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 July 3, 1999
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 July 31, 1999
- -------------------------- ----------------------------
Common stock, $1 par value 58,469,617 shares
SNAP-ON INCORPORATED
INDEX
Page
Part I. Financial Information
Consolidated Statements of Earnings -
Thirteen and Twenty-six Weeks Ended
July 3, 1999 and July 4, 1998 3
Consolidated Balance Sheets -
July 3, 1999 and January 2, 1999 4-5
Consolidated Statements of Cash Flows -
Twenty-six Weeks Ended
July 3, 1999 and July 4, 1998 6
Notes to Consolidated Unaudited Financial Statements 7-13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
Part II. Other Information 20
PART I. FINANCIAL INFORMATION
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
---------- ---------- ----------- -----------
Net sales $ 473,153 $ 442,176 $ 925,738 $ 868,605
Cost of goods sold (247,888) (237,486) (481,572) (452,370)
Operating expenses (174,482) (178,148) (356,711) (348,980)
Restructuring and other non-recurring charges (7,037) - (8,970) -
Net finance income 13,141 15,893 34,133 32,872
Interest expense (5,417) (5,449) (10,098) (9,482)
Other income (expense) - net (12,406) (1,578) (13,239) (2,228)
---------- ---------- ----------- -----------
Earnings before income taxes 39,064 35,408 89,281 88,417
Income tax provision 14,065 12,747 32,041 31,830
---------- ---------- ----------- -----------
Net earnings $ 24,999 $ 22,661 $ 57,240 $ 56,587
========== ========== =========== ==========
Earnings per weighted average
common share - basic $ .43 $ .38 $ .98 $ .95
========== ========== =========== ===========
Earnings per weighted average
common share - diluted $ .42 $ .38 $ .97 $ .94
========== ========== =========== ===========
Weighted average common shares
outstanding - basic 58,384 59,186 58,477 59,540
Effect of dilutive options 420 819 420 819
---------- ---------- ----------- -----------
Weighted average common shares
outstanding - diluted 58,804 60,005 58,897 60,359
========== ========== =========== ===========
Dividends declared per common share $ .45 $ .43 $ .67 $ .64
========== ========== =========== ===========
The accompanying notes are an integral part of these statements.
3
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
July 3, January 2,
1999 1999
------------ -----------
ASSETS
Current Assets
Cash and cash equivalents $ 15,664 $ 15,041
Accounts receivable, less allowances 500,548 554,703
Inventories
Finished stock 379,732 359,358
Work in process 44,881 38,357
Raw materials 65,443 74,192
Excess of current cost over LIFO cost (97,296) (96,471)
------------ -----------
Total inventory 392,760 375,436
Prepaid expenses and other assets 131,068 134,652
------------ -----------
Total current assets 1,040,040 1,079,832
Property and equipment
Land 19,414 19,572
Buildings and improvements 177,133 175,385
Machinery and equipment 387,251 388,862
------------ -----------
583,798 583,819
Accumulated depreciation (313,817) (311,789)
------------ -----------
Total property and equipment 269,981 272,030
Deferred income tax benefits 51,533 60,139
Intangible and other assets 308,624 262,919
------------ -----------
Total assets $ 1,670,178 $ 1,674,920
============ ===========
The accompanying notes are an integral part of these statements.
4
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
July 3, January 2,
1999 1999
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 80,166 $ 89,442
Notes payable and current maturities of long-term debt 61,812 93,117
Dividends payable 13,436 -
Accrued compensation 40,975 42,105
Dealer deposits 39,204 42,421
Deferred subscription revenue 41,768 34,793
Accrued restructuring reserve 21,307 26,165
Other accrued liabilities 158,003 130,010
------------- ------------
Total current liabilities 456,671 458,053
Long-term debt 252,856 246,644
Deferred income taxes 9,959 9,587
Retiree health care benefits 90,047 89,124
Pension and other long-term liabilities 97,680 109,245
------------- ------------
Total liabilities 907,213 912,653
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 -
July 3, 1999 - 66,707,243 shares
January 2, 1999 - 66,685,169 shares 66,707 66,685
Additional paid-in capital 124,720 117,384
Retained earnings 901,252 883,207
Accumulated other comprehensive income (loss) (39,458) (30,231)
Grantor stock trust at fair market value - 6,728,486
and 6,924,019 shares (241,805) (241,042)
Treasury stock at cost - 1,509,140 and 1,016,224 shares (48,451) (33,736)
------------- ------------
Total shareholders' equity 762,965 762,267
------------- ------------
Total liabilities and shareholders' equity $ 1,670,178 $ 1,674,920
============= ============
The accompanying notes are an integral part of these statements.
5
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Twenty-six Weeks Ended
July 3, July 4,
1999 1998
------------- -----------
OPERATING ACTIVITIES
Net earnings $ 57,240 $ 56,587
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 19,183 16,783
Amortization 5,650 4,199
Deferred income taxes 9,920 (44)
(Gain) on sale of assets (995) (1,462)
Loss on currency hedge for purchase
price commitment, net of tax 8,700 -
Charges due to restructuring and other
non-recurring charges, net of tax 5,640 -
Changes in operating assets and liabilities:
Decrease in receivables 52,874 31,792
(Increase) in inventories (18,584) (60,471)
Decrease in prepaid and other assets 9,043 31,301
(Decrease) in accounts payable (9,251) (8,479)
Increase (decrease) in accruals and other liabilities 9,827 (59,517)
------------- ------------
Net cash provided by operating activities 149,246 10,689
INVESTING ACTIVITIES
Capital expenditures (19,991) (20,272)
Acquisitions of businesses (70,257) (53,407)
Disposal of property and equipment 3,650 2,083
------------- ------------
Net cash used in investing activities (86,598) (71,596)
FINANCING ACTIVITIES
Payment of long-term debt (335) (780)
Increase in long-term debt 6,356 46,269
Increase (decrease) in short-term borrowings-net (33,461) 81,597
Purchase of treasury stock (14,714) (61,458)
Proceeds from stock plans 6,594 6,717
Cash dividends paid (25,760) (25,049)
------------- ------------
Net cash provided by (used in) financing activities (61,320) 47,296
Effect of exchange rate changes on cash (705) (106)
------------- ------------
Increase (decrease) in cash and cash equivalents 623 (13,717)
Cash and cash equivalents at beginning of period 15,041 25,679
------------- ------------
Cash and cash equivalents at end of period $ 15,664 $ 11,962
============= ============
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 2, 1999.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments and adjustments related to restructuring and other
non-recurring charges) necessary to a fair statement of financial condition
and results of operations for the thirteen and twenty-six weeks ended July
3, 1999 have been made. Management also believes that the results of
operations for the thirteen and twenty-six weeks ended July 3, 1999 are not
necessarily indicative of the results to be expected for the full year.
Certain prior-year amounts have been reclassified to conform with
current-year presentation.
2. Snap-on Incorporated (the "Corporation") 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 twenty-six week period ended July 3, 1999 and July
4, 1998 was $8.7 million and $34.0 million. Interest paid for the
twenty-six week period ended July 3, 1999 and July 4, 1998 was $13.4
million and $9.4 million.
4. In 1998, the Corporation announced a simplification initiative ("Project
Simplify") which is a broad program of internal rationalizations,
consolidations and reorganizations. The goal is to make the Corporation's
business operations simpler and more effective. Project Simplify, upon
completion in the first quarter of 2000, will result in the closing of six
manufacturing facilities, seven warehouses and 47 small offices in North
America and Europe; the elimination of 1,100 positions; the discontinuance
of 12,000 stock keeping units ("SKUs") of inventory; and the consolidation
of certain business units. Total charges for Project Simplify are composed
of restructuring charges, other non-recurring charges and related
transitional costs.
For the second quarter and first six months of 1999, the Corporation
recorded pre-tax charges of $7.0 million and $9.0 million, respectively, of
other non-recurring charges. Total reported charges related to Project
Simplify as of July 3, 1999 are $158.8 million. This amount consists of
$75.6 million of restructuring charges and $83.2 million of other
non-recurring charges.
7
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
The composition of the Corporation's $75.6 million restructuring charges is
as follows:
Original Write-down Restructuring
Restructuring Additions of Assets Cash Reserves as
(Amounts in thousands) Reserves to Reserves to Fair Value Payments July 3, 1999
-------- ----------- ------------- --------- ------------
Expenditures for severance
and other exit costs $ 21,105 $ 1,969 $ - $ (10,854) $ 12,220
Loss on the write-down
of intangibles and
goodwill 36,240 298 (36,538) - -
Charges for warranty
provisions 9,660 - - (573) 9,087
Loss on the write-down
of assets 5,978 357 (6,335) - -
-------- -------- ---------- --------- ---------
Total restructuring
reserves $ 72,983 $ 2,624 $ (42,873) $ (11,427) $ 21,307
======== ======== ========== ========= =========
The Corporation has recorded restructuring charges of $15.5 million for
severance and of $7.6 million for non-cancelable lease agreements on
facilities to be closed and other exit costs associated with Project
Simplify. Severance costs provided for worldwide salaried and hourly
employees relate to facility closures, staffing redundancies elimination
and operational streamlining. As of July 3, 1999, 889 employees of an
estimated 1,100 have separated from the Corporation and severance payments
of $7.2 million have been made. The elimination of the remaining positions
is expected by the first quarter of 2000. The Corporation has adjusted
property, plant and equipment and other assets to net realizable value
through a $6.3 million restructuring charge.
As part of the restructuring efforts, the Corporation has also written down
impaired goodwill and other intangible assets of certain discontinued
business units by $36.5 million. The majority of this write-down relates to
Computer Aided Services, Inc. and Edge Diagnostic Systems. No net
realizable value was assessed for these intangible assets due to the
closure of these operations and the discontinuance of their product lines.
As part of the elimination of these business units and their product lines,
the Corporation has recorded a charge in the amount of $9.7 million to
provide additional warranty support, at no cost to the customer, 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.
Other non-recurring Charges: As part of Project Simplify, the Corporation
has recorded other non-recurring charges in the amount of $83.2 million.
These charges include the elimination of $50.9 million of discontinued SKUs
of inventory, costs to resolve certain legal matters in the amount of $18.7
million and other transitional costs in the amount of $13.6 million.
Transitional costs, which are comprised of employee incentives ($1.9
million), relocation costs ($4.6 million) and professional services ($7.1
million), do not qualify for restructuring accrual treatment and are
therefore expensed when incurred. The reduction of SKUs is an effort to
reduce the transaction costs and working capital intensity of the
Corporation's product offering, and refocus on high
8
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
volume growth products. The charge for certain legal matters includes legal
costs to conclude these issues. The non-recurring charge related to the
reduction of SKUs 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.
5. During the second quarter of 1999, the Corporation announced that it had
entered into a definitive agreement with Sandvik AB to acquire the Sandvik
Saws and Tools division for approximately $400 million. The acquisition of
Sandvik Saws and Tools is expected to close in September 1999. Sandvik Saws
and Tools, based in Sandviken, Sweden, is a leading global manufacturer and
supplier of professional hand tool products.
6. 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.
7. In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Statement of
Financial Accounting Standards (SFAS) No. 133 was effective for fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133". SFAS
No. 137 defers the effective date of SFAS No. 133 for one year to fiscal
years beginning after June 15, 2000. The Corporation is currently
evaluating the impact of this pronouncement.
8. Total comprehensive income, consisting of net earnings and foreign currency
translation adjustments, for the thirteen and twenty-six week periods ended
July 3, 1999 and July 4, 1998, was as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4
(Amounts in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Net earnings $ 24,999 $ 22,661 $ 57,240 $ 56,587
Foreign currency translation (2,521) (414) (9,227) (854)
--------- --------- --------- ---------
Total comprehensive income $ 22,478 $ 22,247 $ 48,013 $ 55,733
========= ========= ========= =========
9. 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.
9
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
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. In the second quarter of 1999, the Corporation
entered into a forward currency hedge to buy 3.2 billion of Swedish Krona
on the US$400 million equivalent purchase price commitment for the Sandvik
acquisition. The hedge was marked to market at the end of the second
quarter resulting in a $13.6 million pre-tax unrealized loss. Other than
the forward currency hedge related to the Sandvik acquisition, gains and/or
losses from foreign currency hedges have not been material to the
consolidated financial statements.
10. 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 that are expected to be received from the State of Texas
pursuant to a settlement agreement approved by the U.S. Bankruptcy Court.
Under this settlement agreement, the obligation under the Guaranty
previously recorded as a contingent liability in the amount of $38.5
million was satisfied, leaving an expected receivable of $55.2 million. In
1998, the Corporation received $18.2 million, leaving a net receivable
balance of $37.0 million as of July 3, 1999. This amount is included in
Intangible and Other Assets on the accompanying Consolidated Balance
Sheets. The Texas Legislature has appropriated funds to settle the amount
outstanding during its session which concluded May 31, 1999. The
Corporation believes recovery of the net receivable is probable.
10
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
In April 1996, the Corporation filed a complaint against SPX Corporation
("SPX") alleging infringement of the Corporation's patents and asserting
claims relating to SPX's hiring of the former president of Sun Electric.
SPX filed a counterclaim, alleging infringement of certain SPX patents.
Upon the Corporation's request for reexamination, the U.S. Patent and
Trademark Office initially rejected SPX's patents as invalid, but recently
reconfirmed them. Document and deposition discovery is proceeding. The
original trial date for non-patent claims, set for April 5, 1999, has been
postponed. No trial dates have been established for either the patent or
non-patent claims. The Corporation believes it has numerous meritorious
defenses to SPX's claims, including defenses of patent invalidity and
non-infringement, and intends to vigorously prosecute the claims it has
raised. Neither the complaint nor the counterclaim contains specific
allegations of damages; however, the parties' claims could involve multiple
millions of dollars. It is not possible at this time to assess the outcome
of any of the claims.
The Corporation is involved in various legal matters, which are being
defended and handled in the ordinary course of business. Although it is not
possible to predict the outcome of these matters, management believes that
the results will not have a material impact on the Corporation's financial
statements.
11. In 1998, the Corporation created a Grantor Stock Trust ("GST"). In
conjunction with the formation of the GST, the Corporation sold 7.1 million
shares of treasury stock to the GST. The sale of these shares had no net
impact on shareholders' equity or on the Corporation's Consolidated
Statements of Earnings. The GST is a funding mechanism for certain benefit
programs and compensation arrangements, including the incentive stock
program and employee and franchised dealer stock purchase plans. The
Northern Trust Company, as trustee of the GST, will vote the common stock
held by the GST based on the directions of non-director employees holding
vested options and certain employee and dealer participants in those stock
purchase plans, as set forth in the GST Agreement. The GST is recorded as
Grantor Stock Trust at Fair Market Value on the accompanying Consolidated
Balance Sheets. Shares owned by the GST are accounted for as a reduction to
shareholders' equity until used in connection with employee benefits. Each
period, the shares owned by the GST are valued at the closing market price,
with corresponding changes in the GST balance reflected in additional
paid-in capital.
12. In January 1999, the Corporation recorded a gain in accordance with SFAS
No. 125. of $40 million (reported in 1998 annual report as a preliminary
estimate of $44 million before post-closing adjustments) pre-tax that
resulted from the sale of $141.1 million of U.S. installment accounts
receivables to Newcourt Financial USA Inc. ("Newcourt"). A significant
portion of the receivables sold to Newcourt were previously securitized
with a third party. The Corporation reacquired these previously securitized
receivables through an arms length transaction and they were recorded at
cost. These receivables, along with previously unsecuritized receivables,
were sold to Newcourt resulting in a pre-tax gain of $40 million. The gain
is being recognized over a two-year period.
13. In 1998, the Corporation adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which changes the way the Corporation reports information
about its operating segments. The information for 1998 has been restated
from the prior years' presentation in order to conform to the 1999
presentation.
11
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
The Corporation's segments are based on the organization structure that is
used by management for making operating and investment decisions and for
assessing performance. Based on this management approach, the Corporation
has five reportable segments: North America Transportation, North America
Other, Europe, International and Financial Services. The North America
Transportation segment consists of the Corporation's business operations
serving primarily the franchised dealer channel in the United States and
Canada. The North America Other segment consists of the Corporation's
business operations serving the direct sales and distributor channels in
the United States and Canada, as well as the Corporation's exports from the
United States. The Europe segment consists of the Corporation's operations
in Europe and Africa. The International segment consists of the
Corporation's operations in the Asia/Pacific region and Latin America.
These four segments derive revenues primarily from the sale of tools and
equipment. The Financial Services segment derives royalty income, based on
new loan originations, and management fees from Snap-on Credit LLC, a 50%
owned joint venture with Newcourt Financial USA Inc. ("Newcourt"). Earnings
from this segment also includes a portion of the amortization of the
approximately $40 million pre-tax gain that resulted from the Corporation's
sale of installment accounts receivables to Newcourt. The overall gain is
being recognized over a two year period. The Financial Services segment
also provides limited financing to technicians, shop owners and dealers.
The Corporation evaluates the performance of its operating segments based
on earnings before taxes, interest expense, other income/expense-net and
restructuring and other non-recurring charges. The Corporation accounts for
intersegment sales and transfers based on established sales prices between
the segments, which represent cost plus an intercompany markup. The
Corporation allocates shared service expenses to those segments that
utilize the services based on their percentage of revenues from external
sources. The Corporation has charged license fees to its North America
segments based on their percentages of certain North America sales.
Expenses related to restructuring and other non-recurring charges are not
allocated to the reportable segments.
Financial data by segment for the thirteen and twenty-six weeks ended:
Thirteen Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4,
(Amounts in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Revenues from external customers:
North America Transportation $ 228,533 $ 218,380 $ 445,385 $ 422,555
North America Other 121,963 110,725 232,873 225,416
Europe 101,164 94,246 208,450 182,901
International 21,493 18,824 39,030 37,732
----------- ------------ ----------- ------------
Total from reportable segments $ 473,153 $ 442,175 $ 925,738 $ 868,604
=========== ============ =========== ============
12
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4,
(Amounts in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Intersegment revenues:
North America Transportation $ - $ - $ - $ 11
North America Other 70,209 57,367 132,110 114,392
Europe 2,798 1,632 5,215 3,362
International 3 1 3 47
------------- ------------ ---------- ------------
Total from reportable segments 73,010 59,000 137,328 117,812
Elimination of intersegment revenue (73,010) (59,000) (137,328) (117,812)
------------- ------------ ---------- ------------
Total consolidated intersegment revenue $ - $ - $ - $ -
============= ============ ========== ============
Earnings:
North America Transportation $ 24,657 $ 9,528 $ 47,414 $ 29,058
North America Other 24,233 18,238 38,926 41,316
Europe 2,103 392 3,098 (98)
International (210) (1,616) (1,983) (3,021)
Financial Services 13,141 15,893 34,133 32,872
------------- ------------ ---------- ------------
Total from reportable segments 63,924 42,435 121,588 100,127
Restructuring and other
non-recurring charges (7,037) - (8,970) -
Interest expense (5,417) (5,449) (10,098) (9,482)
Other income (expense) - net (12,406) (1,578) (13,239) (2,228)
------------- ------------ ---------- ------------
Total consolidated earnings before taxes $ 39,064 $ 35,408 $ 89,281 $ 88,417
============= ============ ========== ============
Financial data by segment as of: July 3, January 2,
(Amounts in thousands) 1999 1999
---- ----
Total assets:
North America Transportation $ 512,918 $ 516,372
North America Other 618,803 591,831
Europe 405,431 407,663
International 60,405 56,293
Financial Services 139,810 231,092
------------- ------------
Total from reportable segments $ 1,737,367 $ 1,803,251
============= ============
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview: The Corporation posted record sales for the second quarter and first
six months of 1999, and increased net earnings and earnings per share. Net sales
increased 7.0% to $473.2 million for the second quarter and increased 6.6% to
$925.7 million for the first six months of 1999 as compared to the comparable
1998 periods of $442.2 million and $868.6 million. The increase in net sales in
the second quarter was driven by increases across all segments and was the
seventh consecutive second quarter with record sales. Reported net earnings for
the second quarter and first six months of 1999 were $25.0 million and $57.2
million as compared to $22.7 million and $56.6 million in the comparable prior
year periods. Reported diluted earnings per share for the second quarter and
first six months of 1999 were $0.42 per share and $0.97 per share as compared to
$0.38 per share and $0.94 per share in the comparable prior year periods.
Net earnings for the second quarter, excluding other non-recurring charges
related to Project Simplify of $4.5 million after-tax and the negative impact of
the forward currency hedge on the US$400 million equivalent purchase price
commitment for the Sandvik acquisition of $8.7 million after-tax ("non-recurring
items"), improved to $38.2 million from $22.7 million, an increase of 68.6% from
the same year-ago period. Net earnings for the first six months of 1999,
excluding other non-recurring charges of $5.7 million after-tax and the negative
impact of a currency hedge of $8.7 million after-tax, increased 26.5% to $71.6
million, versus $56.6 million in the same period a year ago. Diluted earnings
per share for the 1999 second quarter were $0.65, excluding non-recurring items.
For the first six months of 1999, diluted earnings per share were $1.22,
excluding non-recurring items.
Operating expenses as a percentage of net sales decreased to 36.9% in the second
quarter of 1999 from 40.3% in prior year period. For the six month period,
operating expenses as a percentage of net sales decreased to 38.5% in 1999 from
40.2% in the prior year period. The declines in operating expenses as a
percentage of net sales reflects the streamlining benefits of Project Simplify
actions, the absence of computer system difficulties experienced last year, a
generally lower level of costs present in the organization, and the growth in
net sales.
The Corporation's simplification initiative, Project Simplify, is a broad
program of internal rationalizations, consolidations and reorganizations
intended to make the Corporation's business operations simpler and more
effective. The actions associated with Project Simplify, upon completion in the
first quarter of 2000, are expected to lead to the closing of six manufacturing
facilities, seven warehouses and 47 small offices in North America and Europe;
the elimination of more than 1,100 positions; the elimination of nearly 12,000
SKUs; and the consolidation of certain business units. As of the end of the
second quarter of 1999, 889 positions were eliminated, 44 facilities were closed
and the SKU reduction activities were on schedule with over 75% of target
achieved to date. The closing of the remaining 16 facilities and the elimination
of the remaining 211 positions is expected to be completed by the first quarter
of 2000. The Corporation expects to realize annual cost savings of approximately
$60 million from the initiative. On an annual run-rate basis, the Corporation
expects to achieve half of these savings in 1999, with the full amount achieved
in 2000. As of July 3, 1999, annualized savings in excess of $30 million were
achieved.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In the second quarter and first six months of 1999, $7.0 million ($4.5 million
or $0.08 per share after-tax) and $9.0 million ($5.7 million or $0.10 per share
after-tax) of other non-recurring charges were taken in connection with Project
Simplify, primarily for reassignment of personnel and costs for facilities
consolidation. Of the expected total charge of approximately $185.0 million to
be recorded through the first quarter of 2000, a total of $158.8 million in
pre-tax charges have been recorded through the second quarter of 1999 (including
$133.1 million in the third quarter of 1998, $16.8 million in the fourth quarter
of 1998, $1.9 million in the first quarter of 1999, and $7.0 million in the
second quarter of 1999). Approximately one-half of the total charges will be
non-cash with the remaining costs requiring cash outflows which will be and are
being provided from operations.
Finance income for the second quarter of 1999 was $13.1 million, a decrease of
17.3% from second quarter 1998 of $15.9 million, reflecting the expected decline
resulting from the reduced level of extended credit receivables. This lower
level is the result of the sale of extended credit receivables in the first
quarter to Snap-on Credit LLC. Finance income for the first six months of 1999
was $34.1 million, an increase of 3.8% from six-month 1998 finance income of
$32.9 million. The increase in finance income for the six month period is due to
gains on the initial sale of non-recourse receivables to Snap-on Credit LLC and
strong originations in the first quarter partially offset by the reduced level
of extended credit receivables in the second quarter.
Segment Results: North America Transportation sales consist of business
operations serving the dealer channel in the U.S. and Canada. For the second
quarter of 1999, sales were $228.5 million, an increase of 4.6% over second
quarter 1998 sales of $218.4 million. For the first six months of 1999, sales
were $445.4 million, an increase of 5.4% over six-month 1998 sales of $422.6
million. Renewed focus on Snap-on's traditional product lines - hand tools, tool
storage and power tools - resulted in a significantly better product mix during
the quarter and six month period. The resulting improvement in gross margin,
impact of Project Simplify and the absence of computer system difficulties drove
improved earnings in this segment.
North America Other sales consist of business operations serving the direct
sales and distributor channels in the U.S. and Canada, as well as exports from
the U.S. For the second quarter of 1999, sales were $122.0 million, an increase
of 10.1% over second quarter 1998 sales of $110.7 million, reflecting solid
growth to industrial customers and equipment sales to the Corporation's growing
base of national and OEM accounts. For the first six months of 1999, sales were
$232.9 million, an increase of 3.3% over six-month 1998 sales of $225.4 million,
reflecting growth to industrial customers and equipment sales to the growing
base of national and OEM accounts partially offset by the reduction in emissions
and a discontinued product line.
Europe sales consist of business operations in Europe and Africa. For the second
quarter of 1999, sales were $101.2 million, an increase of 7.3% over second
quarter 1998 sales of $94.2 million. For the first six months of 1999, sales
were $208.5 million, an increase of 14.0% over six-month 1998 sales of $182.9
million. The increases in both periods year over year is mainly from sales
increases as a result of acquisitions. Excluding acquisitions, sales overall
were roughly flat in local currencies in the second quarter, as weakness
continued in exports to Eastern Europe and Russia. Currency exchange rates
negatively affected segment sales by approximately four percentage points for
the
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
second quarter and one percentage point for the first six months of 1999 as
compared to prior year periods.
International sales consist of business operations in the Asia/Pacific and Latin
America markets, with the majority derived from Japan and Australia. For the
second quarter of 1999, sales were $21.5 million, an increase of 14.2% over
second quarter 1998 sales of $18.8 million. For the first six months of 1999,
sales were $39.0 million, an increase of 3.4% over six-month 1998 sales of $37.7
million. Although reported results increased year over year, operations continue
to be affected by the weakened economies in the Asia/Pacific region.
FINANCIAL CONDITION
Liquidity: Cash and cash equivalents increased to $15.7 million at the end of
the second quarter from $15.0 million at the end of 1998. Working capital
increased to $583.4 million at second quarter end, from $621.8 million at the
end of 1998.
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, pay dividends and
provide for costs of Project Simplify. The corporation intends to finance the
acquisition of Sandvik through existing credit facilities.
Accounts receivable less allowances: Accounts receivable less allowances
decreased 9.8% to $500.5 million at the end of the second quarter, compared with
$554.7 million at the end of 1998, mainly reflecting the sale of additional
non-securitized receivables to Snap-on Credit LLC.
Inventories: Inventories increased 4.6% to $392.8 million in the 1999 second
quarter, compared with $375.4 million at the end of 1998, primarily due to
seasonal inventory buildups.
Liabilities: Total short-term and long-term debt was $314.7 million at the end
of the second quarter, compared with $339.8 million at the end of 1998. The
decrease is due to payments made from funds received from the extended credit
receivable portfolio sale which were partially offset by cash paid for
acquisitions, the repurchase of common stock and working capital needs.
Average shares outstanding: Average shares outstanding for diluted EPS and basic
EPS in 1999's second quarter were 58.8 million and 58.4 million shares versus
60.0 million and 59.2 million in last year's second quarter. Average shares
outstanding for diluted EPS and basic EPS in the first six months of 1999 were
58.9 million and 58.5 million shares versus 60.4 million and 59.5 million in
last year's second quarter.
Share repurchase: In 1996, the Corporation's board of directors approved an
ongoing authorization to repurchase 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. On June
27,
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
1997, the Corporation's board of directors authorized the repurchase of $100.0
million of the Corporation's common stock over a two-year period. On June 26,
1998, the Corporation's board of directors authorized an additional share
repurchase program aggregating $100.0 million of the Corporation's common stock.
In the first quarter of 1999, the Corporation's board of directors authorized an
additional share repurchase program of $50.0 million. The Corporation
repurchased $14.7 million or 492,800 shares in the first quarter of 1999. The
Corporation did not repurchase any additional shares of its common stock in the
second quarter of 1999. The Corporation's outstanding authorizations are
approximately $140 million.
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 9 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 information systems, third-party systems, and products. The
objective of this project is to identify, develop, implement and test any
modifications that are required so that these systems and products 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 completed the risk
assessment phase of this project, and is finalizing the remediation and testing
phases of the required modifications. In North America, the implementation of
the BaaN enterprise-wide system, which is Year 2000 compliant, has been
completed. The Corporation has substantially completed the replacement or
upgrades of the mission critical systems worldwide. These projects are expected
to be completed by the end of the third quarter of 1999, and no significant
issues have been identified.
For third-party systems, the Corporation has communicated with suppliers,
dealers, financial institutions and others with which the Corporation does
business, and has received responses from more than 95% of those contacted that
they either are, or plan on a timely basis to be Year 2000 compliant.
The Corporation tested its current product line for Year 2000 compliance and
found no date-related issues in these products. The Corporation also tested its
previously manufactured products likely to still be in use and has established
mechanisms to address any date related issues found and to communicate with
customers regarding the handling of these issues, whether or not covered by the
product warranty.
The Corporation completed its risk assessment and is finalizing the remediation
and testing of embedded systems at its facilities and manufacturing plants
worldwide. This is more than 95% complete. No significant issues have been
identified and these final phases are expected to be completed during the third
quarter of 1999.
The Corporation is completing 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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Corporation is continuing to develop contingency plans for its critical
business systems and processes to deal with the most reasonably likely
worst-case scenario. The Corporation could potentially experience disruptions to
some mission critical operations as a result of Year 2000 problems outside of
the Corporation's control. These disruptions could be caused by problems with
systems utilized by significant suppliers, government entities, customers or
others, as well as risks related to infrastructure (e.g., electricity supply and
water and sewer service). The contingency plans cannot guarantee that mission
critical systems or business functions will not be affected by Year 2000
problems, especially those related to third parties. The Corporation expects to
have the analysis completed and contingency plans in place by the end of the
third quarter of 1999.
Based on information currently known to it, the Corporation expects to be fully
Year 2000 compliant by the end of the fourth quarter of 1999. None of the
Corporation's other information technology projects has been delayed as a result
of these issues. The Corporation believes that total costs for the compliance
activities will approximate between $4 million and $6 million through December
1999. Through the end of the second quarter of 1999, the Corporation has spent
$3.4 million on these Year 2000 issues, with funding provided by cash flows from
operations. The estimated costs do not include any potential costs related to
customer or other claims, or potential amounts related to executing contingency
plans, such as costs incurred as a result of an infrastructure or supplier
failure. All cost estimates are based on the current assessment of the projects
and are subject to change as the projects progress. Based on currently available
information, the Corporation does not believe that the Year 2000 matters
discussed above related to internal systems or products sold to customers will
have a material adverse effect on the Corporation's financial condition or its
results. In addition, there can be no assurance that the failure to ensure Year
2000 capability by a supplier, customer or another party would not have a
material adverse effect on the Corporation's financial condition or its results.
Euro Conversion: On January 1, 1999, certain member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the euro. The euro trades on
currency exchanges and may be used in business transactions. Beginning in
January 2002, the new euro-denominated bills and coins will be used, 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, (i) the need to adapt computer and other business
systems and equipment to accommodate euro-denominated transactions, and (ii) the
competitive impact of cross-border price transparency, which may affect pricing
strategies. The Corporation does not expect this conversion to have a material
impact on its financial condition or results of operations.
Sandvik Acquisition: During the second quarter of 1999, the Corporation
announced that the respective boards of directors of the Corporation and Sandvik
AB have entered into a definitive agreement that the Corporation will acquire
the Sandvik Saws and Tools division for approximately $400 million. This
acquisition will be financed through debt, and accounted for under purchase
accounting rules. The Corporation recorded an after-tax charge of $8.7 million
($0.15 per diluted share after-tax) on the foreign currency hedge of the US$400
million equivalent purchase price commitment. The acquisition of Sandvik Saws
and Tools is expected to close in September 1999. The Corporation expects this
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
transaction to have a minimal effect on 1999 earnings, and to be accretive to
earnings per share beginning in 2000.
Sandvik Saws and Tools, based in Sandviken, Sweden, is a leading global
manufacturer and supplier of professional hand tool products. This division has
approximately 2,700 employees worldwide, with 12 manufacturing plants and 4
distribution centers. They sell to both the retail and industrial channels
supported by a worldwide sales force. They have sales of approximately $325
million (60% Europe, 26% U.S. and Latin America, and 14% in Asia/Pacific and the
rest of the world).
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 or other factors that could cause (and in some cases
have caused) actual results to differ materially from those described in any
such statement. Those important factors include the timing and progress with
which the Corporation can implement the Project Simplify initiatives; the timing
and progress related to the acquisition of Sandvik Saws and Tools, which could
include failure to receive applicable approvals; the Corporation's ability to
manufacture, distribute, and/or record the sale of products during the
implementation of a new computer system involving the replacement of hardware
and software components and the enterprise-wide linking of all functions; the
Year 2000 issue; 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 situation in Asia or
other parts of the world; 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. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Corporation disclaims
any responsibility to update any forward-looking statement provided in this
document.
Item 3: Qualitative and Qualitative Disclosures About Market Risk
- -----------------------------------------------------------------
Pursuant to Item 305 of Regulation S-K, there were no material changes for the
quarter ended July 3, 1999.
19
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
The Corporation held its Annual Meeting of Shareholders on April 23, 1999. The
following is a summary of the matters voted on in that meeting. There were
65,591,328 outstanding shares eligible to vote.
a) The shareholders elected four members of the Corporation's Board of
Directors, whose terms were up for reelection, to serve until the 2002
Annual Meeting. The persons elected to the Corporation's Board of
Directors, the number of votes cast for and the number of votes withheld
with respect to each of these persons were as follows:
Director For Withheld Term
-------- --- -------- ----
Branko M. Beronja 54,855,125 1,493,532 2002
Richard F. Teerlink 55,017,340 1,331,317 2002
Donald W. Brinckman 55,000,369 1,348,288 2002
George W. Mead 54,991,006 1,357,651 2002
Leonard A. Hadley 2001
Robert A. Cornog 2001
Edward H. Rensi 2001
Bruce S. Chelberg 2000
Arthur L. Kelly 2000
Roxanne J. Decyk 2000
Jack D. Michaels 2000
Item 6: Exhibits and Reports on Form 8-K
- ----------------------------------------
Item 6(a): Exhibits
- --------------------
Exhibit 27 Financial Data Schedule
20
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: August 17, 1999 /s/ R. A. Cornog
---------------- -----------------------------------------------
R. A. CORNOG
(Chairman, President and Chief Executive Officer)
Date: August 17, 1999 /s/ N. T. Smith
---------------- -----------------------------------------------
N. T. SMITH
(Principal Accounting Officer and Controller)
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule