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 April 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 May 1, 1999
- -------------------------- --------------------------
Common stock, $1 par value 58,321,765 shares
<PAGE>
SNAP-ON INCORPORATED
INDEX
Page
Part I. Financial Information
Consolidated Statements of Earnings -
Thirteen Weeks Ended
April 3, 1999 and April 4, 1998 3
Consolidated Balance Sheets -
April 3, 1999 and January 2, 1999 4-5
Consolidated Statements of Cash Flows -
Thirteen Weeks Ended
April 3, 1999 and April 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
<PAGE>
PART I. FINANCIAL INFORMATION
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended
April 3, April 4,
1999 1998
-------- --------
Net sales $ 452,585 $ 426,429
Cost of goods sold (233,684) (214,884)
Operating expenses (182,229) (170,832)
Net finance income 20,992 16,979
Restructuring and other non-recurring charges (1,933) -
Interest expense (4,681) (4,033)
Other income (expense) - net (833) (650)
--------- ---------
Earnings before income taxes 50,217 53,009
Income tax provision 17,976 19,083
--------- ---------
Net earnings $ 32,241 $ 33,926
========= =========
Earnings per weighted average
common share - basic $ .55 $ .57
========= =========
Earnings per weighted average
common share - diluted $ .55 $ .56
========= =========
Weighted average common shares
outstanding - basic 58,569 59,894
Effect of dilutive options 389 863
--------- ---------
Weighted average common shares
outstanding - diluted 58,958 60,757
========= =========
Dividends declared per common share $ .22 $ .21
========= =========
The accompanying notes are an integral part of these statements.
3
<PAGE>
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
April 3, January 2,
1999 1999
--------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 19,238 $ 15,041
Accounts receivable, less allowances 500,265 554,703
Inventories
Finished stock 359,114 359,358
Work in process 46,947 38,357
Raw materials 72,647 74,192
Excess of current cost over LIFO cost (97,011) (96,471)
--------- ----------
Total inventory 381,697 375,436
Prepaid expenses and other assets 135,831 134,652
--------- ---------
Total current assets 1,037,031 1,079,832
Property and equipment
Land 19,202 19,572
Buildings and improvements 172,765 175,385
Machinery and equipment 393,048 388,862
--------- ----------
585,015 583,819
Accumulated depreciation (317,740) (311,789)
--------- ----------
Total property and equipment 267,275 272,030
Deferred income tax benefits 57,527 60,139
Intangible and other assets 280,296 262,919
--------- ---------
Total assets $1,642,129 $1,674,920
========== ==========
The accompanying notes are an integral part of these statements.
4
<PAGE>
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
April 3, January 2,
1999 1999
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 99,975 $ 89,442
Notes payable and current maturities
of long-term debt 50,415 93,117
Accrued compensation 34,997 42,105
Dealer deposits 41,214 42,421
Deferred subscription revenue 34,952 34,793
Accrued restructuring reserves 24,529 26,165
Other accrued liabilities 155,108 130,010
--------- ----------
Total current liabilities 441,190 458,053
Long-term debt 246,288 246,644
Deferred income taxes 9,615 9,587
Retiree health care benefits 89,552 89,124
Pension and other long-term liabilities 93,751 109,245
--------- ----------
Total liabilities 880,396 912,653
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 -
April 3, 1999 - 66,696,770 shares
January 2, 1999 - 66,685,169 shares 66,697 66,685
Additional paid-in capital 76,294 117,384
Retained earnings 902,521 883,207
Accumulated other comprehensive income (loss) (36,936) (30,231)
Grantor stock trust at fair market value
- 6,870,719 and 6,924,019 shares (198,392) (241,042)
Treasury stock at cost - 1,509,140
and 1,016,224 shares (48,451) (33,736)
--------- ---------
Total shareholders' equity 761,733 762,267
--------- ----------
Total liabilities and shareholders' equity $1,642,129 $1,674,920
========== ==========
The accompanying notes are an integral part of these statements.
5
<PAGE>
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Thirteen Weeks Ended
April 3, April 4,
1999 1998
--------- ----------
OPERATING ACTIVITIES
Net earnings $ 32,241 $ 33,926
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation 10,240 8,561
Amortization 2,271 2,108
Deferred income taxes 2,577 (361)
(Gain) loss on sale of assets 6 (63)
Charges due to restructuring and other
non-recurring charges, net of tax 1,135 -
Changes in operating assets and liabilities:
(Increase) decrease in receivables 49,298 (9,121)
(Increase) in inventories (9,426) (47,966)
Decrease in prepaid and other assets 12,137 32,670
Increase in accounts payable 11,077 4,691
Increase (decrease) in accruals and
other liabilities 16,806 (50,089)
--------- ---------
Net cash provided by (used in) operating activities 128,362 (25,644)
INVESTING ACTIVITIES
Capital expenditures (8,907) (10,034)
Acquisitions of businesses (47,277) (10,102)
Disposal of property and equipment 751 314
--------- ---------
Net cash used in investing activities (55,433) (19,822)
FINANCING ACTIVITIES
Payment of long-term debt (335) (359)
Increase in long-term debt - 5,236
Increase (decrease) in short-term borrowings-net (43,368) 83,169
Purchase of treasury stock (14,714) (47,805)
Proceeds from stock plans 1,572 1,189
Cash dividends paid (12,927) (12,644)
--------- ---------
Net cash provided by (used in) financing activities (69,772) 28,786
Effect of exchange rate changes 1,040 (9)
--------- ---------
Increase (decrease) in cash and cash equivalents 4,197 (16,689)
Cash and cash equivalents at beginning of period 15,041 25,679
--------- ---------
Cash and cash equivalents at end of period $ 19,238 $ 8,990
========= =========
The accompanying notes are an integral part of these statements.
6
<PAGE>
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 only of normal
recurring adjustments) necessary to a fair statement of financial condition
and results of operations for the thirteen weeks ended April 3, 1999 have
been made. Management also believes that the results of operations for the
thirteen weeks ended April 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. Income tax paid for the thirteen weeks ended April 3, 1999 and April 4,
1998 was $1.0 million and $5.3 million. Interest paid for the thirteen
weeks ended April 3, 1999 and April 4, 1998 was $6.3 million and $5.8
million.
3. 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 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.
Restructuring Charges: In the first quarter of 1999, the Corporation
recorded pre-tax charges of $1.9 million of other non-recurring charges.
Total reported charges related to Project Simplify as of April 3, 1999 are
$151.8 million. This amount consists of $75.6 million of restructuring
charges and $76.2 million of other non-recurring charges.
The composition of the Corporation's $75.6 million restructuring charges is
as follows:
<TABLE>
<CAPTION>
Original Write-down Restructuring
Restructuring Additions of Assets Cash Reserves as
(Amounts in thousands) Reserves to Reserves to Fair Value Payments April 3, 1999
-------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Expenditures for severance
and other exit costs $21,105 $1,969 $ - $(8,205) $14,869
Loss on the write-down
of intangibles and
goodwill 36,240 298 (36,538) - -
Charges for warranty
provisions 9,660 - - - 9,660
Loss on the write-down
of assets 5,978 357 (6,335) - -
--------- ------ -------- ------- -------
Total restructuring
reserves $72,983 $2,624 $(42,873) $(8,205) $24,529
========= ====== ======== ======== =======
</TABLE>
7
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
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, duplicate position elimination and
streamlining operations. As of April 3, 1999, 704 employees have separated
from the Corporation and severance payments of $5.1 million have been made.
The Corporation has adjusted property, plant and equipment and other assets
to net realizable value through an additional $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 $76.2 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 $6.6 million. 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 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.
4. During the first quarter of 1999, the Corporation acquired an additional
39% percent interest in the Thomson Corporation's Mitchell Repair
Information business that resulted in the Corporation owning 99% of
Mitchell Repair Information Company ("MRIC"). The Corporation is obligated
to purchase the remainder of MRIC within the next three years. Subsequent
to the first quarter, the Corporation announced that it has entered into a
definitive agreement with Sandvik AB to acquire the Sandvik Saws and Tools
division for approximately $400.0 million. Sandvik Saws and Tools, based in
Sandviken, Sweden, is one of the largest manufacturers and suppliers of
professional hand tool products.
5. On January 3, 1999, the Corporation established a joint venture with
Newcourt Financial USA Inc. ("Newcourt") to provide financial services to
the Corporation's global dealer and customer network through a limited
liability company known as Snap-on Credit LLC (the "LLC"). As a result of
the establishment of the joint venture, the Corporation effectively
outsourced to the LLC its captive credit function. The captive credit
function was previously managed by the Corporation's wholly owned
subsidiary Snap-on Credit Corporation.
8
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
The LLC will be the preferred provider of financial services to the
Corporation's global dealer and customer network. The Corporation will
receive income from fees paid by the LLC. The fees will be based primarily
upon the volume of installment receivables originated by the LLC. Newcourt
will provide services and expertise to the LLC with a view to increasing
originations by the LLC. Newcourt will be paid a management fee by the LLC
for such services. The management fee paid to Newcourt also will be based
primarily on the volume of installment receivables originated by the LLC.
Newcourt will receive warehousing and securitization fees from the LLC in
connection with the purchased receivables.
On January 4, 1999, in a separate transaction, CreditCorp SPC, LLC, whose
sole member is Snap-on Financial Services, Inc., sold to Newcourt its
entire portfolio of U.S. installment accounts receivable, including
existing extended customer accounts receivable, equipment lease receivables
and dealer loan receivables for an aggregate sale price of $141.1 million,
resulting in a pre-tax gain of approximately $44 million. Newcourt has the
right to put back to the Corporation the unpaid portion of the extended
customer accounts receivable portfolio based on the same pricing formula.
As a result, this gain will be recognized as part of Net Finance Income
over a two-year period.
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 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for 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.
8. 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. Total comprehensive income, consisting of net earnings, foreign currency
translation adjustments and minimum pension liability adjustments, for the
thirteen week periods ended April 3, 1999 and April 4, 1998, were as
follows:
April 3, April 4,
(Amounts in thousands) 1999 1998
---- ----
Net earnings $ 32,241 $ 33,926
Foreign currency translation (6,706) (440)
Minimum pension liability - -
--------- ---------
Total comprehensive income $ 25,535 $ 33,486
========= =========
9
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
10. 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 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 April 3, 1999. 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 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.
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
10
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
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.
12. 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 employees 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.
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.
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 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 provides financing to technicians and shop
owners, as well as to dealers.
11
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
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.
Corporate expenses related to restructuring and other non-recurring charges
are not allocated to the reportable segments.
Financial data by segment for the
thirteen weeks ended: April 3, April 4,
(Amounts in thousands) 1999 1998
---- ----
Revenues from external customers:
North America Transportation $ 216,852 $ 204,175
North America Other 110,910 114,691
Europe 107,286 88,655
International 17,537 18,908
------------ ------------
Total from reportable segments $ 452,585 $ 426,429
============ ============
Intersegment revenues:
North America Transportation $ 2,108 $ 11
North America Other 53,262 47,724
Europe 2,417 1,730
International - 46
------------ ------------
Total from reportable segments 57,787 49,511
Elimination of intersegment revenue (57,787) (49,511)
------------ ------------
Total consolidated intersegment revenue $ - $ -
============ ============
Earnings:
North America Transportation $ 24,201 $ 22,893
North America Other 13,249 16,797
Europe 995 1,253
International (1,773) (230)
Financial Services 20,992 16,979
------------ ------------
Total from reportable segments 57,664 57,692
Corporate restructuring and other
non-recurring charges (1,933) -
Interest expense (4,681) (4,033)
Other income (expense) - net (833) (650)
------------ ------------
Total consolidated earnings before taxes $ 50,217 $ 53,009
============ ============
12
<PAGE>
Financial data by segment as of: April 3, January 2,
(Amounts in thousands) 1999 1999
Total assets:
North America Transportation $ 495,189 $ 516,372
North America Other 605,513 591,831
Europe 401,470 407,663
International 56,059 56,293
Financial Services 140,231 231,092
----------- -----------
Total from reportable segments $ 1,698,462 $ 1,803,251
=========== ===========
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview: The Corporation posted record results for first quarter sales and
earnings per share. First quarter 1999 net sales increased 6.1% to $452.6
million, compared with $426.4 million in the first quarter of 1998 with the
North America Transportation and Europe segments reporting higher sales.
Excluding all restructuring and other non-recurring charges, diluted earnings
per share improved to $0.57 from $0.56 in the same quarter a year ago, an
increase of 1.8%.
Net earnings for the first quarter, excluding all restructuring and other
non-recurring charges, declined 1.6% to $33.4 million from $33.9 million in the
1998 first-quarter period. Gross profit was 48.4% for the quarter, compared with
49.6% in last year's first quarter. Total operating expenses as a percent of
sales were 40.3%, compared with 40.1% in the 1998 comparable period. This
percentage is expected to improve as Project Simplify cost savings are
implemented during the year. Finance income improved for the 1999 first quarter
as expected to $21.0 million compared with $17.0 million last year. This
increase was as expected, reflecting gains on receivable sales and strong
originations.
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 of Project Simplify 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 first quarter of 1999, 704 positions were
eliminated, 32 facilities were closed and the SKU reduction activities were on
schedule with over 50% of target achieved to date. 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.
In the first quarter of 1999, $1.9 million ($.02 per share after tax) of
restructuring and other non-recurring charges were taken in connection with
Project Simplify, primarily for reductions 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 $151.8 million in
pre-tax charges have been recorded through the first quarter of 1999 ( including
$133.1 million in the third quarter of 1998 and $16.8 million in the fourth
quarter of 1998).
Segment Results: North America Transportation sales consisting of business
operations serving the dealer channel in the U.S. and Canada for the first
quarter of 1999 were $216.9 million, an increase of 6.2% over first quarter 1998
sales of $204.2 million. Dealer base sales increased by approximately 5% against
a difficult comparison for the first quarter 1998. Canadian sales were enhanced
by an emissions program contributing approximately one percentage point to this
segment. Sales excluding the effects of currency increased by 7%. Earnings in
this segment for the first quarter of 1999 were $24.2 million, compared with
earnings of $22.9 million for the comparable 1998 period. The increase was due
to the increase in sales and a favorable product mix, offset in part by lower
margins on emission sales.
North America Other sales consisting of business operations serving the direct
sales and distributor channels in the U.S. and Canada, as well as exports from
the U.S., were $110.9 million, a decrease of
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
3.3% from first quarter 1998 sales of $114.7 million. The decrease was in part
due to the elimination of two business units as a result of Project Simplify and
higher emission sales in the first quarter of 1998. This segment's base
business, industrial and equipment sales, increased by approximately 6%.
Earnings for the first quarter of 1999 were $13.2 million, compared with
earnings of $16.8 for the comparable 1998 period. The decrease was mainly due to
the reduction in emissions and increased costs related to a discontinued product
line.
Europe sales consisting of business operations in Europe and Africa were $107.3
million, an increase of 21.0% over first quarter 1998 sales of $88.7 million.
Increases were primarily due to acquisitions as weakness continued in exports to
Asia and Eastern Europe. Currency positively affected sales by approximately two
percentage points. Sales excluding acquisitions and currency effects were even
with the first quarter 1998. Earnings for the first quarter of 1999 were $1.0
million, compared with earnings of $1.3 for the comparable 1998 period.
International sales consisting of business operations in the Asia/Pacific and
Latin America markets, with the majority derived from Japan and Australia, were
$17.5 million, a decrease of 7.3% from first quarter 1998 sales of $18.9
million. Results continued to be affected by the weak economies of the
Asia/Pacific region and currency effects. A loss for the first quarter of 1999
of $1.8 million was reported in this segment, compared with a loss of $0.2 for
the comparable 1998 period. Results continue to be affected by the weak
economies in the Asia/Pacific region.
Finance income improved for the first quarter 1999 to $21.0 million compared
with $17.0 million last year. The increase represents a disproportionately large
percentage of the full years' anticipated results due to gains on the initial
sale of non-recourse receivables to Snap-on Credit LLC, a newly formed joint
venture with Newcourt Financial USA Inc. and strong originations in the quarter.
FINANCIAL CONDITION
Liquidity: Cash and cash equivalents increased to $19.2 million at the end of
the first quarter from $15.0 million at the end of 1998. Working capital
decreased to $595.8 million at first 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 and pay dividends.
Accounts receivable: Accounts receivable decreased 9.8% to $500.3 million at the
end of the first quarter, which is comprised of $79.3 million of installment
receivables and $421.0 million of trade and other receivables, compared with
$554.7 million at the end of 1998. The decrease was primarily due to the sale by
CreditCorp SPC, LLC on January 4, 1999 of its entire portfolio of U.S.
installment accounts receivable, including existing extended customer accounts
receivable, equipment lease receivables and dealer loan receivables, to Newcourt
Financial USA Inc.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Inventories: Inventories increased 1.7% to $381.7 million in the 1999 first
quarter, compared with $375.4 million at the same period of 1998.
Liabilities: Total short-term and long-term debt was $296.7 million at the end
of the first quarter, compared with $339.8 million at the end of 1998. The
decrease is due to payments made from funds received from the 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 basic EPS in the
first quarter of 1999 were 58.6 million shares versus 59.9 million in last
year's first quarter. Average shares outstanding for diluted EPS for the first
quarter of 1999 were 59.0 million shares versus 60.8 million in the same quarter
of 1998.
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, 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'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 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 information systems, third-party systems, products and information
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, has been completed. In Europe, the
Corporation has begun to upgrade or replace all mission critical systems. These
projects are expected to be complete by the end of the second quarter of 1999,
and no significant issues have been identified.
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 more than 90% of those contacted that they either
are or plan on a timely basis to be Year 2000 compliant. For the Corporation's
currently manufactured products, the committee has worked with most business
units in the
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
testing of their products for compliance and in most cases has found no
indication that these products create date-related issues when used in customary
applications. It is expected that any remaining issues will be resolved by
December 1999. The committee also has been working with its third-party vendors
to test and resolve issues regarding the Corporation's embedded systems. Based
on testing completed to date, no significant issues have been identified.
The Corporation is currently conducting risk assessments of embedded systems at
its facilities and manufacturing plants in North America and Europe. This
assessment is more than 90% complete in North America and is 90% complete in
Europe. These assessments are expected to be complete during the second quarter
of 1999. 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 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. The Corporation
believes that total costs for the compliance activities, which are primarily
outside North America, will approximate between $5 million and $7 million
through December 1999. Through the end of the first quarter of 1999, the
Corporation has spent $2.2 million on these Year 2000 issues, with funding being
provided by cash flows from operations. 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 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.
Value at Risk: The Corporation uses derivative instruments to manage
well-defined interest rate and foreign currency exposures and to limit the
impact of interest rate and foreign currency rate changes on earnings and cash
flows. The Corporation does not use derivative instruments for trading purposes.
The Corporation utilizes a "Value-at-Risk" ("VAR") model to determine the
potential one-day loss in the fair value of its interest rate and foreign
exchange sensitive financial instruments from adverse changes in market factors.
The VAR model estimates are made assuming normal market conditions and a 95%
confidence level. The Corporation's computations are based on the
interrelationships among movements
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
in various currencies and interest rates (variance/co-variance technique). These
interrelationships are determined by observing interest rate and foreign
currency market changes over the previous quarter for year-end.
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. The Corporation also enters into interest rate swap
agreements to manage interest costs and risks associated with changing interest
rates.
In the first quarter of 1999, the Corporation examined the underlying
instruments and determined that there had been no significant movements in the
factors used in its model nor in market conditions.
The VAR model is a risk tool and does not purport to represent actual losses in
fair value that will be incurred by the Corporation, nor does it consider the
potential effect of favorable changes in market factors.
Subsequent Event: Subsequent to the end of the first quarter, the Corporation
announced that the respective board 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 $400.0 million. This
acquisition will be financed through debt, and accounted for under purchase
accounting rules. The Corporation expects the transaction to have no impact on
1999 earnings, and to be accretive to Snap-on's earnings per share beginning in
2000.
Sandvik Saws and Tools, based in Sandviken, Sweden, is one of the largest
manufacturers and suppliers 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 meaning 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 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
timing or speed with which the Corporation can implement the Project Simplify
initiatives and the roll-out of Snap-on Credit LLC without 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 situation in Asia or other
parts of the world; and the achievement of productivity improvements and cost
reductions. These factors
18
<PAGE>
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.
19
<PAGE>
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
---------- -------------- ----
January 19, 1999 January 3, 1998 Item 2. The Corporation filed a report
relating to the establishment of the
joint venture know as Snap-on Credit LLC
with Newcourt Financial USA Inc.
20
<PAGE>
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: May 18, 1999 /s/ R. A. Cornog
------------ -------------------------------------------------
R. A. CORNOG
(Chairman, President and Chief Executive Officer)
Date: May 18, 1999 /s/ N. T. Smith
------------ -------------------------------------------------
N. T. SMITH
(Principal Accounting Officer and Controller)
21
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SNAP-ON INCORPORATED AS OF AND FOR THE
THIRTEEN WEEKS ENDED APRIL 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 19,238
<SECURITIES> 0
<RECEIVABLES> 520,829
<ALLOWANCES> 20,564
<INVENTORY> 381,697
<CURRENT-ASSETS> 1,037,031
<PP&E> 585,015
<DEPRECIATION> 317,740
<TOTAL-ASSETS> 1,642,129
<CURRENT-LIABILITIES> 441,190
<BONDS> 246,288
0
0
<COMMON> 66,697
<OTHER-SE> 695,036
<TOTAL-LIABILITY-AND-EQUITY> 1,642,129
<SALES> 452,585
<TOTAL-REVENUES> 452,585
<CGS> 233,684
<TOTAL-COSTS> 233,684
<OTHER-EXPENSES> 182,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,681
<INCOME-PRETAX> 50,217
<INCOME-TAX> 17,976
<INCOME-CONTINUING> 32,241
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<NET-INCOME> 32,241
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
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