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 1, 2000
Commission File Number 1-7724
SNAP-ON INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-0622040
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10801 Corporate Drive, Pleasant Prairie, Wisconsin 53158-1603
- -------------------------------------------------- ----------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (262) 656-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at April 29, 2000
- -------------------------- -----------------------------
Common stock, $1 par value 58,569,234 shares
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SNAP-ON INCORPORATED
INDEX
Page
----
Part I. Financial Information
Consolidated Statements of Earnings -
Thirteen Weeks Ended
April 1, 2000 and April 3, 1999 3
Consolidated Balance Sheets -
April 1, 2000 and January 1, 2000 4-5
Consolidated Statements of Cash Flows -
Thirteen Weeks Ended
April 1, 2000 and April 3, 1999 6
Notes to Consolidated Unaudited Financial Statements 7-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information 17
2
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PART I. FINANCIAL INFORMATION
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
(Unaudited)
Thirteen Weeks Ended
April 1, April 3,
2000 1999
-------- --------
Net sales $ 544,345 $ 452,585
Cost of goods sold (295,900) (233,684)
Operating expenses (197,234) (182,229)
Net finance income 11,671 20,992
Restructuring and other
non-recurring charges (353) (1,933)
Interest expense (10,325) (4,681)
Other income (expense) - net 1,083 (833)
--------- ---------
Earnings before income taxes 53,287 50,217
Income taxes 19,443 17,976
--------- ---------
Net earnings $ 33,844 $ 32,241
========= =========
Earnings per weighted average
common share - basic $ .58 $ .55
========= =========
Earnings per weighted average
common share - diluted $ .58 $ .55
========= =========
Weighted average common shares
outstanding - basic 58,557 58,569
Effect of dilutive options 176 389
--------- ---------
Weighted average common shares
outstanding - diluted 58,733 58,958
========= =========
Dividends declared per common share $ .23 $ .22
========= =========
The accompanying Notes are an integral part of these statements.
3
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SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
(Unaudited)
April 1, January 1,
2000 2000
----------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 14,897 $ 17,617
Accounts receivable, less allowances 641,348 617,645
Inventories
Finished stock 417,831 418,490
Work in process 47,348 47,869
Raw materials 85,086 81,856
Excess of current cost over LIFO cost (92,520) (93,374)
---------- ----------
Total inventory 457,745 454,841
Prepaid expenses and other assets 111,977 116,238
---------- ----------
Total current assets 1,225,967 1,206,341
Property and equipment
Land 28,417 26,753
Buildings and improvements 203,272 207,959
Machinery and equipment 457,344 454,089
---------- ----------
689,033 688,801
Accumulated depreciation (335,087) (326,203)
---------- ----------
Total property and equipment 353,946 362,598
Deferred income tax benefits 55,685 54,652
Intangibles 453,598 453,293
Other assets 79,767 72,938
---------- ----------
Total assets $2,168,963 $2,149,822
========== ==========
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 1, January 1,
2000 2000
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 127,245 $ 146,422
Notes payable and current maturities
of long-term debt 29,010 22,349
Accrued compensation 46,004 57,540
Dealer deposits 44,566 48,251
Deferred subscription revenue 42,636 42,056
Accrued restructuring reserves 1,267 4,500
Other accrued liabilities 156,118 131,631
---------- ----------
Total current liabilities 446,846 452,749
Long-term debt 622,188 607,476
Deferred income taxes 28,714 26,989
Retiree health care benefits 92,095 91,391
Pension liability 94,477 96,238
Other long-term liabilities 41,423 49,718
---------- ----------
Total liabilities 1,325,743 1,324,561
SHAREHOLDERS' EQUITY
Preferred stock - authorized 15,000,000
shares of $1 par value; none outstanding - -
Common stock - authorized 250,000,000
shares of $1 par value; issued -
66,746,585 shares and 66,729,457 shares 66,747 66,729
Additional paid-in capital 60,182 62,292
Retained earnings 978,139 957,763
Accumulated other comprehensive income (loss) (38,702) (35,814)
Grantor stock trust at fair market value -
6,675,194 and 6,677,450 shares (174,810) (177,373)
Treasury stock at cost - 1,505,339 and
1,505,339 shares (48,336) (48,336)
---------- ----------
Total shareholders' equity 843,220 825,261
---------- ----------
Total liabilities and shareholders' equity $2,168,963 $2,149,822
========== ==========
The accompanying Notes are an integral part of these statements.
5
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SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Thirteen Weeks Ended
April 1, April 3,
2000 1999
--------- ---------
OPERATING ACTIVITIES
Net earnings $ 33,844 $ 32,241
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 13,039 10,240
Amortization 4,436 2,271
Deferred income taxes 2,402 2,577
Loss on sale of assets 6 6
Charges due to restructuring and other
non-recurring charges, net of tax 217 1,135
Changes in operating assets and liabilities:
(Increase) decrease in receivables (26,308) 49,298
(Increase) in inventories (5,877) (9,426)
(Increase) decrease in prepaid and other assets (13,043) 12,137
Increase (decrease) in accounts payable (17,418) 11,077
Increase in accruals and other liabilities 2,911 16,806
--------- ---------
Net cash provided by (used in)
operating activities (5,791) 128,362
INVESTING ACTIVITIES
Capital expenditures (9,562) (8,907)
Acquisitions of businesses (1,114) (47,277)
Disposal of property and equipment 1,542 751
--------- ---------
Net cash used in investing activities (9,134) (55,433)
FINANCING ACTIVITIES
Payment of long-term debt - (335)
Increase in long-term debt 3,203 -
Increase (decrease) in short-term borrowings-net 22,039 (43,368)
Purchase of treasury stock - (14,714)
Proceeds from stock plans 470 1,572
Cash dividends paid (13,468) (12,927)
--------- ---------
Net cash provided by (used in) financing activities 12,244 (69,772)
Effect of exchange rate changes (39) 1,040
--------- ---------
Increase (decrease) in cash and cash equivalents (2,720) 4,197
Cash and cash equivalents at beginning of period 17,617 15,041
--------- ---------
Cash and cash equivalents at end of period $ 14,897 $ 19,238
========= =========
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 1, 2000.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments and adjustments related to restructuring and other
non-recurring charges) necessary to a fair statement of financial
condition and results of operations for the thirteen weeks ended April 1,
2000 have been made. Management also believes that the results of
operations for the thirteen weeks ended April 1, 2000 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. On September 30, 1999, Snap-on Incorporated ("the Corporation") acquired
the Sandvik Saws and Tools business, formerly a wholly owned operating
unit of Sandvik AB. The Sandvik Saws and Tools business now operates as
the Bahco Group AB ("Bahco"). Bahco is a manufacturer and supplier of
professional tool products.
The acquisition is being accounted for as a purchase and the results of
Bahco have been included in the accompanying consolidated financial
statements since the date of the acquisition. A preliminary goodwill
allocation in accordance with the criteria established under Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations" has been
performed. The cost of the acquisition has been allocated on the basis of
the fair market value of the assets acquired and the liabilities assumed.
This preliminary allocation results in goodwill of $215 million being
recorded. The purchase price allocation will be finalized during 2000 upon
completion of asset valuations and any post-closing purchase price
adjustments.
The following unaudited pro forma summary gives effect to the acquisition
of Bahco as if the acquisition had occurred on January 1, 1998, after
giving effect to certain adjustments for depreciation, amortization,
interest expense and income taxes associated with the purchase method of
accounting as performed at the time of the acquisition. The unaudited pro
forma summary is based on historical financial data and on assumptions and
adjustments that may be inherently subject to significant uncertainty and
contingencies. It can be expected that some or all of the assumptions on
which the following unaudited pro forma summary is based will prove to be
inaccurate. As a result, the unaudited pro forma summary does not purport
to represent what the Corporation's results of operations would have been
if the acquisition of Bahco had occurred on January 1, 1998, and is not
intended to project the Company's results of operations for any future
period. The final purchase price allocation, when completed in 2000, will
result in changes to the amount of recorded assets and goodwill included
in the pro forma amounts.
7
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
(Amounts in thousands Thirteen Weeks Ended
except per share data) April 3, 1999
--------------------------------- --------------------
Net sales:
As reported $ 452,585
Pro forma (unaudited) 532,270
Net earnings:
As reported $ 32,241
Pro forma (unaudited) 33,352
Earnings per share - basic:
As reported $ .55
Pro forma (unaudited) .57
Earnings per share - diluted:
As reported $ .55
Pro forma (unaudited) .57
3. Income tax paid for the thirteen weeks ended April 1, 2000 and April 3,
1999 was $1.6 million and $1.0 million. Interest paid for the thirteen
weeks ended April 1, 2000 and April 3, 1999 was $8.7 million and $6.3
million.
4. In the third quarter of 1998, the Corporation's board of directors
approved Project Simplify, a broad program of internal rationalizations,
consolidations and reorganizations to make the Corporation's business
operations simpler and more effective. Project Simplify was essentially
completed and fully provided for at 1999 year end. The initiative's
savings goal, which was achieved, was to reduce costs by approximately $60
million, with one-half of the savings realized in 1999.
The Corporation achieved its original targets of closing 60 facilities,
eliminating 1,100 positions and discontinuing more than 12,000 stock
keeping units ("SKUs") of inventory, along with the consolidation of
certain business units. Total charges for Project Simplify, which were
composed of restructuring charges and other non-recurring charges,
amounted to $187.4 million. This amount consists of $67.1 million of
restructuring charges and $120.3 million of other non-recurring charges.
As of January 1, 2000, the Corporation had a remaining restructuring
reserve of $4.5 million for severance and other exit costs including
non-cancelable lease agreements on facilities to be closed relating to
Project Simplify. Severance costs provided for worldwide salaried and
hourly employees relate to facility closures, elimination of staffing
redundancies and operational streamlining. During the first quarter of
2000, $3.2 million in cash payments relating to severance and other exit
costs were made leaving a balance of $1.3 million. The remaining balance
will be spent during the second quarter of 2000.
8
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
In the first quarter of 2000, the Corporation recorded an incremental $0.3
million in pre-tax non-recurring charges relating to relocation costs
compared to $1.9 million in the first quarter of 1999 comprised of
employee incentives ($.2 million), relocation costs ($.5 million) and
professional services ($1.2 million).
5. 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.
6. In June 1999, the Financial Accounting Standards Board ("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. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. The Corporation is currently evaluating the impact of
this pronouncement.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in
Financial Statements", which provides guidance on applying generally
accepted accounting principles for recognizing revenue. In March 2000, the
SEC issued SAB 101A which defers the effective date to the second quarter
of 2000 for companies with fiscal year ends between December 16, 1999 and
March 15, 2000. The Corporation is currently evaluating the impact, if
any, of adopting this pronouncement.
7. Total comprehensive income, consisting of net earnings and foreign
currency translation adjustments, for the thirteen week periods ended
April 1, 2000 and April 3, 1999, was as follows:
April 1, April 3,
(Amounts in thousands) 2000 1999
--------- ---------
Net earnings $ 33,844 $ 32,241
Foreign currency translation (2,888) (6,706)
--------- ---------
Total comprehensive income $ 30,956 $ 25,535
========= =========
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.
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/or losses realized upon settlement of these agreements
are deferred and
9
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SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
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.
9. In April 1996, the Corporation filed a complaint against SPX Corporation
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. 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 other 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.
10. The Corporation created a Grantor Stock Trust ("GST") in 1998 that was
subsequently amended. In connection 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 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 terms set forth in
the GST Agreement as amended. 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.
11. 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 two reportable segments: Global Transportation and Global Operations.
The Global Transportation segment consists of the Corporation's business
operations serving the dealer van channel worldwide. The Global Operations
segment consists of the business operations serving the direct sales and
distributor channels worldwide. These two segments derive revenues
primarily from the sale of tools and equipment.
10
<PAGE>
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (continued)
The Corporation evaluates the performance of its operating segments based
on segment net sales and earnings. The Corporation accounts for
intersegment sales and transfers based primarily on standard costs
established between the segments. The Corporation allocates shared service
expenses to those segments that utilize the services based on their
percentage of revenues from external sources. Restructuring and other
non-recurring charges are not allocated to the reportable segments.
Financial data by segment for the
Thirteen weeks ended: April 1, April 3,
(Amounts in thousands) 2000 1999
-------- --------
Net sales from external customers:
Global Transportation $ 264,273 $ 257,494
Global Operations 280,072 195,091
---------- ----------
Total from reportable segments $ 544,345 $ 452,585
========== ==========
Intersegment sales:
Global Transportation $ 6 $ 5
Global Operations 90,710 109,801
---------- ----------
Total from reportable segments 90,716 109,806
Elimination of intersegment sales (90,716) (109,806)
---------- ----------
Total consolidated intersegment sales $ - $ -
========== ==========
Earnings:
Global Transportation $ 32,762 $ 24,895
Global Operations 18,449 11,777
---------- ----------
Total from reportable segments 51,211 36,672
Net finance income 11,671 20,992
Restructuring and other
non-recurring charges (353) (1,933)
Interest expense (10,325) (4,681)
Other income (expense) - net 1,083 (833)
---------- ----------
Total consolidated earnings before taxes $ 53,287 $ 50,217
========== ==========
Financial data by segment as of: April 1, January 1,
(Amounts in thousands) 2000 2000
-------- ----------
Total assets:
Global Transportation $ 790,915 $ 789,201
Global Operations 1,308,348 1,308,365
---------- ----------
Total from reportable segments 2,099,263 2,097,566
Financial Services 103,670 97,267
Elimination of intersegment receivables (33,970) (45,011)
---------- ----------
Total consolidated assets $2,168,963 $2,149,822
========== ==========
11
<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 2000 net
sales, net earnings and earnings per share. First quarter 2000 net sales
increased 20.3% to $544.3 million, compared with $452.6 million in the first
quarter of 1999. The increase in sales was driven by solid gains in dealer sales
and the contribution from Bahco Group AB (formerly Sandvik Saws and Tools)
acquired on Sept. 30, 1999. Excluding a 17% contribution from Bahco and a
negative 2% impact from currency translations, organic growth was 5% in the
quarter. Continued strength in dealer sales in North America (up 6% excluding
the sales of emissions-testing equipment), improving dealer sales in
Japan/Asia-Pacific and Europe, and incremental sales to new-car dealerships
under management facilitation agreements were partially offset by lower
Industrial sales to the depressed aerospace sector and difficult comparisons
with emissions-testing equipment sales in 1999.
First quarter 2000 reported net earnings increased to $33.8 million from $32.2
million in 1999. First quarter 2000 diluted earnings per share increased to
$0.58 from $0.55 in 1999.
Net earnings for the first quarter of 1999, excluding non-recurring charges
related to Project Simplify of $1.2 million ($.02 per share after tax), were
$33.4 million. Excluding non-recurring charges in 1999, diluted earnings per
share improved to $0.58 in the first quarter of 2000 from $0.57 in the same
quarter a year ago.
The Corporation's simplification initiative, Project Simplify, which began in
the third quarter of 1998 and was essentially completed and fully provided for
as of January 1, 2000, was a broad program of internal rationalizations,
consolidations and reorganizations intended to make the Corporation's business
operations simpler and more effective. The initiative's savings goal was to
reduce costs by approximately $60 million, with one-half of the savings realized
in 1999. During the first quarter of 2000, there was an incremental $0.3 million
pre-tax in non-recurring charges compared to $1.9 million pre-tax (or $.02 per
share) in the first quarter of 1999 taken primarily for costs related to
reductions of personnel and facilities consolidation.
Segment Results: Global Transportation sales consisting of the Corporation's
business operations serving the dealer van channel worldwide for the first
quarter of 2000 were $264.3 million, an increase of 2.6% over first quarter 1999
sales of $257.5 million. Global Transportation sales were driven by strong
dealer activity in North America, up 6% in the first quarter of 2000 compared
with the comparable period in 1999, excluding emissions-testing equipment.
Strong dealer sales in North America and Japan were partially offset by
currency-impacted sales declines in Europe. In local currencies, European dealer
sales were up 4%, and Japan and Australia were up 13%. Earnings increased
year-over-year to $32.8 million for the first quarter of 2000 from $24.9 million
in the prior year period, benefiting from the sales growth and the savings
generated from Simplify activities.
Global Operations sales consisting of the Corporation's business operations
serving the direct sales and distributor channels worldwide for the first
quarter of 2000 were $280.1 million, an increase of 43.6% over first quarter
1999 sales of $195.1 million. The increase in Global Operations sales resulted
from incremental sales to new-car dealerships, under management facilitation
agreements with car manufacturers, and the addition of Bahco, partially offset
by a negative impact from European
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
currency translation. Excluding Bahco and the currency translation impact,
Global Operations sales were up 9%. Earnings grew year-over-year to $18.4
million for the first quarter of 2000 from $11.8 million in the prior year
period, benefiting from organic growth, the addition of Bahco, and improvement
in operating profitability in Europe, partially offset by a decline in the
Industrial sales business.
Gross margins were 45.6% for the first quarter of 2000 compared to 48.4% in the
comparable prior year period. During the first quarter, the continued benefits
of Project Simplify activities, particularly in Europe, and improved
productivity were more than offset by a business mix shift. The consolidation of
Bahco caused a 170 basis point negative shift in gross margin. This is primarily
because Bahco sells its products through distributors. As a consequence, Bahco's
gross margin and operating expense as a percent of sales are substantially lower
than the Corporation's previous business mix. The incremental growth of the OEM
business (sales to new-car dealerships under facilitation agreements for
corporate-approved purchasing of equipment and other items, such as the Ford
Rotunda program) reduced the gross margin by a further 180 basis points. The
gross margin on the core business improved 70 basis points due to the savings
being delivered by Project Simplify and other productivity enhancing actions.
Operating expense as a percentage of sales declined 410 basis points in the
quarter reflecting the incremental savings of Project Simplify actions, and the
lower operating expense ratio due to the addition of Bahco and the growth in the
OEM business. The addition of Bahco lowered the ratio by 150 basis points, and
the incremental growth in the OEM business lowered it another 140 basis points.
The additional 120 basis point improvement results from the favorable operating
leverage and savings from Project Simplify initiatives.
Net finance income in the first quarter of 2000 was $11.7 million, a decline as
expected, from $21.0 million in 1999. The decline was the result of the
establishment of the financial services joint venture with Newcourt Financial
USA Inc. during the first quarter of 1999 to leverage the infrastructure and new
product development capabilities of a strong financial products partner and
enhance economic profit. As the Corporation made its transition to an
"origination fee" business model from what had essentially been an
"interest-rate-spread" business, the domestic credit receivables portfolio was
sold and generated incremental gains. During the first quarter 2000, origination
of extended credit receivables grew at a high single-digit rate. Originations
also benefited from the addition of new financing products.
Interest expense for the first quarter of 2000 was $10.3 million, up from the
$4.7 million in the first quarter of 1999. The increase was due to the
additional debt associated with the Bahco acquisition for $380 million, which
closed September 30, 1999.
Other income (expense)-net for the first quarter of 2000 was $1.1 million. This
line item includes the impact of all non-operating items, such as interest
income, adjustment for minority interests, disposal of fixed assets, foreign
exchange transaction gains and losses, and other non-significant miscellaneous
items.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The effective tax rate on operations was 36.5% in the first quarter of 2000, and
36.0% in the comparable period of 1999, with the increase in 2000 due to the
additional goodwill amortization associated with the Bahco acquisition.
FINANCIAL CONDITION
Liquidity: Cash and cash equivalents were $14.9 million at the end of the first
quarter from $17.6 million at the end of 1999. Working capital increased to
$779.1 million at first quarter end, from $753.6 million at the end of 1999.
The Corporation has on file a shelf registration that allows the Corporation to
issue from time to time up to $300.0 million of unsecured indebtedness. Of this
amount, $100.0 million aggregate principal amount of its notes has been issued
to the public. The notes require payment of interest on a semiannual basis at a
rate of 6.625% and mature in their entirety on October 1, 2005.
The Corporation believes it has sufficient sources of liquidity to support
working capital requirements, finance capital expenditures and pay dividends.
Accounts receivable less allowances: Accounts receivable less allowances
increased 3.8% to $641.3 million at the end of the first quarter compared with
$617.6 million at the end of 1999, primarily due to sales growth at several
business units particularly Bahco and U.S. Transportation, and an increase in
dealer finance receivables, partially offset by the pay-down of receivables
relating to equipment solutions and U.S. Industrial businesses.
Inventories: Inventories were essentially flat with inventories at $457.7
million in the first quarter of 2000 compared to $454.8 million at year-end.
Liabilities: Total short-term and long-term debt was $651.2 million at the end
of the first quarter, compared with $629.8 million at the end of 1999.
Average shares outstanding: Average shares outstanding for basic EPS in the
first quarter of 2000 and in last year's first quarter was 58.6 million. Average
shares outstanding for diluted EPS for the first quarter of 2000 were 58.7
million shares versus 59.0 million in the same quarter of 1999.
Share repurchase: Since 1995, the Corporation has undertaken stock repurchases
from time to time to prevent dilution created by shares issued for employee and
dealer stock purchase plans, stock options and other corporate purposes, as well
as to repurchase shares when market conditions are favorable. At its January
1999 meeting, the board of directors authorized the repurchase of up to $50.0
million of the Corporation's common stock. This action followed the board's
authorization in 1998 to repurchase up to $100.0 million of common stock and its
authorization in 1997 for up to $100.0 million of common stock. At the end of
1999, all of the 1999 authorization and substantially all of the 1998
authorization remained available. The Corporation repurchased 492,800 shares of
its common stock in 1999, 2,279,400 shares in 1998 and 986,333 shares in 1997.
Since 1995, the Corporation has repurchased 8,570,083 shares.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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 8 for a discussion of the
Corporation's accounting policies for the use of derivative instruments.
Year 2000 Compliance: The Corporation has not experienced any significant
century date-related issues. Based on information currently known to it, the
Corporation believes that all critical areas of its business are Year 2000
compliant. The Corporation's Year 2000 efforts focused on ensuring that its
information systems, embedded systems, third-party systems and products would
achieve a Year 2000 date conversion with no disruption to the Corporation's
business operations and that contingency plans were developed to address most
likely worst case scenarios. Information systems, critical third-party suppliers
and date-related issues, if any, will continue to be monitored and contingency
plans will remain in place.
The Corporation does not anticipate any significant expenditure for these or
other Year 2000 compliance activities in 2000. If a situation attributed to Year
2000 issues occurs, which the Corporation believes is unlikely, the funding for
remediation will be provided by cash flows from operations.
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.
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 continue to achieve higher productivity and attain
further cost reductions; the Corporation's ability to retain and attract
dealers, to integrate Bahco successfully, to realize benefits in growth and
efficiencies from e-business investments and to withstand external negative
factors including changes in trade, monetary and fiscal policies, laws and
regulations, or other activities of governments or their agencies; and the
absence of significant changes in the current competitive environment,
inflation, currency
15
<PAGE>
fluctuations or the material worsening of economic and political situations
around the world. These factors may not constitute all factors that could cause
actual results to differ materially from those discussed in any forward-looking
statement. 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: Quantitative and Qualitative Disclosures About Market Risk
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 in various currencies and interest rates
(variance/co-variance technique). These interrelationships were determined by
observing interest rate and foreign currency market changes over the preceding
quarter.
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.
The estimated maximum potential one-day loss in fair value, calculated using the
VAR model, at April 1, 2000, was $0.4 million on interest rate-sensitive
financial instruments and $2.1 million on foreign currency-sensitive financial
instruments.
The VAR model is a risk management tool and does not purport to represent actual
losses in fair value that will be incurred by the Corporation, nor does it
consider the potential effect of favorable changes in market factors.
16
<PAGE>
PART II. OTHER INFORMATION
Item 6: Exhibits and reports on Form 8-K
Item 6(a): Exhibits
Exhibit 27 Financial Data Schedule
Exhibit 99 Acquisition Schedule
Item 6(b): Reports on Form 8-K Filed During the Reporting Period
Date Filed Date of Report Item
---------- -------------- ----
During the first quarter of 2000, the Corporation reported on Form
8-K the following:
January 20, 2000 Sept. 30, 1999 Item 7. The Corporation filed
information related to the Bahco
Group AB acquisition.
Subsequent to the first quarter of 2000, the Corporation reported on
Form 8-K the following:
April 4, 2000 March 17, 2000 Item 5. The Corporation filed
a report relating to amendments
to the Corporation's Benefit
Trust Agreement relating to the
grantor stock ownership program.
17
<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 15, 2000 /s/ R. A. Cornog
------------- -------------------------------------------
R. A. CORNOG
(Chairman, President and
Chief Executive Officer)
Date: May 15, 2000 /s/ N. T. Smith
------------ -------------------------------------------
N. T. SMITH
(Principal Accounting Officer
and Controller)
18
<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 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000091440
<NAME> SNAP-ON INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-START> JAN-02-2000
<PERIOD-END> APR-01-2000
<CASH> 14,897
<SECURITIES> 0
<RECEIVABLES> 669,852
<ALLOWANCES> 28,504
<INVENTORY> 457,745
<CURRENT-ASSETS> 1,225,967
<PP&E> 689,033
<DEPRECIATION> 335,087
<TOTAL-ASSETS> 2,168,963
<CURRENT-LIABILITIES> 446,846
<BONDS> 622,188
0
0
<COMMON> 66,747
<OTHER-SE> 776,473
<TOTAL-LIABILITY-AND-EQUITY> 2,168,963
<SALES> 544,345
<TOTAL-REVENUES> 544,345
<CGS> 295,900
<TOTAL-COSTS> 295,900
<OTHER-EXPENSES> 197,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,325
<INCOME-PRETAX> 53,287
<INCOME-TAX> 19,443
<INCOME-CONTINUING> 33,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,844
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.58
</TABLE>
UNAUDITED PRO FORMA FINANICAL STATEMENT SCHEDULE
OF BAHCO GROUP AB ACQUISITION
On September 30, 1999, the Corporation acquired the Sandvik Saws and Tools
business, formerly a wholly owned operating unit of Sandvik AB. Sandvik Saws and
Tools business now operates as the Bahco Group AB ("Bahco"). Bahco is a
manufacturer and supplier of professional tool products and employs
approximately 2,400 people. Of those, approximately 1,000 employees are in
Sweden. Products are manufactured at 11 plants in Sweden, Germany, Portugal,
France, England, the United States and Argentina.
The acquisition is being accounted for as a purchase and the results of Bahco
have been included in the accompanying consolidated financial statements since
the date of the acquisition. The total purchase price of approximately $380
million includes the purchase of facilities, a number of brand names and
trademarks, and certain other assets and liabilities. The Corporation funded the
acquisition through working capital and an expansion of an existing commercial
paper credit facility.
A preliminary goodwill allocation in accordance with the criteria established
under Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations," has been performed. The cost of the acquisition has been
allocated on the basis of the fair market value of the assets acquired and the
liabilities assumed. This preliminary allocation results in goodwill of $215
million being recorded. The final purchase price allocation will be finalized
during 2000 upon completion of asset valuations and any post-closing purchase
price adjustments.
The preliminary allocation of the purchase price of $380 million, which includes
direct acquisition costs of $9 million, is as follows:
(Amounts in millions)
Fair value of property and equipment $ 98
Fair value of patents and trademarks 25
Other net assets acquired 42
Goodwill 215
-------
Purchase price $ 380
=======
Assigned useful lives are as follows:
Patents 13 years
Trademarks 40 years
Goodwill 40 years
The following unaudited pro forma statement of earnings of the Corporation gives
effect to the acquisition of Bahco as if the acquisition had occurred on January
1, 1998, after giving effect to certain adjustments for depreciation,
amortization, interest expense, and income taxes associated with the purchase
method of accounting as performed at the time of the acquisition.
For pro forma purposes, the Corporation's Unaudited Consolidated Statement of
Earnings for the thirteen weeks ended April 3, 1999, has been combined with the
Unaudited Combined Statement of Revenues and Direct Expenses of the Bahco Group
for the three months ended March 31, 1999, and the effects of pro forma
adjustments as set forth in the notes thereto.
The following unaudited pro forma statement of earnings are based on historical
financial data and on assumptions and adjustments described in the notes
thereto. All such assumptions and adjustments are inherently subject to
significant uncertainty and contingencies. It can be expected that some or all
of the assumptions on which the following unaudited pro forma statements of
earnings is based will prove to be inaccurate. As a result, the unaudited pro
forma statements of earnings do not purport to represent what the Corporation's
results of operations would have been if the acquisition of Bahco had occurred
on January 1, 1998, and is not intended to project the Company's results of
operations for any future period. The final purchase price allocation, when
completed in 2000, will result in changes to the amount of recorded assets and
goodwill included as pro forma amounts.
1
<PAGE>
Unaudited Pro Forma Statement of Earnings
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
Snap-on Bahco Group
Incorporated Unaudited
Unaudited Combined
Consolidated Statement of
Statement Revenues and
Of Earnings Direct Expenses
Thirteen Three-Months
Weeks Ended Ended Pro forma
April 3, 1999 March 31, 1999 Adjustments Pro forma
----------------------------------------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 452,585 $ 79,685 $ - $ 532,270
Cost of goods sold (233,684) (51,456) (615) a (285,755)
Operating expenses (182,229) (20,616) (1,320) b (204,165)
Net finance income 20,992 - - 20,992
Restructuring and other
non-recurring charges (1,933) - - (1,933)
Interest expense (4,681) - (3,913) c (8,594)
Other income (expense) - net (833) 124 - (709)
Earnings (loss) before income taxes 50,217 7,737 (5,848) 52,106
Income tax provision (benefit) 17,976 - 778 d 18,754
Net earnings (loss) $ 32,241 $ 7,737 $(6,626) $ 33,352
Earnings per weighted average
common share - basic $ .55 $ .57
Earnings per weighted average
common share - diluted $ .55 $ .57
Weighted average common shares
outstanding - basic 58,569 58,569
Effect of dilutive options 389 389
Weighted average common shares
outstanding - diluted 58,958 58,958
</TABLE>
2
<PAGE>
The following notes to the pro forma adjustments for the Unaudited Pro forma
Statement of Earnings for the first quarter of 1999 represent the adjustments in
the first quarter of 1999 that would have resulted from the acquisition of the
Bahco Group had the acquisition occurred on January 1, 1998.
(a) To adjust depreciation expense for the preliminary change in the basis to
fair market value of property, plant and equipment.
(b) To adjust depreciation and amortization expense for the preliminary change
in the basis to fair market value of property, plant and equipment and
intangible assets including goodwill.
(c) To record additional interest expense resulting from the debt issued to
acquire the Bahco Group.
(d) To record an income tax benefit(expense) to return to an appropriate
consolidated effective tax rate of 36% for 1999.
