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 October 3, 1998
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: (414) 656-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at October 31, 1998
Common stock, $1 par value 58,874,019 shares
SNAP-ON INCORPORATED
INDEX
Page
Part I. Financial Information
Consolidated Statements of Earnings -
Thirteen and Thirty-nine Weeks Ended
October 3, 1998 and September 27, 1997 3
Consolidated Balance Sheets -
October 3, 1998 and January 3, 1998 4-5
Consolidated Statements of Cash Flows -
Thirty-nine Weeks Ended
October 3, 1998 and September 27, 1997 6
Notes to Consolidated Unaudited Financial Statements 7-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Part II. Other Information 18
PART I. FINANCIAL INFORMATION
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
--------- -------- -------- --------
Net sales $427,272 $391,162 $1,295,877 $1,175,692
Cost of goods sold 225,184 191,868 677,554 575,764
Cost of goods sold -
discontinued products 50,562 -- 50,562 --
--------- -------- ---------- ----------
Gross profit 151,526 199,294 567,761 599,928
Operating expenses 176,366 154,344 525,346 464,775
--------- -------- ---------- ----------
Operating profit (loss) (24,840) 44,950 42,415 135,153
Net finance income 14,657 18,126 47,529 53,953
Restructuring and other
non-recurring charges (82,559) -- (82,559) --
--------- -------- ---------- ----------
Operating income (loss) (92,742) 63,076 7,385 189,106
Interest expense (5,883) (4,119) (15,365) (12,979)
Other income (expense) - net 604 (2,585) (1,624) (4,160)
--------- -------- ---------- ----------
Earnings (loss) before
income taxes (98,021) 56,372 (9,604) 171,967
Income tax provision (benefit) (24,024) 20,858 7,806 63,628
--------- -------- ---------- ----------
Net earnings (loss) $ (73,997) $ 35,514 $ (17,410) $ 108,339
========= ======== ========== ==========
Earnings (loss) per weighted
average common share - basic $ (1.24) $ .58 $ (.29) $ 1.78
========= ======== ========== ========
Earnings (loss) per weighted
average common share - diluted $ (1.24) $ .58 $ (.29) $ 1.76
========= ======== ========== ========
Weighted average common shares
outstanding - basic 58,995 60,969 59,359 60,916
Effect of dilutive options -- 828 -- 828
--------- -------- ---------- -------
Weighted average common shares
outstanding - diluted 58,995 61,797 59,359 61,744
========= ======== ========== ========
Dividends declared per
common share $ -- $ -- $ .64 $ .61
========= ======== ========== ========
The accompanying notes are an integral part of these statements.
3
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
October 3, January 3,
1998 1998
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 13,470 $ 25,679
Accounts receivable, less allowances 507,784 539,589
Inventories
Finished stock 388,542 366,324
Work in process 43,617 42,384
Raw materials 78,269 66,008
Excess of current cost over LIFO cost (89,916) (101,561)
----------- ----------
Total inventory 420,512 373,155
Prepaid expenses and other assets 127,180 83,286
---------- ----------
Total current assets 1,068,946 1,021,709
Property and equipment
Land 23,863 23,980
Buildings and improvements 175,695 163,596
Machinery and equipment 377,796 341,875
---------- ----------
577,354 529,451
Accumulated depreciation (304,963) (263,686)
---------- ----------
Total property and equipment 272,391 265,765
Deferred income tax benefits 67,082 55,699
Intangible and other assets 262,928 298,184
---------- ----------
Total assets $1,671,347 $1,641,357
========== ==========
The accompanying notes are an integral part of these statements.
4
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
October 3, January 3,
1998 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 85,240 $ 91,553
Notes payable and current
maturities of long-term debt 61,988 23,951
Accrued compensation 39,897 43,712
Dealer deposits 38,495 43,848
Accrued income taxes 20,816 14,831
Deferred subscription revenue 31,668 29,265
Accrued restructuring reserves 29,347 --
Other accrued liabilities 132,535 105,370
---------- ----------
Total current liabilities 439,986 352,530
Long-term debt 246,096 151,016
Deferred income taxes 12,249 11,824
Retiree health care benefits 88,800 86,936
Pension and other long-term liabilities 111,577 146,914
---------- ----------
Total liabilities 898,708 749,220
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 -
October 3, 1998 - 66,674,685 shares
January 3, 1998 - 66,472,127 shares 66,675 66,472
Additional paid-in capital 89,708 82,758
Retained earnings 883,523 938,963
Foreign currency translation adjustment (26,054) (30,385)
Employee benefit trust at fair market
value - 7,088,926 and 0 shares (218,428) --
Treasury stock at cost - 697,812 and
5,956,313 shares (22,785) (165,671)
---------- ----------
Total shareholders' equity 772,639 892,137
---------- ----------
Total liabilities and shareholders'
equity $1,671,347 $1,641,357
========== ==========
The accompanying notes are an integral part of these statements.
5
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Thirty-nine Weeks Ended
October 3, September 27,
1998 1997
---------- ----------
OPERATING ACTIVITIES
Net earnings (loss) $ (17,410) $ 108,339
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation 25,715 22,918
Amortization 7,099 5,169
Deferred income taxes (4,310) (1,743)
(Gain) on sale of assets (4,412) (74)
Charges due to restructuring and other
non-recurring charges 96,461 --
Changes in operating assets and liabilities:
Decrease in receivables 56,514 61,954
(Increase) in inventories (66,935) (95,706)
(Increase) decrease in prepaid and other assets 50,261 (20,415)
Increase (decrease) in accounts payable (16,127) 2,686
(Decrease) in accruals and other liabilities (53,882) (13,825)
--------- ---------
Net cash provided by operating activities 72,974 69,303
INVESTING ACTIVITIES
Capital expenditures (32,332) (35,597)
Acquisitions of businesses (76,155) (52,609)
Disposal of property and equipment 7,115 1,681
--------- ---------
Net cash used in investing activities (101,372) (86,525)
FINANCING ACTIVITIES
Payment of long-term debt (3,543) (7,755)
Increase in long-term debt 47,412 --
Increase in short-term borrowings-net 78,830 65,928
Purchase of treasury stock (75,723) (14,562)
Proceeds from stock plans 7,333 11,496
Cash dividends paid (38,030) (37,151)
--------- ---------
Net cash provided by financing activities 16,279 17,956
Effect of exchange rate changes (90) (662)
--------- ---------
(Decrease) increase in cash and cash equivalents (12,209) 72
Cash and cash equivalents at beginning of period 25,679 15,350
--------- ---------
Cash and cash equivalents at end of period $ 13,470 $ 15,422
========= =========
The accompanying notes are an integral part of these statements.
6
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. This report should be read in conjunction with the consolidated financial
statements and related notes included in Snap-on Incorporated's Annual
Report for the year ended January 3, 1998.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) necessary to a fair statement of financial condition
and results of operations for the thirteen and thirty-nine weeks ended
October 3, 1998 have been made. Management also believes that the results
of operations for the thirteen and thirty-nine weeks ended October 3, 1998
are not necessarily indicative of the results to be expected for the full
year.
2. Snap-on Incorporated normally declares and pays in cash four regular,
quarterly dividends. However, the third quarter dividend in each year is
declared in June, giving rise to two regular quarterly dividends appearing
in the second quarter and correspondingly, three regular quarterly
dividends appearing in the first twenty-six weeks' statements.
3. Income tax paid for the thirty-nine week period ended October 3, 1998 and
September 27, 1997 was $43.4 million and $60.2 million.
4. Interest paid for the thirty-nine week period ended October 3, 1998 and
September 27, 1997 was $16.9 million and $11.2 million.
5. During the second quarter of 1998, the Corporation announced a
simplification initiative ("Project Simplify") which is a broad program of
internal rationalizations, consolidations and reorganizations that will
make the Corporation's business operations simpler and more effective.
Project Simplify will result in the closing of 60 facilities, the
elimination of 1,100 positions, the discontinuance of 12,000 stock keeping
units ("SKU's"), and the consolidation of certain business units. Total
charges for Project Simplify are expected to approximate $175 million
through the first quarter of 2000. These charges are comprised of
restructuring charges, other non-recurring charges and related transitional
costs.
During the third quarter of 1998, the Corporation received board approval
for Project Simplify and recorded a one-time pre-tax charge of $133.1
million ($96.5 million, or $1.62 per share after taxes). This amount
consists of $73.0 million of restructuring charges and $60.1 million of
other non-recurring charges.
7
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
The composition of the Corporation's $73.0 million restructuring reserves
is as follows (in thousands):
Original Writedown of Restructuring
Restructuring Assets Cash Reserves as of
Reserve To Fair Value Payments October 3, 1998
------------- ------------- -------- ---------------
Restructuring
expenditures for
severance and other
exit costs $21,105 $ - $ 1,418 $19,687
Restructuring loss on
the writedown of
intangibles 36,240 36,240 - -
Restructuring charges
for warranty
provisions 9,660 - - 9,660
Restructuring loss
on the writedown of
fixed assets 5,978 5,978 - -
------- ------- ------- -------
Total restructuring
reserves $72,983 $42,218 $ 1,418 $29,347
======= ======= ======= =======
The Corporation has recorded a restructuring charge for severance,
non-cancelable lease agreements on facililites to be closed and other exit
costs associated with the simplification initiative in the amount of $21.1
million, and has adjusted fixed assets held for sale to fair value through
an additional $6.0 million restructuring charge. As part of the
restructuring efforts, the Corporation has also impaired the goodwill and
other intangible assets of certain discontinued business units and incurred
a charge of $36.2 million. This amount relates to the write-down of
remaining intangible balances established for those business units at the
time of acquisition. As part of the elimination of these discontinued
operations and their product lines, the Corporation has recorded an
additional restructuring reserve in the amount of $9.7 million to provide
additional warranty support, at no cost, for products already sold. The
warranty reserve has been included in Cost of Goods Sold-Discontinued
Products while all remaining restructuring charges have been included in
Restructuring and Other Non-Recurring Charges on the accompanying
Consolidated Statements of Earnings.
As part of the simplification initiative, the Corporation has recorded
other non-recurring charges in the amount of $60.1 million. These charges
include the elimination of $40.9 million ($50.9 million on a FIFO basis,
net of a $10.0 million LIFO reserve adjustment) of discontinued SKU's,
costs to resolve certain legal matters in the amount of $18.7 million and
other transitional costs in the amount of $0.5 million. The reduction of
SKU's is an effort to reduce transaction costs and working capital
intensity of our product offering, and refocus on high volume growth
products. The charge for certain legal matters includes legal costs to
conclude these issues. The non-recurring charge
8
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
related to the reduction of SKU's has been included as part of Cost of
Goods Sold-Discontinued Products, while the remaining non-recurring charges
have been included in Restructuring and Other Non-Recurring Charges on the
accompanying Consolidated Statements of Earnings.
6. During the first quarter of 1998, the Corporation acquired an additional 10
percent interest in the Thomson Corporation's Mitchell Repair Information
business. The Corporation is obligated to purchase the remaining 40 percent
of Mitchell Repair Information Company within the next four years. During
the second quarter of 1998, the Corporation acquired White Industries, a
manufacturer of air conditioning service equipment sold through
distributors. Also during the second quarter, the Corporation completed the
tender offer for all outstanding common shares of Hein-Werner Corporation,
a manufacturer of collision repair equipment. The acquisition of
Hein-Werner was completed in July 1998, at a cost of approximately $37
million. During the third quarter of 1998, the Corporation acquired G.S.
S.r.l./Fontec S.r.l., an Italy-based tire service equipment company, at a
cost of approximately $17 million.
7. During the third quarter, the Corporation sold $24.6 million of secured
dealer loan receivables. During the second quarter of 1998, the Corporation
sold $48.5 million of interest-bearing installment receivables under its
asset securitization program. As of October 3, 1998, the total amount of
receivables sold and remaining outstanding under this program was $348.5
million. The total amount of installment receivables authorized under the
asset securitization program is $350.0 million.
8. 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 shares of common stock is calculated
using the treasury stock method. Diluted earnings per share are the same as
presented for basic earnings per share in periods where the effect is
antidilutive (that is, the calculation results in increased earnings per
share or reduces net loss per share). The dilutive effect of stock options
as of October 3, 1998 was 679,000 shares. These shares, however, are not
included in the third quarter and first nine months of 1998 calculations
due to their antidilutive nature.
9. In the first quarter of 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." Total comprehensive income (loss), consisting of net earnings
(loss) and foreign currency translation adjustments, amounted to losses of
$68.8 million and $13.1 million for the thirteen and thirty-nine week
periods ended October 3, 1998 while total comprehensive income was $33.0
million and $97.6 million for the thirteen and thirty-nine week periods
ended September 27, 1997.
The Financial Accounting Standards Board (FASB) has issued two accounting
pronouncements which the Corporation will adopt in the fourth quarter of
1998. FASB Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information" and Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The Corporation does not
anticipate that the adoption of these statements will have a material
impact on results of operations or financial position. FASB has also issued
Statement No. 133, "Accounting for
9
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
Derivative Instruments and Hedging Activities," which the Corporation is
required to adopt no later than January 1, 2000. The Corporation is
currently evaluating the impact of this pronouncement.
10. The Corporation uses derivative instruments to manage well-defined interest
rate and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes. The criteria used to determine
if hedge accounting treatment is appropriate are (i) the designation of the
hedge to an underlying exposure, (ii) whether or not overall risk is being
reduced and (iii) if there is a correlation between the value of the
derivative instrument and the underlying obligation.
Interest Rate Derivative Instruments:
The Corporation enters into interest rate swap agreements to manage
interest costs and risks associated with changing interest rates. The
differentials paid or received on interest rate agreements are accrued and
recognized as adjustments to interest expense. Gains and losses realized
upon settlement of these agreements are deferred and amortized to interest
expense over a period relevant to the agreement if the underlying hedged
instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
Foreign Currency Derivative Instruments:
The Corporation has operations in a number of countries and has
intercompany transactions among them and, as a result, is exposed to
changes in foreign currency exchange rates. The Corporation manages most of
these exposures on a consolidated basis, which allows netting certain
exposures to take advantage of any natural offsets. To the extent the net
exposures are hedged, forward contracts are used. Gains and/or losses on
these foreign currency hedges are included in income in the period in which
the exchange rates change. Gains and/or losses have not been material to
the consolidated financial statements.
11. Tejas Testing Technology One, L.C. and Tejas Testing Technology Two, L.C.
(the "Tejas Companies"), former subsidiaries of the Corporation, previously
entered into contracts with the Texas Natural Resources Conservation
Commission ("TNRCC"), an agency of the State of Texas, to perform
automotive emissions testing services. The Corporation guaranteed payment
(the "Guaranty") of the Tejas Companies' obligations under a seven-year
lease agreement in the amount of approximately $98.8 million plus an
interest factor, pursuant to which the Tejas Companies leased the
facilities necessary to perform the contracts. The Guaranty was assigned to
the lessor's lenders. The Tejas Companies agreed to indemnify the
Corporation for any payments it must make under the Guaranty.
The State of Texas subsequently terminated the emissions program described
in the contracts. The Tejas Companies filed for bankruptcy, and commenced
litigation in state and federal court against the TNRCC and related
entities. The Corporation has recorded as assets the net amounts paid under
the Guaranty, which are expected to be received from the State of Texas
pursuant to a settlement agreement approved by the U.S. Bankruptcy Court.
In the third quarter of 1998, the Corporation received $16.9 million,
leaving a net receivable balance of $37.0 million as of October 3, 1998.
This amount is included in Intangible and Other Assets on the accompanying
Consolidated Balance Sheets. The Corporation expects to receive further
payments in an amount sufficient to satisfy the
10
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
balance of the net receivable by August 31, 2001, which payments are
subject to legislative appropriation. The Corporation believes that
ultimate recovery of the net receivable is probable.
12. At the end of the second quarter of 1998, the Corporation adopted a Grantor
Trust Stock Ownership Plan ("GSOP"). In conjunction with the formation of
the GSOP, the Corporation sold 7.1 million shares of treasury stock to the
GSOP. The sale of these shares had no net impact on shareholders' equity or
on the Corporation's statement of earnings. The GSOP is a funding mechanism
for certain benefit programs and compensation arrangements including the
incentive stock program, and employee and dealer stock purchase plans. The
GSOP is recorded as Employee Benefit Trust at Fair Market Value on the
accompanying Consolidated Balance Sheets. Shares owned by the GSOP are
accounted for as a reduction to shareholders' equity until used in
connection with employee benefits. Each period the shares owned by the GSOP
are valued at the closing market price, with corresponding changes in the
GSOP balance reflected in additional paid-in capital.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview: The Corporation posted record sales for the third quarter and first
nine months of 1998, and reduced earnings and earnings per share. Net earnings
for the third quarter of 1998 decreased from the year ago quarter despite a net
sales increase of 9.2%. For the first nine months of 1998, net earnings
decreased from the comparable 1997 period; net sales increased 10.2%. The
shortfalls resulted primarily from restructuring and other non-recurring charges
related to the Corporation's simplification initiative ("Project Simplify"),
which were recorded during the third quarter, declining gross profit due to a
change in product and business mix and from expenses incurred as the Corporation
realigns its internal processes to synchronize with its new enterprise-wide
computer system.
The Corporation's simplification initiative, Project Simplify, which was
approved by the board and implemented in the third quarter of 1998, is a broad
program of internal rationalizations, consolidations and reorganizations that
will make the Corporation's business operations simpler and more effective, and
is expected to generate annual cost savings of $60 million by year-end 2000.
Project Simplify will result in the closing of 6 manufacturing facilities, 7
warehouses and 47 offices, representing approximately 17% of the Corporation's
total square footage and 29% of the total number of current facilities. This
project also provides for the elimination of 1,100 positions out of a workforce
of 12,000, the elimination of 12,000 stock keeping units ("SKU's"), representing
approximately 16% of the total, and the consolidation of certain business units.
Charges relating to these restructuring efforts will be recorded in the third
and fourth quarters of 1998 along with one-time special charges associated with
certain legal matters and the elimination of certain SKU's. The implementation
of the restructuring initiatives will also result in additional transitional
costs. The Corporation expects the total charge for Project Simplify to
approximate $175 million through the first quarter of 2000.
These actions resulted in a one-time pre-tax charge of $133.1 million ($96.5
million, or $1.62 per share after taxes) during the third quarter of 1998, which
consists of restructuring charges ($73.0 million) and other non-recurring
charges ($60.1 million). Excluding these charges, net earnings decreased 36.7%
and 27.0% in the third quarter and first nine months of 1998, respectively,
compared to 1997. Excluding these charges, diluted and basic earnings per share
for the third quarter of 1998 each decreased 34.5% compared to the third quarter
of 1997, while diluted and basic earnings per share for the first nine months of
1998 decreased 25.0% and 25.3%, respectively, compared to the first nine months
of 1997.
Sales: Net sales for the third quarter of 1998 were $427.3 million, an increase
of 9.2% over the third quarter of 1997 sales of $391.2 million. Net sales for
the first nine months of 1998 were $1.296 billion, an increase of 10.2% over
1997 nine-month sales of $1.176 billion. The negative effect of foreign currency
translation reduced the sales increase by 2 percentage points in both the third
quarter and first nine months of 1998. Excluding acquisitions, net sales
increased 1% in the quarter and 3% in the first nine months of 1998.
North American sales for the third quarter of 1998 were $323.8 million, an
increase of 3.2% over third quarter 1997 sales of $313.7 million. Excluding
acquisitions, sales were flat as increased sales through the dealer and
industrial channels were offset by difficult sales comparisons versus a year ago
when a high level of emissions-testing equipment was sold, and by weakness in
exports to the Asia/Pacific
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
region. North American sales for the first nine months of 1998 were $984.6
million, an increase of 7.3% over nine-month 1997 sales of $917.7 million.
Excluding acquisitions, sales rose 5% for the first nine months of 1998.
European sales for the third quarter of 1998 were $85.8 million, an increase of
52.0% over third quarter 1997 sales of $56.5 million. European sales for the
first nine months of 1998 were $257.6 million, an increase of 30.4% over
nine-month 1997 sales of $197.5 million. During the quarter, tool and equipment
sales within Europe were strong, but weakness continued in equipment exports to
Asia and Eastern Europe. Excluding acquisitions, sales were 17% higher in the
quarter and were even in the first nine months of 1998. In local currency, sales
rose 50% for the quarter and 33% for the first nine months of 1998.
Other sales for the third quarter of 1998 were $17.7 million, a decrease of
15.7% from third quarter 1997 sales of $21.0 million. Other sales for the first
nine months of 1998 were $53.7 million, a decrease of 11.3% over nine-month 1997
sales of $60.5 million. Despite recent economic events in Asia, sales in local
currency rose 2% for the quarter and 3% for the first nine months.
Earnings: The net loss for the third quarter was $74.0 million, compared with
net earnings of $35.5 million for the comparable 1997 period. Basic per share
earnings decreased to a loss of $1.24 per share, compared with earnings of $.58
per share in the third quarter a year ago. The net loss for the first nine
months of 1998 was $17.4 million, compared to net earnings of $108.3 million in
the first nine months of 1997. Basic per share earnings for the first nine
months of 1998 decreased to a loss of $.29 per share, compared with earnings of
$1.78 per share in the first nine months of 1997. Diluted per share earnings for
the third quarter and the first nine months of 1998 are the same as presented
for basic earnings per share due to the antidilutive effect of the computation
(see Note 8). Diluted per share earnings for the third quarter and first nine
months of 1997 were $.58 and $1.76, respectively.
Excluding the $96.5 million ($1.62 per share) restructuring and other
non-recurring charges related to Project Simplify, earnings for the third
quarter of 1998 were $22.5 million, a decrease of 36.7% compared to the third
quarter of 1997. Diluted and basic per share earnings, excluding the
restructuring and non-recurring charges, were both $.38 per share, a decrease of
34.5% compared to the year-ago period. The decrease is primarily the result of
changes in business and product mix and expenses incurred as the Corporation
realigns its internal processes to synchronize with its new enterprise-wide
computer system. Excluding the charges for Project Simplify, earnings for the
first nine months of 1998 were $79.1 million, a decrease of 27.0% compared to
the first nine months of 1997. Diluted per share earnings for the first nine
months of 1998, excluding the restructuring and non-recurring charges, were
$1.32 per share, a decrease of 25.0% from a year ago. Basic per share earnings
were $1.33, a decrease of 25.3% from the first nine months of 1997.
Gross profit: The 1998 third quarter gross profit decline from last year's
comparable period was primarily the result of the impact of the $50.6 million
restructuring and other non-recurring charges related to Project Simplify.
Excluding these charges, gross profit as a percentage of net sales for the third
quarter of 1998 declined to 47.3% compared to 50.9% during the third quarter of
1997. Also excluding these charges, gross profit as a percentage of net sales
declined to 47.7% compared to 51.0% for the first nine
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
months of 1997. The decline in gross profit is driven by the lower margins of
several recent acquisitions and a shift in sales mix to lower margin equipment
products. The difficulties related to the implementation of the new computer
system in North America has also had anegative impact on the sale of hand tools,
a product line with high gross margins. The lower gross margins of several
recent acquisitions also negatively affected consolidated gross profit.
Operating expenses: As a percentage of net sales, third quarter total operating
expenses increased to 41.3% in 1998 from 39.5% in the same period of 1997. The
increase is primarily a result of expenses (such as freight and temporary
workers) related to the realignment of internal processes to synchronize with
the new enterprise-wide computer system, and lower productivity as employees
resolved the problems and were trained on the processes. As a percentage of net
sales, nine-month operating expenses increased to 40.5% in 1998 from 39.5% in
1997.
Finance income: Finance income for the third quarter of 1998 was $14.7 million,
a decrease of 19.1% from third quarter 1997 finance income of $18.1 million.
Finance income for the first nine months of 1998 was $47.5 million, a decrease
of 11.9% from nine-month 1997 finance income of $54.0 million. Net finance
income declined because of the increased securitization of extended credit
receivables and the sale of a majority of the lease portfolio in the past year.
Other income: During the third quarter of 1998, the Corporation recorded a $2.5
million gain on the disposal of property.
FINANCIAL CONDITION
Liquidity: Cash and cash equivalents decreased to $13.5 million at the end of
the third quarter from $25.7 million at the end of 1997. Working capital
decreased to $629.0 million at third quarter end, from $669.2 million at the end
of 1997. During the first quarter, the Corporation raised its commercial paper
program to $175 million, which is supported by revolving credit facilities.
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 shelf
registration gives the Corporation financing flexibility to operate the
business.
The Corporation believes it has sufficient sources of liquidity to support
working capital requirements, finance capital expenditures and pay dividends.
Accounts receivable: Accounts receivable decreased 5.9% to $507.8 million at the
end of the third quarter, which is comprised of $134.2 million of installment
receivables and $373.6 million of trade and other receivables, compared with
$539.6 million at the end of 1997. Growth related to acquisitions was more than
offset by the sale of $73.1 million of installment receivables in the first nine
months of 1998.
The majority of the Corporation's accounts receivable involve customers'
extended credit and lease purchases of higher-value products. Other receivables
include those from dealers, industrial customers, national accounts and
government entities.
Inventories: Inventories increased 12.7% to $420.5 million in the 1998 third
quarter, compared with $373.2 million at the end of 1997. Excluding the
non-recurring charge and acquisitions, inventories were 2% above the end of the
second quarter, as inventory reductions in North America Transportation and
Diagnostics were offset by inventories built for fourth quarter sales in Europe
and the additive effect of
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
foreign currency. Industrial channel inventories also increased as planned
September third quarter shipments for a private label program for a national
retailer were shipped in October.
Liabilities: Total short-term and long-term debt was $308.1 million at the end
of the third quarter, compared with $175.0 million at the end of 1997. Funding
requirements for acquisitions, the repurchase of common stock and working
capital needs were responsible for the higher debt levels.
Average shares outstanding: Average shares outstanding for basic EPS in the
third quarter of 1998 were 59.0 million shares, versus 61.0 million in last
year's third quarter. Average shares outstanding for basic EPS in the first nine
months of 1998 were 59.4 million shares, versus 60.9 million in last year's
comparable period. Average shares outstanding for diluted EPS for the third
quarter of 1998 and the first nine months of 1998 are the same as presented as
those for basic EPS due to the antidilutive effect of stock options on the
calculations (see Note 8). Average shares outstanding for dilutive EPS were 59.0
million and 61.0 million for the third quarter and first nine months of 1997,
respectively.
Share repurchase: On June 26, 1998, the Corporation's board of directors
authorized an additional share repurchase program aggregating $100 million of
the Corporation's common stock. On June 27, 1997, the Corporation's board of
directors authorized the repurchase of $100 million of the Corporation's common
stock over a two-year period. In 1996, the Corporation's board of directors
authorized the ongoing repurchase of stock in an amount equivalent to that
necessary to prevent dilution created by shares issued for stock options,
employee and dealer stock purchase plans, and other corporate purposes. As of
October 3, 1998, approximately $115 million was available for share repurchases
under these programs. The Corporation repurchased 420,000 shares of its common
stock in the third quarter of 1998 and 1,959,400 shares in the first nine months
of 1998.
Dividend increase: At its June 26, 1998 board meeting, the Corporation's board
of directors declared a 4.8% increase in the common stock dividend. The new
quarterly dividend will increase $.01 per share to $.22 per share, or $.88 on an
annual basis.
Foreign currency: The Corporation operates in a number of countries and, as a
result, is exposed to changes in foreign currency exchange rates. Most of these
exposures are managed on a consolidated basis to take advantage of natural
offsets through netting. To the extent that the net exposures are hedged,
forward contracts are used. Refer to Note 10 for a discussion of the
Corporation's accounting policies for the use of derivative instruments.
Year 2000 Update: The Corporation is engaged in a comprehensive project
involving its products, information systems, imbedded systems and third-party
systems. The objective of this project is to identify, develop, implement and
test any modifications that are required so that these systems will achieve a
Year 2000 date conversion with no disruption to the Corporation's business
operations. A committee has been established and given the responsibility for
achieving this objective.
For the Corporation's information systems, the committee has substantially
completed the first two phases of this project, identification and development,
and is proceeding with the implementation and testing phases of the required
modifications. In North America, the implementation of the BaaN enterprise-wide
system, which is Year 2000 compliant, will be substantially complete in the
fourth quarter of 1998. In Europe, the implementation of the BaaN
enterprise-wide system has just begun and is expected to be complete by the end
of the fourth quarter 1999. The timely completion of the European implementation
is
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
a top priority for the Corporation's European and IT management. They are
working with the systems supplier toensure that the timetable is met and that
any necessary contingency plans are in place. For third-party systems, the
committee has communicated with suppliers, dealers, financial institutions and
others with whom the Corporation does business, and has received responses from
over 80 percent of those contacted that they either are or plan to be Year 2000
compliant. For the Corporation's currently manufactured products, the committee
has worked with the various business units in the testing of their products for
compliance and in most cases have found no indication that these products create
date-related issues when used in customary applications. It is expected that any
remaining issues will be compliant by December of 1999. The committee has also
been working with its third-party vendors to test and remediate issues regarding
embedded systems. Based on testing completed to date, no significant issues have
been identified.
The Corporation has begun, but not yet completed, a comprehensive analysis of
the costs and operational problems that may occur if the Corporation or third
parties fail to achieve Year 2000 compliance on a timely basis. The Corporation
is also in the process of establishing a contingency plan in order to deal with
the most reasonably likely worst case scenario, although such scenario has not
yet been identified. The Corporation expects to have the analysis complete and a
contingency plan in place by the end of the first quarter of 1999.
The Corporation expects to be fully Year 2000 compliant by the end of the fourth
quarter 1999 with costs to approximate between $5 and $7 million through
December 1999. None of the Corporation's other information technology projects
have been delayed as a result of these issues.
Euro Conversion: On January 1, 1999, certain member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency - the euro. The euro
will then trade on currency exchanges and may be used in business transactions.
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legacy currencies will be withdrawn from circulation. The Corporation's
operating subsidiaries affected by the euro conversion are developing plans to
address the systems and business issues affected by the euro currency
conversion. These issues include, among others, (1) the need to adapt computer
and other business systems and equipment to accommodate euro-denominated
transactions; and (2) the competitive impact of cross-border price transparency,
which may make it more difficult for businesses to charge different prices for
the same products on a country-by-country basis. The Corporation does not expect
this conversion to have a material impact on its financial condition or results
of operations.
Other Matters: The Corporation's pursuit of a partnership or joint venture
format to optimize the returns on its financial services business has resulted
in the signing of a letter of intent with a partner, and negotiations for this
venture are proceeding.
Safe Harbor: Statements in this document that are not historical facts,
including statements (i) that include the words "believes," "expects,"
"anticipates" or "estimates" or words of similar importance with reference to
the Corporation or management, (ii) specifically identified as forward-looking,
or (iii) describing the Corporation's or management's future plans, objectives
or goals, are forward-looking statements. The Corporation or its representatives
may also make similar forward-looking statements from time to time orally or in
writing. The Corporation cautions the reader that these statements are subject
to risks, uncertainties and 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 Corporation's ability to
manufacture, distribute and/or record the sale of products during the
implementation of a new
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
computer system involving the replacement of hardware and software components
and the enterprise-wide linking of all functions; the timing or speed with which
the Corporation can implement the Project Simplify initiatives and the absence
of unanticipated complications; the Corporation's ability to withstand external
negative factors including changes in trade, monetary and fiscal policies, laws
and regulations, or other activities of governments or their agencies;
significant changes in the current competitive environment; inflation; currency
fluctuations or the material worsening of the economic and political system in
Asia; and the achievement of productivity improvements and cost reductions.
These factors may not constitute all factors that could cause actual results to
differ materially from those discussed in any forward-looking statement. The
Corporation operates in a continually changing business environment and new
factors emerge from time to time. The Corporation cannot predict such factors
nor can it assess the impact, if any, of such factors on the Corporation or its
results. The Corporation disclaims anyresponsibility to update any
forward-looking statement provided in this document. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
17
PART II. OTHER INFORMATION
Item 6: Exhibits and reports on Form 8-K
Item 6(a): Exhibits
Exhibit 27 Financial Data Schedule
Item 6(b): Reports on Form 8-K Filed During the Reporting Period
Date Filed Date of Report Item
July 22, 1998 June 1, 1998 Item 2. The Corporation filed a
report outlining the completion
of its acquisition of
Hein-Werner Corporation.
October 22, 1998 October 22, 1998 Item 5. The Corporation filed a report
which contained its third quarter
Analyst Bulletin.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Snap-on
Incorporated has duly caused this report to be signed on its behalf by the
undersigned duly authorized persons.
SNAP-ON INCORPORATED
Date: November 17, 1998 /s/ R. A. Cornog
----------------- ------------------------------------------------
R. A. CORNOG
(Chairman, President and Chief Executive Officer)
Date: November 17, 1998 /s/ N. T. Smith
----------------- ------------------------------------------------
N. T. SMITH
(Principal Accounting Officer and Controller)
19
EXHIBIT INDEX
Exhibit
No. Description
27 Financial Data Schedule