------------------------------------
Net deferred income
tax asset $ 79.3 $ 83.2 $ 68.9
===================================================================
At December 28, 2002, Snap-on had tax net operating loss carryforwards
totaling $157.6 million as follows:
U.S. U.S.
(Amounts in millions) State Federal Foreign Total
- -------------------------------------------------------------------
Year of expiration:
2003 - 2004 $ -- $-- $ 2.3 $ 2.3
2005 - 2008 -- 3.8 6.8 10.6
2009 - 2013 19.4 -- 4.0 23.4
2014 - 2020 43.2 -- -- 43.2
Indefinite -- -- 78.1 78.1
- -------------------------------------------------------------------
$62.6 $3.8 $91.2 $157.6
===================================================================
A valuation allowance totaling $28.7 million, $26.3 million and $27.2
million in 2002, 2001 and 2000 has been established for deferred income tax
benefits related to certain subsidiary loss carryforwards that may not be
realized. 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 asset will be realized. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The undistributed earnings of all non-U.S. subsidiaries totaled $180.0
million, $159.1 million and $146.7 million at the end of 2002, 2001 and 2000.
Snap-on has not provided any deferred taxes on these undistributed earnings as
it considers the undistributed earnings to be permanently invested.
NOTE 13: 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 ("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
Snap-On Incoporated
52
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 2002 and 2001, Snap-on contributed common stock of $2.0 million
and $.4 million to the 401(k) Plan.
Snap-on utilizes the market-related approach to value its pension 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 was reported as a cumulative effect of a
change in accounting principle for pensions that increased net earnings in 2000
by $25.4 million ($41.3 million pretax). 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) 2002 2001 2000
- -------------------------------------------------------------------
Service cost $ 15.1 $ 15.8 $ 15.8
Interest cost 39.9 38.9 35.6
Less: actual loss (return)
on plan assets 48.9 1.6 (33.1)
Curtailment gain (.5) -- (.6)
Net amortization and deferral:
Projected return on plan
assets in excess of
actual return (103.4) (57.2) (20.2)
Amortization of net
assets at transition (1.3) (1.3) (1.3)
Other 1.2 (4.1) (3.7)
- -------------------------------------------------------------------
Net pension income $ (.1) $ (6.3) $ (7.5)
===================================================================
Due to the combination of lower-than-expected returns on pension plan
assets and a decrease in both the discount rate used to calculate pension
obligations and the expected long-term rate of return on plan assets, Snap-on
currently expects that its 2003 pension expense will increase by approximately
$17 million over 2002 levels.
The status of Snap-on's pension plans was as follows:
(Amounts in millions) 2002 2001
- -------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 562.0 $490.6
Service cost 15.1 15.8
Interest cost 39.9 38.9
Plan participants' contributions .8 .8
Benefits paid (30.1) (26.4)
Curtailment gain (.5) --
Plan amendments 2.7 6.9
Actuarial loss 34.3 31.2
Foreign currency impact 6.5 (2.8)
Effect of business acquisitions -- 7.0
Effect of settlements (6.3) --
- -------------------------------------------------------------------
Benefit obligation at end of year $ 624.4 $562.0
===================================================================
Change in plan assets
Fair value of plan assets at
beginning of year $ 529.7 $545.8
Actual loss on plan assets (48.9) (1.6)
Plan participants' contributions .8 .8
Employer contributions 13.1 5.4
Benefits paid (30.1) (26.4)
Foreign currency impact 2.4 (1.8)
Effect of business acquisitions -- 7.5
Effect of settlements (6.3) --
- -------------------------------------------------------------------
Fair value of plan assets at end of year $ 460.7 $529.7
===================================================================
Unfunded status $(163.7) $ (32.3)
Unrecognized net assets at year end (1.7) (2.9)
Unrecognized net loss from
experience different than assumed 137.6 .1
Unrecognized prior service cost 15.5 14.8
- -------------------------------------------------------------------
Net amount recognized $ (12.3) $ (20.3)
===================================================================
Amounts recognized in the
consolidated balance sheets
consist of:
Prepaid benefit cost $ 9.7 $ 31.6
Accrued benefit liability (134.8) (56.2)
Other assets 15.0 .7
Accumulated other
comprehensive income (loss) 97.8 3.6
- -------------------------------------------------------------------
Net amount recognized $ (12.3) $ (20.3)
===================================================================
Snap-on's shareholders' equity at year-end 2002 was reduced by $60.9
million (net of tax) for the excess of accumulated pension benefit obligations
over the fair market value of plan
2002 Annual Report
53
Notes to Consolidated Financial Statements(continued)
assets, of which $57.4 million was recorded in 2002. This resulted from the
combination of lower-than-expected returns on plan investments and a decrease in
both the discount rate used to calculate pension obligations and the expected
long-term rate of return on plan assets. The weighted-average rate assumptions
used in determining pension costs and the projected benefit obligation as of the
respective year end were as follows:
2002 2001
- -------------------------------------------------------------------
Discount rate used to determine
present value of projected
benefit obligation at end of year 6.7% 7.4%
Expected long-term rate of return on
plan assets for the year 8.2% 9.6%
Expected rate of increase in
future compensation levels 3.7% 4.6%
- -------------------------------------------------------------------
Snap-on has pension plans in which the accumulated benefit obligation
exceeds the fair value of plan assets. At the end of 2002 and 2001, Snap-on had
six such plans, including certain non-U.S. plans, with an aggregate accumulated
benefit obligation of $43.6 million and $40.3 million with no plan assets.
NOTE 14: 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 insurance coverage.
For employees retiring under the comprehensive major medical plans, retiree
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) 2002 2001 2000
- -------------------------------------------------------------------
Service cost--benefits
attributed to service
during the year $ 1.1 $ 1.1 $ 1.3
Interest cost on accumulated
postretirement benefit
obligation 6.0 5.5 5.6
Curtailment gain (.2) -- --
Amortization of
unrecognized net gain (.6) (1.4) (.9)
- -------------------------------------------------------------------
Net postretirement health
care benefit expense $ 6.3 $ 5.2 $ 6.0
===================================================================
The status of Snap-on's U.S. postretirement plans was as follows:
(Amounts in millions) 2002 2001
- -------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 75.3 $ 75.0
Service cost 1.1 1.1
Interest cost 6.0 5.5
Plan participants' contributions 2.7 2.2
Curtailment gain (.2) --
Benefits paid (7.8) (6.8)
Actuarial loss (gain) 18.2 (1.7)
- -------------------------------------------------------------------
Benefit obligation at end of year $ 95.3 $ 75.3
===================================================================
Change in plan assets
Fair value of plan assets at beginning
of year $ -- $ --
Plan participants' contributions 2.7 2.2
Employer contributions 5.1 4.6
Benefits paid (7.8) (6.8)
- -------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ --
===================================================================
Unfunded status $(95.3) $(75.3)
Unrecognized actuarial gain (3.4) (22.2)
- -------------------------------------------------------------------
Postretirement liability $(98.7) $(97.5)
===================================================================
The accumulated postretirement benefit obligation of $98.7 million at the
end of 2002 consists of a current liability of $4.7 million reported in "Other
accrued liabilities" and a long-term liability of $94.0 million reported in
"Retiree health care benefits" on the accompanying Consolidated Balance Sheets.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 6.75% at the end of 2002
Snap-On Incoporated
54
and 7.5% at the end of 2001. The actuarial calculation assumes a health care
cost trend rate of 10.0% in 2003, decreasing gradually to 6.0% in 2009 and
thereafter.
As of December 28, 2002, a one-percentage-point increase in the health care
cost trend rate for future years would increase the accumulated postretirement
benefit obligation by $1.1 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 $1.0 million and the service cost and
interest cost components by $.1 million.
NOTE 15: STOCK OPTIONS AND PURCHASE PLANS
Snap-on has stock option plans for directors, officers and key employees, with
expiration dates on the options ranging from 2003 to 2012 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. This plan reserves five million shares of common stock for
issuance, of which 3,660,655 shares were available for future grants at December
28, 2002.
Under the Directors' Fee Plan, 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's common stock. Directors may elect to defer receipt of all
or part of these shares. For 2002, 2001 and 2000, issuances under the Directors'
Fee Plan totaled 4,750 shares, 10,367 shares and 8,908 shares. Additionally,
receipt of 11,865 shares, 15,043 shares and 11,670 shares was deferred in 2002,
2001 and 2000. At December 28, 2002, shares reserved for issuance to directors
under this plan totaled 183,713 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 2002, 2001 and 2000, issuances
under the employee stock ownership plan totaled 53,142 shares, 57,231 shares and
55,322 shares. At December 28, 2002, shares reserved for issuance to employees
under this plan totaled 490,714, and Snap-on held contributions of approximately
$1.0 million for the purchase of common stock by employees.
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 2002, 2001 and 2000, issuances under the
dealer stock purchase plan totaled 76,381 shares, 78,440 shares and 78,165
shares. At December 28, 2002, shares reserved for issuance to franchised dealers
under this plan totaled 214,543, and Snap-on held dealer contributions of
approximately $1.1 million for the purchase of common stock. Compensation
expense for plan participants in 2002, 2001 and 2000 was not material.
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 contributions. For 2002, 2001 and 2000,
issuances under the dividend reinvestment and stock purchase plan totaled 45,649
shares, 47,650 shares and 50,725 shares. At December 28, 2002, shares available
for purchase under this plan totaled 1,762,637 shares.
Snap-on accounts for its stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." In accordance with the provisions of APB Opinion No.
25, no compensation expense was recorded for stock options as all options
granted had an exercise price equal to the market value of the underlying common
stock on the measurement date. For restricted stock and stock appreciation
rights awards, Snap-on recorded compensation expense in the respective periods
as appropriate.
Snap-on has adopted the disclosure provisions of SFAS No. 148 as of
December 28, 2002, and the table on the top of page 56 illustrates the effect on
net earnings and earnings per share as if Snap-on had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compen-
sation," to stock-based employee compensation using the Black-Scholes
option-pricing model.
2002 Annual Report
55
Notes to Consolidated Financial Statements(continued)
(Amounts in millions except per share data) 2002 2001 2000
- ------------------------------------------------------------------------------
Net earnings, as reported $106.0 $ 19.0 $148.5
Add: Stock-based employee compensation
expense included in reported net earnings,
net of related tax effects 1.7 2.3 .2
Deduct: Stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects (7.5) (8.3) (7.4)
- ------------------------------------------------------------------------------
Pro forma net earnings $100.2 $ 13.0 $141.3
==============================================================================
Net earnings per share--basic:
As reported $ 1.82 $ .33 $ 2.54
Pro forma 1.72 .22 2.42
Net earnings per share--diluted:
As reported $ 1.81 $ .33 $ 2.53
Pro forma 1.71 .22 2.41
- ------------------------------------------------------------------------------
Weighted-average assumptions under Black-Scholes:
Risk-free interest rate 3.8% 4.9% 6.7%
Dividend yield 2.8% 2.8% 2.5%
Expected stock price volatility 33.1% 38.7% 28.2%
Expected option life (in years) 6.1 5.6 5.6
- ------------------------------------------------------------------------------
For disclosure purposes only under SFAS No. 123, the fair value of each
option grant was estimated as of the date of grant using the Black-Scholes
option-pricing model. The weighted-average fair value of options granted was
$9.16 in 2002, $9.37 in 2001 and $7.55 in 2000, as calculated using the
Black-Scholes option-pricing model.
Stock option activity was as follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Options Exercise Price* Options Exercise Price* Options Exercise Price*
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 5,189,146 $29.83 4,526,481 $29.44 2,977,467 $30.83
Granted 863,809 31.90 1,227,707 28.95 1,735,600 26.37
Exercised (478,285) 22.80 (375,756) 21.83 (118,681) 20.42
Canceled (175,076) 32.96 (189,286) 30.14 (67,905) 28.16
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 5,399,594 $30.70 5,189,146 $29.83 4,526,481 $29.44
=======================================================================================================================
Exercisable at end of year 4,060,271 $30.66 3,447,146 $30.65 2,887,481 $30.21
Available for grant at end of year 3,660,655 4,349,388 387,809
- -----------------------------------------------------------------------------------------------------------------------
* Weighted-average
The following table summarizes information about stock options as of December 28, 2002:
2002 Options Outstanding 2002 Options Exercisable
- -------------------------------------------------------------------------------------------------------------------
Remaining
Options Contractual Options
Range of Exercise Prices Outstanding Life (Years)* Exercise Price* Exercisable Exercise Price*
- -------------------------------------------------------------------------------------------------------------------
$19 to $25 255,500 1.9 $21.28 255,500 $21.28
$25 to $31 2,768,281 7.6 27.65 2,172,253 27.25
$31 to $38 1,873,946 7.0 34.01 1,130,651 35.18
$38 to $46 501,867 5.1 39.97 501,867 39.98
- -------------------------------------------------------------------------------------------------------------------
Totals 5,399,594 6.9 $30.70 4,060,271 $30.66
===================================================================================================================
* Weighted-average
Snap-On Incoporated
56
In 2002, Snap-on granted 209,000 shares of restricted stock and performance
units to certain executive officers and other key employees under the 2001
Incentive Stock and Awards Plan. Vesting of the shares of restricted stock and
performance units will be dependent upon performance relative to pre-defined
goals for revenue growth and return on net assets employed before interest and
taxes for fiscal years 2002 and 2003. Based on Snap-on's performance relative to
these goals, the recipient can earn up to 100% of the restricted stock award.
For performance achieved above a certain level, the recipient will then earn
performance units in addition to the restricted stock, not to exceed 50% of the
number of shares of restricted stock initially awarded. Each performance unit
represents the right to receive in cash $34.96, which was the fair market value
of a share of the company's common stock on March 12, 2002. Based on the plan
performance criteria, the company was not required to recognize any compensation
expense in 2002 for these awards.
As of December 28, 2002, Snap-on also had 105,600 restricted stock grants
outstanding valued at $3.1 million that were issued to certain officers under
the 2001 Incentive Stock and Awards Plan. Compensation expense is being
recognized on a straight-line basis over the respective service period and was
$1.0 million in both 2002 and 2001.
As of December 28, 2002, Snap-on had 577,750 stock appreciation rights
outstanding that were granted to certain key non-U.S. employees with an average
grant price of $30.48 per unit. These performance units expire 10 years after
date of grant and have vesting periods that range from two to three years. The
performance units provide for the cash payment of the excess of the fair market
value of Snap-on's common stock price on the date of exercise over the grant
price, and Snap-on accrues compensation expense based upon the current market
price for its common stock and the number of performance units outstanding. The
performance share units have no effect on dilutive shares or shares outstanding
as any appreciation of Snap-on's common stock value over the grant price is paid
in cash and not in common stock.
NOTE 16: CAPITAL STOCK
Snap-on has undertaken repurchases of its common stock from time to time to
offset 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 405,000 shares
in 2002, following the repurchase of 400,000 shares in 2001 and 1,019,500 shares
in 2000. As of the end of 2002, Snap-on has remaining availability to repurchase
up to an additional $142 million in common stock pursuant to the Board of
Directors' authorizations. The purchase of Snap-on common stock is at the
company's discretion, subject to prevailing financial and market conditions. In
2002, Snap-on's average common stock repurchase price was approximately $30.03
per share.
In August 1997, the Board of Directors declared 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 2001 Incentive Stock and Awards Plan 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 28, 2002, the GST
held 5,321,977 shares of common stock.
2002 Annual Report
57
Notes to Consolidated Financial Statements(continued)
NOTE 17: 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-lease income, were as follows:
Year Ending (Amounts in millions)
- -------------------------------------------------------------
2003 $26.1
2004 19.4
2005 14.2
2006 10.4
2007 8.9
2008 and thereafter 18.3
- -------------------------------------------------------------
Rent expense, net of sub-lease rental income, for worldwide facilities and
office equipment was $32.3 million, $32.1 million and $35.3 million in 2002,
2001 and 2000.
SOC 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 $11.0 million at December 28, 2002, and
$22.0 million at December 29, 2001. This bank line of credit has an expiration
date of May 31, 2003. To date, there have been no draws upon this guarantee.
Snap-on has credit risk exposure for certain loan originations with recourse
provisions from SOC. Refer to Note 9 for additional information.
Snap-on provides product warranties for specific product lines and accrues
for estimated future warranty cost in the period in which the sale is recorded.
Snap-on calculates its reserve requirements based on historic warranty loss
experience that is periodically adjusted for recent actual experience. The
following is an analysis of Snap-on's product warranty reserve for fiscal-year
2002:
(Amounts in millions) 2002
- -------------------------------------------------------------
Warranty reserve:
Beginning of year $ 8.2
Additions 15.2
Usage (11.8)
- -------------------------------------------------------------
End of year $11.6
=============================================================
Snap-on held 1,592 active or pending patents as of year-end 2002, and
Snap-on vigorously prosecutes its claims and defends its patents in the ordinary
course of business. In February 1998, Snap-on filed a complaint alleging
infringement of certain of Snap-on's patents by Hunter Engineering Company
("Hunter"). Hunter counterclaimed, alleging infringement of certain of its
patents and one trademark. In April 2002, the court set a trial date of October
14, 2002, for various patents. In May 2002, Hunter alleged infringement of two
additional patents for which a March 2003 trial date was later set. That trial
date was vacated when the case was consolidated with the above litigation in
October 2002.
The October 14, 2002, trial date was later postponed by the court to
October 30, 2002. On October 22, 2002, a settlement was reached between Snap-on
and Hunter for all of the above-mentioned matters, and in the fourth quarter of
2002, a final, comprehensive agreement was reached in Snap-on's favor for $10.8
million, net of related legal expenses incurred in the year.
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. As part of a binding arbitration process in 2001, the
arbitrator ruled in favor of SPX, and Snap-on was ordered to pay $44.0 million
to SPX. This obligation was paid in January 2002 and was recorded in "Other
accrued liabilities" on the accompanying 2001 Consolidated Balance Sheet and in
"Operating expenses" on the accompanying 2001 Consolidated Statement of
Earnings.
Snap-on has various corporate and government customers worldwide that
purchase Snap-on products pursuant to multi-year contracts. These contracts can
include a variety of terms and are periodically subject to audit by the
customers for compliance. Snap-on currently has two contracts being audited by
government auditors. Snap-on is also involved in various other legal matters
that are being defended and handled in the ordinary course of business. Snap-on
maintains accruals for such costs that are expected to be incurred with regards
to these matters. 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 18, SEGMENTS
Snap-on's business segments are based on the organizational structure used by
management for making operating and investment decisions and for assessing
performance. Snap-on previously reported two business segments: the Snap-on
Dealer Group, which represented the worldwide franchised dealer van channel, and
the Commercial and Industrial Group, which included all of Snap-on's non-dealer
businesses. Due to changes in Snap-on's management organization structure,
Snap-on changed its reportable business segments in 2002 to the following: (i)
the Snap-on Dealer Group; (ii) the Commercial and Industrial Group; and (iii)
the Diagnostics and Information Group. The Snap-on Dealer Group consists of
Snap-on's business operations serving the worldwide franchised dealer van
channel. The Commercial and Industrial Group consists of the business operations
providing tools and equipment products to a broad range of industrial and
commercial customers worldwide through direct, distributor and other
non-franchised distribution channels. The Diagnostics and Information Group
consists of the business operations providing
Snap-On Incoporated
58
diagnostics equipment, vehicle service information, business management systems,
equipment repair services and other solutions for customers in the worldwide
vehicle service and repair marketplace. The accompanying financial information
for 2002, 2001 and 2000 is presented in the new segment structure.
The accounting policies described in Note 2 are applicable to reportable
segments. Snap-on evaluates the performance of its operating segments based on
segment net sales and operating earnings. Segment net sales are defined as total
net sales, including both net sales to external customers and intersegment
sales, before elimination of intersegment activity. Segment operating earnings
are defined as segment net sales less cost of goods sold and operating expenses.
Snap-on accounts for intersegment sales and transfers based primarily on
standard costs with reasonable mark-ups established between the segments.
Snap-on allocates shared services expenses to those segments that utilize the
services based on a percentage of either cost of goods sold or segment net
sales, as appropriate.
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.
Financial data by segment was as follows:
(Amounts in millions) 2002 2001 2000
- --------------------------------------------------------------------
Net sales from
external customers
Snap-on Dealer Group $1,032.5 $1,026.0 $1,065.8
Commercial and
Industrial Group 911.1 905.9 943.3
Diagnostics and
Information Group 165.5 163.8 166.6
- --------------------------------------------------------------------
Total net sales $2,109.1 $2,095.7 $2,175.7
====================================================================
Intersegment sales
Snap-on Dealer Group $ 22.6 $ 24.8 $ 43.0
Commercial and
Industrial Group 117.2 109.8 116.7
Diagnostics and
Information Group 168.9 157.4 128.4
- --------------------------------------------------------------------
Total intersegment sales $ 308.7 $ 292.0 $ 288.1
====================================================================
Total net sales
Snap-on Dealer Group $1,055.1 $1,050.8 $1,108.8
Commercial and
Industrial Group 1,028.3 1,015.7 1,060.0
Diagnostics and
Information Group 334.4 321.2 295.0
- --------------------------------------------------------------------
Segment net sales 2,417.8 2,387.7 2,463.8
Intersegment eliminations (308.7) (292.0) (288.1)
- --------------------------------------------------------------------
Total net sales $2,109.1 $2,095.7 $2,175.7
====================================================================
The following is a reconciliation of Snap-on's segment operating earnings
to earnings before income taxes:
(Amounts in millions) 2002 2001 2000
- --------------------------------------------------------------------
Operating earnings
Snap-on Dealer Group $ 91.9 $122.9 $136.3
Commercial and
Industrial Group 50.5 25.7 62.3
Diagnostics and
Information Group 23.3 8.3 15.1
- --------------------------------------------------------------------
Segment operating earnings 165.7 156.9 213.7
Net finance income 37.7 35.7 38.1
Restructuring and other
non-recurring charges (5.1) (62.0) (21.8)
Arbitration resolution -- (44.0) --
Interest expense (28.7) (35.5) (40.7)
Other income
(expense)--net (8.4) (3.5) 3.3
- --------------------------------------------------------------------
Earnings before
income taxes $161.2 $ 47.6 $192.6
====================================================================
Snap-on does not allocate restructuring and other non-recurring charges
(credits) to its reportable segments. Had it been Snap-on's policy to allocate
these items to its reportable segments, such amounts would have been allocated
as follows:
(Amounts in millions) 2002 2001 2000
- --------------------------------------------------------------------
Restructuring and
other non-recurring
charges (credits)
Snap-on Dealer Group $ 1.9 $ 14.2 $ 13.3
Commercial and
Industrial Group 4.9 22.4 .7
Diagnostics and
Information Group (1.7) 25.4 7.8
- --------------------------------------------------------------------
Total restructuring and
other non-recurring
charges $ 5.1 $ 62.0 $ 21.8
====================================================================
In 2001, the $44.0 million cost incurred for the resolution of patent
arbitration was not allocated to the reportable segments.
2002 Annual Report
59
Notes to Consolidated Financial Statements(continued)
(Amounts in millions) 2002 2001 2000
- --------------------------------------------------------------------
Total assets
Snap-on Dealer Group $ 759.7 $ 805.0 $ 802.4
Commercial and
Industrial Group 1,010.7 921.8 968.8
Diagnostics and
Information Group 198.5 208.7 269.0
- --------------------------------------------------------------------
Total from reportable
segments 1,968.9 1,935.5 2,040.2
Financial Services 82.5 82.0 96.2
Elimination of
intersegment receivables (57.3) (43.2) (67.3)
- --------------------------------------------------------------------
Total assets $1,994.1 $1,974.3 $2,069.1
====================================================================
Capital expenditures
Snap-on Dealer Group $ 15.0 $ 19.3 $ 15.0
Commercial and
Industrial Group 23.9 29.5 37.4
Diagnostics and
Information Group 6.9 4.8 5.2
- --------------------------------------------------------------------
Total from reportable
segments 45.8 53.6 57.6
Financial Services -- -- --
- --------------------------------------------------------------------
Total capital expenditures $ 45.8 $ 53.6 $ 57.6
====================================================================
Depreciation and amortization
Snap-on Dealer Group $ 24.3 $ 28.3 $ 26.2
Commercial and
Industrial Group 22.9 30.0 28.9
Diagnostics and
Information Group 4.5 9.7 11.1
- --------------------------------------------------------------------
Total from reportable
segments 51.7 68.0 66.2
Financial Services -- -- --
- --------------------------------------------------------------------
Total depreciation and
amortization $ 51.7 $ 68.0 $ 66.2
====================================================================
Geographic data is as follows:
(Amounts in millions) 2002 2001 2000
- --------------------------------------------------------------------
Geographic information
Net sales*
United States $1,358.7 $1,360.0 $1,367.1
Europe 547.0 537.5 587.5
All other 203.4 198.2 221.1
- --------------------------------------------------------------------
Total net sales $2,109.1 $2,095.7 $2,175.7
====================================================================
Long-lived assets
United States $ 178.0 $ 189.1$ 199.0
Europe 132.0 114.0 121.7
All other 20.2 24.6 24.4
- --------------------------------------------------------------------
Total long-lived assets $ 330.2 $ 327.7 $ 345.1
====================================================================
* 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 categories: tools and
equipment. The following table shows the consolidated sales of these product
categories in the last three years:
(Amounts in millions) 2002 2001 2000
- --------------------------------------------------------------------
Net sales
Tools $1,281.7 $1,291.1 $1,343.5
Equipment 827.4 804.6 832.2
- --------------------------------------------------------------------
Total net sales $2,109.1 $2,095.7 $2,175.7
====================================================================
Snap-On Incoporated
60
Quarterly Financial Information (Unaudited)
First Second Third Fourth
(Amounts in millions except per share data) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------
2002
Net sales $ 510.0 $ 547.2 $ 502.4 $ 549.5 $2,109.1
Gross profit 235.7 251.4 227.8 250.0 964.9
Net earnings 24.5 29.2 19.2 33.1 106.0
Earnings per share--basic .42 .50 .33 .57 1.82
Earnings per share--diluted .42 .50 .33 .56 1.81
Cash dividends paid per share $ .24 $ .24 $ .24 $ .25 $ .97
2001
Net sales $ 527.4 $ 525.6 $ 508.1 $ 534.6 $2,095.7
Gross profit 243.7 239.3 222.4 243.6 949.0
Net earnings (loss) 26.9 8.9 .6 (17.4) 19.0
Earnings (loss) per share--basic .47 .15 .01 (.30) .33
Earnings (loss) per share--diluted .47 .15 .01 (.30) .33
Cash dividends paid per share $ .24 $ .24 $ .24 $ .24 $ .96
2002:
In 2002, restructuring and other non-recurring charges totaled $5.1 million
($3.3 million after tax or $.05 per basic share and $.06 per diluted share).
Restructuring and non-recurring charges (credits) were incurred throughout the
year as follows: First quarter--$3.4 million; Second quarter - $1.4 million;
Third quarter--$1.6 million; Fourth quarter--$(1.3) million. Non-comparable
credits in 2002 totaled a net gain of $2.0 million ($1.3 million after tax or
$.02 per basic and diluted share). Non-comparable charges (credits) occurred as
follows: First quarter--$2.6 million for the write-down of a receivable related
to the closure of auto service centers associated with a major retailer's
bankruptcy; Fourth quarter--$(4.6) million net benefit from the resolution of a
patent infringement matter partially offset by a provision for certain
contractual matters.
As a result of the adoption of SFAS No. 142 at the beginning of the 2002 fiscal
year, Snap-on no longer records amortization expense for goodwill and certain
other intangibles.
2002 includes a gain of $2.8 million ($2.8 million after tax or $.05 per basic
and diluted share) for the cumulative effect of a change in accounting principle
for goodwill in the first quarter.
2001:
In 2001, restructuring and other non-recurring charges totaled $62.0 million
($46.1 million after tax or $.80 per basic and diluted share), of which $12.6
million was recorded in cost of goods sold. Restructuring and non-recurring
charges occurred as follows: Second quarter--$14.4 million; Third quarter--$30.4
million; Fourth quarter--$17.2 million. Non-comparable charges in 2001 totaled
$58.4 million ($39.1 million after tax or $.67 per basic and diluted share),
including $1.5 million in cost of goods sold for inventory write-downs
associated with the termination of a European supplier relationship and $56.9
million in operating expenses that included $44.0 million for the resolution of
an arbitration matter and $3.0 million for related legal costs; $5.9 million for
costs associated with terminating the European supplier relationship; and $4.0
million for emissions-related bad debts and other costs. Non-comparable charges
occurred as follows: Second quarter--$6.1 million; Third quarter--$4.0 million;
Fourth quarter--$48.3 million.
2001 results also contain $15.1 million ($12.7 million after tax or $.22 per
basic and diluted share) of goodwill and intangible amortization that occurred
ratably throughout the year.
2001 results included a 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 in the first quarter.
2002 Annual Report
61
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. Management relies on a system of
internal accounting controls and procedures that is intended, consistent with
reasonable cost, to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that they are included in the
financial records in all material respects, and that accountability for assets
is maintained. Internal auditors conduct operational and financial audits to
evaluate the adequacy of internal controls and accounting practices.
Snap-on's consolidated financial statements for fiscal 2002 have been
audited by Deloitte & Touche LLP, independent auditors, whose report thereon
appears herein. As part of their audit of Snap-on's consolidated financial
statements, Deloitte & Touche LLP considered Snap-on's system of internal
controls to the extent they deemed necessary to determine the nature, timing and
extent of their audit tests. Management has made available to Deloitte & Touche
LLP Snap-on's financial records and related data.
The Board of Directors has appointed an audit committee composed entirely
of outside directors. The committee 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 auditors to discuss Snap-on's internal
accounting controls, auditing and financial reporting matters. The committee
reports to the Board of Directors on its activities and findings. The internal
auditors and independent auditors have unrestricted access to the audit
committee.
/s/ Dale F. Elliott /s/ Martin M. Ellen
DALE F. ELLIOTT MARTIN M. ELLEN
Chairman, President and Senior Vice President--Finance
Chief Executive Officer and Chief Financial Officer
Independent Auditors' Report
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SNAP-ON INCORPORATED
We have audited the accompanying consolidated balance sheet of Snap-on
Incorporated and subsidiaries (the Company) as of December 28, 2002, and the
related consolidated statements of earnings, shareholders' equity and
comprehensive income, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company as of December 29, 2001, and
for each of the two years in the period ended December 29, 2001, were audited by
other auditors who have ceased operations. Those auditors, whose report dated
January 29, 2002, expressed an unqualified opinion on those statements and
included an explanatory paragraph that described the changes in accounting
method for derivatives effective December 31, 2000 (explained in Note 11 to the
consolidated financial statements), and pensions effective January 2, 2000
(explained in Note 13 to the consolidated financial statements).
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
28, 2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 8 to the consolidated financial statements, the
Company ceased its amortization of goodwill and other indefinite-lived
intangible assets in 2002 in accordance with Statement of Financial Accounting
Standards (Statement) No. 142, "Goodwill and Other Intangible Assets," which was
adopted by the Company as of December 30, 2001.
As discussed above, the consolidated financial statements of the Company as
of December 29, 2001, and for the two years then ended were audited by other
auditors who have ceased operations. As described in Note 8, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement No. 142. Our audit procedures with respect to the
disclosures in Note 8 with respect to 2001 and 2000 included (i) agreeing the
previously reported net income to the previously issued financial statements and
the adjustments to reported net earnings representing amortization expense
(including any related tax effects) recognized in those periods
Snap-On Incoporated
62
related to goodwill and other indefinite-lived intangible assets as a result of
initially applying Statement No. 142 (including any related tax effects) to the
Company's underlying records obtained from management, and (ii) testing the
mathematical accuracy of the reconciliation of adjusted net earnings to reported
net earnings, and the related earnings-per-share amounts. In our opinion, the
disclosures for 2001 and 2000 in Note 8 are appropriate.
As discussed above, the consolidated financial statements of the Company as
of December 29, 2001, and for the two years then ended were audited by other
auditors who have ceased operations. As described in Note 18, the Company
changed the composition of its reportable segments in 2002, and the amounts in
the 2001 and 2000 financial statements relating to reportable segments have been
restated to conform to the 2002 composition of reportable segments. We audited
the adjustments that were applied to restate the disclosures for reportable
segments reflected in the 2001 and 2000 financial statements. Our procedures
included (i) agreeing the adjusted amounts of segment net sales from external
customers, intersegment sales, earnings and assets to the Company's underlying
records obtained from management, and (ii) testing the mathematical accuracy of
the reconciliations of segment amounts to the consolidated financial statements.
In our opinion, such adjustments are appropriate and have been properly applied.
As discussed above, the consolidated financial statements of the Company as
of December 29, 2001, and for the two years then ended were audited by other
auditors who have ceased operations. As described in Note 5, the Company has
reclassified trade accounts receivable and gross installment receivables not due
within one year from current assets, and the related amounts in the 2001 and
2000 financial statements have been reclassified. We audited the adjustments
that were applied to reclassify these amounts in the 2001 and 2000 financial
statements. Our procedures included (i) agreeing the amounts representing
receivables due in excess of one year from Note 5 of the previously issued
financial statements to the Company's underlying records obtained from
management, and (ii) testing the mathematical accuracy of the reconciliations of
adjusted accounts receivable (current and noncurrent) to the reported amounts.
In our opinion, the adjustments described above to present the transitional
disclosures required by Statement No. 142, restate the reportable segments and
to reclassify trade accounts receivable and gross installment receivables not
due within one year have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 or 2000 consolidated
financial statements of the Company other than with respect to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance on
the 2001 or 2000 consolidated financial statements taken as a whole.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 22, 2003
Report of Independent Public Accountants
The following Report of Independent Public Accountants is a copy of a report
that Arthur Andersen LLP previously issued in connection with Snap-on's Annual
Report on Form 10-K for the year ended December 29, 2001. Arthur Andersen LLP
has not reissued this report in connection with the preparation of Snap-on's
financial statements as of and for the period ended December 28, 2002. In 2002,
the company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets." As described in Note 8, these
consolidated financial statements have been revised to include the transitional
disclosures required by SFAS No. 142. As described in Note 18, the company
changed the composition of its reportable segments in 2002, and the amounts in
the 2001 and 2000 financial statements relating to reportable segments have been
restated to conform to the 2002 composition of reportable segments. As described
in Note 5, the company has reclassified trade accounts receivable and gross
installment receivables not due within one year from current assets, and the
related amounts in the 2001 and 2000 financial statements have been
reclassified. In each of these cases, the Arthur Andersen LLP report does not
extend to the transitional disclosures or the restated or reclassified amounts.
These transitional disclosures and restated and reclassified amounts are
reported on by Deloitte & Touche LLP as stated in their report appearing herein.
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
2002 Annual Report
63