UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended September 27, 2003
Commission File Number 1-7724
Snap-on Incorporated
(Exact name of registrant as specified in its charter)
Delaware 39-0622040
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10801 Corporate Drive, Pleasant Prairie, Wisconsin 53158-1603
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (262) 656-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 25, 2003
- -------------------------- -------------------------------
Common stock, $1 par value 58,264,700 shares
SNAP-ON INCORPORATED
INDEX
Page
----
Part I. Financial Information
Consolidated Statements of Earnings -
Three and Nine Months Ended
September 27, 2003, and September 28, 2002 3
Consolidated Balance Sheets -
September 27, 2003, and December 28, 2002 4-5
Consolidated Statements of Cash Flows -
Nine Months Ended
September 27, 2003, and September 28, 2002 6
Notes to Consolidated Financial Statements 7-21
Management's Discussion and Analysis of
Financial Condition and Results of Operations 22-36
Quantitative and Qualitative Disclosures
About Market Risk 37-38
Controls and Procedures 38
Part II. Other Information 39-40
2
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 525.6 $ 502.4 $ 1,633.9 $ 1,559.6
Cost of goods sold (303.8) (274.6) (920.6) (844.7)
--------- --------- --------- ---------
Gross profit 221.8 227.8 713.3 714.9
Operating expenses (200.7) (198.8) (630.2) (604.3)
Net finance income 10.0 10.3 31.7 26.4
--------- --------- --------- ---------
Operating earnings 31.1 39.3 114.8 137.0
Interest expense (5.8) (6.9) (18.2) (22.2)
Other income (expense) - net (2.4) (2.3) (6.5) (5.3)
--------- --------- --------- ---------
Earnings before income taxes 22.9 30.1 90.1 109.5
Income taxes (5.2) (10.9) (28.7) (39.4)
--------- --------- --------- ---------
Earnings before cumulative effect of a change in
accounting principle 17.7 19.2 61.4 70.1
Cumulative effect of a change in accounting
principle, net of tax - - - 2.8
--------- --------- --------- ---------
Net earnings $ 17.7 $ 19.2 $ 61.4 $ 72.9
========= ========= ========= =========
Net earnings per share - basic and diluted:
Earnings before cumulative effect of a change in
accounting principle $ .30 $ .33 $ 1.05 $ 1.20
Cumulative effect of a change in accounting
principle, net of tax - - - .05
--------- --------- --------- ---------
Net earnings per share $ .30 $ .33 $ 1.05 $ 1.25
========= ========= ========= =========
Weighted-average shares outstanding:
Basic 58.3 58.4 58.2 58.2
Effect of dilutive options .1 .3 .2 .3
--------- --------- --------- ---------
Diluted 58.4 58.7 58.4 58.5
========= ========= ========= =========
Dividends declared per common share $ - $ - $ .75 $ .72
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
3
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
September 27, December 28,
2003 2002
------------- ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 85.4 $ 18.4
Accounts receivable - net of allowances 561.2 556.2
Inventories
Finished goods 316.8 337.5
Work in process 47.0 42.0
Raw materials 90.9 86.2
Excess of current cost over LIFO cost (89.5) (95.8)
-------- --------
Total inventory 365.2 369.9
Prepaid expenses and other assets 119.1 106.5
-------- --------
Total current assets 1,130.9 1,051.0
Property and equipment
Land 25.6 23.8
Buildings and improvements 216.3 202.9
Machinery and equipment 570.8 541.8
-------- --------
812.7 768.5
Accumulated depreciation (487.2) (438.3)
-------- --------
Property and equipment - net 325.5 330.2
Deferred income tax benefits 61.5 60.9
Goodwill 397.5 366.4
Other intangibles - net 68.6 65.7
Other assets 123.9 119.9
-------- --------
Total assets $2,107.9 $1,994.1
======== ========
See Notes to Consolidated Financial Statements.
4
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except share data)
September 27, December 28,
2003 2002
------------- ------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 175.4 $ 170.9
Notes payable and current maturities of long-term debt 31.8 56.4
Accrued benefits 44.1 40.1
Accrued compensation 43.3 44.4
Dealer deposits 48.4 46.1
Deferred subscription revenue 31.8 42.5
Income taxes 35.9 29.8
Other accrued liabilities 147.8 122.2
-------- ---------
Total current liabilities 558.5 552.4
Long-term debt 303.9 304.3
Deferred income taxes 35.4 33.6
Retiree health care benefits 98.4 94.0
Pension liability 139.6 136.6
Other long-term liabilities 44.0 42.8
-------- ---------
Total liabilities 1,179.8 1,163.7
-------- ---------
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 66,942,777 and 66,897,506 shares 66.9 66.9
Additional paid-in capital 72.0 72.9
Retained earnings 1,081.9 1,064.2
Accumulated other comprehensive income (loss) (43.6) (123.8)
Grantor stock trust at fair market value - 5,075,680
and 5,321,977 shares (138.8) (147.5)
Treasury stock at cost - 3,624,764 and 3,326,462 shares (110.3) (102.3)
-------- ---------
Total shareholders' equity 928.1 830.4
-------- ---------
Total liabilities and shareholders' equity $2,107.9 $1,994.1
======== =========
See Notes to Consolidated Financial Statements.
5
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Nine Months Ended
-----------------------------------
September 27, September 28,
2003 2002
------------- -------------
OPERATING ACTIVITIES
Net earnings $ 61.4 $ 72.9
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Cumulative effect of a change in accounting principle
(net of tax) for goodwill - (2.8)
Depreciation 41.9 37.8
Amortization of intangibles 1.6 1.3
Deferred income tax provision (benefit) (5.2) 26.3
Gain on sale of assets - (.5)
Loss (gain) on mark to market for cash flow hedges .8 (1.6)
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in receivables 27.7 40.6
(Increase) decrease in inventories 29.5 (19.0)
(Increase) decrease in prepaid and other assets (23.0) (9.6)
Increase (decrease) in accounts payable (2.9) 40.4
Increase (decrease) in accruals and other liabilities 8.2 (60.0)
------- -------
Net cash provided by operating activities 140.0 125.8
INVESTING ACTIVITIES
Capital expenditures (18.7) (37.3)
Acquisitions of businesses - net of cash acquired .1 (.8)
Disposal of property and equipment 4.0 6.8
------- -------
Net cash used in investing activities (14.6) (31.3)
FINANCING ACTIVITIES
Payment of long-term debt (.2) (3.1)
Increase in long-term debt - 4.3
Net decrease in short-term borrowings (22.8) (65.3)
Purchase of treasury stock (8.1) (6.4)
Proceeds from stock purchase and option plans 7.8 17.2
Proceeds from termination of interest rate swap agreement 5.1 -
Cash dividends paid (43.6) (41.8)
------- -------
Net cash used in financing activities (61.8) (95.1)
Effect of exchange rate changes on cash 3.4 .8
------- -------
Increase in cash and cash equivalents 67.0 .2
Cash and cash equivalents at beginning of period 18.4 6.7
------- -------
Cash and cash equivalents at end of period $ 85.4 $ 6.9
======= =======
Supplemental cash flow disclosures:
Cash paid for interest $ 19.3 $ 24.2
Cash paid (refunded) for income taxes $ 13.3 $ (2.4)
See Notes to Consolidated Financial Statements.
6
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. This report should be read in conjunction with the consolidated financial
statements and related notes included in Snap-on Incorporated's ("Snap-on"
or "the company") Annual Report on Form 10-K for the year ended December
28, 2002.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments and adjustments related to restructuring and other
non-recurring charges) necessary to a fair statement of financial condition
and results of operations for the three and nine months ended September 27,
2003, have been made. Management also believes that the results of
operations for the three and nine months ended September 27, 2003, are not
necessarily indicative of the results to be expected for the full year.
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
2. In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and Equity," which requires issuers to classify as liabilities certain
classes of freestanding financial instruments (instruments that are entered
into separately from other instruments or transactions or are legally
detachable and separately exercisable) that represent obligations of the
issuer. SFAS No. 150 is effective for all public company freestanding
financial instruments entered into or modified after May 31, 2003. The
adoption of SFAS No. 150, which became effective for Snap-on on June 29,
2003, the beginning of its fiscal 2003 third quarter, did not have a
material impact on the company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities," which became
effective for Snap-on on June 29, 2003, the beginning of its fiscal 2003
third quarter. SFAS No. 149 clarifies accounting for certain derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities under SFAS No. 133. The adoption of SFAS
No. 149 did not have a material impact on the company's consolidated
financial statements. See Note 9 for additional information on Snap-on's
derivative and hedging financial instruments.
The 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. FIN No. 46
provides consolidation guidance regarding the identification of variable
interest entities ("VIE") for which control is achieved through means other
than through voting rights. FIN No. 46 provides guidance in determining if
a business enterprise is the primary beneficiary of a VIE and whether or
not that business enterprise should consolidate the VIE for financial
reporting purposes. FIN No. 46 applies to a VIE in which equity investors
of the VIE, if any, 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, then that
entity would be the primary beneficiary and would be required to include
the assets,
7
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
liabilities and results of operations of the special purpose entity in its
consolidated financial statements.
In Snap-on's Form 10-Q for the quarter ended June 28, 2003, the company
disclosed that it had completed its evaluation of FIN No. 46 and concluded
that Snap-on was not required to consolidate Snap-on Credit LLC ("SOC"), a
50%-owned financial services joint venture that is accounted for using the
equity method. On October 9, 2003, the FASB postponed the initial
implementation date for FIN No. 46, which would have been effective for
Snap-on on June 29, 2003, the beginning of its fiscal 2003 third quarter.
The company is evaluating recent guidance from the FASB, the U.S.
Securities and Exchange Commission ("SEC") and the accounting profession on
the implementation of FIN No. 46, the results of which could alter the
company's previously disclosed position on the consolidation of SOC. During
the fourth quarter of 2003, Snap-on will continue to evaluate the
appropriate accounting for SOC under FIN No. 46. The company will conclude
on the impact of the adoption of FIN No. 46 in the fourth quarter of fiscal
2003, provided that FIN No. 46 becomes effective for Snap-on in that
quarter. If it is determined that Snap-on is required to consolidate SOC,
then Snap-on will include the assets and liabilities of SOC in its
consolidated financial statements as of January 3, 2004, Snap-on's fiscal
2003 year end. Refer to Note 7 for additional information regarding SOC,
including SOC's unaudited summary statements of financial condition as of
September 30, 2003, and December 31, 2002, and SOC's unaudited summary
results of operations for the three and nine months ended September 30,
2003, and September 30, 2002.
3. Accounts receivable include trade accounts receivable, installment
receivables and dealer financing. Current gross installment receivables
amounted to $59.1 million and $49.5 million at September 27, 2003, and
December 28, 2002, and include $9.9 million and $8.1 million of unearned
finance charges. The components of Snap-on's current accounts receivable
were as follows:
Sept.27, Dec. 28,
(Amounts in millions) 2003 2002
---- ----
Trade accounts receivable $519.3 $497.0
Installment receivables 49.2 41.4
Other accounts receivable 38.3 59.0
------ ------
Total 606.8 597.4
Allowance for doubtful accounts (45.6) (41.2)
------ ------
Total accounts receivable - net $561.2 $556.2
====== ======
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 payment terms that are
due beyond one year. Long-term gross installment receivables amounted to
$49.2 million and $45.2 million at September 27, 2003, and December 28,
2002, and include $8.5 million and $7.9 million of unearned finance
charges.
4. 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 as of September
27, 2003, and December 28, 2002, approximated 68% and 65% of total
inventories, respectively. All other inventories are generally determined
using the last-in, first-out (LIFO) cost method.
The company's LIFO reserve at September 27, 2003, was $89.5 million, down
$6.3 million from $95.8 million at December 28, 2002,and down $5.1 million
from $94.6 million at June 28, 2003, reflecting lower inventory levels.
Since year-end 2002, finished goods inventory levels have declined from
$337.5 million to $316.8 million at September 27, 2003. The change in the
company's LIFO reserve for both the three and nine months ended September
27, 2003, is reflected as a reduction in "Cost of goods sold" on the
accompanying Consolidated Statements of Earnings.
8
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. At the beginning of its 2002 fiscal year, Snap-on adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142 applies to all
goodwill and other intangible assets recognized by the company as of
December 30, 2001. In accordance with SFAS No. 142, 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.
Additional disclosures related to acquired intangible assets were as
follows:
September 27, 2003 December 28, 2002
------------------------------------- --------------------------------------
Gross Carrying Gross Carrying
Value Accumulated Value Accumulated
Amortization Amortization
(Amounts in millions)
---------------- ----------------- ------------------ ----------------
Amortized intangible assets:
Trademarks $ 4.4 $ (.4) $ 3.9 $ (.3)
Patents 31.4 (10.7) 29.4 (8.3)
------ ------ ------ ------
Total 35.8 (11.1) 33.3 (8.6)
Unamortized intangible assets:
Trademarks 43.9 - 41.0 -
------ ------ ------ ------
Total intangible assets $ 79.7 $(11.1) $ 74.3 $ (8.6)
====== ====== ====== ======
As of September 27, 2003, the weighted-average amortization period was 35
years for trademarks, 16 years for patents, and 19 years on a combined
basis. As of December 28, 2002, the weighted-average amortization period
was 34 years for trademarks, 16 years for patents, and 19 years on a
combined basis.
Amortization expense was $.7 million and $1.6 million for the three and
nine months ended September 27, 2003, and $.5 million and $1.3 million for
the three and nine months ended September 28, 2002. Total estimated annual
amortization expense expected for each of the next five fiscal years, based
on current levels of other intangible assets, is approximately $2.0
million.
Goodwill was $397.5 million and $366.4 million at September 27, 2003, and
December 28, 2002. The increase in goodwill as compared to the December 28,
2002, balance primarily reflects currency translation.
6. 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 nullifies EITF Issue No. 94-3 and requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, rather than at
9
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the date of the entity's commitment to an exit plan. SFAS No. 146 is
effective for exit and disposal activities that are initiated after
December 28, 2002. Snap-on adopted SFAS No. 146 at the beginning of its
2003 fiscal year.
In mid-July 2003, Snap-on announced plans to phase out production at two of
its U.S. hand tool manufacturing facilities, with a planned completion in
2004. In the company's Form 10-Q for the quarter ended June 28, 2003,
Snap-on disclosed that it expected to record approximately $22 million of
costs in the remainder of 2003 associated with these actions, of which
approximately $17 million would be in the third quarter, including
approximately $12 million for accelerated pension and post-retirement
medical curtailment expenses, with the remaining costs primarily for
severance and transition expenses. Snap-on also disclosed that it expected
to incur approximately $4 million of severance and transition expenses over
the phase-out period in 2004.
In the third quarter of 2003, Snap-on recorded restructuring charges of
$14.0 million, including $13.3 million for costs related to the
above-mentioned facility closures. Due to continuing negotiations with the
representative unions for these locations, the company was unable to record
a portion of the severance and benefits that were previously anticipated to
be recorded in the third quarter of 2003. Of the $13.3 million in facility
closure costs recorded in the third quarter, $11.7 million was for the
recognition of accelerated pension and post-retirement medical curtailment
expenses, with the remaining costs primarily for severance, equipment
transfer and other costs. In addition to the $13.3 million of costs
incurred in the third quarter of 2003, the company now expects that it will
record approximately $4 million to $5 million of severance and transition
costs in the fourth quarter of 2003 and approximately $8 million to $9
million of remaining severance and transition costs in the first quarter of
2004 for these actions. Snap-on believes that the anticipated savings from
the closure of the two U.S. hand tool facilities will be approximately $12
million per year, beginning in 2004. In the third quarter of 2003, Snap-on
also incurred $.7 million of costs primarily for severance and facility
consolidation or closure costs to effect consolidation initiatives and
management realignment actions at various other Snap-on facilities.
For the three months ended September 27, 2003, Snap-on recorded
restructuring charges of $14.0 million, including $11.7 million for pension
and post-retirement medical curtailment costs, as discussed above, $1.1
million for severance costs to effect consolidation initiatives and
management realignment actions, and $1.2 million for facility consolidation
or closure costs. For the nine months ended September 27, 2003, Snap-on
recorded restructuring charges of $19.5 million, including the $11.7
million for pension and post-retirement medical curtailment costs, $6.1
million for severance costs to effect consolidation initiatives and
management realignment actions, and $1.7 million for facility consolidation
or closure costs. For the three and nine months ended September 27, 2003,
restructuring charges of $13.3 million and $16.1 million were included in
"Cost of goods sold," and $.7 million and $3.4 million were included in
"Operating expenses," on the accompanying Consolidated Statements of
Earnings.
The restructuring reserve usage of $14.6 million for the quarter ended
September 27, 2003, consisted of a non-cash pension and post-retirement
medical curtailment charge of $11.7 million related to the above-mentioned
closure of the two hand tool facilities, $1.6 million for severance
10
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
payments related to the separation of 207 employees, and $1.3 million for
equipment transfer and other costs. The restructuring reserve usage of
$19.9 million for the nine months ended September 27, 2003, included the
$11.7 million for pension and post-retirement medical curtailment, $6.5
million for severance payments related to the separation of 353 employees,
and $1.7 million for equipment transfer and other costs. During the first
quarter of 2003, Snap-on completed its restructuring actions initiated in
the fourth quarter of 2002.
The composition of Snap-on's restructuring charge activity for the quarter
ended September 27, 2003, was as follows:
Balance at Balance at
(Amounts in millions) June 28, 2003 Additions Usage Sept. 27, 2003
------------- --------- ----- --------------
Severance costs $ 3.0 $ 1.1 $ (1.6) $ 2.5
Pension and post-
retirement medical - 11.7 (11.7) -
Facility consolidation
or closure costs .1 1.2 (1.3) -
----- ----- ------ -----
Total $ 3.1 $14.0 $(14.6) $ 2.5
===== ===== ====== =====
Snap-on has funded and expects to continue to fund the remaining cash
requirements of its restructuring activities with cash flows from
operations and borrowings under its existing credit facilities. The
specific restructuring measures and estimated costs were based on
management's best business judgment under prevailing circumstances. If
future events warrant changes to the reserve, such adjustments will be
reflected as either "Cost of goods sold" or "Operating expenses," as
appropriate, in the applicable Consolidated Statements of Earnings.
7. SOC is an unconsolidated 50%-owned joint venture between Snap-on and The
CIT Group, Inc. ("CIT") that is presently accounted for by Snap-on using
the equity method. SOC was formed as a limited liability company with
member contributions totaling $2.0 million, and SOC commenced operations on
January 3, 1999. As of September 27, 2003, Snap-on's equity investment in
SOC totaled approximately $6.2 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
to its dealers and customers 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 on a limited
recourse basis to CIT, net of certain fees. SOC services these contracts
for an estimated market-rate servicing fee.
11
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the contract receivables retained by SOC were
not material in any year.
Snap-on has credit risk exposure for certain loans that SOC originates with
recourse provisions against Snap-on. At September 27, 2003, and December
28, 2002, $27.4 million and $32.1 million of these loans, with terms
ranging from six months to ten years, have a primary recourse provision
against Snap-on if the loans become more than 90 days past due. For the
three and nine months ended September 27, 2003, $.2 million and $1.2
million of such loans were purchased by Snap-on pursuant to the recourse
provisions.
The maximum potential amount of future payments that Snap-on could be
required to make to SOC under the recourse provisions as of September 27,
2003, is $27.4 million, including $11.1 million that was originated in
fiscal 2003. The asset value of the collateral underlying these recourse
loans would serve to mitigate Snap-on's loss in the event of default. In
accordance with the provisions of FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," Snap-on established a liability for the estimated
fair value of the guarantees for all fiscal-2003 loan originations with
recourse. The remaining estimated fair value of the guarantees for the
$11.1 million of fiscal-2003 loan originations outstanding with recourse as
of September 27, 2003, was $.9 million.
SOC had previously maintained a $25 million bank line of credit for working
capital purposes, of which Snap-on was a 60% guarantor and CIT was a 40%
guarantor. SOC's bank line of credit expired May 31, 2003, and was not
renewed. CIT and Snap-on have agreed to fund SOC's future working capital
requirements on a 50 / 50 basis, with a combined maximum borrowing limit
not to exceed $24 million. As of September 27, 2003, the outstanding amount
loaned by Snap-on to SOC pursuant to this agreement was $1.5 million. The
balance loaned by Snap-on to SOC as of the end of SOC's calendar quarter,
September 30, 2003, was $.5 million.
The maximum exposure to Snap-on as of September 27, 2003, and December 28,
2002, related to SOC was the $6.2 million and $2.7 million equity
investment plus the recourse obligations on customer financings and the
outstanding amount borrowed by SOC, all of which are discussed above. At
December 28, 2002, Snap-on's maximum exposure related to SOC also included
the guarantee on SOC's bank line of credit.
12
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Summarized unaudited financial information of SOC as of September 30, 2003,
and December 31, 2002, and for the three and nine months ended September
30, 2003, and September 30, 2002, as provided to Snap-on by SOC, is as
follows:
September 30, December 31,
(Amounts in millions) 2003 2002
---- ----
Cash and cash equivalents $ 1.2 $ 5.4
Receivables, net of allowances 12.9 13.4
Servicing receivable 8.2 7.6
Due from members 8.1 10.9
Other assets 10.4 8.0
------ ------
$40.8 $ 45.3
====== ======
Payable to members $ 8.3 $ 12.4
Reserves for contract receivables sold 12.0 8.3
Other accrued liabilities 7.2 8.6
Short-term borrowings 1.0 11.0
Members' equity 12.3 5.0
------ ------
$ 40.8 $45.3
====== ======
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
(Amounts in millions) ------------ ------------
Revenues: 2003 2002 2003 2002
---- ---- ---- ----
Gain on sale of contract
receivables sold $14.2 $15.2 $46.4 $39.0
Servicing fee income 2.6 2.1 7.7 6.5
Other income .2 .2 .4 .3
----- ----- ----- -----
Total revenues 17.0 17.5 54.5 45.8
Expenses:
Royalty fees 5.7 5.6 17.3 16.5
Salaries and benefits 4.3 3.8 12.7 11.3
Management fees 2.8 2.8 8.6 8.2
Other 2.8 2.1 8.7 7.6
----- ----- ----- -----
Total expenses 15.6 14.3 47.3 43.6
----- ----- ----- -----
Net income $ 1.4 $ 3.2 $ 7.2 2.2
===== ===== ===== =====
The FASB issued FIN No. 46, "Consolidation of Variable Interest Entities"
in January 2003. As discussed in Note 2, the original implementation date
for FIN No. 46 has been deferred. During the fourth quarter of 2003,
Snap-on will continue to evaluate the appropriate accounting for SOC under
FIN
13
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
No. 46. The company will conclude on the impact of the adoption of FIN No.
46 in the fourth quarter of fiscal 2003, provided that FIN No. 46 becomes
effective for Snap-on in that quarter.
8. Notes payable and long-term debt at September 27, 2003, totaled $335.7
million, down $25.0 million from the $360.7 million reported at December
28, 2002. Notes payable to banks under bank lines of credit totaled $6.6
million and $22.3 million at September 27, 2003, and December 28, 2002. At
September 27, 2003, Snap-on had commercial paper outstanding denominated in
U.S. dollars of $25.0 million, and at December 28, 2002, Snap-on had
commercial paper outstanding denominated in U.S. dollars of $25.0 million
and Japanese yen of $7.9 million.
At September 27, 2003, Snap-on had $408 million of multi-currency revolving
credit facilities that provide back-up liquidity for its commercial paper
programs. These facilities include a $200 million, 364-day revolving credit
facility with a one-year term-out option that terminates on July 30, 2004.
The company's credit facilities also include a five-year, $208 million
revolving credit facility that terminates on August 20, 2005. As of
September 27, 2003, and December 28, 2002, Snap-on was in compliance with
all covenants of its revolving credit facilities and there were no
borrowings under any revolving credit facility. Snap-on also has an unused
committed $20 million bank line of credit that expires on August 1, 2004.
9. Snap-on accounts for its hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
138 and SFAS No. 149. These standards require that all derivative
instruments be reported in the consolidated financial statements at fair
value. Changes in the fair value of derivatives are to be recorded each
period in earnings or "Accumulated other comprehensive income (loss),"
depending on the type of hedged transaction and whether the derivative is
designated and effective as part of a hedged transaction. Gains or losses
on derivative instruments reported in "Accumulated other comprehensive
income (loss)" must be reclassified as earnings in the period in which
earnings are affected by the underlying hedged item, and the ineffective
portion of all hedges must be recognized in earnings in the current period.
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 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
14
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 September 27, 2003, Snap-on had net outstanding foreign exchange forward
contracts totaling $121.1 million comprised of buy contracts of $64.3
million in Swedish kronor and sell contracts of $97.2 million in euros,
$44.4 million in British pounds, $18.6 million in Canadian dollars, $9.9
million in Singapore dollars, $7.2 million in Japanese yen, $3.7 million in
Danish kronor, $3.3 million in Norwegian kronor and $1.1 million in other
currencies. 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, $3.0 million in Danish
kronor, $2.5 million in Australian dollars, $3.7 million in Mexican pesos
and $3.6 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 were not material for the three and nine
months ended September 27, 2003, and September 28, 2002.
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." These ineffective portions were not material for the three and nine
months ended September 27, 2003, and September 28, 2002. At September 27,
2003, net gains of $.1 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
15
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
In June 2003, Snap-on received proceeds of $5.1 million for the termination
of a $25 million interest rate swap that was a fair value hedge for a
portion of its $200 million, 6.25% long-term notes. The $5.1 million will
be amortized to income using the effective interest rate method over the
remaining life of the notes, which mature on August 15, 2011. At the same
time, Snap-on entered into a new $25 million interest rate swap to hedge
that same portion of these notes.
The notional amount of interest rate swaps was $50 million at September 27,
2003, and December 28, 2002, and included $25 million of fair value hedges
and $25 million of cash flow hedges.
For all cash flow hedges qualifying for hedge accounting under SFAS No.
133, the net accumulated derivative loss at September 27, 2003, was $2.4
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 loss at September 27, 2003, was $1.7 million. At September 27,
2003, the maximum maturity date of any cash flow hedge and fair value hedge
was approximately two years and eight years, respectively. During the next
12 months, Snap-on expects to reclassify into earnings net losses from
"Accumulated other comprehensive income (loss)" of approximately $.9
million after tax at the time the underlying hedged transactions are
realized.
During the quarter ended September 27, 2003, cash flow hedge and fair value
hedge ineffectiveness was not material.
10. Snap-on has stock option plans for directors, officers and key employees,
with expiration dates on the options ranging from 2003 to 2013 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.
Snap-on accounts for its stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board
("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.
16
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Snap-on adopted the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123," as of December 28, 2002. The following table
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 Compensation," to stock-based employee
compensation using the Black-Scholes option-pricing model.
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(Amounts in millions except per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net earnings, as reported $17.7 $19.2 $61.4 $72.9
Add: Stock-based employee compensation
expense (income) included in reported net
earnings, net of related tax effects .3 (.2) 2.2 (.7)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (2.0) (1.9) (5.7) (5.7)
----- ----- ----- -----
Pro forma net earnings $16.0 $17.1 $57.9 $66.5
===== ===== ===== =====
Net earnings per share - basic and diluted:
As reported $ .30 $ .33 $1.05 $1.25
Pro forma .27 .29 .99 1.14
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
11. 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 September 27,
2003, and September 28, 2002, of 149,711 shares and 326,352 shares. Options
to purchase 3,779,270 shares and 2,320,019 shares of Snap-on common stock
at September 27, 2003, and September 28, 2002, were not included in the
computation of diluted earnings per share as the exercise prices of the
options was greater than the average market price of the common stock for
the respective period and the effect on earnings per share would be
anti-dilutive.
17
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Total comprehensive income for the three and nine months ended September
27, 2003, and September 28, 2002, was as follows:
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(Amounts in millions) 2003 2002 2003 2002
---- ---- ---- ----
Net earnings $ 17.7 $ 19.2 $ 61.4 $ 72.9
Foreign currency translation .4 (8.0) 79.1 31.5
Change in fair value of derivative
instruments, net of tax .2 (.9) 1.0 (1.7)
------- ------- ------- -------
Total comprehensive income $ 18.3 $ 10.3 $ 141.5 $ 102.7
======= ======= ======= =======
13. 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 it expects to
incur with regard 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.
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 historical
warranty loss experience that is periodically adjusted for recent actual
experience. The following is an analysis of Snap-on's product warranty
reserve for the three and nine months ended September 27, 2003, and
September 28, 2002:
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(Amounts in millions) 2003 2002 2003 2002
---- ---- ---- ----
Beginning of period $ 11.8 $ 8.4 $ 11.6 $ 8.2
Additions 2.6 5.0 8.7 11.7
Usage (3.0) (2.6) (8.9) (9.1)
------- ------- ------- -------
End of period $ 11.4 $ 10.8 $ 11.4 $ 10.8
======= ======= ======= =======
18
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Snap-on's business segments are based on the organization structure used by
management for making operating and investment decisions and for assessing
performance. Snap-on's reportable business segments include: (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 vehicle service to
customers in the worldwide vehicle service and repair marketplace.
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. Segment operating earnings are defined as segment net
sales less cost of goods sold and operating expenses, including applicable
restructuring and other non-recurring charges. Snap-on began allocating
restructuring and other non-recurring charges to its reportable segments in
fiscal 2003. Prior to fiscal 2003, Snap-on did not allocate such charges to
the reportable segments. As a result, all prior-year segment information
presented herein has been restated to conform to the 2003 presentation.
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. Certain other prior-year reclassifications have
been made to conform to the 2003 management reporting structure.
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.
19
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial data by segment was as follows:
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(Amounts in millions) 2003 2002 2003 2002
---- ---- ---- ----
Net sales to external customers:
Snap-on Dealer Group $ 244.9 $ 236.5 $ 777.6 $ 758.4
Commercial and Industrial Group 236.0 224.2 729.5 680.8
Diagnostics and Information Group 44.7 41.7 126.8 120.4
-------- --------- --------- ---------
Total net sales to external customers $ 525.6 $ 502.4 $ 1,633.9 $ 1,559.6
======== ========= ========= =========
Intersegment sales:
Snap-on Dealer Group $ 6.7 $ 6.8 $ 20.2 $ 17.5
Commercial and Industrial Group 28.6 28.8 90.1 89.3
Diagnostics and Information Group 34.8 43.3 105.0 135.1
-------- --------- --------- ---------
Total intersegment sales $ 70.1 $ 78.9 $ 215.3 $ 241.9
======== ========= ========= =========
Total net sales:
Snap-on Dealer Group $ 251.6 $ 243.3 $ 797.8 $ 775.9
Commercial and Industrial Group 264.6 253.0 819.6 770.1
Diagnostics and Information Group 79.5 85.0 231.8 255.5
-------- --------- --------- ---------
Segment net sales 595.7 581.3 1,849.2 1,801.5
Intersegment eliminations (70.1) (78.9) (215.3) (241.9)
-------- --------- --------- ---------
Total consolidated net sales $ 525.6 $ 502.4 $ 1,633.9 $ 1,559.6
======== ========= ========= =========
Operating earnings:
Snap-on Dealer Group $ 8.2 $ 11.7 $ 55.4 $ 64.6
Commercial and Industrial Group 3.8 9.2 10.7 28.6
Diagnostics and Information Group 9.1 8.1 17.0 17.4
-------- --------- --------- ---------
Segment operating earnings 21.1 29.0 83.1 110.6
Net finance income 10.0 10.3 31.7 26.4
-------- --------- --------- ---------
Operating earnings 31.1 39.3 114.8 137.0
Interest expense (5.8) (6.9) (18.2) (22.2)
Other income (expense) - net (2.4) (2.3) (6.5) (5.3)
-------- --------- --------- ---------
Earnings before income taxes $ 22.9 $ 30.1 $ 90.1 $ 109.5
======== ========= ========= =========
20
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
----------------------------
Sept. 27, Dec. 28,
(Amounts in millions) 2003 2002
--------- ------------
Assets:
Snap-on Dealer Group $ 757.0 $ 759.7
Commercial and Industrial Group 1,087.3 1,010.7
Diagnostics and Information Group 199.0 198.5
-------- --------
Total from reportable segments 2,043.3 1,968.9
Financial Services 97.6 82.5
Elimination of intersegment receivables (33.0) (57.3)
-------- --------
Total assets $2,107.9 $1,994.1
======== ========
21
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Consolidated
- ------------
Third Quarter
Net sales were $525.6 million in the third quarter of 2003, up $23.2 million, or
4.6%, from the $502.4 million in the prior-year period. The year-over-year
increase in net sales includes favorable currency translation of $19.7 million,
or 3.9% of total sales, as well as a 5.7% increase in sales volume in the North
American franchised dealer operation, and a 10.7% increase in sales to new
vehicle dealerships under facilitation agreements ("the facilitation business").
Favorable net pricing also contributed to the year-over-year sales increase.
These year-over-year increases in sales were largely offset by a continued
decline in sales of equipment and large platform-based diagnostics. Sales of
tools for industrial and commercial applications worldwide were essentially flat
year over year.
The ramp-up of the Technical Automotive Group ("TAG"), which was launched in the
second quarter of 2003, continued in the third quarter with sales, sales leads
and margins increasing sequentially compared with the second quarter of 2003,
despite a traditional seasonal downturn and the continued difficult economy. The
TAG direct sales group was created to enhance Snap-on's existing equipment
distribution network and improve the long-term operating margin in that
business. As expected, the launch of the new TAG sales organization led to a
short-term disruption in sales, negatively affecting both second and third
quarter year-over-year sales comparisons. Snap-on continues to expect
sequentially improved TAG equipment sales and profitability trends in the fourth
quarter of 2003.
Net earnings were $17.7 million, or $.30 per diluted share, for the third
quarter of 2003, as compared with net earnings of $19.2 million, or $.33 per
diluted share, for the third quarter of 2002. Net earnings in the third quarter
of 2003 included $8.7 million ($13.3 million pretax), or $.15 per diluted share,
for costs associated with the previously announced closure of two of Snap-on's
U.S. hand tool manufacturing facilities. Net earnings in 2003 also included $2.8
million, or $.05 per diluted share, as a result of a lower third-quarter
effective tax rate. Foreign currency effects on diluted earnings per share were
negligible in the third quarter of 2003.
Gross profit for the third quarter of 2003 was $221.8 million, down $6.0 million
from $227.8 million in the prior-year period. As a percentage of sales, gross
profit margin was 42.2% in the third quarter of 2003, versus 45.3% in the third
quarter of 2002. Gross profit in the third quarter of 2003 was reduced by $13.3
million, primarily for accelerated pension and post-retirement medical
curtailment costs, for the closure of the two hand tool facilities. The combined
effect of lower sales of large platform-based diagnostics products through the
company's technical representatives ("tech rep") organization, unfavorable sales
mix and lower sales volumes in the Commercial and Industrial Group, higher sales
volume in the North American franchised dealer business and favorable net
pricing, lowered third-quarter 2003 gross profit by $1.6 million. Additionally,
year-over-year favorable net currency impacts of $6.6 million and net savings
from restructuring and Operational Fitness activities of $3.2 million were
partially offset by higher pension, other retirement and insurance costs of $2.1
million. Unfavorable year-over-year manufacturing cost absorption, primarily due
to lower production volumes associated with improving inventory turns in a slow
sales environment, and inventory-related adjustments were more than offset by a
third-quarter 2003 reduction of $5.1 million in the company's LIFO reserve,
relfecting the continued progress in Snap-on's efforts to reduce inventory
levels.
22
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Operating expenses for the third quarter of 2003 were $200.7 million, or 38.2%
of sales, as compared to $198.8 million, or 39.6% of sales, in the prior-year
period. The $1.9 million increase in year-over-year operating expenses primarily
includes unfavorable net currency impacts of $6.6 million, higher pension, other
retirement and insurance costs of $3.5 million, and higher health care costs of
$1.8 million, partially offset by savings from continuous improvement and cost
reduction initiatives of $4.3 million and lower bad debt expense of $3.7
million. Snap-on also incurred operating expenses of $.7 million in the third
quarter of 2003 for continuous improvement initiatives, as compared to $1.6
million in the third quarter of 2002.
Operating earnings were $31.1 million for the third quarter of 2003 compared
with $39.3 million in the third quarter of 2002. In addition to the
year-over-year gross profit and operating expense impacts discussed above, net
finance income of $10.0 million in the third quarter of 2003 was down slightly
as compared to $10.3 million in the third quarter of 2002.
Year to Date
For the first nine months of 2003, net sales were $1,633.9 million, up $74.3
million, or 4.8%, from the $1,559.6 million in the prior-year period. Favorable
currency impacts of $78.4 million, along with increased sales in the worldwide
franchised dealer operation and in the facilitation business, were partially
offset by declines in sales of industrial tools, equipment and large
platform-based diagnostics. Favorable net pricing and benefits from sales of new
products also contributed to the year-over-year sales increase.
For the first nine months of 2003, net earnings were $61.4 million, or $1.05 per
diluted share, as compared with net earnings of $72.9 million, or $1.25 per
diluted share, in 2002. Net earnings in 2002 included a first-quarter net gain
of $2.8 million, or $.05 per diluted share, for the cumulative effect of an
accounting change associated with Snap-on's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Snap-on adopted SFAS No. 142 at the beginning of its 2002 fiscal year. For the
first nine months of 2002, net earnings before the cumulative effect of the
change in accounting principle were $70.1 million, or $1.20 per diluted share.
Foreign currency effects on diluted earnings per share were negligible in the
first nine months of 2003.
Gross profit for the first nine months of 2003 was $713.3 million, as compared
to $714.9 million in the first nine months of 2002. Year to date, gross profit
margin was 43.7% in 2003, versus 45.8% in 2002. For the first nine months of
2003, gross profit benefited from favorable net currency impacts of $25.4
million and savings from restructuring and Operational Fitness activities of
$12.9 million. Gross profit in 2003 was negatively impacted by $16.1 million of
higher costs for continuous improvement initiatives, including the $13.3 million
incurred in the third quarter for the closure of the two hand tool facilities.
The combination of unfavorable sales mix and lower sales volumes, particularly
in the Commercial and Industrial Group, partially offset by benefits from
favorable net pricing, reduced gross profit by $11.0
23
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
million for the first nine months of 2003. Unfavorable manufacturing cost
absorption and inventory-related costs, net of LIFO reserve benefits realized,
also lowered year-to-date 2003 gross profit by $10.0 million. In the first nine
months of 2003, Snap-on also incurred higher year-over-year pension, other
retirement and insurance costs of $5.1 million.
Operating expenses for the first nine months of 2003 were $630.2 million, or
38.6% of sales, as compared to $604.3 million, or 38.7% of sales, in the
prior-year period. The $25.9 million, or 4.3%, increase in year-over-year
operating expenses primarily includes unfavorable net currency impacts of $25.4
million, higher pension, other retirement and insurance costs of $11.1 million,
increased costs of $1.7 million for the "More Feet on the Street" dealer
expansion and enhancement initiative, costs for continuous improvement
initiatives of $3.4 million, higher health care costs of $2.0 million, and
higher research and development spending of $1.4 million. The year-over-year
operating expense comparison was also impacted by the inclusion, in 2003, of
$3.8 million in operating expenses for the prior-year acquisition of two
business operations. These year-over-year increases were partially offset by
savings of $13.7 million from Snap-on's restructuring and Operational Fitness
activities. In addition, the year-over-year operating expense comparison
benefited from the absence of costs incurred in the first quarter of 2002 that
included $3.0 million related to the 2002 resignation of Snap-on's former chief
financial officer and $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. Operating expenses in the first nine months of 2002 included $3.4
million for employee and equipment relocation transition costs to finalize the
company's fiscal 2001 restructuring actions.
Operating earnings for the first nine months of 2003 were $114.8 million,
compared to $137.0 million in the first nine months of 2002. In addition to the
year-over-year gross profit and operating expense impacts discussed above,
Snap-on realized higher net finance income of $5.3 million for the first nine
months of 2003, primarily as a result of increased credit originations and
continued favorable interest rates.
Segment Results
- ---------------
Snap-on's business segments are based on the organization structure used by
management for making operating and investment decisions and for assessing
performance. Snap-on's reportable business segments include: (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 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
24
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
customers and intersegment sales. Segment operating earnings are defined as
segment net sales less cost of goods sold and operating expenses, including
applicable restructuring and other non-recurring charges. Snap-on began
allocating restructuring and other non-recurring charges to its reportable
segments in fiscal 2003. Prior to fiscal 2003, Snap-on did not allocate such
charges to the reportable segments. As a result, all prior-year segment
information presented herein has been restated to conform to the 2003
presentation. 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. Certain other prior-year reclassifications
have been made to conform to the 2003 management reporting structure.
The following discussion focuses on Snap-on's net sales and operating earnings
by reportable segment.
Three Months Ended Nine Months Ended
-------------------------- --------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
(Amounts in millions) 2003 2002 2003 2002
--------- --------- --------- ---------
Total net sales:
Snap-on Dealer Group $ 251.6 $ 243.3 $ 797.8 $ 775.9
Commercial and Industrial Group 264.6 253.0 819.6 770.1
Diagnostics and Information Group 79.5 85.0 231.8 255.5
------- ------- -------- --------
Segment net sales 595.7 581.3 1,849.2 1,801.5
Intersegment eliminations (70.1) (78.9) (215.3) (241.9)
------- ------- -------- --------
Total consolidated net sales $ 525.6 $ 502.4 $1,633.9 $1,559.6
======= ======= ======== ========
Operating earnings:
Snap-on Dealer Group $ 8.2 $ 11.7 $ 55.4 $ 64.6
Commercial and Industrial Group 3.8 9.2 10.7 28.6
Diagnostics and Information Group 9.1 8.1 17.0 17.4
------- ------- -------- --------
Segment operating earnings 21.1 29.0 83.1 110.6
Net finance income 10.0 10.3 31.7 26.4
------- ------- -------- --------
Operating earnings 31.1 39.3 114.8 137.0
Interest expense (5.8) (6.9) (18.2) (22.2)
Other income (expense) - net (2.4) (2.3) (6.5) (5.3)
------- ------- -------- --------
Earnings before income taxes $ 22.9 $ 30.1 $ 90.1 $109.5
======= ======= ======== ========
Snap-on Dealer Group
In the worldwide Snap-on Dealer Group, segment net sales for the third quarter
of 2003 were $251.6 million, as compared to $243.3 million in the comparable
prior-year period. Higher year-over-year sales in the North American franchised
dealer operation, coupled with favorable currency translation impacts of $5.3
million, were partially offset by significantly lower sales of equipment and
large platform-based diagnostics through the tech rep organization. The sales
growth in the North American franchised dealer operation in the third quarter of
2003 reflects sales gains by dealers to end-user customers - automotive
25
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
technicians and mechanics. In the Dealer Group's international markets, sales
were up slightly year over year due to favorable currency translation.
In 2002, Snap-on began focusing its dealers on the importance of better working
capital management, including improving inventory turns. Over the past 15
months, Snap-on's sales growth was constrained as dealers continued to improve
their inventory turns. While this focus will continue, Snap-on believes the
unfavorable effect on its sales from this action to be largely behind it at the
present time. The improved working capital position of its dealers reflects
Snap-on's continued focus on enhancing the business proposition for, and the
fiscal strength of, its dealers under the More Feet on the Street initiative.
End-market demand for tools and tool storage products in the first nine months
of 2003 increased as sell-through by the dealers was up slightly when compared
with the first nine months of 2002, despite the negative effect of severe winter
weather in certain parts of the United States that hindered dealers' sales
activity in the first quarter of 2003.
Segment earnings for the Dealer Group for the third quarter of 2003 of $8.2
million were down from $11.7 million in the third quarter of 2002. As a
percentage of net sales, segment earnings were 3.3% in the third quarter of
2003, as compared to 4.8% in the third quarter of 2002. Segment earnings in 2003
were reduced by $11.6 million for continuous improvement activities, including
$11.5 million in costs related to the closure of two hand tool facilities, and
by $2.6 million in higher year-over-year costs for pension, other retirement and
insurance. In 2003, benefits from favorable net pricing, lower inventory levels
and the success of new products, as well as productivity and cost savings of
$2.0 million, and lower year-over-year bad debt expense of $1.8 million, were
only partially offset by lower manufacturing cost absorption and weakness in
sales of equipment and large platform-based diagnostics sold through the tech
rep organization. In the third quarter of 2002, the Dealer Group incurred $.8
million of restructuring-related transition costs to complete its 2001
restructuring initiatives.
For the first nine months of 2003, segment net sales were $797.8 million, as
compared to $775.9 million in the comparable prior-year period. Higher
year-over-year sales in the North American franchised dealer operation and in
the Dealer Group's international markets, including favorable currency
translation impacts of $16.5 million, were partially offset by lower sales of
equipment and large platform-based diagnostics sold through the tech rep
organization.
Segment earnings for the Dealer Group for the first nine months of 2003 were
$55.4 million, down from $64.6 million in the first nine months of 2002. On a
year-to-date basis, segment earnings were 6.9% of segment net sales in 2003, as
compared to 8.3% in the first nine months of 2002. Costs of $15.0 million for
continuous improvement initiatives, including third-quarter costs of $11.6
million, and increased costs for pension, other retirement and insurance of $8.3
million, lowered segment earnings for the Dealer Group in 2003. Snap-on also
incurred higher year-over-year costs of $1.7 million for continued investment in
the More Feet on the Street initiative. Costs incurred for the More Feet on the
Street initiative included higher dealer turnover costs to remove low-performing
dealers, as well as higher costs for new dealer training, recruiting and other
dealer expansion costs. In 2003, benefits from productivity and cost savings of
$7.0 million, as well as benefits from favorable net pricing and the success of
new products, were only partially offset by lower manufacturing cost absorption
and weakness in sales of equipment and large platform-based diagnostics sold
through the tech rep organization. For the first nine
26
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
months of 2002, the Dealer Group incurred $2.4 million of restructuring-related
transition costs to complete its 2001 restructuring initiatives.
Commercial and Industrial Group
In the Commercial and Industrial Group, segment net sales for the third quarter
of 2003 were $264.6 million, up 4.6% from $253.0 million in the third quarter of
2002, including favorable currency translation of $13.1 million and sales growth
in the facilitation business. These year-over-year increases were partially
offset by sales declines of capital equipment to vehicle repair shops in North
America and Europe, reflecting ongoing depressed economic conditions. Sales of
tools in the industrial and commercial marketplace worldwide for the third
quarter of 2003 were flat with prior-year levels. The continued decline in sales
to states and local municipalities was more than offset by increased sales to
federal government entities. In addition to the continuing weak capital goods
market, the second-quarter 2003 launch of the new TAG sales organization, which
is focused on the marketing of equipment, also contributed to the weaker third
quarter sales performance year over year. Snap-on believes that the TAG
organization will enhance the company's alignment of resources to provide better
sales coverage, training and service to its customers. As of the end of the
third quarter, sales, sales leads and margins increased sequentially compared
with the second quarter of 2003, despite a traditional seasonal downturn and the
continued difficult economy. Snap-on continues to expect sequentially improved
TAG equipment sales and profitability trends toward the latter part of 2003, and
on into 2004.
Segment earnings for the Commercial and Industrial Group for the third quarter
of 2003 were $3.8 million, down from $9.2 million in the third quarter of 2002.
As a percentage of net sales, segment earnings were 1.4% in the third quarter of
2003, as compared to 3.6% in the third quarter of 2002. Lower volumes and
unfavorable sales mix in 2003 adversely impacted year-over-year operating
earnings by $4.8 million, as the unfavorable earnings effect from lower sales of
high-margin industrial tools and equipment, including the impact related to the
start-up of the new TAG organization, was not offset by the increased sales in
the lower-margin facilitation business. Segment earnings in 2003 were also
lowered by $2.2 million for continuous improvement activities, including $1.8
million related to the closure of the two hand tool facilities, and by $2.5
million in higher year-over-year costs for pension, other retirement and
insurance. Savings of $3.8 million from restructuring and Operational Fitness
activities partially offset these declines in year-over-year segment earnings.
In the third quarter of 2002, the Commercial and Industrial Group incurred $.6
million of restructuring-related transition costs to complete its 2001
restructuring initiatives.
In the Commercial and Industrial Group, segment net sales for the first nine
months of 2003 were $819.6 million, up $49.5 million or 6.4%, as compared to
$770.1 million in the first nine months of 2002, including $55.5 million from
favorable currency translation. Growth in the company's facilitation business,
along with higher sales of equipment for the European vehicle-service
marketplace, reflecting the success of new product introductions over the past
three years, was partially offset by sales declines in industrial tools and
equipment, principally in North America, largely reflecting the continued impact
of weak economic conditions in the manufacturing and capital goods marketplace.
27
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
For the first nine months of 2003, segment earnings for the Commercial and
Industrial Group were $10.7 million, as compared to $28.6 million in the first
nine months of 2002. As a percentage of segment net sales, segment earnings for
the first nine months of 2003 were 1.3%, as compared to 3.7% in the comparable
prior-year period. Segment operating earnings in 2003 were adversely impacted by
lower volumes, general cost increases and unfavorable sales mix of $14.7
million, unfavorable manufacturing absorption and inventory-related costs of
$7.2 million, and higher costs of $6.7 million for pension, other retirement and
insurance. Segment earnings in 2003 were also lowered by $4.3 million for
continuous improvement activities, including $1.8 million related to the closure
of the two U.S. hand tool facilities. Savings from fiscal 2002 restructuring and
Operational Fitness activities of $13.5 million and benefits from favorable net
pricing partially offset these declines in year-over-year segment earnings. For
the first nine months of 2002, the Commercial and Industrial Group incurred $3.9
million of restructuring-related transition costs to complete its 2001
restructuring initiatives.
Diagnostics and Information Group
In the Diagnostics and Information Group, segment net sales for the third
quarter of 2003 were $79.5 million, down $5.5 million, or 6.5%, as compared to
$85.0 million in the third quarter of 2002, including favorable currency of $1.3
million. The year-over-year sales decline is principally attributable to lower
intersegment sales. Increased sales of handheld diagnostics were more than
offset by a decline in sales of equipment and large platform-based diagnostics
in North America, primarily in products sold through the Dealer Group's tech rep
organization. In addition, the Diagnostics and Information Group transferred
production of certain European equipment products to the Commercial and
Industrial Group, which reduced its intersegment sales for these products.
Despite the decline in year-over-year sales, segment earnings for the
Diagnostics and Information Group for the third quarter of 2003 were $9.1
million, as compared to $8.1 million in the third quarter of last year. As a
percentage of segment net sales, operating margin in the Diagnostics and
Information Group was 11.4%, as compared to 9.5% in the third quarter of 2002.
The year-over-year increase in both segment earnings and operating margins
primarily reflects the impact of productivity and cost savings of $1.7 million
from the realignment of production capabilities in certain European equipment
lines, as well as contributions from new products and favorable net pricing.
In the Diagnostics and Information Group, segment net sales for the first nine
months of 2003 were $231.8 million, down $23.7 million, or 9.3%, as compared to
the comparable period in 2002. As discussed above, the year-over-year sales
decline is principally attributable to lower intersegment sales, including the
transferring of production of certain European equipment products to the
Commercial and Industrial Group.
Segment earnings for the Diagnostics and Information Group for the first nine
months of 2003 were $17.0 million, or 7.3% of segment net sales, as compared to
$17.4 million, or 6.8%, in the first nine months of 2002. Savings of $6.1
million from productivity, restructuring and cost reduction efforts, as well as
benefits from favorable net pricing and new product sales, were more than offset
by the combined net margin impact of the lower sales volumes and lower
manufacturing cost absorption. In addition, year-over-year segment earnings were
lowered by higher costs for pension, other retirement and insurance of
28
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
$1.2 million. Segment earnings in 2002 were lowered by $2.6 million for the
first-quarter write-down of a receivable related to the closure of auto service
centers associated with a major retailer's bankruptcy.
Other
- -----
Net finance income was $10.0 million in the third quarter of 2003, down $.3
million from $10.3 million in the prior-year period, primarily reflecting higher
expenses on flat credit originations volume. For the first nine months of 2003,
net finance income was $31.7 million, compared to $26.4 million in 2002. Higher
credit originations and a more favorable interest-rate environment contributed
to the year-over-year increase.
Interest expense was $5.8 million in the third quarter of 2003, down $1.1
million from $6.9 million in the third quarter of 2002, reflecting significantly
lower year-over-year debt levels. For the first nine months of 2003, interest
expense of $18.2 million was down $4.0 million from $22.2 million in the prior
year, reflecting lower average interest rates and significantly lower debt
levels due to strong cash flow from operating activities.
Other income (expense)-net was an expense of $2.4 million for the third quarter
of 2003, as compared to an expense of $2.3 million in the comparable prior-year
period. This item includes the impact of all non-operating items such as
interest income, minority interests, hedging and exchange rate transaction gains
and losses, and other miscellaneous non-operating items. Minority interest
expense for the third quarter of 2003 was $.8 million, as compared to $.9
million for the third quarter of 2002. For the nine months ended September 27,
2003, and September 28, 2002, minority interest expense totaled $1.9 million and
$2.0 million, respectively.
Snap-on's effective tax rate of 22.7% for the third quarter of 2003 benefited
from the conclusion of prior-years' tax matters. For the first nine months of
2003, Snap-on's overall effective tax rate was 31.9%. Snap-on anticipates that
its effective tax rate for the fourth quarter of 2003 will approximate 35%.
Snap-on's effective income tax rate was 36.2% in the third quarter of 2002 and
36.0% for the first nine months of 2002.
Exit or Disposal Activities
- ---------------------------
In June 2002, the Financial Accounting Standards Board ("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 nullifies EITF Issue No. 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, rather than at the date of the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit and disposal
activities that are initiated after December 28, 2002. Snap-on adopted SFAS No.
146 at the beginning of its 2003 fiscal year.
29
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In mid-July 2003, Snap-on announced plans to phase out production at two of its
U.S. hand tool manufacturing facilities, with a planned completion in 2004. In
the company's Form 10-Q for the quarter ended June 28, 2003, Snap-on disclosed
that it expected to record approximately $22 million of costs in the remainder
of 2003 associated with these actions, of which approximately $17 million would
be in the third quarter, including approximately $12 million for accelerated
pension and post-retirement medical curtailment expenses, with the remaining
costs primarily for severance and transition expenses. Snap-on also disclosed
that it expected to incur approximately $4 million of severance and transition
expenses over the phase-out period in 2004.
In the third quarter of 2003, Snap-on recorded restructuring charges of $14.0
million, including $13.3 million for costs related to the above-mentioned
facility closures. Due to continuing negotiations with the representative unions
for these locations, the company was unable to record a portion of the severance
and benefits that were previously anticipated to be recorded in the third
quarter of 2003. Of the $13.3 million in facility closure costs recorded in the
third quarter, $11.7 million was for the recognition of accelerated pension and
post-retirement medical curtailment expenses, with the remaining costs primarily
for severance, equipment transfer and other costs. In addition to the $13.3
million of costs incurred in the third quarter of 2003, the company now expects
that it will record approximately $4 million to $5 million of severance and
transition costs in the fourth quarter of 2003 and approximately $8 million to
$9 million of remaining severance and transition costs in the first quarter of
2004 for these actions. Snap-on believes that the anticipated savings from the
closure of the two U.S. hand tool facilities will be approximately $12 million
per year, beginning in 2004. In the third quarter of 2003, Snap-on also incurred
$.7 million of costs primarily for severance and facility consolidation or
closure costs to effect consolidation initiatives and management realignment
actions at various other Snap-on facilities.
For the three months ended September 27, 2003, Snap-on recorded restructuring
charges of $14.0 million, including $11.7 million for pension and
post-retirement medical curtailment costs, as discussed above, $1.1 million for
severance costs to effect consolidation initiatives and management realignment
actions, and $1.2 million for facility consolidation or closure costs. For the
nine months ended September 27, 2003, Snap-on recorded restructuring charges of
$19.5 million, including the $11.7 million for pension and post-retirement
medical curtailment costs, $6.1 million for severance costs to effect
consolidation initiatives and management realignment actions, and $1.7 million
for facility consolidation or closure costs. For the three and nine months ended
September 27, 2003, restructuring charges of $13.3 million and $16.1 million
were included in "Cost of goods sold," and $.7 million and $3.4 million were
included in "Operating expenses," on the accompanying Consolidated Statements of
Earnings.
The restructuring reserve usage of $14.6 million for the quarter ended September
27, 2003, consisted of a non-cash pension and post-retirement medical
curtailment charge of $11.7 million related to the above-mentioned closure of
the two hand tool facilities, $1.6 million for severance payments related to the
separation of 207 employees, and $1.3 million for equipment transfer and other
costs. The restructuring reserve usage of $19.9 million for the nine months
ended September 27, 2003, included the $11.7 million for pension and
post-retirement medical curtailment, $6.5 million for severance
30
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
payments related to the separation of 353 employees, and $1.7 million for
equipment transfer and other costs. During the first quarter of 2003, Snap-on
completed its restructuring actions initiated in the fourth quarter of 2002.
The composition of Snap-on's restructuring charge activity for the quarter ended
September 27, 2003, was as follows:
Balance at Balance at
(Amounts in millions) June 28, 2003 Additions Usage Sept. 27, 2003
------------- --------- ----- --------------
Severance costs $ 3.0 $ 1.1 $ (1.6) $ 2.5
Pension and post-
retirement medical - 11.7 (11.7) -
Facility consolidation
or closure costs .1 1.2 (1.3) -
----- ------ ------ -----
Total $ 3.1 $ 14.0 $(14.6) $ 2.5
===== ====== ====== =====
Snap-on has funded and expects to continue to fund the remaining cash
requirements of its restructuring activities with cash flows from operations and
borrowings under its existing credit facilities. The specific restructuring
measures and estimated costs were based on management's best business judgment
under prevailing circumstances. If future events warrant changes to the reserve,
such adjustments will be reflected as either "Cost of goods sold" or "Operating
expenses," as appropriate, in the applicable Consolidated Statements of
Earnings.
FINANCIAL CONDITION
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. As of the date of the filing of this
Form 10-Q, Snap-on's long-term debt and commercial paper was rated A2 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.
Cash flow provided by operating activities was $140.0 million for the first nine
months of 2003, including $54.3 million from a net reduction in accounts
receivable and inventories, less accounts payable. Cash flow from operating
activities in the first nine months of 2003 included pension plan contributions
of $14 million. In the fourth quarter of 2003, Snap-on may, at its discretion,
use cash flow from operating or financing activities to make additional
voluntary pension plan contributions. Snap-on also expects that its full-year
2003 pension expense will increase by approximately $17 million over 2002
levels. Cash flow from operating activities in 2002 was $125.8 million,
including a $44.0 million payment ($27.9 million
31
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
net of tax benefit) for the December 2001 resolution of an arbitration matter,
partially offset by a net reduction in accounts receivable and inventories, less
accounts payable.
Total notes payable and long-term debt was $335.7 million at the end of the
third quarter of 2003, as compared to $360.7 million at year-end 2002 and $407.8
million at the end of the third quarter of 2002. Third-quarter 2003 total debt
levels have decreased $72.1 million from the end of the third quarter of 2002,
reflecting Snap-on's increased cash flow. Cash and cash equivalents were $85.4
million and $6.9 million at the end of the third quarters of 2003 and 2002.
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 21.2% at the end of the third quarter of 2003,
compared to 29.2% at year-end 2002 and 32.1% at the end of the third quarter of
2002. The improvement in this ratio reflects lower debt levels and increased
shareholders' equity, including a $79.1 million increase from foreign currency
translation, since December 28, 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 may use debt to fund
acquisitions. Snap-on expects that its total net debt to total capital ratio
will target 30% - 35% in the long term; however, in the near term, this ratio is
expected to remain below 30%. Total invested capital was $1,178.4 million, up
$5.7 million from year-end 2002 and down $70.0 million from the end of the third
quarter of 2002.
In June 2003, Snap-on received proceeds of $5.1 million for the termination of a
$25 million interest rate swap that was a fair value hedge for a portion of its
$200 million, 6.25% long-term notes. The $5.1 million will be amortized to
income using the effective interest rate method over the remaining life of the
notes, which mature on August 15, 2011. At the same time, Snap-on entered into a
new $25 million interest rate swap to hedge that same portion of these notes.
Borrowings under commercial paper programs totaled $25.0 million at the end of
the third quarter of 2003 and $32.9 million at year-end 2002. At September 27,
2003, Snap-on had $408.0 million of multi-currency revolving credit facilities
that provide back-up liquidity for its commercial paper programs. These
facilities include a $200 million, 364-day revolving credit facility with a
one-year term-out option that terminates on July 30, 2004. The term-out option
allows Snap-on to elect to borrow under the credit facility for an additional
year after the termination date. The company's credit facilities also include a
five-year, $208 million revolving credit facility that terminates on August 20,
2005. As of September 27, 2003, and December 28, 2002, Snap-on was in compliance
with all covenants of its revolving credit facilities and there were no
borrowings under any revolving credit facility. 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%. The
company's total debt to total capital ratio, computed as defined by the
financial covenant, was 26.6% at September 27, 2003, and 30.3% at December 28,
2002. Snap-on also has an unused committed $20 million bank line of credit that
expires August 1, 2004.
At September 27, 2003, Snap-on had cash and cash equivalents of $85.4 million
and approximately $403.0 million of unused available debt capacity under the
terms of its revolving credit facilities and committed bank line of credit.
32
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Working investment (defined as current accounts receivable - net plus
inventories less accounts payable) as of September 27, 2003, was $751.0 million,
down $4.2 million from the $755.2 million as of year-end 2002, despite an
increase of $50.1 million from currency translation effects. The working
investment measure is used by Snap-on in assessing management performance and
effectiveness related to working capital.
Current accounts receivable-net at the end of the third quarter of 2003 was
$561.2 million, up $5.0 million from year-end 2002 levels, including an increase
of $32.7 million from currency translation, and up $13.9 million from the third
quarter of 2002. As of the end of the third quarter of 2003, days sales
outstanding improved to 96 days from 98 days for the comparable prior-year
period. Additionally, allowances for doubtful accounts increased from $41.2
million at year-end 2002 to $45.6 million at the end of the third quarter of
2003, including an increase of $2.0 million from currency translation.
Inventories totaled $365.2 million at the end of the third quarter of 2003, down
$40.7 million from the end of the third quarter of 2002, including a $32.9
million increase from currency translation. Inventories at September 27, 2003,
were down $4.7 million from year-end 2002 levels, including an increase of $24.8
million from currency translation. The inventory change in the first nine months
of 2003 reflects Snap-on's continued focus on improving working investment
levels. Inventories accounted for using the first-in, first-out (FIFO) method as
of September 27, 2003, and December 28, 2002, approximated 68% and 65% of total
inventories, respectively. All other inventories are generally accounted for
using the last-in, first-out (LIFO) cost method. As a result of the progress
made in reducing its inventory levels, the company's LIFO reserve declined from
$95.8 million at December 28, 2002, to $89.5 million at September 27, 2003. As
compared to the third quarter of 2002, inventory turns have improved from 2.8
turns to 3.3 turns (defined as the current quarter's cost of goods sold
annualized, divided by the average of the last four quarter-end's inventory
balances).
Capital expenditures of $18.7 million in the first nine months of 2003 were down
from $37.3 million in the first nine months of 2002, reflecting a more
disciplined approach to capital spending that focuses on investment in growth
projects while eliminating waste. Investments primarily included new
product-related, quality, and cost-reduction capital investments, as well as
ongoing replacements of manufacturing and distribution facilities and equipment.
Snap-on now anticipates fiscal 2003 capital expenditures will be in the range of
$30 million, of which approximately two-thirds is expected to be used for
investments relating to new products, quality enhancement or cost reduction.
Capital expenditures in fiscal 2002 totaled $45.8 million.
Snap-on has undertaken stock repurchases 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 300,000 shares of common
stock for $8.1 million under its previously announced share repurchase programs
during the first nine months of 2003. As of the end of the third quarter of
2003, Snap-on has remaining availability to repurchase up to an additional
$145.7 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.
33
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Snap-on has paid consecutive quarterly cash dividends since 1939. Cash dividends
paid totaled $43.6 million for the first nine months of 2003, as compared to
$41.8 million for the first nine months of 2002.
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 continuous improvement activities,
acquisitions, common stock repurchases and dividend payments.
Unconsolidated Joint Venture
- ----------------------------
The FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities" in January 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 the company's 50%-owned
financial services joint venture, Snap-on Credit LLC ("SOC"), which is accounted
for using the equity method. In Snap-on's Form 10-Q for the quarter ended June
28, 2003, the company disclosed that it had completed its evaluation of FIN No.
46 and concluded that Snap-on was not required to consolidate SOC. On October 9,
2003, the FASB postponed the initial implementation date for FIN No. 46, which
would have been effective for Snap-on on June 29, 2003, the beginning of its
fiscal 2003 third quarter.
The company is evaluating recent guidance from the FASB, the U.S. Securities and
Exchange Commission and the accounting profession on the implementation of FIN
No. 46, the results of which could alter the company's previously disclosed
position on the consolidation of SOC. During the fourth quarter of 2003, Snap-on
will continue to evaluate the appropriate accounting for SOC under FIN No. 46.
The company will conclude on the impact of the adoption of FIN No. 46 in the
fourth quarter of fiscal 2003, provided that FIN No. 46 becomes effective for
Snap-on in that quarter. 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 as of January 3, 2004,
Snap-on's fiscal 2003 year end. See Note 7 for additional information on SOC,
including SOC's unaudited summary statements of financial condition as of
September 30, 2003, and December 31, 2002, and SOC's unaudited summary results
of operations for the three and nine months ended September 30, 2003, and
September 30, 2002.
OTHER MATTERS
For a discussion of recent accounting pronouncements, see Note 2.
CRITICAL ACCOUNTING POLICIES
Snap-on's disclosures of its critical accounting policies, which are contained
in its Annual Report on Form 10-K for the year ended December 28, 2002, have not
materially changed since that report was filed.
34
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OUTLOOK
Snap-on will continue to emphasize the consistent and widespread application of
its Driven to Deliver(TM) strategic framework, including the implementation of
performance improvement initiatives. The company remains committed to seeking
opportunities for process improvements that will enhance competitiveness and
customer responsiveness throughout its global organization.
Snap-on expects to record in the fourth quarter of 2003 approximately $4 million
to $5 million of costs associated with the previously announced closing of two
U.S. hand tool manufacturing facilities, primarily for severance and transition
expenses. Snap-on also expects to record approximately $8 million to $9 million
of additional severance and transition costs for these closures in the first
quarter of 2004. Savings from these actions are expected to be approximately $12
million annually, beginning in 2004. In addition, Snap-on also expects that it
will incur between $2 million and $4 million of costs in the fourth quarter of
2003 for other continuous improvement actions.
For the remainder of the year, Snap-on expects continued steady growth in demand
for tools and handheld diagnostics by vehicle-service technicians. Additionally,
while there are indications of improving trends in the overall general economy,
these have not yet been reflected in sales improvements of equipment in the
industrial and capital goods sectors in which Snap-on participates. As a result
of its nine-month results and these marketplace assumptions, Snap-on expects
full-year 2003 reported earnings to be in a range of $1.50 to $1.55 per diluted
share.
Safe Harbor: Statements in this document that are not historical facts,
including statements (i) that include the words "expects," "believes,"
"anticipates," 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.
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 savings from its cost reduction and other Operational Fitness
initiatives; Snap-on's capability to retain and attract dealers and effectively
implement new programs; its ability to capture new business; the success of new
products and other Profitable Growth initiatives; Snap-on's ability to withstand
external negative factors including terrorist disruptions on business; changes
in trade, monetary and fiscal policies, regulatory reporting requirements, laws
and regulations, or other activities of governments or their agencies, including
military actions and such aftermath that might occur; disruption arising from
planned facility closures, Snap-on's ability to grow the U.S. dealer network;
differences between the actual and estimated return on pension plan assets; and
the absence of significant changes in inflation, the current competitive
35
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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.
36
Item 3: Quantitative and Qualitative Disclosures About Market Risk
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 in an attempt to protect the
residual net anticipated exposures. For additional information, refer to Note 9.
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 better manage funding costs of the differing maturities and interest
rate structures of Snap-on's assets and liabilities. For additional information,
refer to Note 9.
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 September 27, 2003, was $1.3 million on interest rate-sensitive
financial instruments and $.6 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.
37
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 loans that SOC
originated with recourse provisions against Snap-on. At September 27, 2003,
$27.4 million of loans originated by SOC have a recourse provision against
Snap-on if the loans become more than 90 days past due. For additional
information on SOC, refer to Note 7.
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 hand-tool manufacturing facility in Argentina with net assets of
approximately $9.7 million as of September 27, 2003. Due to economic instability
in Argentina, Snap-on resized its operations there in 2001, and 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.
Item 4: Controls and Procedures
- -------------------------------
(a) Disclosure Controls and Procedures. The company's management, with the
participation of the company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the company's disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the company in the
reports that it files or submits under the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any changes
in the company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the company's internal control over
financial reporting.
38
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
Item 6(a): Exhibits
- -------------------
Exhibit 10.1 Snap-on Incorporated Deferred Compensation Plan (as amended
through August 21, 2003)
Exhibit 10.2 Amended and Restated 364-Day Credit Agreement between the
Corporation and Citigroup Global Markets, Inc., Banc One Capital
Markets, Inc., Citibank N.A. and Bank One N.A.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as amended.
Exhibit 31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. This certification accompanies the
issuer's Quarterly Report on Form 10-Q and is not filed as
provided in SEC Release Nos. 33-8212, 34-47551 and IC-25967.
Exhibit 32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. This certification accompanies the
issuer's Quarterly Report on Form 10-Q and is not filed as
provided in SEC Release Nos. 33-8212, 34-47551 and IC-25967.
39
Item 6(b): Reports on Form 8-K Filed During the Reporting Period
- ----------------------------------------------------------------
During the third quarter of 2003, Snap-on reported on Form 8-K the following:
Date Filed Date of Report Item
- ---------- -------------- ----
July 23, 2003 July 23, 2003 Snap-on furnished a press release entitled
"Snap-on Reports $.38 in EPS for the Second
Quarter; Results in line with recent outlook;
Announces additional actions to enhance
performance."
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Snap-on
Incorporated has duly caused this report to be signed on its behalf by the
undersigned duly authorized person.
SNAP-ON INCORPORATED
Date: October 29, 2003 /s/ Martin M. Ellen
---------------------------------------------
Martin M. Ellen, Principal Financial Officer,
Chief Financial Officer and
Senior Vice President - Finance
41
EXHIBIT INDEX
Exhibit No. Exhibit
10.1 Snap-on Incorporated Deferred Compensation Plan (as amended
through August 21, 2003)
10.2 Amended and Restated 364-Day Credit Agreement between the
Corporation and Citigroup Global Markets, Inc., Banc One
Capital Markets, Inc., Citibank N.A. and Bank One N.A.
12 Computation of Ratio of Earnings to Fixed Charges.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. This certification
accompanies the issuer's Quarterly Report on Form 10-Q and
is not filed as provided in SEC Release Nos. 33-8212,
34-47551 and IC-25967.
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. This certification
accompanies the issuer's Quarterly Report on Form 10-Q and
is not filed as provided in SEC Release Nos. 33-8212,
34-47551 and IC-25967.
42