Exhibit (13)
PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS
[Pages 16-19 of Annual Report]
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
(Note: All share and per share amounts in this Discussion reflect the
September 10, 1996 three-for-two split of the Corporation's common stock.)
Overview: Net sales grew 14.9% in 1996; acquisitions, higher unit volume
and modest price increases were all elements of the growth. Excluding
acquisitions, sales rose 5%. The translation of foreign-currency-
denominated results into U.S. dollars negatively affected sales by one
percentage point. North America and Europe posted sales growth, while
Other Non-U.S. revenues declined. In 1995, net sales increased 8.2%, with
higher sales in North America and Other Non-U.S. markets and lower results
in Europe.
Net earnings increased 16.0% in 1996 due to higher sales, continued
improvement in operating expenses as a percent of sales, and acquisitions.
In 1995, net earnings rose 15.3%, as higher gross margins resulting from
increased sales volumes and improved productivity, lower operating
expenses as a percent of net sales, and acquisitions all contributed to
the increase. Earnings per share increased 17.4% in 1996 and 20.0% in
1995. In 1995, earnings per share grew at a higher rate than net earnings
because of a share repurchase program that reduced the number of common
shares outstanding.
(Amounts in thousands) 1996 1995 1994
Net earnings $131,451 $113,330 $98,314
Earnings per common share $ 2.16 $ 1.84 $ 1.53
Sales: Sales in North America increased 10.5% in 1996 following a 9.7%
increase in 1995. The growth in both 1996 and 1995 was driven by higher
volumes from new product introductions; improved service levels; increased
sales to the dealer channel and to national accounts; price increases, and
a moderately strong U.S. economy. Contributions from the 1995 acquisitions
of Edge Diagnostic Systems ("Edge") and Consolidated Devices, Inc. ("CDI")
and the 1996 acquisition of the John Bean Company ("John Bean") were also
important factors in the increase. Excluding acquisitions, sales in 1996
rose 5%. Acquisitions accounted for more than one-third of the sales gain
in 1995.
Sales in Europe increased 46.7% in 1996 following a decline of 4.4% in
1995. The 1996 year benefited from contributions from the 1995 acquisition
of Herramientas Eurotools, S.A. of Spain ("Eurotools") and the 1996
acquisition of John Bean, higher sales through the dealer channel, and
equipment sales related to the start-up of an emissions-testing program in
the United Kingdom. Excluding acquisitions, sales increased 8% in 1996.
The translation of foreign currencies into U.S. dollars negatively
affected sales; excluding the translation effects, 1996 sales grew 49%.
The 1995 decline in sales was due to reduced emissions-testing equipment
sales in Germany. Hand tool and other equipment sales, however, were
positive contributors.
Sales in Other Non-U.S. markets declined 1.1% in 1996 after an increase of
22.9% in 1995. Growth in tool and equipment sales in Australia were more
than offset by a decline in sales in Japan. The strength of the U.S.
dollar against the Japanese yen and general weakness in the Japanese
economy were primarily responsible for the 1996 decrease. Excluding the
net effects of foreign currency, 1996 sales increased 5%. In 1995, strong
sales were recorded by most of the countries in this geographic category.
1995 results also benefited from a weak U.S. dollar relative to the
Japanese yen.
(Amounts in thousands) 1996 1995 1994
North American sales $1,138,016 $1,029,516 $ 938,126
European sales 268,818 183,301 191,648
Other Non-U.S. sales 78,445 79,308 64,522
---------- ---------- ----------
Total sales $1,485,279 $1,292,125 $1,194,296
========== ========== ==========
The Corporation manufactures, markets and distributes tools and equipment
for the automotive and industrial service markets around the world using
multiple brands sold through multiple channels of distribution. In some
instances, it finances the purchase of those products.
Increased sales of tools were attributable primarily to the continued
success of the dealer network in serving its customers and to the full-
year contributions of the Eurotools and CDI acquisitions completed in
1995. Equipment revenues benefited from new product introductions such as
the Vantage multimeter, from increased business with national account
customers, from emissions-testing equipment sales in several countries,
and from the 1995 acquisition of Edge and the 1996 acquisition of John
Bean. A review of net finance income is included in the "Cost and Profit
Margins" section of this Discussion.
Sales per employee, a common measure of productivity, increased 11% in
1996 over 1995. Since 1992, sales per employee has grown 28%.
During the year, the Corporation increased prices by varying degrees in
each of its product groups. List price increases averaged 2.9% in 1996 and
3.0% in 1995. Promotional activities reduced the revenue realization of
these price increases.
Cost and profit margins: The gross profit margin was 50.5% in 1996
compared with 51.3% in 1995 and 51.0% in 1994. The decline in 1996's gross
margin was due to a change in business mix resulting from several recent
acquisitions. In 1995, gross margins increased as a result of improved
productivity and higher factory utilization rates.
Total operating expenses as a percent of net sales continued to decline;
the 1996 percentage was 40.0% compared with 41.6% in 1995 and 42.7% in
1994. Higher sales volumes, continued improvement in processes and in
productivity, a change in business mix, and other general overhead
reductions all contributed to the decline. The decrease in 1995 was the
result of higher sales volumes, lower legal expenses, realization of the
full benefits of inventory, customer service and facilities
consolidations, and other overhead reductions. Total operating expenses
rose $56.5 million, compared with increases of $27.7 million in 1995 and
$0.5 million in 1994. All three years' increases were primarily due to
acquisitions.
Operating income margins improved to 14.8% in 1996 from 14.6% in 1995 and
13.3% in 1994. In 1996, lower operating expenses as a percent of sales
more than offset the lower gross margin. In 1995, higher gross margins and
lower operating expenses as a percent of sales both contributed to the
increased margin.
Net finance income was $64.3 million in 1996, compared with $63.2 million
in 1995 and $60.5 million in 1994. The Corporation uses its financing
programs to facilitate sales and does not actively seek to increase
finance income as a direct source of earnings growth. The rise in net
finance income in 1996 and 1995 was the result of increases in both
extended credit receivables and lease receivables, and benefits from
programs to control related costs. This growth was offset in part by the
asset securitization program discussed in the next paragraph.
In the first and fourth quarters of 1996, the Corporation sold $50 million
and $25 million, respectively, of its extended credit receivables, with
the proceeds used to pay down short-term debt and for working capital and
general corporate purposes. The effect of the asset securitization is a
decline in net finance income offset by an equivalent decline in interest
expense. In the fourth quarter of 1995, the Corporation sold $100 million
of its extended credit receivables.
In 1996, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and SFAS No. 123,
"Accounting for Stock-Based Compensation." The adoption of these
statements had no impact on the consolidated financial statements. In the
first quarter of 1997, the Corporation will adopt SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Corporation does not anticipate that
the adoption of this standard will have any impact on the consolidated
financial statements.
Other income and expenses: Interest expense recorded in 1996 was $12.6
million, compared with $13.3 million in 1995 and $10.8 million in 1994.
The decrease in 1996 is primarily due to the effects of the asset
securitization program. The 1995 increase reflected higher borrowings to
repurchase stock and finance acquisitions.
(Amounts in thousands) 1996 1995 1994
Interest expense $(12,649) $(13,327) $(10,806)
Interest income 2,134 3,222 2,799
Other income (expense) (1,358) 1,350 2,742
-------- -------- --------
Total other expense $(11,873) $ (8,755) $ (5,265)
======== ======== ========
Income taxes: The Corporation's effective tax rate was 37.0% in 1996,
37.0% in 1995 and 36.0% in 1994. The Corporation's effective tax rate was
lower in 1994 as a result of an increase in the operating income from
those subsidiaries that benefit from the utilization of net operating loss
carryforwards ("NOLs"). The Corporation has U.S. tax NOLs acquired in
acquisitions totaling $48.2 million and non-U.S. tax NOLs of $19.5 million
resulting from operations primarily in Australia, Canada, Mexico and the
Netherlands. See Note 7 for a further discussion of income taxes.
Other matters: During 1996, the Corporation acquired three new business
operations for an aggregate purchase price of $38.7 million. These
operations are John Bean, Automotive Data Solutions ("ADS") and Snap-on
Tools/PST Africa (Pty.), Ltd. ("Snap-on Tools/PST Africa").
John Bean is a leading producer of wheel and brake service
equipment, including wheel aligners and balancers, tire changers and brake
lathes. Its products are sold in North America, Europe and select other
parts of the world. The acquisition extends the Corporation's reach in the
global market for under-car service. It also provides greater access to
original equipment manufacturers, national service chains and other
service repair providers through John Bean's traditional distributor
channel.
ADS is a tele-diagnostics service for automotive technicians. Its master
technicians and database of repair solutions provide the Corporation with
a core competency that can enrich current customer relationships and serve
as the basis for the generation of new business.
Snap-on Tools/PST Africa is a mobile van distributor of tools to
professional users in South Africa. The acquisition represents the
Corporation's first operation in that country, which can be used as a base
for the region.
Subsequent to the close of 1996, the Corporation acquired a 50 percent
interest in The Thomson Corporation's Mitchell Repair Information
business. Snap-on will purchase the remainder of the newly formed Mitchell
Repair Information Company, LLC within the next five years. The new
company is the largest provider of print and electronic versions of
vehicle mechanical and electrical system repair information to repair and
service establishments throughout North America. The acquisition will
enable the Corporation to offer a complete package of integrated
information and business services to vehicle repair centers around the
world. The integration of the vehicle repair database into the
Corporation's diagnostics equipment is also an important benefit of the
relationship.
The Corporation guaranteed payment (the "Guaranty") of certain lease
obligations of a former subsidiary in the aggregate amount of $98.8
million plus an interest factor in connection with a centralized
emissions-testing program in the State of Texas. Subsequently, the State
of Texas enacted legislation designed to terminate its centralized
emissions testing program. Litigation was commenced with respect to the
emissions-testing program and related contracts. The Corporation is making
regular monthly payments under the Guaranty. The Corporation believes that
it is probable that there will be developments, prior to the end of the
1997 Texas legislative session (approximately May 1997), to enable the
lease obligations to ultimately be recovered. Therefore, it is
management's opinion that the Guaranty is not likely to have a material
adverse effect on the Corporation's financial condition or results of
operations. Refer to Note 13 for an expanded discussion of the Guaranty.
Stock repurchase program: An authorization by the board of directors is
currently in effect to repurchase common shares of the Corporation in an
amount equivalent to the number of shares issued in connection with the
exercise of options, employee and dealer stock purchase programs, and
other similar issuances. The intent of this authorization is to prevent
dilution of shareholders' interests. In 1996, 615,750 shares of the
Corporation's common stock were repurchased. In May 1995, the Corporation
completed a program authorized by the board of directors to repurchase
$100 million in common shares. A total of 4.2 million shares were
repurchased under the program, representing approximately 6.5% of total
shares outstanding at the time the repurchase was authorized.
Stock split: At its June 1996 meeting, the board of directors voted to
split the Corporation's common stock. Shareholders of record on August 20,
1996, received one additional share for every two owned on that date. The
distribution of the shares was made on September 10, 1996.
Financial Condition
Overview: The Corporation continued its commitment to a strong financial
position and solid capital structure in 1996. At the end of 1996, the
ratio of total debt to total capital declined to 17.3% from 18.5% as of
year-end 1995, reflecting strong cash flow that enabled the Corporation to
invest in its businesses and satisfy its obligations without significantly
increasing its total debt.
Liquidity: In 1996, the Corporation's working capital increased by $65.3
million following a decline of $24.5 million in 1995. Acquisitions
primarily accounted for the increase in 1996. The ratio of current assets
to current liabilities was 3.0 to 1 at the end of 1996, compared with 2.8
to 1 at the end of 1995. Cash and short-term investments were $15.4
million, a decrease of $0.8 million from year-end 1995's $16.2 million.
Accounts receivable increased $41.7 million to $651.7 million. The growth
in accounts receivable was partially offset by the asset securitization
program discussed previously and in Note 5. Exclusive of the asset
securitization effected in 1996, receivables increased by $116.7 million,
reflecting continued strong growth in various financing instruments
(including extended credit installment contracts and leases) provided by
the Corporation, and acquisitions. These financing instruments represent a
majority of the Corporation's accounts receivable and currently average
approximately 20.5 months in duration. The remaining accounts receivable
include those from dealers, industrial customers and governments. The
percentage of total write-offs for bad debts improved to 1.5% of average
accounts receivable in 1996 from 1.7% in 1995, reflecting the
effectiveness of the Corporation's credit extension and collections
practices.
Inventories increased by $19.3 million to $269.8 million, primarily
because of acquisitions. Inventories related to the Corporation's
continuing operations were $5.4 million higher at the end of 1996, from
$250.4 million at the close of 1995.
(Amounts in thousands) 1996 1995
Current assets $1,017,324 $946,689
Current liabilities 341,371 336,075
Working capital $ 675,953 $610,614
Current ratio 3.0 to 1 2.8 to 1
Short-term debt at the 1996 year end was $23.3 million, a decrease from
$27.1 million at year-end 1995. Current maturities of long-term debt at
the end of 1996 and 1995 were $0.3 million and $0.9 million. In addition,
at year-end 1996, the Corporation had $42.0 million in short-term
commercial notes payable outstanding that were classified as long term
since it is the Corporation's intent, and it has the ability, to refinance
this debt on a long-term basis, supported by its $100 million revolving
credit facility. In 1995, the Corporation had on file a $300 million shelf
registration that allows the Corporation to issue from time to time up to
$300 million of unsecured indebtedness. Of this amount, $100 million
aggregate principal amount of its notes were issued to the public in
October 1995.
These sources of borrowing, coupled with cash from operations, are
sufficient to support working capital requirements, finance capital
expenditures, make acquisitions and pay dividends. The Corporation's high
credit rating over the years has ensured that external funds are available
at a reasonable cost. At the end of 1996, the Corporation's long-term debt
was rated Aa3 and AA by Moody's Investor Service and Standard & Poor's,
respectively. The strength of the Corporation's balance sheet provides the
financial flexibility to respond to growth opportunities existing
internally and through acquisition.
Capital expenditures/Depreciation and amortization: Capital expenditures
for 1996 totaled $52.3 million, an increase of $20.8 million over 1995.
Investments for the year included normal replacement and upgrading of
manufacturing and distribution facilities and equipment, upgrading and
integration of the Corporation's computer systems, and the construction of
a new hand tool manufacturing facility in Spain for Eurotools. The
Corporation anticipates capital expenditures in 1997 to total $35 to $40
million.
Depreciation for 1996 was $26.6 million, up $1.1 million from 1995. The
growth was primarily related to acquisitions. Amortization expense in 1996
was $5.2 million, a decline of $0.8 million from 1995. In 1995, intangible
amortization expense included the write-off of certain research and
development in process related to the acquisition of a majority ownership
interest in Edge during the year. Excluding this 1995 action, amortization
expense in 1996 would have shown an increase because of recent
acquisitions.
(Amounts in thousands) 1996 1995
Capital expenditures $52,333 $31,581
Depreciation 26,644 25,503
Amortization 5,235 6,031
Dividends: At its June 1996 meeting, the board of directors declared an
11.1% increase in the quarterly dividend on the Corporation's common
stock, raising the annual dividend rate to $.80 per share. The Corporation
has paid consecutive quarterly dividends since 1939.
(Amounts in thousands) 1996 1995
Cash dividends paid $46,323 $44,113
Cash dividends per common share .76 .72
Cash dividends as a % of net income 35.2% 38.9%
[Pages 20-35 of Annual Report]
Consolidated Statements of Earnings
(Amounts in thousands except share data) 1996 1995 1994
Net sales $ 1,485,279 $ 1,292,125 $ 1,194,296
Cost of goods sold 734,495 628,634 585,459
----------- ----------- -----------
Gross profit 750,784 663,491 608,837
Operating expenses 594,527 538,021 510,361
Net finance income (64,269) (63,174) (60,458)
----------- ----------- -----------
Operating income 220,526 188,644 158,934
Interest expense (12,649) (13,327) (10,806)
Other income - net 776 4,572 5,541
----------- ----------- -----------
Earnings before income taxes 208,653 179,889 153,669
Income taxes 77,202 66,559 55,355
----------- ----------- -----------
Net earnings $ 131,451 $ 113,330 $ 98,314
=========== =========== ===========
Earnings per weighted
average common share $ 2.16 $ 1.84 $ 1.53
=========== =========== ===========
Weighted average common
shares outstanding 60,967,865 61,510,500 64,187,874
=========== =========== ===========
The accompanying notes are an integral part of these statements.
Consolidated Balance Sheets
Dec. 28, Dec. 30,
(Amounts in thousands except share data) 1996 1995
Assets
Current assets
Cash and cash equivalents $ 15,350 $ 16,211
Accounts receivable, less allowance
for doubtful accounts of $16.9 million
in 1996 and $14.7 million in 1995 651,739 610,064
Inventories 269,750 250,434
Prepaid expenses and other assets 80,485 69,980
---------- ----------
Total current assets 1,017,324 946,689
Property and equipment - net 245,294 220,067
Deferred income tax benefits 55,413 61,471
Intangible and other assets 202,757 132,746
---------- ----------
Total assets $1,520,788 $1,360,973
========== ==========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 89,310 $ 75,603
Notes payable and current maturities
of long-term debt 23,274 27,126
Accrued compensation 36,467 37,769
Dealer deposits 51,036 65,344
Accrued income taxes 11,366 16,106
Other accrued liabilities 129,918 114,127
---------- ----------
Total current liabilities 341,371 336,075
Long-term debt 149,804 143,763
Deferred income taxes 7,027 4,760
Retiree health care benefits 84,593 80,665
Pension and other long-term liabilities 109,832 44,978
---------- ----------
Total liabilities 692,627 610,241
Shareholders' equity
Preferred stock - authorized 15,000,000
shares of $1 par value; none outstanding - -
Common stock - authorized 125,000,000
shares of $1 par value; issued
65,971,917 and 43,571,363 shares 65,972 43,571
Additional paid-in capital 66,506 74,250
Retained earnings 838,484 753,356
Foreign currency translation adjustment (13,930) (10,758)
Treasury stock at cost - 5,186,550
and 3,047,200 shares (128,871) (109,687)
---------- ----------
Total shareholders' equity 828,161 750,732
---------- ----------
Total liabilities and shareholders' equity $1,520,788 $1,360,973
========== ==========
The accompanying notes are an integral part of these statements.
Consolidated Statements of Shareholders' Equity
(Amounts in thousands except share data) 1996 1995 1994
Common stock
Amount at beginning of year $ 43,571 $ 43,128 $ 42,819
Shares issued under stock purchase
and option plans 410 425 291
Three-for-two stock split 21,971 - -
Dividend reinvestment plan 20 18 18
-------- -------- --------
Amount at end of year 65,972 43,571 43,128
Additional paid-in capital
Amount at beginning of year 74,250 61,827 52,153
Additions from stock purchase
and option plans 12,436 11,778 8,779
Tax benefit from certain stock
options and other items 1,031 - 264
Three-for-two stock split (21,971) - -
Dividend reinvestment plan 760 645 631
-------- -------- --------
Amount at end of year 66,506 74,250 61,827
Retained earnings
Amount at beginning of year 753,356 684,139 632,022
Net earnings for the year 131,451 113,330 98,314
Dividends per share paid in
cash - $.76 in 1996, $.72
in 1995 and $.72 in 1994 (46,323) (44,113) (46,197)
-------- -------- --------
Amount at end of year 838,484 753,356 684,139
Foreign currency translation adjustment
Amount at beginning of year (10,758) (13,384) (16,019)
Net currency translation
adjustment for the year (3,172) 2,626 2,635
-------- -------- --------
Amount at end of year (13,930) (10,758) (13,384)
Treasury stock at cost
Amount at beginning of year (109,687) (9,312) (9,312)
Treasury stock purchased at cost (19,184) (100,375) -
-------- -------- --------
Amount at end of year (128,871) (109,687) (9,312)
-------- -------- --------
Total shareholders' equity $828,161 $750,732 $766,398
======== ======== ========
The accompanying notes are an integral part of these statements.
Consolidated Statements of Cash Flows
(Amounts in thousands) 1996 1995 1994
Operating activities
Net earnings $131,451 $113,330 $ 98,314
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 26,644 25,503 26,893
Amortization of intangibles 5,235 6,031 2,739
Deferred income tax provision 8,398 (10,098) (1,103)
Gain on sale of assets (876) (236) (2,938)
Changes in operating assets
and liabilities, net of effects
of acquisitions:
(Increase) in receivables (29,591) (18,267) (27,256)
(Increase) decrease in inventories (10,543) (121) 32,331
(Increase) decrease in prepaid
expenses 3,361 (3,989) (15,470)
Increase (decrease) in accounts
payable 12,069 10,786 (1,453)
Increase (decrease) in accruals,
deposits, and other long-term
liabilities (16,427) 49,961 (4,882)
-------- -------- -------
Net cash provided by
operating activities 129,721 172,900 107,175
Investing activities
Capital expenditures (52,333) (31,581) (41,788)
Acquisitions of businesses (38,553) (37,965) (23,332)
Disposition of business - - 26,611
Disposal of property and equipment 3,317 5,961 10,017
(Increase) decrease in
other noncurrent assets 6,679 (7,627) (3,219)
-------- -------- -------
Net cash used in investing activities (80,890) (71,212) (31,711)
Financing activities
Payment of long-term debt (40,902) (99,150) (807)
Increase in long-term debt 46,205 133,513 427
Increase (decrease) in
short-term borrowings - net (4,112) 3,109 (35,826)
Purchase of treasury stock (19,184) (100,375) -
Proceeds from stock purchase
and option plans 14,656 12,866 9,983
Cash dividends paid (46,323) (44,113) (46,197)
-------- -------- -------
Net cash used in financing activities (49,660) (94,150) (72,420)
Effect of exchange rate changes
on cash (32) (342) (758)
-------- -------- -------
Increase (decrease) in cash
and cash equivalents (861) 7,196 2,286
Cash and cash equivalents at
beginning of year 16,211 9,015 6,729
-------- -------- -------
Cash and cash equivalents at
end of year $ 15,350 $ 16,211 $ 9,015
======== ======== =======
The accompanying notes are an integral part of these statements.
Notes to Consolidated Financial Statements
Note 1 - Summary of Accounting Policies
A summary of significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows:
a. Nature of operations: The Corporation is a leading global developer,
manufacturer and distributor of hand and power tools, diagnostic hardware
and software, shop equipment, and tool storage products. The Corporation's
customers include professional automotive technicians and shop owners,
original equipment manufacturers and industrial tool users worldwide.
b. Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
c. Principles of consolidation: The consolidated financial statements
include the accounts of the Corporation and its subsidiaries, all of which
are wholly owned with the exception of Edge and Snap-on Tools/PST Africa.
Significant intercompany accounts and transactions have been eliminated.
d. Accounting period: The Corporation's accounting period ends on the
Saturday nearest December 31. The 1996, 1995 and 1994 years ended on
December 28, 1996, December 30, 1995 and December 31, 1994.
e. Cash equivalents: The Corporation considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash equivalents are stated at cost, which approximates
market value.
f. Inventories: Inventories are stated at the lower of cost or market.
Cost elements include the cost of raw materials, direct labor and overhead
incurred in the manufacturing process. For detailed inventory information,
refer to Note 2.
g. Property and equipment: Depreciation and amortization are calculated
primarily on a straight-line basis. Accelerated methods are used for
income tax purposes. For detailed property and equipment information,
refer to Note 3.
h. Intangibles: During 1996, the Corporation made three acquisitions with
an aggregate purchase price of $38.7 million. During 1995, the Corporation
made three acquisitions with an aggregate purchase price of $61.2 million.
Pro forma results of operations are not presented, as the effect of these
acquisitions is not material. Goodwill arising from business acquisitions
is included in Intangible and Other Assets in the accompanying
Consolidated Balance Sheets and is being amortized principally over 20
years on a straight-line basis. The Corporation continually evaluates the
existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted net cash flows of the
related business unit.
Subsequent to year-end 1996, the Corporation acquired a 50 percent
interest in The Thomson Corporation's Mitchell Repair Information business
at a purchase price of $40.0 million. The Corporation is obligated to
purchase the remainder of the newly formed Mitchell Repair Information
Company within the next five years.
Goodwill, net of accumulated amortization, was $80.8 million and $78.0
million at the end of 1996 and 1995. Goodwill amortization was $4.8
million, $3.9 million and $3.2 million for 1996, 1995 and 1994.
Accumulated amortization of goodwill was $18.1 million and $13.3 million
at the end of 1996 and 1995.
i. Research and engineering: Research and engineering costs are charged to
expense in the year incurred. For 1996, 1995 and 1994, these costs were
$42.4 million, $33.9 million and $30.6 million.
j. Income taxes: Deferred income taxes are provided for temporary
differences arising from differences in bases of assets and liabilities
for tax and financial reporting purposes. Deferred income taxes are
recorded on temporary differences at the tax rate expected to be in effect
when the temporary differences reverse. For detailed tax information,
refer to Note 7.
k. Foreign currency translation: The financial statements of the
Corporation's foreign subsidiaries are translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." Net assets of certain foreign subsidiaries
are translated at current rates of exchange, and income and expense items
are translated at the average exchange rate for the year. The resulting
translation adjustments are recorded directly into a separate component of
shareholders' equity. Certain other translation adjustments and
transaction gains and losses are reported in net income and were not
material in any year.
l. Revenue recognition: The Corporation recognizes revenues at the time
that products are shipped or the time that services are performed.
Franchise fee revenue is recognized as the fees are earned. Revenue from
franchise fees was not material in any year.
m. Net finance income: Net finance income consists of installment contract
income, dealer start-up loan receivable income and lease income, net of
related expenses.
n. Advertising and promotion expense: Production costs of future media
advertising are deferred until the advertising occurs. All other
advertising and promotion costs are generally expensed when incurred.
o. Warranty expense policy: The Corporation provides product warranties
for specific product lines and accrues for estimated future warranty costs
in the period that the sale was recorded.
p. Accounting standards: In 1996, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and SFAS No. 123, "Accounting for Stock-Based Compensation." The
adoption of these statements had no impact on the consolidated financial
statements. In the first quarter of 1997, the Corporation will adopt SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The Corporation does not anticipate that
the adoption of this standard will have any impact on the consolidated
financial statements.
q. Reclassified prior-year amounts: Certain prior-year amounts have been
reclassified to conform with current-year presentation.
r. Per share data: In June 1996, the board of directors approved a three-
for-two split of the Corporation's common stock, which was distributed on
September 10, 1996 to shareholders of record on August 20, 1996. All prior
year and certain 1996 per share and weighted average share information has
been restated.
Note 2 - Inventories
The components of the Corporation's inventory were as follows for the
years ended:
(Amounts in thousands) 1996 1995
Finished stock $271,785 $264,184
Work in process 42,483 39,977
Raw materials 62,057 56,191
Excess of current cost
over LIFO cost (106,575) (109,918)
-------- --------
Total inventory $269,750 $250,434
======== ========
Inventories accounted for using the last-in, first-out (LIFO) cost method
approximated 73% and 63% of total inventory as of year-end 1996 and 1995.
Note 3 - Property and Equipment
The Corporation's property and equipment values, which are carried at
cost, were as follows:
(Amounts in thousands) 1996 1995
Land $ 24,337 $ 22,875
Buildings and improvements 166,764 149,087
Machinery and equipment 319,138 296,916
-------- --------
510,239 468,878
Less: accumulated depreciation (264,945) (248,811)
-------- --------
Property and equipment - net $245,294 $220,067
======== ========
The estimated service lives of property and equipment are principally as
follows:
Buildings and improvements 5 to 50 years
Machinery and equipment 3 to 15 years
Transportation vehicles 2 to 5 years
Note 4 - Litigation
At January 31, 1997, the Corporation was a party to various pending legal
proceedings in which approximately eight current or former U.S. dealers,
and in some cases their spouses, have asserted claims against the
Corporation, and approximately 14 current or former U.S. dealers have
threatened to assert claims against the Corporation. In most instances,
these claims include allegations that the Corporation made
misrepresentations, violated statutes or contract rights, and caused
distress. During 1996, 1995 and 1994, the Corporation charged earnings a
total of approximately $4.3 million, $4.9 million and $7.9 million for
settlement costs, including the establishment of related reserves, legal
fees and expenses with respect to dealer claims. Although it is not
possible to predict the outcome of the existing dealer claims with any
certainty, it is management's opinion, based in part on advice from its
legal counsel, that the costs, losses and settlements of these claims are
not expected to have a material adverse effect on the Corporation's
financial condition and results of operations.
Note 5 - Receivables
Accounts receivable include installment receivable amounts that are due
beyond one year from balance sheet dates. These amounts were approximately
$47.6 million and $38.3 million at the end of 1996 and 1995. Gross
installment receivables amounted to $422.2 million and $433.1 million at
the end of 1996 and 1995. Of these amounts, $42.4 million and $59.6
million represented unearned finance charges at the end of 1996 and 1995.
The Corporation has an agreement with a financial institution to sell, on
an ongoing basis and with full recourse, up to $77.3 million of dealer
start-up loan receivables. During 1996 and 1995, the Corporation sold
$31.6 million and $29.5 million of these receivables to the financial
institution. At the end of 1996 and 1995, $56.5 million and $40.1 million
remained outstanding.
In October 1995, the Corporation entered into agreements that provide for
the sale, without recourse, of an undivided interest in a pool of certain
of its accounts receivable to a third-party financial institution. These
agreements, which include subsequent amendments, provide for a maximum of
$200 million of such accounts receivable to be sold and remain outstanding
at any one time. As of December 28, 1996, $175.0 million of interest-
bearing installment receivables were sold under these agreements on a
revolving basis, of which $100.0 million, $50.0 million and $25.0 million
were sold in October 1995, January 1996 and October 1996. The agreement
for revolving purchases terminates in October 1997. The sale is reflected
as a reduction of accounts receivable in the accompanying Consolidated
Balance Sheets and as operating cash flows in the accompanying
Consolidated Statements of Cash Flows. The impact of the sale on the
Consolidated Statements of Earnings was not material. Subsequent to year-
end, the Corporation sold an additional $25.0 million of interest-bearing
installment receivables under these agreements.
Note 6 - Short-term and Long-term Debt
Notes payable to banks under bank lines of credit totaled $22.9 million
and $26.2 million at the end of 1996 and 1995.
Commercial notes payable totaled $42.0 million and $30.0 million at the
end of 1996 and 1995. The commercial paper outstanding at year end is
classified as long-term debt since it is the Corporation's intent, and it
has the ability (supported by a $100 million revolving credit facility),
to refinance the debt on a long-term basis.
Under the terms of a $100 million revolving credit commitment entered into
by the Corporation in 1994, borrowings can be made at the London Interbank
Offered Rate in effect at the time of such borrowings plus 0.14% and may
be fixed for periods ranging from one to twelve months under reborrowing
provisions of the commitment. This commitment terminates on January 2,
2000. There were no borrowings under this revolving credit commitment at
the end of 1996 and 1995.
Under the commitment, the Corporation must maintain a specific level of
consolidated tangible net worth and meet certain leverage and subsidiary
indebtedness ratios. In addition, certain capital transactions are
restricted. At the end of 1996, the Corporation was in compliance with all
covenants of the commitment.
Maximum short-term debt outstanding at the end of any month was $64.9
million in 1996 and $154.7 million in 1995. The average short-term debt
outstanding was $41.9 million in 1996 and $69.2 million in 1995. The
weighted average interest rates were 6.0% in 1996 and 5.9% in 1995. The
weighted average interest rates on long-term and short-term debt
outstanding were 6.4% and 6.9% at December 28, 1996 and December 30, 1995.
The Corporation's long-term debt consisted of the following for the years
ended:
(Amounts in thousands) 1996 1995
Senior unsecured indebtedness $100,000 $100,000
Borrowings supported by a
revolving credit commitment 42,000 30,000
Other long-term debt 8,129 4,676
-------- --------
150,129 144,676
Less: current maturities (325) (913)
-------- --------
Total long-term debt $149,804 $143,763
======== ========
The annual maturities of the Corporation's long-term debt due in the next
five years are $0.3 million in 1997, $0.3 million in 1998 and $49.4
million in 2000.
In September 1994, the Corporation filed a registration statement with the
Securities and Exchange Commission that allows the Corporation to issue
from time to time up to $300 million of unsecured indebtedness. In October
1995, the Corporation issued $100 million of its notes to the public. The
notes require payment of interest on a semiannual basis at a rate of
6.625% and mature in their entirety on October 1, 2005. The proceeds of
this issuance were used to repay a portion of the Corporation's
outstanding commercial paper and for working capital and general corporate
purposes.
Interest payments on debt and on other interest-bearing obligations
approximated $13.2 million, $13.0 million and $11.6 million for 1996, 1995
and 1994.
Note 7 - Income Taxes
Earnings before income taxes consisted of the following:
(Amounts in thousands) 1996 1995 1994
U.S. 172,553 $153,423 $117,509
Foreign 36,100 26,466 36,160
-------- -------- --------
Total $208,653 $179,889 $153,669
======== ======== ========
The provision for income taxes consists of the following:
(Amounts in thousands) 1996 1995 1994
Current:
Federal $ 55,949 $ 57,328 $ 36,279
Foreign 13,803 10,250 14,091
State 8,997 9,079 6,088
-------- -------- --------
Total current 78,749 76,657 56,458
Deferred:
Federal (615) (8,895) (684)
Foreign (428) (176) (517)
State (504) (1,027) 98
-------- -------- --------
Total deferred (1,547) (10,098) (1,103)
-------- -------- --------
Total income tax provision $ 77,202 $ 66,559 $ 55,355
======== ======== ========
A reconciliation of the Corporation's effective income tax rate to the
statutory federal tax rate follows for the years ended:
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax
rate resulting from:
State income taxes, net of
federal benefit 2.4 2.5 2.7
Foreign sales corporation
tax benefit (1.5) (1.8) (1.9)
Other 1.1 1.3 0.2
-------- -------- --------
Effective tax rate 37.0% 37.0% 36.0%
======== ======== ========
Temporary differences that give rise to the net deferred tax benefit are
as follows:
(Amounts in thousands) 1996 1995 1994
Current deferred income
tax benefit:
Inventories $ 14,599 $ 16,534 $ 15,007
Accruals and reserves not
currently deductible 36,372 15,136 19,217
Other 56 2,956 302
-------- -------- --------
Total current (included
in prepaid expenses) 51,027 34,626 34,526
Long-term deferred income tax benefit:
Employee benefits 57,299 50,017 44,215
Net operating losses 23,585 30,313 30,124
Depreciation (13,409) (18,118) (17,239)
Other (6,528) 4,661 3,200
Valuation allowance (12,561) (10,162) (9,869)
-------- -------- --------
Total long-term 48,386 56,711 50,431
-------- -------- --------
Net deferred income tax benefit $ 99,413 $ 91,337 $ 84,957
======== ======== ========
The valuation allowance required under Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," has been
established for deferred income tax benefits related to certain subsidiary
loss carryforwards that may not be realized. Included in the valuation
allowance is $7.5 million that relates to the deferred tax assets recorded
from acquisitions. Any tax benefits subsequently recognized for these
deferred tax assets will be allocated to goodwill.
The Corporation has U.S. tax NOLs acquired from acquisitions totaling
$48.2 million that expire as follows: 2000-$10.9 million, 2002-$1.3
million, 2003-$14.0 million, 2004-$1.6 million, 2005-$14.0 million, 2006-
$1.5 million, 2007-$1.1 million and 2010-$3.8 million. The Corporation
also has non-U.S. tax NOLs of $19.5 million resulting from operations
primarily in Australia, Spain, Mexico and the Netherlands. These losses
expire as follows: 2000-$1.8 million, 2001-$0.3 million, 2010-$1.9 million
and 2011-$2.8 million. The remaining non-U.S. NOLs of $12.7 million may be
carried forward indefinitely. A valuation allowance has been established
in the amount of $3.4 million for the U.S. NOLs and $6.6 million for the
non-U.S. NOLs. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization
is not assured, management believes it is more likely than not that the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
The undistributed earnings of all subsidiaries were approximately $120.3
million, $100.2 million and $85.4 million at the end of 1996, 1995 and
1994. The Corporation does not expect that additional income taxes will be
incurred on future distributions of such earnings and, accordingly, no
deferred income taxes have been provided for the distribution of these
earnings to the parent company.
The Corporation made income tax payments of $69.7 million, $63.5 million
and $65.9 million in 1996, 1995 and 1994.
Note 8 - Financial Instruments
Foreign Exchange Contracts: The Corporation enters into foreign currency
contracts to manage its exposure to foreign currency fluctuations in
receivables and payables denominated in foreign currencies. Gains and
losses on these contracts are recognized currently. These forward exchange
contract transactions generally mature quarterly, at which time they are
replaced with new contracts. At December 28, 1996, the Corporation had
forward exchange contracts to exchange British pounds, Spanish pesetas,
Irish punts, Dutch guilders and Australian dollars for a U.S.-dollar
equivalent of approximately $71 million.
Interest Rate Swap Agreements: The Corporation enters into interest rate
swap agreements to manage interest costs and risks associated with
changing interest rates. The differentials paid or received on interest
rate agreements are accrued and recognized as adjustments to interest
expense. Gains and losses realized upon settlement of these agreements are
deferred and amortized to interest expense over a period relevant to the
agreement if the underlying hedged instrument remains outstanding, or
immediately if the underlying hedged instrument is settled.
At December 28, 1996, the Corporation had swap agreements in place to pay
fixed rates ranging from 6.2% to 7.8% in exchange for floating interest
rate payment obligations on $25.6 million notional principal amount for
the years 1997 through 2004 and 6.0% on $10.1 million notional principal
amount through the year 2006. At December 30, 1995, the Corporation had
swap agreements on $28.1 million notional principal amount.
Credit Concentrations: The Corporation is exposed to credit losses in the
event of nonperformance by the counterparties to its interest rate swap
and foreign exchange contracts. The Corporation does not anticipate
nonperformance by the counterparties. The Corporation does not obtain
collateral or other security to support financial instruments subject to
credit risk but monitors the credit standing of the counterparties and
enters into agreements only with financial institution counterparties with
a credit rating of A- or better.
While the Corporation primarily sells to professional technicians and shop
owners, the Corporation's accounts receivable do not represent significant
concentrations of credit risk because of the diversified portfolio of
individual customers and geographic areas.
Fair Value of Financial Instruments: Statement of Financial Accounting
Standards (SFAS) No. 107, "Disclosure about Fair Value of Financial
Instruments," requires the Corporation to disclose the fair value of
financial instruments for both on- and off-balance sheet assets and
liabilities for which it is practicable to estimate that value. The
following methods and assumptions were used in estimating the fair value
for financial instruments:
Installment contracts: A discounted cash flow analysis was performed over
the average life of a contract using a discount rate currently available
to the Corporation adjusted for credit quality, cost and profit factors.
As of December 28, 1996 and December 30, 1995, the fair value was
approximately $408.2 million and $407.7 million versus a book value of
$379.7 million and $373.5 million.
Interest rate swap agreements: The fair value of the agreements was based
on a quote from the financial institution with which the Corporation
executed the transactions. As of December 28, 1996, the cost to terminate
the agreements was $0.9 million. As of December 30, 1995, the Corporation
would have realized a gain of $1.0 million upon termination of the
agreements.
All other financial instruments: The carrying amounts approximate fair
value based on quoted market prices or discounted cash flow analysis for
cash equivalents, debt, forward exchange contracts and other financial
instruments.
Note 9 - Pension Plans
The Corporation has several noncontributory pension plans covering most
employees, including certain employees in foreign countries. Retirement
benefits are generally provided based on employees' years of service and
average earnings or stated amounts for years of service. Normal retirement
age is 65, with provisions for earlier retirement. The Corporation
recognizes retirement plan expenses in accordance with Statement of
Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for
Pensions," and contributes amounts to the plans, with most using the
actuarially computed entry age normal cost method, which includes, in
certain defined retirement benefit plans, amortization of past service
cost over 30 years.
The Corporation has several non-U.S. subsidiary pension plans that do not
report pension expense in accordance with SFAS No. 87, as these plans and
the related pension expense are not material.
The Corporation's net pension expense included the following components:
(Amounts in thousands) 1996 1995 1994
Service cost - benefits earned
during year $ 13,191 $ 10,813 $ 12,146
Interest cost on projected
benefits 25,657 23,764 22,112
Less actual return on
plan assets (40,788) (53,895) (1,949)
Net amortization and deferral:
Actual return on plan assets
in excess of (less than)
projected return 14,226 28,721 (20,226)
Amortization of net assets
at transition (1,084) (1,401) (1,082)
Other 865 1,431 591
-------- -------- --------
Net pension expense $ 12,067 $ 9,433 $ 11,592
======== ======== ========
The funded status of the Corporation's U.S. pension plans was as follows:
1996 1995
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
(Amounts in thousands) Benefits Assets Benefits Assets
Actuarial present value
of accumulated benefits:
Vested benefits $249,753 $ 6,166 $173,865 $ 63,180
Non-vested benefits 38,221 2,348 28,970 8,238
-------- -------- --------- --------
Accumulated benefit
obligation 287,974 8,514 202,835 71,418
Effect of projected
future salary
increases 48,485 2,946 45,949 5,153
-------- -------- --------- --------
Projected benefit
obligation 336,459 11,460 248,784 76,571
Plan assets at
market value 370,058 - 262,293 64,738
-------- -------- --------- --------
Plan assets in
excess of (less
than) projected
benefit obligation 33,599 (11,460) 13,509 (11,833)
Unrecognized net
assets at year end (7,119) 91 (6,230) (1,744)
Unrecognized net
(gain) or loss
from experience
different from assumed (82,238) 3,292 (49,356) (489)
Unrecognized prior
service cost 9,708 493 4,956 5,309
Additional minimum
liability - (640) - (846)
-------- -------- --------- --------
Pension liability $(46,050) $ (8,224) $ (37,121) $ (9,603)
======== ======== ========= ========
The actuarial present value of the projected benefit obligation was
determined using a discount rate of 7.75% for 1996 and 1995. The projected
future salary increase assumption was 5.0% and the expected long-term rate
of return on plan assets was 9.0% for the two years reported.
Plan assets are stated at market value and primarily consist of corporate
equities and various debt securities.
The pension liability for 1996 consists of a current liability of $9.8
million and a long-term liability of $44.5 million. The long-term
liability represents pension obligations that are not expected to be
funded during the next 12 months.
Note 10 - Retiree Health Care
The Corporation provides certain health care benefits for most retired
U.S. employees. The majority of the Corporation's U.S. employees become
eligible for those benefits if they reach early retirement age while
working for the Corporation; however, the age and service requirements for
eligibility under the plans have been increased for certain employees
hired on and after specified dates since 1992. Generally, most plans pay
stated percentages of covered expenses after a deductible is met. There
are several plan designs, with more recent retirees being covered under a
comprehensive major medical plan. In determining benefits, the plans take
into consideration payments by Medicare and other coverages.
For employees retiring under the comprehensive major medical plans, there
are contributions required, and these plans contain provisions allowing
for benefit and coverage changes. The plans require retirees to contribute
either the full cost of the coverage or amounts estimated to exceed a
capped per retiree annual cost commitment by the Corporation. Most
employees hired since 1994 are required to pay the full cost. The
Corporation does not fund the retiree health care plans.
The Corporation recognizes postretirement health care expense in
accordance with Statement of Financial Accounting Standards (SFAS) No.
106, "Employers' Accounting for Postretirement Benefits Other than
Pensions."
The components of the expense for postretirement health care benefits are
as follows:
(Amounts in thousands) 1996 1995 1994
Service cost - benefits attributed
to service during the period $ 2,012 $ 1,707 $ 2,139
Interest cost on accumulated
postretirement benefit obligation 5,273 5,228 5,081
Amortization of unrecognized
net gain (487) (622) -
------- ------- -------
Net postretirement health
care expense $ 6,798 $ 6,313 $ 7,220
======= ======= =======
The components of the accumulated postretirement benefit obligation are as
follows:
(Amounts in thousands) 1996 1995
Accumulated postretirement benefit obligation
Retirees $ 35,329 $ 37,215
Fully eligible active plan participants 11,481 10,810
Other active plan participants 26,205 23,642
-------- --------
Accumulated postretirement benefit obligation 73,015 71,667
Unrecognized net gain 15,067 11,998
-------- --------
Postretirement liability $ 88,082 $ 83,665
======== ========
The accumulated postretirement benefit obligation at the end of 1996
consists of a current liability of $3.5 million and a long-term liability
of $84.6 million. The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was 7.75% at the end of
1996 and 1995.
The actuarial calculation assumes a health care trend rate of 9.2% in 1997
for benefits paid on pre-Medicare retirees, decreasing gradually to 5.0%
in the year 2003 and thereafter. For benefits paid on Medicare-eligible
retirees, a health care trend rate of 8.1% was assumed in 1997, decreasing
to 5.0% in the year 2007 and thereafter.
As of December 28, 1996, a one percentage point increase in the health
care cost trend rate for future years would not materially affect the
accumulated postretirement benefit obligation or the service cost and
interest cost components.
Note 11 - Corporation Stock Option and Purchase Plans
On June 28, 1996, the board of directors approved a three-for-two stock
split of the Corporation's common stock to shareholders of record on
August 20, 1996. Distribution of shares in connection with the stock split
was made on September 10, 1996. All share-related amounts in this note
reflect that split.
On April 26, 1996, shareholders approved the board of directors' request
to reserve 1,500,000 additional common shares for issuance under the 1986
Amended and Restated Incentive Stock Program.
The Corporation has a stock option plan for directors, officers and key
employees, with expiration dates on the options ranging from 1999 to 2006.
The plan provides that options be granted at exercise prices equal to
market value on the date the option is granted.
The Corporation offers shareholders a convenient way to increase their
investment in the Corporation through a no-commission dividend
reinvestment and stock purchase plan. Participating shareholders may
invest the cash dividends from all or a portion of their common stock to
buy additional shares. The program also permits shareholders to invest
cash for additional shares that are purchased for them each month. For
1996, 1995 and 1994, shares issued under the dividend reinvestment and
stock purchase plan totaled 24,283, 26,567 and 26,987. At December 28,
1996, 1,349,402 shares were reserved for issuance to shareholders under
this plan.
Employees of the Corporation are entitled to participate in an employee
stock ownership plan. The purchase price of the common stock is the lesser
of the mean of the high and low price of the stock on the beginning date
(May 15) or ending date (May 14) of each plan year. The board of directors
may terminate this plan at any time. For 1996, 1995 and 1994, shares
issued under the employee stock ownership plan totaled 131,432, 73,409 and
64,808. At December 28, 1996, shares totaling 911,583 were reserved for
issuance to employees under this plan, and the Corporation held
contributions of approximately $2.0 million for the purchase of common
stock.
Franchised dealers are entitled to participate in a dealer stock ownership
plan. The purchase price of the common stock is the lesser of the mean of
the high and low price of the stock on the beginning date (May 15) or
ending date (May 14) of each plan year. For 1996, 1995 and 1994, shares
issued under the dealer stock ownership plan totaled 117,902, 84,701 and
75,189. At December 28, 1996, 764,663 shares were reserved for issuance to
franchised dealers under this plan, and the Corporation held contributions
of approximately $2.3 million for the purchase of common stock.
Non-employee directors receive a mandatory minimum of 25% and an elective
maximum of up to 100% of their fees and retainer in shares of the
Corporation's stock. Directors may elect to defer receipt of all or part
of these shares. For 1996, 1995 and 1994, shares issued under the
Directors' Fee Plan totaled 3,140, 8,613 and 2,318. Additionally, receipt
of 6,327, 2,588 and 903 shares were deferred in 1996, 1995 and 1994. At
December 28, 1996, 274,330 shares were reserved for issuance to directors
under this plan.
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," effective January
1996. As permitted, the Corporation continued its current method of
accounting for stock-based compensation plans in accordance with
Accounting Principles Board (APB) Opinion No. 25.
In accordance with SFAS No. 123, the fair value of each option grant was
estimated as of the date of grant using an option pricing model. The
Corporation used the Black-Scholes option pricing model with the following
weighted average assumptions for options granted in 1996 and 1995,
respectively: expected volatility of 21.6% and 21.3%; risk-free interest
rates of 5.7% and 7.5%; dividend yield of 3.1% and 3.3%, and expected
option lives of 6.9 years and 5.7 years. If the Corporation had elected to
recognize compensation cost for stock-based compensation consistent with
the methodology prescribed by SFAS No. 123, net earnings and net earnings
per share for 1996 and for 1995 would not have been materially different
from amounts reported in the Consolidated Statements of Earnings.
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at
beginning
of period 2,498,742 $ 21.54 2,329,826 $ 20.99 2,847,996 $ 20.84
Granted 72,000 30.52 714,750 21.06 60,750 24.63
Exercised (370,146) 20.78 (516,044) 18.40 (305,168) 19.52
Canceled (193,173) 22.56 (29,790) 21.51 (273,752) 21.87
--------- ------- --------- ------- --------- -------
Outstanding at
end of
period 2,007,423 $ 21.90 2,498,742 $ 21.54 2,329,826 $ 20.99
========= ======= ========= ======= ========= =======
Exercisable at
end of period 1,792,859 $ 21.88 2,122,736 $ 21.52 2,247,006 $ 20.78
Available for
grant at end
of period 3,543,353 1,892,390 2,607,140
The weighted average fair value of options, calculated using the Black-
Scholes option pricing model, granted during the years ended December 28,
1996 and December 30, 1995 were $6.99 and $4.91. The following table
summarizes information about stock options outstanding as of December 28,
1996:
1996 Options Outstanding 1996 Options Exercisable
Weighted Weighted Weighted
Range of Average Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$ 19 to 23 1,604,663 6.4 $ 21.09 1,417,099 $ 21.11
$ 23 to 27 324,760 3.2 23.88 324,760 23.88
$ 27 to 32 78,000 9.1 30.35 51,000 30.59
--------- --- ------- --------- -------
Totals 2,007,423 6.0 $ 21.90 1,792,859 $ 21.88
========= === ======= ========= =======
Note 12 - Capital Stock
In 1996, the Corporation repurchased, on a post-split basis, 615,750
shares of its common stock at an average price
of $31.12.
In May 1995, the Corporation completed a $100 million Share Repurchase
Program authorized by the board of directors in January 1995. The
Corporation repurchased 4.2 million shares (post-split) under the program
at an average price of $23.83 per share.
The board of directors declared on October 23, 1987 a dividend
distribution of one preferred stock purchase right for each share of the
Corporation's outstanding common stock. As a result of the Corporation's
three-for-two stock split effected in 1996, two-thirds of a right is now
associated with each share of common stock. The rights are exercisable
only if a person or group acquires 15% or more of the Corporation's common
stock ("Acquiring Person") or publicly announces a tender offer to become
an Acquiring Person. Each right may then be exercised to purchase one one-
hundredth of a share of Series A Junior Preferred Stock for $125, but if a
person or group becomes an Acquiring Person, then each right entitles the
holder (other than an Acquiring Person) to acquire common stock of the
Corporation having a market value equivalent to two times the current
purchase price. If the Corporation is acquired in a merger or other
business combination not approved by the board of directors, then each
holder of a right will be entitled to purchase common stock of the
surviving company having a market value equivalent to two times the
current purchase price. The effect of the rights is to cause ownership
dilution to a person or group attempting to acquire the Corporation
without approval of the Corporation's board of directors. The rights
expire on November 3, 1997, and may be redeemed by the Corporation at a
price of $.05 per right at any time prior to 10 days after a person or
group becomes an Acquiring Person.
Note 13 - Commitments and Contingencies
The Corporation has entered into certain operating lease agreements on
facilities and computer equipment, which extend for varying amounts of
time.
The Corporation's lease commitments require future payments as follows:
Year Ending (Amounts in Thousands)
1997 $14,793
1998 11,680
1999 6,978
2000 4,542
2001 3,744
2002 and thereafter 10,707
Rent expenses for worldwide facilities and computer equipment were $18.0
million, $14.4 million and $11.8 million in 1996, 1995 and 1994.
Prior to the disposition of Systems Control, Inc. by a subsidiary of the
Corporation on September 29, 1994, Systems Control, Inc.'s single-purpose
subsidiaries, Tejas Testing Technology One, L.C. and Tejas Testing
Technology Two, L.C. (the "Tejas Companies"), entered into two seven-year
contracts with the Texas Natural Resources Conservation Commission
("TNRCC"), an agency of the State of Texas, to perform automotive
emissions testing in the Dallas/Fort Worth and southeast regions of Texas
in a centralized manner in accordance with the federal Environmental
Protection Agency ("EPA") guidelines relating to "I/M 240" test-only
facilities. The Corporation guaranteed payment (the "Guaranty") of the
Tejas Companies' obligations under an Agreement for Lease and a seven-year
Lease Agreement, each dated June 22, 1994, in the amount of approximately
$98.8 million plus an interest factor (the "Lease Obligations"), pursuant
to which the Tejas Companies leased the facilities (and associated testing
equipment) necessary to perform the emissions-testing contracts. The
Guaranty was assigned to the lessor's lenders (the "Lenders") as
collateral. Pursuant to an Indemnity Agreement entered into as of
September 29, 1994, the Tejas Companies agreed to reimburse the
Corporation for any payments it made under the Guaranty.
The State of Texas subsequently enacted legislation designed to terminate
the centralized testing program described in the emissions-testing
contracts. On September 12, 1995, the Tejas Companies filed bankruptcy
petitions under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Western District of Texas (Austin Division). The
Tejas Companies have commenced litigation in state and federal court
against the TNRCC and related entities to assert their rights with respect
to the emissions-testing contracts, and the Corporation has intervened in
such litigation to protect its interests. State court litigation filed in
the 345th Judicial District Court of Travis County, Texas concluded on
January 28, 1997. A decision has not yet been announced. In addition, the
Corporation is a creditor in the Tejas Companies' bankruptcy proceedings
and will continue to take steps to protect its interests in such
proceedings.
The Corporation believes that it is probable that there will be
developments, prior to the end of the 1997 Texas legislative session
(approximately May 1997) to enable the Lease Obligations to ultimately be
satisfied. The basis for such developments arises under the original
contracts to perform centralized emissions testing. Those contracts
obligate the TNRCC to reimburse costs that the Tejas Companies incurred in
the construction and implementation of the centralized testing program and
have not recovered through the sale of the testing facilities to a third
party. Fulfillment of such obligations requires an appropriation of funds
by the Texas Legislature, which is subject to the political process. The
TNRCC is contractually obligated to seek such appropriation and, in a
letter dated November 21, 1996, the TNRCC affirmed this obligation in a
request to the Texas Legislative Budget Board for an appropriation in the
amount of $89.6 million, exclusive of the $14.3 million estimated by the
TNRCC to be realized from the sale of the testing facilities, resulting in
a total reimbursement of $103.9 million. The Corporation believes the
amount to be realized from the sale of the testing facilities will be
approximately $20 million.
The Corporation and the Lenders have been engaged in continuing
discussions concerning this matter, and they have reached an agreement
whereby the Lenders will forbear until at least June 30, 1997 from
exercising their rights under the terms of the Guaranty to cause the
Corporation to pay all Lease Obligations to the Lenders on an accelerated
basis. The Corporation continues to make advances under the Guaranty of
approximately $1.8 million per month, which have totaled $34.5 million
through December 28, 1996. While the Lenders have agreed to forbear until
at least June 30, 1997, given the delay in resolving this matter and other
factors, the Corporation at June 29, 1996 recognized the remaining net
obligation under the Guaranty, which as of December 28, 1996 is $54.5
million. This is included in Other Long-term Liabilities on the
accompanying Consolidated Balance Sheets. In addition, the Corporation has
recorded as assets the monthly advances and the other amounts expected to
be received from the Tejas Companies under the Indemnity Agreement. These
net receivables total $89.0 million as of December 28, 1996 and are
included in Intangible and Other Assets. Described previously are
mechanisms by which the Tejas Companies may receive funds to enable them
to satisfy their contractual obligation to the Corporation under the
Indemnity Agreement. The Corporation believes that recovery of the net
receivables from the Tejas Companies is probable, and it will make an
ongoing assessment of the likelihood of realization of such receivables.
Note 14 - Reporting Segments
The Corporation operates predominantly in a single industry as a
manufacturer and distributor of tools and equipment for the professional
technician.
The following table presents information about the Corporation by
geographic area.
United Other
States Europe Non-U.S. Eliminations Consolidated
Net sales to
unaffiliated
customers
1996 $1,055,999 $268,818 $160,462 $ - $1,485,279
1995 951,912 183,301 156,912 - 1,292,125
1994 862,189 191,648 140,459 - 1,194,296
Transfers between
geographic areas
1996 $ 147,121 $ 2,907 $ 25,295 $(175,323) $ -
1995 140,251 2,478 23,037 (165,766) -
1994 149,986 2,670 9,793 (162,449) -
Earnings from
operations
1996 $ 185,532 $ 20,994 $ 15,569 $ (1,569) $ 220,526
1995 169,236 6,201 17,648 (4,441) 188,644
1994 127,893 21,444 14,217 (4,600) 158,954
Identifiable
assets
1996 $1,179,926 $226,286 $134,730 $ (20,154) $1,520,788
1995 1,059,516 206,177 121,835 (26,555) 1,360,973
1994 1,015,208 137,340 108,083 (25,726) 1,234,905
Transfers between geographic areas primarily represent intercompany export
sales of U.S.-produced goods and are accounted for based on established
sales prices between the related companies. Export sales to foreign
unaffiliated customers represent less than 10% of consolidated net sales.
In computing earnings from operations for foreign subsidiaries, no
allocations of general corporate expenses, interest or income taxes have
been made.
Management's Responsibility for Financial Reporting
The management of Snap-on Incorporated is responsible for the preparation
and integrity of all financial statements and other information contained
in this Annual Report. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
necessarily include amounts based on judgments and estimates by management
giving due consideration to materiality. The Corporation maintains
internal control systems designed to provide reasonable assurance that the
Corporation's financial records reflect the transactions of the
Corporation and that its assets are protected from loss or unauthorized
use. A staff of internal auditors conducts operational and financial
audits to evaluate the adequacy of internal controls and accounting
practices.
The Corporation's consolidated financial statements have been audited by
Arthur Andersen LLP, independent public accountants, whose report thereon
appears below. As part of their audit of the Corporation's consolidated
financial statements, Arthur Andersen LLP considered the Corporation's
system of internal control to the extent they deemed necessary to
determine the nature, timing and extent of their audit tests. Management
has made available to Arthur Andersen LLP the Corporation's financial
records and related data.
The Audit Committee of the board of directors is responsible for reviewing
and evaluating the overall performance of the Corporation's financial
reporting and accounting practices. The Committee meets periodically and
independently with management, internal auditors and the independent
public accountants to discuss the Corporation's internal accounting
controls, auditing and financial reporting matters. The internal auditors
and independent public accountants have unrestricted access to the Audit
Committee.
Robert A. Cornog Donald S. Huml
Chairman, President and Senior Vice President-
Chief Executive Officer Finance and Chief
Financial Officer
Report of Independent Public Accountants
To the Board of Directors and Shareholders of Snap-on Incorporated:
We have audited the accompanying consolidated balance sheets of Snap-on
Incorporated (a Delaware Corporation) and subsidiaries as of December 28,
1996 and December 30, 1995, and the related consolidated statements of
earnings, shareholders' equity and cash flows for each of the three years
in the period ended December 28, 1996. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Snap-on Incorporated and subsidiaries as of December 28, 1996
and December 30, 1995, and the consolidated results of their operations
and cash flows for each of the three years in the period ended
December 28, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
January 27, 1997
[Pages 36-37 of Annual Report]
Quarterly Financial Information
Unaudited
(Amounts in thousands except per share data)
1996 1995 1994
Net sales
1st Quarter $ 344,364 $ 309,107 $ 298,777
2nd Quarter 384,554 326,816 298,752
3rd Quarter 347,202 309,065 278,359
4th Quarter 409,159 347,137 318,408
---------- ---------- ----------
$1,485,279 $1,292,125 $1,194,296
========== ========== ==========
Gross profit
1st Quarter $ 173,829 $ 159,269 $ 153,470
2nd Quarter 194,129 167,247 156,087
3rd Quarter 176,478 158,039 140,771
4th Quarter 206,348 178,936 158,509
---------- ---------- ----------
$ 750,784 $ 663,491 $ 608,837
========== ========== ==========
Net earnings
1st Quarter $ 29,650 $ 26,460 $ 22,834
2nd Quarter 34,528 29,718 26,099
3rd Quarter 30,765 26,329 22,706
4th Quarter 36,508 30,823 26,675
---------- ---------- ----------
$ 131,451 $ 113,330 $ 98,314
========== ========== ==========
Earnings per
common share*
1st Quarter $ .49 $ .42 $ .36
2nd Quarter .56 .48 .41
3rd Quarter .51 .43 .35
4th Quarter .60 .51 .41
---------- ---------- ----------
$ 2.16 $ 1.84 $ 1.53
========== ========== ==========
* Adjusted for the three-for-two stock split in 1996.
Eleven-Year Data
(Amounts in thousands except share data)
1996 1995 1994 1993 1992 1991
Summary of operations
Net sales $ 1,485,279 $ 1,292,125 $ 1,194,296 $ 1,132,010 $ 983,800 $ 881,591
Gross profit 750,784 663,491 608,837 595,728 509,413 437,685
Operating expenses 594,527 538,021 510,361 509,910 457,384 370,708
Net finance income 64,269 63,174 60,458 61,115 63,646 56,890
Operating income 220,526 188,644 158,934 146,933 115,675 123,867
Interest expense 12,649 13,327 10,806 11,198 5,969 5,250
Other income (expense) - net 776 4,572 5,541 756 (131) (91)
Pre-tax earnings 208,653 179,889 153,669 136,491 109,575 118,526
Income taxes 77,202 66,559 55,355 50,679 43,600 45,300
Net earnings 131,451 113,330 98,314 85,812 65,975 34,277**
Financial position
Current assets $ 1,017,324 $ 946,689 $ 873,020 $ 854,598 $ 832,603 $ 666,623
Current liabilities 341,371 336,075 237,869 308,037 317,074 176,650
Working capital 675,953 610,614 635,151 546,561 515,529 489,973
Accounts receivable 651,739 610,064 568,378 539,949 508,092 461,596
Inventories 269,750 250,434 229,037 249,102 216,262 160,148
Property and equipment - net 245,294 220,067 209,142 224,810 226,498 206,481
Total assets 1,520,788 1,360,973 1,234,905 1,218,933 1,172,413 915,374
Long-term debt 149,804 143,763 108,980 99,683 93,106 7,179
Shareholders' equity 828,161 750,732 766,398 701,663 664,665 652,719
Common share summary*
Net earnings per share $ 2.16 $ 1.84 $ 1.53 $ 1.34 $ 1.04 $ .55**
Cash dividends paid per share .76 .72 .72 .72 .72 .72
Shareholders' equity per share 13.62 12.35 11.91 10.99 10.45 10.31
Average shares outstanding 60,967,865 61,510,500 64,187,874 63,856,175 63,515,672 62,732,652
Other financial statistics
Cash dividends paid $ 46,323 $ 44,113 $ 46,197 $ 45,942 $ 45,718 $ 45,086
Dividends paid as a percent
of net earnings 35.2% 38.9% 47.0% 53.5% 69.3% 61.6%***
Capital expenditures 52,333 31,581 41,788 33,248 21,081 23,447
Depreciation and amortization 31,879 31,534 29,632 32,131 29,457 25,619
Current ratio 3.0 2.8 3.7 2.8 2.6 3.8
Total debt to total capital 17.3% 18.5% 13.5% 19.3% 19.5% 1.2%
Effective tax rate 37.0% 37.0% 36.0% 37.1% 39.8% 38.2%
Operating income as a percent of
net sales 14.8% 14.6% 13.3% 13.0% 11.8% 14.1%
Net earnings as a percent of net sales 8.9% 8.8% 8.2% 7.6% 6.7% 8.3%***
Return on average
shareholders' equity 16.7% 14.9% 13.4% 12.6% 10.0% 11.4%***
Common stock price range* 38.25-27.33 31.50-20.67 29.58-19.33 29.67-20.33 26.67-18.00 23.00-18.25
Eleven-Year Data (continued)
(Amounts in thousands except share data)
1990 1989 1988 1987 1986
Summary of operations
Net sales $ 931,533 $ 890,792 $ 854,592 $ 754,303 $ 670,086
Gross profit 469,149 439,861 431,748 377,167 331,950
Operating expenses 359,266 320,178 287,712 252,115 230,489
Net finance income 53,182 47,202 37,991 30,508 25,443
Operating income 163,065 166,885 182,027 155,560 126,904
Interest expense 6,762 3,298 2,637 2,788 2,672
Other income (expense) - net 3,557 1,923 3,432 3,024 2,264
Pre-tax earnings 159,860 165,510 182,822 155,796 126,496
Income taxes 59,100 60,800 69,500 67,200 61,000
Net earnings 100,760 104,710 113,322 88,596 65,496
Financial position
Current assets $ 675,038 $ 564,623 $ 504,980 $ 470,516 $ 392,172
Current liabilities 236,802 179,476 142,337 131,420 112,303
Working capital 438,236 385,147 362,643 339,096 279,869
Accounts receivable 459,381 403,926 336,588 277,357 226,551
Inventories 182,065 137,106 139,460 120,083 124,845
Property and equipment - net 210,414 195,020 146,371 128,082 115,144
Total assets 907,854 777,603 667,538 615,817 526,580
Long-term debt 7,275 7,700 8,125 12,622 16,061
Shareholders' equity 636,403 572,657 505,202 457,536 382,952
Common share summary*
Net earnings per share $ 1.63 $ 1.70 $ 1.81 $ 1.42 $ 1.06
Cash dividends paid per share .72 .69 .59 .47 .41
Shareholders' equity per share 10.28 9.29 8.23 7.31 6.19
Average shares outstanding 61,811,345 61,558,467 62,404,692 62,287,718 61,753,197
Other financial statistics
Cash dividends paid $ 44,505 $ 42,655 $ 36,681 $ 29,060 $ 25,110
Dividends paid as a percent
of net earnings 44.2% 40.7% 32.4% 32.8% 38.3%
Capital expenditures 44,353 72,136 37,949 30,921 32,319
Depreciation and amortization 25,914 21,865 18,699 16,597 14,862
Current ratio 2.9 3.1 3.5 3.6 3.5
Total debt to total capital 11.7% 7.3% 1.7% 3.4% 5.1%
Effective tax rate 37.0% 36.7% 38.0% 43.1% 48.2%
Operating income as a percent of
net sales 17.5% 18.7% 21.3% 20.6% 18.9%
Net earnings as a percent of net sales 10.8% 11.8% 13.3% 11.7% 9.8%
Return on average
shareholders' equity 16.7% 19.4% 23.5% 21.1% 18.2%
Common stock price range* 25.33-17.50 27.92-19.25 29.92-21.83 31.00-16.17 21.42-13.58
* Adjusted for the three-for-two stock split in 1996.
** Includes the cumulative effect of accounting change related to
the early adoption of the accounting provisions of the Statement
of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions."
Excluding this cumulative effect, 1991 net earnings were $73,226
and earnings per share were $1.17.
*** Based on net earnings before cumulative effect of accounting
change related to adoption of SFAS No. 106.
[Page 40 of Annual Report]
Investor Information
Common Stock High/Low Prices*
Quarter 1996 1995
First $31.67-28.50 $24.58-20.67
Second 32.92-30.00 26.50-22.42
Third 32.63-27.33 28.17-25.33
Fourth 38.25-31.88 31.50-25.25
Dividends Per Common Share*
Quarter 1996 1995
First $ .18 $ .18
Second .18 .18
Third .20 .18
Fourth .20 .18
----- -----
Total $ .76 $ .72
===== =====
Exchange Listing
Snap-on Incorporated common stock is listed on the New York Stock
Exchange, Ticker Symbol - SNA.
Transfer Agent and Registrar
Harris Trust and Savings Bank
P.O. Box A3504
Chicago, Illinois 60690-3504
or
311 West Monroe Street
Eleventh Floor
Chicago, Illinois 60606
Shareholder Inquiries
Shareholders with questions may call the Transfer Agent, Harris Trust and
Savings Bank, toll-free at 1-800-524-0687. The deaf and hearing impaired
can call (312) 461-5633.
Dividend Record and Pay Dates for 1997
Quarter Record Date Pay Date
First February 18 March 10
Second May 20 June 10
Third August 20 September 10
Fourth November 19 December 10
Shareholders
The number of shareholder accounts of record as of December 28, 1996, was
10,556.
Dividend Reinvestment
Snap-on shareholders may increase their investment in the corporation
through a no-commission dividend reinvestment plan. For information, write
to:
Harris Trust and Savings Bank
Dividend Reinvestment Plan Services
P.O. Box A3309
Chicago, Illinois 60690-0735
Or phone: 1-800-524-0687
Form 10-K and Other Financial Publications
These publications are available without charge. Contact the public
relations department at P.O. Box 1410, Kenosha, WI 53141-1410, or call
(414) 656-4808 (recorded message).
Analyst Contact
Securities analysts and other investors seeking information about the
corporation should contact Lynn McHugh, assistant treasurer - investor
relations, (414) 656-6488.
Independent Auditors
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
(312) 580-0033
Annual Meeting
The Annual Meeting of Shareholders will be held at the Racine Marriott,
7111 Washington Avenue, Racine, Wisconsin, at 10:00 a.m. on Friday,
April 25, 1997.
Corporate Offices
P.O. Box 1430
Kenosha, Wisconsin 53141-1430
Phone (414) 656-5200
* Adjusted for the three-for-two stock split in 1996.