Securities & Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended January 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
- ------------------- -------------------------------------
Common stock, $1 par value New York Stock Exchange
Preferred stock purchase rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant
at February 23, 1999:
$1,909,184,462
Number of shares outstanding of each of the registrant's classes of common stock
at February 23, 1999:
Common stock, $1 par value, 65,591,328 shares
Documents incorporated by reference
Portions of the Corporation's Annual Report to Shareholders for the fiscal year
ended January 2, 1999, are incorporated by reference into Parts I, II and IV of
this report.
Portions of the Corporation's Proxy Statement, dated March 12, 1999, prepared
for the Annual Meeting of Shareholders scheduled for April 23, 1999, are
incorporated by reference into Part III of this report.
<PAGE>
Part IV, Item 14 of the Corporation's Annual Report on Form 10-K for the year
ended January 2, 1999 (the "Report") is amended for purposes of filing a revised
Exhibit 13 to reflect additional narrative discussion regarding foreign exchange
forward contracts and the nature of our restructuring-related costs, as well as
a change in timing of $2.5 million pre-tax of restructuring-related charges from
the third quarter of 1998 to the fourth quarter of 1998. There is no change to
reported earning or earnings per share. Note that other items of the Report
incorporate various portions of Exhibit 13 by reference.
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
Item 14(A): Document List
1. List of Financial Statements
The following consolidated financial statements of Snap-on Incorporated, and the
Auditors' Report thereon, each included in the 1998 Annual Report of the
Corporation as filed under exhibit No. 13 for the year ended January 2, 1999,
are incorporated by reference in Item 8 of this report:
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998.
Consolidated Statements of Earnings for the years ended January 2, 1999, January
3, 1998 and December 28, 1996.
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
years ended January 2, 1999, January 3, 1998 and December 28, 1996.
Consolidated Statements of Cash Flows for the years ended January 2, 1999,
January 3, 1998 and December 28, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following consolidated financial statement schedule of Snap-on Incorporated
is included in Item 14(d) as a separate section of this report.
Schedule II Valuation and Qualifying Accounts and Reserves. Page 18
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are inapplicable and,
therefore, have been omitted, or are included in the Corporation's 1998 Annual
Report in the Notes to Consolidated Financial Statements for the years ended
January 2, 1999, January 3, 1998 and December 28, 1996, which are incorporated
by reference in Item 8 of this report.
3. List of Exhibits
The exhibits filed with or incorporated by reference in this report are as
specified in the exhibit index. Page 16
Item 14(B): Reports on Form 8-K
During the fourth quarter of 1998, the Corporation reported on Form 8-K dated
October 22, 1998 its third quarter 1998 Analyst Bulletin.
Subsequent to year-end, the Corporation reported on Form 8-K dated January 19,
1999 that the Corporation and Newcourt Financial USA Inc. had established a
joint venture known as Snap-on Credit LLC, which will serve as the preferred
provider of financial services to the Corporation's global dealer and customer
network.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
We have audited, in accordance with generally accepted auditing standards, the
financial statements included in Snap-on Incorporated's (the "Corporation")
Annual Report to Shareholders, incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 2, 1999. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed on page 18 is the responsibility of the Corporation's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 2, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 2, 1999 included in the
Corporation's previously filed Registration Statement File Nos. 2-53663,
2-53578, 33-7471, 33-22417, 33-37924, 33-39660, 33-57898, 33-55607, 33-58939,
33-58943, 333-14769, 333-21277, 333-21285 and 333-41359. It should be noted that
we have not audited any financial statements of the Corporation subsequent to
January 2, 1999 or performed any audit procedures subsequent to the date of our
report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 29, 1999
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance of
Balance at Subsidiary Balance at
Beginning at Time of Costs and End of
Description of Year Acquisition Expenses Deductions (1) Year
- ----------- ----------- ----------- ----------- -------------- ----
Allowance for
doubtful accounts
- -----------------
<S> <C> <C> <C> <C> <C>
Year ended
January 2, 1999 $20,644,676 $ 2,072,723 $24,983,781 $18,470,578 $29,230,602
Year ended
January 3, 1998 $16,902,581 $ 2,220,474 $21,039,748 $19,518,127 $20,644,676
Year ended
December 28, 1996 $14,650,458 $ 296,140 $13,611,414 $11,655,431 $16,902,581
(1) This amount represents write-offs of bad debts.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this amendment to report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SNAP-ON INCORPORATED
By: /s/N.T. Smith Date: January 28, 2000
Neil T. Smith
Principal Accounting Officer and
Controller
15
<PAGE>
EXHIBIT INDEX
Item 14(c): Exhibits
(3) (a) Restated Certificate of Incorporation of the Corporation as
amended through April 25, 1997 (incorporated by reference to
Exhibit (3)(a) to the Corporation's Annual Report on Form 10-K for
the fiscal year ended January 2, 1998 (Commission File No.
1-7724))
(b) Bylaws of the Corporation, effective as of January 26, 1996
(incorporated by reference to Exhibit (3)(b) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 30,
1996 (Commission File No. 1-7724))
(4) (a) Rights Agreement between the Corporation and First Chicago Trust
Company of New York, effective as of August 22, 1997 (incorporated
by reference to the Corporation's Form 8-A12B dated October 17,
1997 (Commission File No. 1-7724))
The Corporation and its subsidiaries have no long-term debt agreement for
which the related outstanding debt exceeds 10% of consolidated total
assets as of January 2, 1999. Copies of debt instruments for which the
related debt is less than 10% of consolidated total assets will be
furnished to the Commission upon request.
(10) Material Contracts
(a) Amended and Restated Snap-on Incorporated 1986 Incentive Stock
Program (incorporated by reference to Exhibit (10)(a) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996 (Commission File No. 1-7724))*
(b) Form of Restated Senior Officer Agreement between the Corporation
and each of Robert A. Cornog, Branko M. Beronja, Frederick D. Hay,
Donald S. Huml and Michael F. Montemurro (incorporated by
reference to Exhibit (10)(b) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 (Commission
File No. 1-7724))*
(c) Form of Restated Executive Agreement between the Corporation and
each of Alan T. Biland, Sharon M. Brady, Richard V. Caskey, Dan G.
Craighead, Dale F. Elliott, Nicholas L. Loffredo, Denis J.
Loverine, Susan F. Marrinan and Neil T. Smith (incorporated by
reference to Exhibit (10)(b) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 (Commission
File No. 1-7724))*
(d) Deferred Compensation Waiver and Insurance Benefit Agreement
between the Corporation and Robert A. Cornog dated January 30,
1998.* [X]
(e) Deferred Compensation Waiver and Insurance Benefit Agreement
between the Corporation and Branko M. Beronja dated December 21,
1998* [X]
(f) Form of Indemnification Agreement between the Corporation and each
of the Directors, Frederick D. Hay, Donald S. Huml, Susan F.
Marrinan and Michael F. Montemurro effective October 24, 1997
(incorporated by reference to Exhibit (3)(a) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended January 2,
1998 (Commission File No. 1-7724))*
(g) Amended and Restated Snap-on Incorporated Directors' 1993 Fee Plan
(incorporated by reference to Exhibit (10)(e) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 28,
1996 (Commission File No. 1-7724))*
(h) Snap-on Incorporated Deferred Compensation Plan (incorporated by
reference to Exhibit (10)(f) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996 (Commission
File No. 1-7724))*
(i) Snap-on Incorporated Supplemental Retirement Plan for Officers
(incorporated by reference to Exhibit (10)(b) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 30,
1995 (Commission File No. 1-7724))*
16
<PAGE>
EXHIBIT INDEX (continued)
(j) Benefit Trust Agreement between the Corporation and The Northern
Trust Company, effective as of July 2, 1998 (incorporated by
reference to the Corporation's Form 8-K dated July 2, 1998
(Commission File No. 1-7724))
(12) Computation of Ratio of Earnings to Fixed Charges [X]
(13) The following portions of the Corporation's Annual Report to
Shareholders, which are incorporated by reference in this Form
10-K, are filed as Exhibit 13: Management's Discussion and
Analysis of Operations and Financial Condition, Consolidated
Statements of Earnings, Consolidated Balance Sheets, Consolidated
Statement of Shareholders' Equity and Comprehensive Income,
Consolidated Statement of Cash Flows, Notes to Consolidated
Financial Statements, Quarterly Financial Information, Six-year
Data, Management's Responsibility for Financial Reporting, Report
of Independent Public Accountants and Investor Information.
(21) Subsidiaries of the Corporation [X]
(23) Consent of Independent Public Accountants
(27) Fiscal 1998 Financial Data Schedule [X]
* Denotes management contract or compensatory plan or arrangement
[X] Previously filed
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
All analyses for 1998 include the effects of restructuring and other
non-recurring charges and inventory adjustments ("1998 charges"), unless
otherwise indicated.
The Corporation manufactures, markets and distributes tools, equipment and
related services for automotive and industrial service customers around the
world using multiple brands sold through multiple channels of distribution. In
some instances, it also finances the purchase of those products.
Restructuring and other charges: In the third quarter of 1998, the Corporation
recorded restructuring and other non-recurring charges related to its Project
Simplify initiative, a broad program of internal rationalizations,
consolidations and reorganizations intended to make the Corporation's business
operations simpler and more effective. Of an expected total charge of
approximately $185 million to be recorded through the first quarter of 2000,
$130.6 million in pre-tax charges were taken in the third quarter of 1998 and
$19.3 million were taken in the 1998 fourth quarter. Of the total $149.9 million
in pre-tax charges recorded in 1998 ($107.6 million or $1.82 per share after
taxes), $73.1 million is restructuring charges and $76.8 million represents
other non-recurring charges. The Corporation expects that approximately 50% of
the total charges will be non-cash, with the remaining 50% requiring cash
outflows.
The $73.1 million of restructuring charges includes severance, non-cancelable
lease agreements on facilities to be closed and other exit costs associated with
the simplification initiative in the amount of $23.1 million. The Corporation
has adjusted property, plant and equipment and other assets to net realizable
value through an additional $3.8 million restructuring charge. As part of the
restructuring efforts, the Corporation also has written off impaired goodwill
and other intangible assets of certain discontinued business units and incurred
a charge of $36.5 million. This amount relates to the write-down of remaining
intangible balances recorded at the time those business units were acquired. As
part of the elimination of these business units and their product lines, the
Corporation has recorded a reserve in the amount of $9.7 million to provide
additional warranty support, at no cost, for products already sold. The warranty
charge has been included in Cost of Goods Sold - Discontinued Products, while
all other restructuring charges recorded to date have been included in
Restructuring and Other Non-recurring Charges on the accompanying Consolidated
Statements of Earnings.
The other non-recurring charges of $76.8 million include $50.9 million to
re-value discontinued stock keeping units ("SKUs") of inventory, costs to
conclude certain non-recurring legal matters in the amount of $18.7 million and
other transitional costs in the amount of $7.2 million. Transitional costs,
which are comprised of accelerated depreciation of computer equipment that was
abandoned during the fourth quarter ($2.5 million), employee incentives ($1.0
million), relocation costs ($1.2 million) and professional services ($2.5
million), do not qualify for restructuring accrual treatment and are therefore
expensed when incurred. The reduction of SKUs is an effort to reduce transaction
costs and working capital intensity of the Corporation's product offering and
refocus on high-volume growth products. The non-recurring charge related to the
reduction of SKUs has been included as part of Cost of Goods Sold - Discontinued
Products, while the other non-recurring charges recorded to date have been
included in Restructuring and Other Non-recurring Charges on the accompanying
Consolidated Statements of Earnings. The composition of the restructuring
reserves is presented in Note 14.
Shown in the table below is a breakdown of the restructuring and other
non-recurring charges by segment:
(Amounts in thousands) Restructuring Non-recurring Total
North America Transportation $ 9,661 $13,576 $ 23,237
North America Other 51,810 51,046 102,856
Europe 7,900 4,789 12,689
International 2,836 4,841 7,677
Financial Services 900 2,504 3,404
------- ------- --------
Total $73,107 $76,756 $149,863
======= ======= ========
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. By the end
of 1998, 509 positions were eliminated, including 100 of the 150 field manager
positions identified for elimination. Of those field managers, approximately 50
are converting to franchised dealers. In addition, eight facilities were closed,
the SKU-reduction activities were on schedule and the European operations had
begun their staff reductions and facilities closures.
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.
The decision to restructure was based on the complexity that had developed
within the organization during the decade. In the early 1990s, management
determined that the increased computerization of the systems contained in motor
vehicles could result in broad changes in the approach to servicing and
repairing such vehicles. Over time, the diagnosing of vehicle problems has grown
much more complicated and requires a broader array of tools and equipment than
was necessary in the past. In addition, the continuing growth in the global
vehicle population resulted in opportunities for companies to expand worldwide.
Since 1992, the Corporation has made 21 acquisitions and has grown from
primarily a single-product, single-channel company to an organization serving
multiple customers with multiple capabilities through multiple channels. It is
also operating in more regions of the world.
The complexity created by this growth added costs, slowed decision making, and
diffused responsibility and accountability. The organizational structure
contained too many individual business units with overlapping functional
disciplines. Each had its own product, brand and channel identity.
In order to combine businesses into larger, more integrated units, with
operating responsibility assigned by brands and channels, and to implement a
shared-function format in areas such as engineering, research, manufacturing,
finance and administration, a more sophisticated computer system was required.
The anticipated completion of the implementation of the Corporation's new
enterprise-wide computer system in 1998 enabled the Corporation to begin to
execute its plans to simplify its operations.
[17 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Discussion and Analysis (continued)
FOURTH QUARTER RESULTS: Net earnings in the 1998 fourth quarter were $11.1
million, a decrease of 73.6 % from the same period of 1997, because of the
remaining difficulties related to the process issues connected with
implementation of the Corporation's new computer system, and the 1998 charges.
Reported earnings per share - diluted were $.19. On a pre-tax basis,
restructuring and transition costs related to Project Simplify totaled $9.3
million ($.11 per share after tax) in the quarter. These charges consist of
additional transition costs of $6.7 million ($2.5 million for accelerated
depreciation on abandoned computer equipment; $1.0 million for employee
incentives; $1.2 million for relocation costs and $2.0 million of professional
services), and of additional restructuring charges of $2.6 million ($.6 million
for the write-down of assets of discontinued operations; and $2.0 million of
additional severance.) These additional restructuring charges were for costs
that did not meet the criteria for accrual under generally accepted accounting
principles in the third quarter of 1998. In addition, a portion of the charge
taken in the third quarter for the reduction of $50.9 million of SKU's included
an estimated $10 million ($.10 per share after tax) LIFO benefit which was based
on projected reductions in inventory levels by year-end. These projected
inventory reductions were not achieved, as such the benefit was reversed in the
fourth quarter. 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. Costs of goods sold in the quarter
included a $14.1 million ($.15 per share after tax) reduction in inventory
discussed in the "Cost and Profit Margins" section. Earnings in the fourth
quarter of 1998 included a $3.1 million gain on the sale of a European facility,
gains related to the sale of installment receivables and pension curtailment
benefits related to the Corporation's restructuring initiatives.
Overview: Net sales in 1998 increased 6.0%. Sales from acquisitions and growth
in the North America Transportation segment were primarily responsible for the
increase. The translation of foreign-currency-denominated results into U.S.
dollars negatively affected sales by approximately one percentage point.
Excluding the results of acquisitions completed in 1998, sales declined
approximately 1%. The unanticipated difficulties encountered in the
implementation of the Corporation's new computer system, continued weakness in
the economies in the Asia/Pacific region and difficult comparisons against 1997,
which contained an unusually high level of emissions-testing equipment sales and
was a 53-week year, affected sales. In 1997, net sales rose 12.6%, with
increases recorded in all segments. Sales excluding acquisitions advanced
approximately 7% in 1997.
In 1998, the Corporation reported a net loss of $4.8 million, following an
increase in earnings of 14.4% in 1997. The reported loss per share in 1998 was
$.08, after 1997's earnings per share grew 14.4% and 14.6% for basic and diluted
earnings, respectively. The loss in 1998 was related to several factors:
restructuring and other non-recurring charges of $149.9 million ($1.82 per share
after tax) in connection with the implementation of the Corporation's Project
Simplify initiative; costs and lost sales associated with the unanticipated
difficulty of aligning internal processes with the Corporation's new
enterprise-wide computer system; and costs related to the organizational
complexity that developed as the Corporation made numerous acquisitions over the
last six years. Excluding the 1998 charges, earnings per share - basic and
earnings per share - diluted were $1.89 and $1.87, respectively. The increase in
net earnings and earnings per share in 1997 was the result of higher sales and
improvement in operating expenses as a percent of sales.
(Amounts in thousands,
except per share data) 1998 1997 1996
Sales $1,772,637 $1,672,215 $1,485,279
Net earnings (loss) (4,779) 150,366 131,451
Earnings (loss) per common
share - basic $ (.08) $ 2.47 $ 2.16
Earnings (loss) per common
share - diluted $ (.08) $ 2.44 $ 2.13
The 1998 and 1996 years contained 52 weeks; 1997 was a 53-week year.
Cost and profit margins: The gross profit margin was 43.1% in 1998 and 50.5% in
both 1997 and 1996. The decline in 1998's gross margin was due to a change in
business mix resulting from several acquisitions, and a less favorable sales mix
and additional costs related to the difficulties in shipping hand tools as the
Corporation resolved process issues in connection with the implementation of its
new computer system. In the fourth quarter of 1998, cost of goods sold also
included a $14.1 million reduction in inventory related to the conversion to the
new enterprise- wide computer system. The new system provides for much improved
visibility at an item level on field inventory.
Total operating expenses as a percent of net sales increased to 39.8% in 1998
after successive decreases in 1997 and 1996. The 1997 and 1996 percentages were
38.9% and 40.0%, respectively. The 1998 performance was affected by the process
difficulties encountered in implementing the Corporation's new computer system.
Costs for additional labor and freight, and lower productivity were primarily
responsible for the results. In 1997 and 1996, improvements in processes and in
productivity, and a change in business mix contributed to the declines in both
years. Total operating expenses in 1998 were $55.6 million higher than in 1997,
compared with increases of $55.7 million in 1997 and $56.5 million in 1996.
Acquisitions contributed to the increases in all years.
[Three bar graphs follow this text. The first is titled "Research &
Development." It shows the dollars spent on research and development by the
Corporation (in millions) in each of fiscal years 1994 through 1998, as follows:
94 - $31
95 - $34
96 - $42
97 - $47
98 - $49
The second graph is titled "Operating Expenses as a Percent of Net Sales." It
shows the Corporation's operating expenses as a percent of its net sales for
each of fiscal years 1994 through 1998, as follows:
94 - 42.7%
95 - 41.6%
96 - 40.0%
97 - 38.9%
98 - 39.8%
The third graph is titled "Margin Analysis." It shows, side-by-side in a
horizontal presentation for each fiscal year, the Corporation's net sales (in
millions of dollars), gross profit margin and operating income margin for each
of fiscal years 1994 through 1998, as follows:
NET SALES GROSS PROFIT MARGIN OPERATING INCOME MARGIN
94 - $ 1,194 51.0% 13.3%
95 - $ 1,292 51.3% 14.6%
96 - $ 1,485 50.5% 14.8%
97 - $ 1,672 50.5% 15.9%
98 - $ 1,773 43.1% 1.9%]
[18 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The operating income margin declined to 1.9% in 1998 because of the lower gross
margin and the higher operating expense margin. In 1997, the operating margin
increased to 15.9% from 14.8% in 1996 because of a reduction in operating
expenses as a percent of sales.
Segment Results: The Corporation has adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The following review reflects the new segment structure
and does not include the allocation by reportable segment of the restructuring
and other non-recurring charges. See Note 13 for additional information,
including a description of the segments.
(Amounts in thousands) 1998 1997 1996
Sales
North America Transportation $ 845,828 $ 836,032 $ 786,609
North America Other 457,255 468,692 341,194
Europe 393,460 279,684 271,957
International 76,094 87,807 85,519
---------- ---------- ----------
Total $1,772,637 $1,672,215 $1,485,279
========== ========== ==========
Operating income
North America Transportation $ 34,176 $ 70,205 $ 48,592
North America Other 70,909 98,143 84,764
Europe 3,205 16,539 11,800
International 9,775 8,759 11,101
Financial Services 65,933 71,891 64,269
Restructuring and other
non-recurring charges (149,863) - -
---------- ---------- ----------
Operating income $ 34,135 $ 265,537 $ 220,526
========== ========== ==========
Net sales in North America Transportation in 1998 increased 1.2%. New products,
including "soft-grip" screwdrivers, battery testers and software upgrades, and
continued strength in the U.S. dealer channel offset difficult comparisons
against 1997, which benefited from above-average sales of emissions-testing
equipment through the channel and from an additional week in the reporting year.
The difficulty in shipping tools during 1998 because of process issues related
to the Corporation's computer conversion constrained sales growth. Operating
income declined 51.3% because of the increased costs incurred to operate during
the computer conversion. These costs included additional labor and freight, and
lower productivity. In 1997, net sales in North America Transportation rose
6.3%. Several large emissions programs, improved sales productivity in the
dealer organization, the introduction of new products, an additional accounting
week, and price increases all contributed to the 1997 growth. Operating income
increased 44.5% because of growth in sales, and improvements in expense control
and productivity.
Net sales in North America Other declined 2.4% in 1998, as the Corporation
experienced difficult comparisons against 1997, when a significant amount of
emissions-testing equipment was sold to distributors and national accounts. In
addition, sales were constrained by difficulties in shipping tools to industrial
customers because of the computer conversion. Acquisitions and new products,
such as a line of palm sanders, additional cordless power tools and new shop
management software, offset part of the decline. Operating income decreased
27.7% in 1998. Lower total sales and the higher expense structure and increased
operating complexity resulting from acquisitions in this segment affected
profitability. In 1997, North America Other net sales increased 37.4%, with high
levels of emissions-testing equipment sales; new products; growth in the
Equipment Solutions equipment facilitation and distribution business;
acquisitions; and an additional accounting week all contributing to the growth.
Operating income in 1997 increased 15.8% on higher sales. Operating income
growth was lower than sales growth because of changes in the product and
business mix. Sales excluding acquisitions in 1998 were approximately 4% lower,
following an increase of approximately 19% in 1997.
Net sales in Europe rose 40.7% in 1998. Acquisitions were responsible for the
increase. Higher tool sales were offset by lower equipment sales because of
significantly reduced exports to the Asia/Pacific and Eastern Europe regions.
The translation of foreign currencies into U.S. dollars negatively affected
sales. Operating income declined 80.6%, as lower than expected performance by
several acquisitions, changes in the business and product mix, and the
short-term effects of the Corporation's restructuring activities negatively
affected results. In 1997, Europe net sales rose 2.8%. Sales of both tools and
equipment increased, while currency translation rates and a sluggish economy in
many of the countries in the segment slowed the growth rate. Acquisitions also
contributed to sales in 1997. Operating income in 1997 increased 40.2% because
of strong growth in tools and the impact of expense reduction activities.
Excluding acquisitions and the translation effects of foreign currency, 1998
sales rose approximately 1%, while 1997 sales increased approximately 4%.
Net sales in the International segment decreased 13.3% in 1998, following an
increase of 2.7% in 1997. Sales in 1998 were negatively affected by the
translation of foreign currencies into the U.S. dollar. The continuing weakness
in the economies of the Asia/Pacific region slowed tools sales growth, while
equipment sales declined. Operating income increased 11.6% because of the
reduced allocation of shared service expenses. Excluding the allocation,
operating income was approximately even with 1997. The 1997 sales advanced
despite difficulties presented by many of the economies in the Asia/Pacific
region. Both tool and equipment sales in the segment rose for the year.
Operating income decreased 21.1% as a less favorable product mix and higher
expenses in the region affected results. Excluding the effects of foreign
currency translation rates, sales decreased approximately 2% in 1998 and
increased approximately 11% in 1997.
The Corporation uses its financing programs to facilitate sales. In 1998, net
finance income (defined as income from the Corporation's financing programs net
of administrative costs, but without any allocation of interest expense)
decreased 8.3% to $65.9 million, from $71.9 million in 1997. Net finance income
in 1997 increased 11.9% from $64.3 million in 1996. The decrease in net finance
income in 1998 was because of the increased securitization of installment
receivables, which is discussed in further detail in the following paragraph.
The higher net finance income in 1997 was the result of increases in extended
credit receivables and benefits from programs to control related costs.
[19 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Discussion and Analysis (continued)
The Corporation seeks to reduce the asset intensity of its balance sheet, which
is the result of its financing activities. During the second quarter of 1998,
the Corporation sold $48.5 million in extended credit receivables. In 1997, the
Corporation sold $25.0 million in each of the first three quarters, and $50.0
million in the fourth quarter, of its extended credit receivables. The effect of
the asset securitizations is a decline in net finance income offset by an
equivalent decline in interest expense. During 1998, the Corporation also sold
an aggregate of $29.4 million of dealer finance receivables in the third and
fourth quarters. In the fourth quarter of 1997, the Corporation sold $73.7
million of net lease receivables. In both years, the proceeds were used to pay
down short-term debt and for working capital and general corporate purposes.
Subsequent to the end of 1998, the Corporation and Newcourt Financial USA Inc.
("Newcourt") formed a new joint venture entity, Snap-on Credit LLC ("the LLC"),
on January 3, 1999. The LLC will be the preferred provider of financial services
to the Corporation's global dealer and customer network. It combines the
operations and commitments of the Corporation's captive finance program with
Newcourt's expertise in providing tailored, flexible financing solutions to
industry leaders. The operations were established initially in the United States
and will be expanded globally later in 1999. The joint venture has an initial
term of five years, with an option for the Corporation to extend it for an
additional five years.
As part of the transition, the Corporation reversed the securitization of its
previously securitized installment receivables and sold them to Newcourt. In
addition, a new $79.2 million of on-balance-sheet installment receivables and
the remaining $17.6 million of related long-term assets were eliminated. The
Corporation received cash proceeds of $141.1 million from these transactions,
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 credit
customer accounts receivable portfolio based on the same pricing formula. As a
result, this gain will be recognized over a two-year period.
Participation in the LLC will enable the Corporation to expand its financial
services product offerings, customer base and geographic reach. The effect of
the transaction on the Corporation's financial statements includes a reduction
in assets on its balance sheet and lower reported finance income, offset by
income from growth in financings, from recognition of the deferred gain on the
sale of receivables and from the application of the cash proceeds, and by a
reduction in credit loss expense. The Corporation expects the transaction, at a
minimum, to be neutral to earnings per share in 1999. On an economic basis, the
Corporation expects its return on net assets and economic profit to be higher
under the new structure.
During the year, the Corporation increased prices by varying degrees in many of
its product groups. Promotional activities negated the effects of the 1998
increases, and reduced the revenue realization in 1997 to approximately 1%.
Other income and expenses: Interest expense for 1998 was $21.3 million, compared
with $17.7 million in 1997 and $12.6 million in 1996. The 1998 and 1997
increases were due to higher average levels of debt outstanding. The decline in
other expense in 1998 is attributable to a $7.5 million gain on the sale of a
European manufacturing facility and lower foreign currency transaction losses.
The increase in other expense in 1997 was primarily because of the deduction of
minority interest income in connection with the Corporation's 50% ownership of
Mitchell Repair Information Company, LLC ("MRIC") and an increase in the loss
from foreign currency transactions.
(Amounts in thousands) 1998 1997 1996
Interest expense $(21,254) $(17,654) $(12,649)
Interest income 1,169 1,163 2,134
Other expense (3,210) (10,370) (1,358)
--------- --------- ---------
Total other expense $(23,295) $(26,861) $(11,873)
========= ========= =========
Income taxes: The Corporation's effective tax rate in 1998, excluding
restructuring and other non-recurring charges, was 36.0%, compared with 37.0% in
1997 and 1996. The decrease in the tax rate was due to the implementation of
several programs that increased the Corporation's tax efficiency. The reported
effective tax rate for 1998 was 144.1%. For additional information about the
Corporation's tax position and activities, see Note 6.
Foreign currency: The Corporation operates in a number of countries and, as a
result, is exposed to changes in 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 7 for a discussion of the Corporation's accounting policies
for the use of derivative instruments.
In 1998, the Corporation adopted SFAS No. 130, "Reporting Comprehensive Income";
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information"; and SFAS No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits." The adoption of these standards had no material impact
on the consolidated financial statements. The Corporation intends to adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," in 2000
and is currently evaluating the impact of this statement.
[Two bar graphs follow this text. The first is titled "Return on Net Assets
Employed Before Interest and Taxes." It shows the percentages of the
Corporation's return on net assets employed before interest and taxes for each
of fiscal years 1994 through 1998, as follows:
94 - 18.7%
95 - 21.1%
96 - 24.4%
97 - 25.1%
98 - 16.5%*
* Excludes 1998 charges.
The second graph is titled "Sales per Employee." It shows the Corporation's
sales per employee (in thousands of dollars) for each of fiscal years 1994
through 1998, as follows:
94 - $129
95 - $137
96 - $142
97 - $149
98 - $153]
<PAGE>
Financial Condition
Overview: At the end of 1998, the ratio of total debt to total capital increased
to 30.8% from 16.4% at year-end 1997. The higher debt ratio in 1998 was the
result of acquisitions, share repurchases and increased working capital
requirements during the year.
Liquidity: The Corporation's working capital in 1998 decreased by $47.4 million
following a decrease of $6.8 million in 1997. The sale of installment
receivables during both 1998 and 1997 more than offset the negative effects of
several other components of working capital, primarily inventories, and of
acquisitions. The ratio of current assets to current liabilities was 2.4 to 1 at
the end of 1998, compared with 2.9 to 1 at the end of 1997. Cash and cash
equivalents were $15.0 million at the end of 1998, a decrease of $10.7 million
from year-end 1997's $25.7 million.
Accounts receivable increased $15.1 million to $554.7 million at the end of
1998. The increase was the result of acquisitions partially offset by the
installment receivables securitization program discussed previously and in Note
4. Exclusive of the asset securitizations effected in 1998, receivables
increased by $14.2 million primarily due to acquisitions. At the end of 1998,
installment receivables represented approximately 29% of the Corporation's total
accounts receivable. The majority of accounts receivable at year-end 1998
included those from dealers, industrial customers and governments. Total
write-offs for bad debts represented 2.1% of average accounts receivable in
1998, an increase from 2.0% in 1997, reflecting a slightly more difficult
environment for credit collections. Trends, however, did improve in the second
half of 1998. The Corporation's ratio remains significantly below that of the
credit industry.
Inventories increased by $2.2 million to $375.4 million at the end of 1998
primarily because of acquisitions. Excluding acquisitions and including 1998
charges, inventories were $19.8 million lower at the close of 1998 than the
$373.2 million reported at year-end 1997.
(Amounts in thousands) 1998 1997
Current assets $1,079,832 $1,021,709
Current liabilities 458,053 352,530
- ---------------------------------------------------------------------
Working capital $ 621,779 $ 669,179
Current ratio 2.4 to 1 2.9 to 1
- ---------------------------------------------------------------------
Short-term debt at the end of 1998 was $93.1 million, an increase over the $24.0
million at the 1997 year end. Current maturities of long-term debt at the end of
1998 and 1997 were $2.2 million and $0.4 million, respectively. In addition, at
year-end 1998, the Corporation had $100.0 million in short-term commercial notes
payable outstanding that were classified as long-term, since it is the
Corporation's intent, and it has the ability, to refinance this debt on a
long-term basis, supported by its $100.0 million revolving credit facility. The
Corporation has on file a $300.0 million 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.
These sources of borrowing, coupled with cash from operations, are sufficient to
support working capital requirements, finance capital expenditures, make
acquisitions, repurchase common stock and pay dividends. The Corporation's high
credit rating over the years has ensured that external funds are available at a
reasonable cost. At the end of 1998, the Corporation's long-term debt was rated
Aa3 and AA- by Moody's Investor Service and Standard & Poor's, respectively. The
Corporation believes the strength of its balance sheet provides the financial
flexibility to respond to both internal growth opportunities and those existing
through acquisition.
[Two bar graphs follow this text. The first is titled "Total Debt to Total
Capital." It shows the percentages of the Corporation's total debt to total
capital for each of fiscal years 1994 through 1998, as follows:
94 - 13.5%
95 - 18.5%
96 - 17.3%
97 - 16.4%
98 - 30.8%
The second graph is titled "Capital Expenditures." It shows the Corporation's
capital expenditures (in millions of dollars) for each of fiscal years 1994
through 1998, as follows:
94 - $42
95 - $32
96 - $52
97 - $55
98 - $47]
Capital expenditures/Depreciation and amortization: Capital expenditures for
1998 were $46.8 million, a decrease of $8.6 million from the $55.4 million
recorded in 1997. Investments for the year included the upgrade and integration
of the Corporation's computer systems, and the normal addition, replacement and
upgrade of manufacturing and distribution facilities and equipment. The
Corporation anticipates that capital expenditures in 1999 will total $40 million
to $45 million.
Depreciation for 1998 was $34.8 million, up $5.1 million from 1997's $29.7
million. The growth was driven by increased capital spending in 1997 and by
acquisitions. Amortization expense in 1998 was $10.2 million, an increase of
$1.5 million from 1997's $8.7 million. Acquisitions accounted for the higher
expense.
(Amounts in thousands) 1998 1997
Capital expenditures $46,779 $55,442
Depreciation 34,801 29,724
Amortization 10,184 8,653
Dividends: At its June 1998 meeting, the board of directors declared a 4.8%
increase in the quarterly dividend on the Corporation's common stock, raising
the annual dividend rate to $.88 per share. The Corporation has paid consecutive
quarterly dividends since 1939.
1998 1997
Cash dividends paid (in thousands) $50,977 $49,888
Cash dividends per common share $ .86 $ .82
Cash dividends as a % of net income N/M 33.2%
N/M = not meaningful.
[21 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Discussion and Anaylsis (continued)
Stock repurchase program: At its June 1998 meeting, the board of directors
authorized the repurchase of up to $100.0 million of the Corporation's common
stock; this action followed the board's authorization for repurchase of $100.0
million of common stock in 1997. At the end of 1998, the 1997 authorization
essentially had been exhausted, and all of the 1998 authorization remained
available. In addition, an authorization by the board of directors is currently
in effect to repurchase common shares of the Corporation in an amount equivalent
to the number of shares issued in connection with the exercise of options,
employee and dealer stock purchase programs, and other similar issuances. The
intent of this authorization is to prevent dilution of shareholders' interests
arising from such issuances. In 1998, the Corporation repurchased 2,279,400
shares of its common stock; 986,333 shares were repurchased in 1997. Since 1995,
the Corporation has repurchased 8,077,283 shares.
Subsequent to the end of the year, at its January 1999 meeting, the board of
directors authorized the repurchase of up to an additional $50.0 million of the
Corporation's common stock.
Other Matters
Acquisitions: During 1998, the Corporation acquired full or partial ownership of
five new business operations and an additional interest in a business for an
aggregate cash purchase price of $79.5 million. Each of the acquisitions
provides the Corporation with a complementary product line, new customer
relationships, access to additional distribution and/or extended geographic
reach. These acquisitions were 100% interests in White Industries ("White"),
Hein-Werner Corporation ("Hein-Werner"), Nationwide International L.L.C.
("Nationwide"), and G.S. S.r.l. ("G.S."); a 55% interest in Cartec GmbH
("Cartec"); and an additional 10% interest in MRIC. Subsequent to the end of the
year, the Corporation announced that it had exercised its call option to
purchase from its venture partner, The Thomson Corporation, a further stake in
MRIC. The purchase will result in Snap-on's owning 99% of MRIC. The transaction
is expected to be modestly accretive in 1999.
White manufactures equipment used to recover, recycle and recharge refrigerant
in vehicle air-conditioning systems. Hein-Werner is a leading manufacturer of
collision repair products in North America and Europe. Nationwide is a
franchisor of vehicle service and repair facilities. G.S. is an Italy-based
manufacturer and distributor of wheel service equipment. Cartec is a German
manufacturer of test and safety lane equipment. MRIC is a major provider of
print and electronic versions of vehicle mechanical and electrical system repair
information and of shop management software to repair and service establishments
throughout North America.
Year 2000 Compliance: The Corporation is engaged in a comprehensive project
involving its products, information systems, embedded systems and third-party
systems. The objective of this project is to identify, develop, implement and
test any modifications that are required so that these systems will achieve a
Year 2000 date conversion with no disruption to the Corporation's business
operations. A committee has been established and given the responsibility for
achieving this objective.
For the Corporation's information systems, the committee has substantially
completed the first two phases of this project, identification and development,
and is proceeding with the implementation and testing phases of the required
modifications. In North America, the implementation of the Baan enterprise-wide
system, which is Year 2000 compliant, has been completed. In Europe, the
Corporation has begun to upgrade or replace all mission critical systems. These
projects are expected to be completed 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 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
compliant by December 1999. The committee also has been working with its
third-party vendors to test and resolve issues regarding 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 80% complete in North America and is 50% complete in
Europe. These assessments are expected to be completed 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.
The Corporation expects to be fully Year 2000 compliant by the end of the fourth
quarter of 1999. The Corporation has implemented, over the last five years, its
enterprise-wide computer system in North America, which is already Year 2000
compliant. The costs for the remaining compliance activities, which are
primarily outside North America, approximate between $5 million and $7 million
through December 1999. Through the end of 1998, the Corporation has spent $1.6
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.
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.
[22 Snap-on Incorporated 1998 Annual Report]
<PAGE>
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 were 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 January 2, 1999, was $833,000 on interest rate sensitive financial
instruments and $626,000 on foreign currency sensitive financial instruments.
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.
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.
Outlook: Subsequent to the end of 1998, the Corporation stated that it believed
that the lower half of the range of published analyst estimates for diluted
earnings per share for 1999, which at that date ranged from $2.60 per share to
$2.95 per share, was more appropriate at that time, as the Corporation takes a
more conservative approach due to the economic uncertainty in some regions of
the world. The Corporation also said it currently anticipated first quarter 1999
earnings to be approximately even with last year's first quarter. The
Corporation's comments about earnings exclude the effects of the remaining
anticipated non-recurring charges related to its Project Simplify initiative.
"Safe Harbor": Statements in this document that are not historical facts,
including statements (i) that include the words "believes," "expects,"
"anticipates," or "estimates" or words of similar importance with reference to
the Corporation or management; (ii) specifically identified as forward-looking;
or (iii) describing the Corporation's or management's future plans, objectives
or goals, are forward-looking statements. The Corporation or its representatives
may also make similar forward-looking statements from time to time orally or in
writing. The Corporation cautions the reader that these statements are subject
to risks, uncertainties and other factors that could cause (and in some cases
have caused) actual results to differ materially from those described in any
such statement. Some of those factors are discussed below, as well as elsewhere
in this document, and in the Corporation's Securities and Exchange Commission
filings. 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's ability to meet its performance objectives and to
achieve results that may be described in any forward-looking statement is
dependent upon both macro-environmental factors and factors related specifically
to the Corporation or the industries in which it participates. These include,
but are not limited to, the following: 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; general
economic weakness; inflation; currency exchange fluctuations or the material
worsening of the economic or political situation in Asia or other parts of the
world; the degree of the Corporation's success in executing its multiple
brands/multiple channels strategy on a global basis and in integrating its
acquisitions; the maintenance of the positive relationship between the
Corporation and its franchisees that currently exists; the timing or speed with
which the Corporation can implement the Project Simplify initiatives and the
rollout of Snap-on Credit LLC without unanticipated complications; the
continuation of good relations with the Corporation's employees; the
Corporation's ability to manufacture, distribute and/or record the sale of
products during any computer systems-related changes or upgrades; and the
ability to grow through successful identification, negotiation and integration
of new acquisitions, joint ventures or strategic alliances.
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.
[23 Snap-on Incorporated 1998 Annual Report]
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
(Amounts in thousands except share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,772,637 $1,672,215 $1,485,279
Cost of goods sold 948,761 828,387 734,495
Cost of goods sold - discontinued products 60,562 - -
- ----------------------------------------------------------------------------------------------
Gross profit 763,314 843,828 750,784
Operating expenses 705,811 650,182 594,527
- ----------------------------------------------------------------------------------------------
Operating profit 57,503 193,646 156,257
Net finance income 65,933 71,891 64,269
Restructuring and other non-recurring charges (89,301) - -
- ----------------------------------------------------------------------------------------------
Operating income 34,135 265,537 220,526
Interest expense (21,254) (17,654) (12,649
Other income (expense) - net (2,041) (9,207) 776
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 10,840 238,676 208,653
Income taxes 15,619 88,310 77,202
- ----------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,779) $ 150,366 $ 131,451
==============================================================================================
Earnings (loss) per weighted average
common share - basic $ (.08) $ 2.47 $ 2.16
- ----------------------------------------------------------------------------------------------
Earnings (loss) per weighted average
common share - diluted $ (.08) $ 2.44 $ 2.13
- ----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 59,219,564 60,845,467 60,967,865
Common stock equivalents - 840,841 624,947
- ----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 59,219,564 61,686,308 61,592,812
- ----------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these statements.
</TABLE>
[24 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Consolidated Balance Sheets
(Amounts in thousands except share data) Jan. 2, 1999 Jan. 3, 1998
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 15,041 $ 25,679
Accounts receivable, less allowance for
doubtful accounts of $29.2 million in 1998
and $20.6 million in 1997 554,703 539,589
Inventories 375,436 373,155
Prepaid expenses and other assets 134,652 83,286
- --------------------------------------------------------------------------------
Total current assets 1,079,832 1,021,709
Property and equipment - net 272,030 265,765
Deferred income tax benefits 60,139 55,699
Intangible and other assets 262,919 298,184
- --------------------------------------------------------------------------------
Total assets $1,674,920 $1,641,357
================================================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 89,442 $ 91,553
Notes payable and current maturities
of long-term debt 93,117 23,951
Accrued compensation 42,105 43,712
Dealer deposits 42,421 43,848
Deferred subscription revenue 34,793 29,265
Accrued restructuring reserves 26,165 -
Other accrued liabilities 130,010 120,201
- --------------------------------------------------------------------------------
Total current liabilities 458,053 352,530
Long-term debt 246,644 151,016
Deferred income taxes 9,587 11,824
Retiree health care benefits 89,124 86,936
Pension and other long-term liabilities 109,245 146,914
- --------------------------------------------------------------------------------
Total liabilities 912,653 749,220
Shareholders' equity
Preferred stock - authorized 15,000,000
shares of $1 par value; none outstanding - -
Common stock - authorized 250,000,000
shares of $1 par value; issued 66,685,169
and 66,472,127 shares 66,685 66,472
Additional paid-in capital 117,384 82,758
Retained earnings 883,207 938,963
Accumulated other comprehensive income (loss) (30,231) (30,385)
Grantor stock trust at fair market value -
6,924,019 and 0 shares (241,042) -
Treasury stock at cost - 1,016,224 and
5,956,313 shares (33,736) (165,671)
- --------------------------------------------------------------------------------
Total shareholders' equity 762,267 892,137
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,674,920 $1,641,357
================================================================================
The accompanying Notes are an integral part of these statements.
[25 Snap-on Incorporated 1998 Annual Report]
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated Total
Additional Other Grantor Share-
Common Paid-in Retained Comprehensive Stock Treasury holders'
(Amounts in thousands Except share data) Stock Capital Earnings Income(Loss) Trust Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 $43,571 $74,250 $753,356 $(10,758) $ - $(109,687) $750,732
Comprehensive income:
Net earnings for 1996 131,451
Foreign currency translation (3,172)
Total comprehensive income 128,279
Cash dividends - $.76 per share (46,323) (46,323)
Three-for-two stock split net
of fractional shares (common
21,969,677, treasury 1,523,600) 21,971 (21,971) -
Issuance of 20,216 shares under
dividend reinvestment plan 20 760 780
Issuance of 410,661 shares under
stock purchase and option plans 410 12,436 12,846
Purchase of 615,750 shares for treasury (19,184) (19,184)
Tax benefit from certain
stock options and other items 1,031 1,031
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1996 65,972 66,506 838,484 (13,930) - (128,871) 828,161
Comprehensive income:
Net earnings for 1997 150,366
Foreign currency translation (16,455)
Total comprehensive income 133,911
Cash dividends - $.82 per share (49,887) (49,887)
Issuance of 19,764 shares under
dividend reinvestment plan 20 804 824
Issuance of 480,446 shares under stock
purchase and option plans 480 10,940 11,420
Purchase of 986,333 shares for treasury (42,324) (42,324)
Reissuance of 216,570 shares from treasury 2,380 5,524 7,904
Tax benefit from certain
stock options and other items 2,128 2,128
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1998 66,472 82,758 938,963 (30,385) - (165,671) 892,137
Comprehensive income:
Net loss for 1998 (4,779)
Foreign currency translation 2,694
Minimum pension liability (2,540)
Total comprehensive income (loss) (4,625)
Cash dividends - $.86 per share (50,977) (50,977)
Issuance of 33,620 shares under
dividend reinvestment plan 34 839 873
Issuance of 179,422 shares under stock
purchase and option plans 179 6,055 6,234
Issuance of 175,981 shares from
grantor stock trust under stock
purchase and option plans 3,774 3,774
Purchase of 2,279,400 shares for treasury (90,357) (90,357)
Reissuance of 119,489 shares from treasury 336 3,683 4,019
Establishment of grantor stock trust
with 7,100,000 shares 36,547 (255,156) 218,609 -
Tax benefit from certain stock
options and other items 1,189 1,189
Adjustment of grantor stock trust
to fair market value (10,340) 10,340 -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 1999 $66,685 $117,384 $883,207 $(30,231) $(241,042) $(33,736) $762,267
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these statements.
</TABLE>
[26 Snap-on Incorporated 1998 Annual Report]
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Amounts in thousands) 1998 1997 1996
Operating activities
<S> <C> <C> <C>
Net earnings (loss) $ (4,779) $150,366 $131,451
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation 34,801 29,724 26,644
Amortization of intangibles 10,184 8,653 5,235
Deferred income tax provision 13,125 11,814 8,398
(Gain) loss on sale of assets (7,312) 114 (876)
Charges due to restructuring and other non-recurring charges 107,628 - -
Changes in operating assets and liabilities,
net of effects of acquisitions:
(Increase) decrease in receivables 11,789 133,171 (29,591)
(Increase) in inventories (28,937) (87,502) (10,543)
(Increase) decrease in prepaid and other assets 35,775 (21,188) (59,524)
Increase (decrease) in accounts payable (13,400) (16,562) 12,069
Increase (decrease) in accruals and other liabilities (83,843) (13,696) 53,137
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 75,031 194,894 136,400
Investing activities
Capital expenditures (46,779) (55,442) (52,333)
Acquisitions of businesses (79,543) (62,947) (38,553)
Disposal of property and equipment 16,680 2,159 3,317
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (109,642) (116,230) (87,569)
Financing activities
Payment of long-term debt (3,543) (7,802) (9,902)
Increase in long-term debt 48,221 - 3,205
Increase in short-term borrowings - net 104,165 10,579 7,888
Purchase of treasury stock - net (86,674) (36,800) (19,184)
Proceeds from stock purchase and option plans 12,405 16,752 14,656
Cash dividends paid (50,977) (49,888) (46,323)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 23,597 (67,159) (49,660)
Effect of exchange rate changes on cash 376 (1,176) (32)
Increase (decrease) in cash and cash equivalents (10,638) 10,329 (861)
Cash and cash equivalents at beginning of year 25,679 15,350 16,211
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15,041 $ 25,679 $ 15,350
- ------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these statements.
</TABLE>
[27 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Accounting Policies
A summary of significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
a. Nature of operations: The Corporation is a leading global developer,
manufacturer and distributor of hand tools, power tools, tool storage products,
shop equipment, under-hood diagnostics equipment, under-car equipment, emissions
and safety equipment, collision repair equipment, vehicle service information
and business management systems and services. The Corporation's customers
include professional automotive technicians, shop owners, franchised service
centers, national accounts, original equipment manufacturers, and industrial
tool and equipment users worldwide.
b. Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Principles of consolidation: The consolidated financial statements include
the accounts of the Corporation and its subsidiaries, all of which are wholly
owned with the exception of Mitchell Repair Information Company, LLC ("MRIC"),
Edge Diagnostic Systems, Texo S.r.l., Cartech GmbH, and Snap-on Tools/PST Africa
(Pty) Ltd. Significant intercompany accounts and transactions have been
eliminated.
d. Accounting period: The Corporation's accounting period ends on the Saturday
nearest December 31. The 1998, 1997 and 1996 years ended on January 2, 1999,
January 3, 1998, and December 28, 1996. The 1998 and 1996 years contained 52
weeks; 1997 was a 53-week year.
e. Cash equivalents: The Corporation considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
f. Inventories: Inventories, consisting of manufactured products and merchandise
for resale, are stated at the lower of cost or market. Manufactured products
include the costs of materials, labor and manufacturing overhead. Inventories
accounted for using the last-in, first-out (LIFO) method approximated 60% and
65% of total inventory as of year-end 1998 and 1997. Remaining inventories are
generally determined using the first-in, first-out (FIFO) cost method. For
detailed inventory information, refer to Note 2.
g. Property and equipment: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over estimated useful lives. Accelerated
depreciation methods are used for income tax purposes. Capitalized software
included in property and equipment reflects costs related to internally
developed or purchased software for internal use that are capitalized and
amortized on a straight-line basis over periods not exceeding seven years. For
detailed property and equipment information, refer to Note 3.
h. Intangibles: During 1998, the Corporation acquired full or partial ownership
of five new business operations and an additional interest in a business for an
aggregate cash purchase price of $79.5 million. During 1997, the Corporation
acquired full or partial ownership of six new business operations with an
aggregate cash purchase price of $62.9 million. Pro forma results of operations
are not presented, as the effect of these acquisitions is not material. Goodwill
arising from business acquisitions is included in Intangible and Other Assets in
the accompanying Consolidated Balance Sheets and is being amortized principally
over 20 years on a straight-line basis. The Corporation continually evaluates
the existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted net cash flows of the related
business unit. Should an impairment be identified, the loss would be measured as
the difference between the current fair value of the asset and the carrying
value. For information on goodwill impairment during 1998, refer to Note 14.
In the first quarter of 1997, the Corporation acquired a 50% interest in The
Thomson Corporation's Mitchell Repair Information business at a purchase price
of $40.2 million. In the first quarter of 1998, the Corporation acquired an
additional 10% interest in MRIC at a purchase price of $10.1 million. Subsequent
to year-end 1998, the Corporation announced its exercise of its call option to
purchase an additional 39% interest in MRIC, which will result in the
Corporation's owning 99% of MRIC. The Corporation is obligated to purchase the
remainder of MRIC within the next three years.
Goodwill, net of accumulated amortization, was $131.5 million and $121.3 million
at the end of 1998 and 1997. Goodwill amortization was $8.5 million, $6.9
million and $4.8 million for 1998, 1997 and 1996. Accumulated amortization of
goodwill was $27.6 million and $25.0 million at the end of 1998 and 1997.
i. Research and engineering: Research and engineering costs are charged to
expense in the year incurred. For 1998, 1997 and 1996, these costs were $48.6
million, $46.5 million and $42.4 million.
j. Income taxes: Deferred income taxes are provided for temporary differences
arising from differences in bases of assets and liabilities for tax and
financial reporting purposes. Deferred income taxes are recorded on temporary
differences at the tax rate expected to be in effect when the temporary
differences reverse. For detailed tax information, refer to Note 6.
[28 Snap-on Incorporated 1998 Annual Report]
<PAGE>
k. Foreign currency translation: The financial statements of the Corporation's
foreign subsidiaries are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." Net assets of certain foreign subsidiaries are translated at
current rates of exchange, and income and expense items are translated at the
average exchange rate for the year. The resulting translation adjustments are
recorded directly into a separate component of shareholders' equity. Certain
other translation adjustments and transaction gains and losses are reported in
net income and were not material in any year.
l. Revenue recognition: The Corporation recognizes revenues at the time that
products are shipped or the time that services are performed. Franchise fee
revenue is recognized as the fees are earned. Revenue from franchise fees was
not material in any year. Subscription revenue is recognized over the life of
the subscription. The total amount of subscription revenue was not material in
any year.
m. Net finance income: Net finance income consists of installment contract
income, dealer start-up loan receivable income, gains on the sale of receivables
and lease income, net of related administrative expenses.
n. Advertising and promotion expense: Production costs of future media
advertising are deferred until the advertising occurs. All other advertising and
promotion costs are generally expensed when incurred.
o. Warranty expense policy: The Corporation provides product warranties for
specific product lines and accrues for estimated future warranty costs in the
period in which the sale was recorded.
p. Accounting standards: In 1998, the Corporation adopted SFAS No. 130,
"Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information"; and SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." The adoption of
these standards had no material impact on the consolidated financial statements.
In 1998, the Financial Accounting Standards Board issued SFAS 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 statement.
q. Reclassified prior-year amounts: Certain prior-year amounts have been
reclassified to conform with current-year presentation.
r. Per share data: Basic earnings per share calculations were computed by
dividing net earnings by the corresponding weighted average number of common
shares outstanding for the period. The dilutive effect of the potential exercise
of outstanding options to purchase common shares is calculated using the
treasury stock method. Diluted earnings per share is the same as presented for
basic earnings per share in periods where the effect is antidilutive (that is,
the calculation results in increased earnings per share or reduces net loss per
share). The dilutive effect of stock options as of January 2, 1999, was 576,000
shares. These shares, however, are not included in the 1998 calculations due to
their antidilutive nature. In June of 1996, the board of directors approved a
three-for-two split of the Corporation's common stock, which was distributed on
September 10, 1996, to shareholders of record on August 20, 1996. All prior-year
per share and weighted average share information has been retroactively
restated.
Note 2 - Inventories
The components of the Corporation's inventory were as follows:
(Amounts in thousands) 1998 1997
Finished stock $ 359,358 $366,324
Work in process 38,357 42,384
Raw materials 74,192 66,008
Excess of current cost over LIFO cost (96,471) (101,561)
- --------------------------------------------------------------------
Total inventory $ 375,436 $373,155
====================================================================
Note 3 - Property and Equipment
The Corporation's property and equipment values, which are carried at cost, were
as follows:
(Amounts in thousands) 1998 1997
Land $ 19,572 $ 23,980
Buildings and improvements 175,385 163,596
Machinery and equipment 388,862 341,875
- --------------------------------------------------------------------
583,819 529,451
Less: accumulated depreciation (311,789) (263,686)
- --------------------------------------------------------------------
Property and equipment - net $ 272,030 $ 265,765
====================================================================
The estimated service lives of property and equipment are principally as
follows:
Buildings and improvements 3 to 50 years
Machinery and equipment 2 to 15 years
Computer software 2 to 7 years
Transportation vehicles 2 to 6 years
Note 4 - Receivables
Accounts receivable include installment receivable amounts that are due beyond
one year from balance sheet dates. These amounts were approximately $16.5
million and $15.6 million at the end of 1998 and 1997. Gross installment
receivables amounted to $176.9 million and $174.0 million at the end of 1998 and
1997. Of these amounts, $16.8 million and $14.6 million represented unearned
finance charges at the end of 1998 and 1997.
[29 Snap-on Incorporated 1998 Annual Report]
<PAGE>
In 1997, the Corporation created CreditCorp SPC, LLC ("CreditCorp"), a
bankruptcy-remote, special-purpose entity, the sole purpose of which is to sell
to various financial institutions dealer loan receivables, extended credit
customer accounts receivable and equipment lease receivables. These receivables
are secured by the underlying inventory, tools or equipment financed. CreditCorp
is a separate corporate entity with its own separate creditors that will be
entitled to be satisfied out of its assets prior to the distribution of any
value to its shareholders.
CreditCorp has an agreement with a third-party financial institution to sell, on
an ongoing basis and with full recourse to the Corporation, up to $70.0 million
of secured dealer loan receivables in the United States and up to Cdn$10.0
million of secured dealer loan receivables in Canada. These receivables are
created through the financing of franchised dealer operations.
During 1998 and 1997, the Corporation sold the U.S. equivalent of $29.4 million
and $31.5 million of these receivables to the third-party financial institution.
During December 1998, the U.S. dealer finance loan receivables outstanding of
$68.3 million were repurchased from the third-party financial institution and,
along with other dealer finance receivables, were sold to Newcourt Financial USA
Inc. ("Newcourt").
CreditCorp has also entered into a facility that provides for the sale, with
limited recourse, of an undivided interest in a pool of secured extended credit
customer accounts receivable to a third-party financial institution. At the end
of 1998 and 1997, $337.0 million and $300.0 million of interest-bearing
installment receivables were sold under this facility on a revolving basis. The
agreement for revolving purchases terminates in January 1999.
In December 1997, CreditCorp sold, with limited recourse, $73.7 million of
equipment lease receivables to a third-party financial institution. At the end
of 1998, $35.8 million of equipment lease receivables remained outstanding.
Generally, the recourse provisions for the above securitizations as they existed
at year end require the Corporation to provide for the deficiency, if any, that
results from the repossession and subsequent sale of collateral in a default
situation. The Corporation maintains credit reserves pursuant to these recourse
provisions that are based on the Corporation's best estimates of probable losses
under such provisions. The reserves were not material as of January 2, 1999, and
January 3, 1998. The Corporation does not receive collateral from any party to
the securitizations, nor does it have any risk of counterparty non-performance.
In December 1996, the Corporation made the determination to sell equipment lease
receivable originations to a third-party financial institution on an ongoing
basis. During 1998 and 1997, the Corporation sold, with no recourse, $54.1
million and $50.9 million of these lease receivables. The Corporation also sold
lease receivables with limited recourse of $27.6 million and $13.0 million in
1998 and 1997.
All transactions are reflected as sales of accounts receivable in the
accompanying Consolidated Balance Sheets and as increases to operating cash
flows in the accompanying Consolidated Statements of Cash Flows. The gains on
these sales are included in net finance income on the accompanying Consolidated
Statements of Earnings.
Subsequent to year end, CreditCorp repurchased and then sold to Newcourt the
entire pool of $337.0 million of interest-bearing installment receivables and
the outstanding $35.8 million of equipment lease receivables. In addition,
subsequent to year end, CreditCorp sold to Newcourt certain equipment lease
receivables and dealer loan receivables that were held by the Corporation at
year end. For more information, see Note 15.
Note 5 - Short-term and Long-term Debt
Notes payable to banks under bank lines of credit totaled $34.9 million and
$23.6 million at the end of 1998 and 1997.
Commercial notes payable totaled $156.0 million and $51.0 million at the end of
1998 and 1997. The first $100.0 million of commercial paper outstanding is
classified as long-term debt, since it is the Corporation's intent and it has
the ability (supported by a $100.0 million long-term revolving credit facility)
to refinance the debt on a long-term basis. Commercial paper outstanding in
excess of $100.0 million is considered short-term debt, as it is supported by a
$75.0 million short-term revolving credit facility.
For both the long-term and short-term revolving credit facilities, the
Corporation must maintain a specific level of consolidated tangible net worth
and meet certain leverage and subsidiary indebtedness ratios. In addition,
certain capital transactions are restricted. At the end of 1998, the Corporation
was in compliance with all covenants of both commitments. The long-term
commitment terminates on September 5, 2002, and the short-term commitment
terminates on March 22, 1999. At the end of 1998 and 1997, there were no
borrowings under either revolving credit commitment.
Maximum short-term debt outstanding at the end of any month was $237.5 million
in 1998 and $177.4 million in 1997. The average short-term debt outstanding was
$165.2 million in 1998 and $117.6 million in 1997. The weighted average interest
rates on short-term debt were 5.6% in 1998 and 5.5% in 1997. The weighted
average interest rates on long-term and short-term debt outstanding at January
2, 1999, and January 3, 1998, were 6.4% and 6.3%.
The Corporation's long-term debt consisted of the following:
(Amounts in thousands) 1998 1997
Senior unsecured indebtedness $100,000 $100,000
Borrowings supported by a
revolving credit commitment 100,000 51,000
Canadian long-term debt 39,210 -
Other long-term debt 9,679 368
- ----------------------------------------------------------------
248,889 151,368
Less: current maturities (2,245) (352)
- ----------------------------------------------------------------
Total long-term debt $246,644 $151,016
================================================================
[30 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The annual maturities of the Corporation's long-term debt due in the next five
years are $2.2 million in 1999, $2.2 million in 2000, $1.5 million in 2001,
$102.1 million in 2002, and $39.5 million in 2003.
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 $300.0 million of unsecured indebtedness. In October 1995,
the Corporation issued $100.0 million of its notes to the public. The notes
require payment of interest on a semiannual basis at a rate of 6.625% and mature
in their entirety on October 1, 2005. The proceeds of this issuance were used to
repay a portion of the Corporation's outstanding commercial paper and for
working capital and general corporate purposes.
At the end of 1998, the Corporation has a Cdn$60.0 million (equivalent of U.S.
$39.2 million) five-year floating rate loan outstanding. The loan requires
payment of interest quarterly based on the Canadian Bankers Acceptance Rate plus
17.5 basis points. The loan matures in its entirety on June 5, 2003.
Interest payments on debt and on other interest-bearing obligations approximated
$20.9 million, $17.5 million and $13.2 million for 1998, 1997 and 1996.
Note 6 - Income Taxes
Earnings before income taxes consisted of the following:
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------
U.S. $(12,128) $210,966 $172,553
Foreign 22,968 27,710 36,100
- ---------------------------------------------------------------------
Total $ 10,840 $238,676 $208,653
=====================================================================
The provision for income taxes consisted of the following:
(Amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $31,516 $60,551 $55,949
Foreign 8,078 7,555 13,803
State 3,701 8,390 8,997
- --------------------------------------------------------------------------------
Total current 43,295 76,496 78,749
Deferred:
Federal (25,067) 8,493 (615)
Foreign 769 1,865 (428)
State (3,378) 1,456 (504)
- --------------------------------------------------------------------------------
Total deferred (27,676) 11,814 (1,547)
- --------------------------------------------------------------------------------
Total income tax provision $15,619 $88,310 $77,202
================================================================================
A reconciliation of the Corporation's effective income tax rate to the statutory
federal tax rate follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate
resulting from:
State income taxes, net of
federal benefit 3.0 2.8 2.4
Foreign sales corporation tax benefit (1.7) (1.2) (1.5)
Restructuring and other
non-recurring charges 108.1 - -
Other (0.3) 0.4 1.1
- --------------------------------------------------------------------------------
Effective tax rate 144.1% 37.0% 37.0%
================================================================================
Temporary differences that give rise to the net deferred tax benefit are as
follows:
(Amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current deferred income tax benefits:
Inventories $21,309 $18,294 $14,599
Accruals and reserves not
currently deductible 24,702 26,820 36,372
Restructuring and other
non-recurring accruals 23,379 - -
Other (2,551) (491) 56
- --------------------------------------------------------------------------------
Total current (included in
prepaid expenses) 66,839 44,623 51,027
Long-term deferred income tax benefits:
Employee benefits 61,870 61,017 57,299
Net operating losses 38,300 23,277 23,585
Depreciation (21,721) (22,363) (13,409)
Restructuring and other
non-recurring accruals 2,638 - -
Other (1,163) (3,398) (6,528)
Valuation allowance (29,372) (14,658) (12,561)
- --------------------------------------------------------------------------------
Total long-term 50,552 43,875 48,386
- --------------------------------------------------------------------------------
Net deferred income
tax benefit $117,391 $ 88,498 $ 99,413
================================================================================
At January 2, 1999, the Corporation had tax net operating loss carryforwards
("NOLs") totaling $103.6 million as follows:
(Amounts in millions) U.S. Foreign Total
Year of expiration:
1999 - 2002 $ - $ 8.7 $ 8.7
2003 - 2006 33.2 5.3 38.5
2007 - 2011 4.9 1.8 6.7
Indefinite - 49.7 49.7
- --------------------------------------------------------------------------------
$ 38.1 $ 65.5 $ 103.6
================================================================================
[31 Snap-on Incorporated 1998 Annual Report]
<PAGE>
In accordance with current accounting standards, a valuation allowance totaling
$29.4 million, $14.7 million and $12.6 million in 1998, 1997 and 1996 has been
established for deferred income tax benefits related to certain subsidiary loss
carryforwards that may not be realized. Included in this valuation allowance is
$6.7 million that relates to the deferred tax assets recorded from acquisitions.
Any tax benefits subsequently recognized for these deferred tax assets will be
allocated to goodwill.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Although realization is not assured,
management believes it is more likely than not that the net deferred tax asset
will be realized. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The undistributed earnings of all subsidiaries were $121.7 million, $117.0
million and $120.3 million at the end of 1998, 1997 and 1996. The Corporation
does not expect that additional income taxes will be incurred on future
distributions of such earnings and, accordingly, no deferred income taxes have
been provided for the distribution of these earnings to the parent company.
The Corporation made income tax payments of $66.2 million, $76.0 million and
$69.7 million in 1998, 1997 and 1996.
Note 7 - Financial Instruments
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.
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.
At January 2, 1999, the Corporation had outstanding foreign exchange forward
contracts totaling $113.9 million comprised of 23.0 million in British Pounds,
10.0 million in Canadian Dollars, 21.7 million in German Marks, 3.5 million in
Spanish Pesetas, 5.9 million in French Francs, 21.5 million in Italian Liras,
12.1 million in Dutch Guilders, 3.7 million in Australian Dollars, 2.7 million
in Singapore Dollars and 9.8 million in Irish Punts. At January 3, 1998, the
Corporation had outstanding foreign exchange forward contracts totaling $79.8
million comprised of 33.6 million in British Pounds, 7.5 million in German
Marks, 4.6 million in Spanish Pesetas, 3.5 million in French Francs, 1.1 million
in Italian Liras, 13.3 million in Dutch Guilders, 7.3 million in Australian
Dollars and 8.9 million in Irish Punts.
Interest Rate Swap Agreements: The Corporation enters into interest rate swap
agreements to manage interest costs and risks associated with changing interest
rates. The differentials paid or received on interest rate agreements are
accrued and recognized as adjustments to interest expense. Gains and losses
realized upon settlement of these agreements are deferred and amortized to
interest expense over a period relevant to the agreement if the underlying
hedged instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
The Corporation has interest rate swap agreements in place to pay fixed interest
rates in exchange for floating interest rate payments. At January 2, 1999, and
January 3, 1998, the notional principal amount outstanding of these agreements
was $167.0 million and $32.1 million.
Credit Concentrations: The Corporation is exposed to credit losses in the event
of non-performance by the counterparties to its interest rate swap and foreign
exchange contracts. The Corporation does not anticipate non-performance by the
counterparties. The Corporation does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of the counterparties and enters into agreements only with financial
institution counterparties with a credit rating of A- or better.
While the Corporation sells primarily to professional technicians and shop
owners, the Corporation's accounts receivable do not represent significant
concentrations of credit risk because of the diversified portfolio of individual
customers and geographic areas.
Fair Value of Financial Instruments: Statement of Financial Accounting Standards
No. 107, "Disclosure about Fair Value of Financial Instruments," requires the
Corporation to disclose the fair value of financial instruments for both on- and
off-balance sheet assets and liabilities for which it is practicable to estimate
that value. The following methods and assumptions were used in estimating the
fair value for financial instruments:
<PAGE>
Installment contracts: A discounted cash flow analysis was performed over
the average life of a contract using a discount rate currently available to
the Corporation adjusted for credit quality, cost and profit factors. As of
January 2, 1999, and January 3, 1998, the fair value was approximately
$168.9 million and $168.2 million versus a book value of $159.6 million and
$159.4 million.
Interest rate swap agreements: The fair value of the agreements was based on
a quote from the financial institution with which the Corporation executed
the transactions. As of January 2, 1999, and January 3, 1998, the cost to
terminate the agreements was $6.1 million and $1.0 million.
All other financial instruments: The carrying amounts approximate fair value
based on quoted market prices or discounted cash flow analysis for cash
equivalents, debt, forward exchange contracts and other financial
instruments.
[32 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Note 8 - Pension Plans
The Corporation has several non-contributory pension plans covering most
employees, including certain employees in foreign countries, as well as a
contributory plan covering certain salaried employees in Canada. Retirement
benefits are generally provided based on employees' years of service and average
earnings or stated amounts for years of service. Normal retirement age is 65,
with provisions for earlier retirement. The Corporation recognizes retirement
plan expenses in accordance with Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions," and contributes amounts to the plans,
with most using the actuarially computed entry age normal cost method, which
includes, in certain defined retirement benefit plans, amortization of past
service cost over a maximum of 30 years.
The status of the Corporation's North American pension plans was as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 405,666 $364,353
Service cost 15,865 14,630
Interest cost 29,653 28,047
Plan amendments 1,159 216
Benefits paid (19,264) (16,570)
Plan participant contributions 461 437
Curtailment gain (2,731) -
Actuarial loss 61,267 14,553
- --------------------------------------------------------------------------
Benefit obligation at end of year 492,076 405,666
- --------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 467,835 395,997
Actual return on plan assets 48,212 84,155
Contributions by employer 6,718 3,816
Contributions by plan participants 461 437
Benefits paid (19,264) (16,570)
- --------------------------------------------------------------------------
Fair value of plan assets at end of year 503,962 467,835
- --------------------------------------------------------------------------
Funded status 11,886 62,169
Unrecognized net assets at year-end (4,757) (6,697)
Unrecognized net gain from
experience different than assumed (76,530) (123,881)
Unrecognized prior service cost 9,272 9,173
- --------------------------------------------------------------------------
Net amount recognized $(60,129) $(59,236)
==========================================================================
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------------
Amounts recognized in the statement
of financial position consist of:
Prepaid benefit cost $ 16,383 $ 10,491
Accrued benefit liability (79,532) (70,280)
Intangible asset 480 553
Additional minimum liability 2,540 -
- --------------------------------------------------------------------------
Net amount recognized $ (60,129) $(59,236)
==========================================================================
The Corporation's net pension expense included the following components:
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Service cost - benefits
earned during year $15,865 $14,630 $13,191
Interest cost on projected benefits 29,653 28,047 25,657
Less: actual return on plan assets (39,551) (76,768) (40,788)
Curtailment gain (2,731) - -
Net amortization and deferral:
Actual return on plan assets in
excess of projected return 5,532 46,641 14,226
Amortization of net
assets at transition (1,268) (1,193) (1,084)
Other 1,096 1,170 865
- -----------------------------------------------------------------------------
Net pension expense $ 8,596 $12,527 $12,067
=============================================================================
Related to the Corporation's restructuring initiatives, the Corporation's
actuaries have estimated future pension curtailment gains to be $10 million. The
Corporation will recognize these gains as the initiatives are completed.
<PAGE>
The assumptions used in determining pension costs and the projected benefit
obligation were:
1998 1997
-------------------------------------------
U.S. Canada U.S. Canada
- ----------------------------------------------------------------------------
Discount rate 7.0% 8.5% 7.5% 8.5%
Expected long-term rate
of return on plan assets 9.0% 8.5% 9.0% 8.5%
Expected rate of
increase in future
compensation levels 5.0% 7.0% 5.0% 7.0%
- ----------------------------------------------------------------------------
Plan assets are stated at market value and primarily consist of corporate
equities and various debt securities.
The pension liability for 1998 consists of a current liability of $4.5 million
and a long-term liability of $55.6 million. The long-term liability represents
pension obligations that are not expected to be funded during the next 12
months.
The Corporation has pension plans in which the projected benefit obligation
exceeds the fair value of plan assets. At the end of 1998, the Corporation had
three such plans with an aggregate projected benefit obligation of $49.4 million
and an aggregate fair value of plan assets of $32.0 million. At the end of 1997,
the Corporation had two such plans with an aggregate projected benefit
obligation of $13.6 million and no plan assets.
Note 9 - Retiree Health Care
The Corporation provides certain health care benefits for most retired U.S.
employees. The majority of the Corporation's U.S. employees become eligible for
those benefits if they reach early retirement age while working for the
Corporation; however, the age and service requirements for eligibility under the
plans have been increased for certain employees hired on and after specified
dates since 1992. Generally, most plans pay stated percentages of
[33 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Notes to Consolidated Financial Statements (continued)
covered expenses after a deductible is met. There are several plan designs, with
more recent retirees being covered under a comprehensive major medical plan. In
determining benefits, the plans take into consideration payments by Medicare and
other coverages.
For employees retiring under the comprehensive major medical plans,
contributions are required, and these plans contain provisions allowing for
benefit and coverage changes. The plans require retirees to contribute either
the full cost of the coverage or amounts estimated to exceed a capped per
retiree annual cost commitment by the Corporation. Most employees hired since
1994 are required to pay the full cost. The Corporation does not fund the
retiree health care plans.
The Corporation recognizes postretirement health care expense in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions."
The components of the expense for postretirement health care benefits are as
follows:
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Net periodic cost
Service cost - benefits attributed
to service during the period $ 1,966 $ 1,945 $ 2,012
Interest cost on accumulated
postretirement benefit obligation 5,494 5,467 5,273
Curtailment gain (403) - -
Amortization of unrecognized
net gain (572) (527) (487)
- ---------------------------------------------------------------------------
Net postretirement health
care expense $ 6,485 $ 6,885 $ 6,798
===========================================================================
The status of the Corporation's U.S. postretirement plans was
as follows:
(Amounts in thousands) 1998 1997
- -----------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 77,780 $ 73,015
Service cost 1,966 1,945
Interest cost 5,494 5,467
Plan participants' contributions 656 543
Benefits paid (4,378) (4,690)
Curtailment gain (403) -
Actuarial loss 2,436 1,500
- -----------------------------------------------------------------------
Benefit obligation at end of year 83,551 77,780
- -----------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year - -
Plan participants' contributions 656 543
Contributions by employer 3,722 4,147
Benefits paid (4,378) ( 4,690)
- -----------------------------------------------------------------------
Fair value of plan assets at end of year - -
- -----------------------------------------------------------------------
Funded status (83,551) (77,780)
Unrecognized actuarial gain (10,032) (13,040)
- -----------------------------------------------------------------------
Postretirement liability $ (93,583) $ (90,820)
=======================================================================
The accumulated postretirement benefit obligation at the end of 1998 consists of
a current liability of $4.5 million and a long-term liability of $89.1 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at the end of 1998 and 7.5% at the
end of 1997.
The actuarial calculation assumes a health care trend rate of 7.5% in 1998 for
benefits paid on pre-Medicare retirees, decreasing gradually to 4.0% in the year
2007 and thereafter. For benefits paid on Medicare-eligible retirees, a health
care trend rate of 7.3% was assumed in 1998, decreasing to 4.0% in the year 2007
and thereafter.
As of January 2, 1999, a one percentage point increase or decrease in the health
care cost trend rate for future years would not materially affect the
accumulated postretirement benefit obligation or the service cost and interest
cost components.
Related to the Corporation's restructuring initiatives, the Corporation's
actuaries have estimated future postretirement curtailment gains to be $2
million. The Corporation will recognize these gains as the initiatives are
completed.
Note 10 - Stock Option and Purchase Plans
On June 28, 1996, the board of directors approved a three-for-two stock split of
the Corporation's common stock. Distribution of shares in connection with the
stock split was made on September 10, 1996. All share-related amounts in these
financial statements reflect that split.
The Corporation has a stock option plan for directors, officers and key
employees, with expiration dates on the options ranging from 1999 to 2008. The
plan provides that options be granted at exercise prices equal to market value
on the date the option is granted.
The Corporation offers shareholders a convenient way to increase their
investment in the Corporation through a no-commission dividend reinvestment and
stock purchase plan. Participating shareholders may invest the cash dividends
from all or a portion of their common stock to buy additional shares. The
program also permits new investors and current shareholders to invest cash for
additional shares that are purchased for them each month. For 1998, 1997 and
1996, shares issued under the dividend reinvestment and stock purchase plan
totaled 33,620, 19,764 and 24,283. At January 2, 1999, 1,945,470 shares were
available for purchase under this plan.
Employees of the Corporation are eligible to participate in an employee stock
ownership plan. The purchase price of the common stock is the lesser of the mean
of the high and low price of the stock on the beginning date (May 15) or ending
date (May 14) of each plan year. The board of directors may terminate this plan
at any time. For 1998, 1997 and 1996, shares issued under the employee stock
ownership plan totaled 81,114, 120,978 and 131,432. At January 2, 1999, shares
totaling 709,491 were reserved for issuance to employees under this plan, and
the Corporation held contributions of approximately $1.5 million for the
purchase of common stock.
[34 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Franchised dealers are eligible to participate in a dealer stock ownership plan.
The purchase price of the common stock is the lesser of the mean of the high and
low price of the stock on the beginning date (May 15) or ending date (May 14) of
each plan year. The board of directors may terminate this plan at any time. For
1998, 1997 and 1996, shares issued under the dealer stock ownership plan totaled
117,825, 133,679 and 117,902. At January 2, 1999, 513,159 shares were reserved
for issuance to franchised dealers under this plan, and the Corporation held
contributions of approximately $1.9 million for the purchase of common stock.
Non-employee directors receive a mandatory minimum of 50% and an elective
maximum of up to 100% of their fees and retainer in shares of the Corporation's
stock. Directors may elect to defer receipt of all or part of these shares. For
1998, 1997 and 1996, shares issued under the Directors' Fee Plan totaled 5,060,
3,008 and 3,140. Additionally, receipt of 3,951, 3,226 and 6,327 shares was
deferred in 1998, 1997 and 1996. At January 2, 1999, 259,085 shares were
reserved for issuance to directors under this plan.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," effective January 1996. As
permitted, the Corporation continued its current method of accounting for
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25.
In accordance with SFAS No. 123, the fair value of each option grant was
estimated as of the date of grant using an option pricing model. The Corporation
used the following weighted average assumptions, under the Black-Scholes option
pricing model, for options granted in 1998, 1997 and 1996, respectively:
expected volatility of 21.2%, 17.9% and 21.6%; risk-free interest rates of 5.5%,
6.4% and 5.7%; dividend yield of 2.5%, 2.8% and 3.1%; and expected option lives
of 5.8 years, 5.8 years and 6.9 years. If the Corporation had elected to
recognize compensation cost for stock-based compensation consistent with the
methodology prescribed by SFAS No. 123, net earnings and net earnings per share
for 1998, 1997 and 1996, would have changed to the following pro forma amounts:
(Amounts in thousands except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------
Net earnings (loss):
As reported $(4,779) $150,366 $131,451
Pro forma (7,896) 148,354 130,595
Earnings (loss) per share - diluted:
As reported $ (.08) $ 2.44 $ 2.13
Pro forma (.13) 2.41 2.12
- -----------------------------------------------------------------------------
Stock option activity was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 2,114,228 $25.37 2,007,423 $21.90 2,498,742 $21.54
Granted 585,950 39.77 480,125 37.13 72,000 30.52
Exercised (280,020) 21.84 (364,802) 21.64 (370,146) 20.78
Canceled (22,022) 34.74 (8,518) 31.24 (193,173) 22.56
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,398,136 $29.21 2,114,228 $25.37 2,007,423 $21.90
===================================================================================================================================
Exercisable at end of period 1,641,296 $24.71 1,663,253 $22.18 1,792,859 $21.88
Available for grant at end of period 2,507,818 3,071,746 3,543,353
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
As calculated using the Black-Scholes option pricing model, the weighted average
fair value of options granted during the years ended January 2, 1999, January 3,
1998, and December 28, 1996, were $8.92, $7.86 and $6.99. The following table
summarizes information about stock options outstanding as of January 2, 1999:
<TABLE>
<CAPTION>
1998 Options Outstanding 1998 Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$19 to $25 1,274,222 4.1 $ 21.48 1,274,222 $ 21.48
$25 to $31 60,789 6.5 29.47 60,789 29.47
$31 to $38 495,675 8.0 36.79 282,285 36.65
$38 to $46 567,450 9.0 39.94 24,000 43.69
- ----------------------------------------------------------------------------------------------------------------------------
Totals 2,398,136 6.2 $ 29.21 1,641,296 $ 24.71
============================================================================================================================
</TABLE>
[35 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Notes to Consolidated Financial Statements (continued)
Note 11 - Capital Stock
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 1998,
the Corporation repurchased 2,279,400 shares of its common stock at an average
price of $39.64. In 1997, the Corporation repurchased 986,333 shares of its
common stock at an average price of $42.91. Subsequent to year-end 1998, the
Corporation's board of directors authorized an additional share repurchase
program of $50.0 million.
The board of directors declared on August 22, 1997, a dividend distribution of
one preferred stock purchase right for each share of the Corporation's
outstanding common stock. The rights are exercisable only if a person or group
acquires 15% or more of the Corporation's common stock ("Acquiring Person") or
publicly announces a tender offer to become an Acquiring Person. Each right may
then be exercised to purchase one one-hundred-and- fiftieth of a share of Series
A Junior Preferred Stock for $190, but if a person or group becomes an Acquiring
Person, then each right entitles the holder (other than an Acquiring Person) to
acquire common stock of the Corporation having a market value equivalent to two
times the current purchase price. If the Corporation is acquired in a merger or
other business combination not approved by the board of directors, then each
holder of a right will be entitled to purchase common stock of the surviving
company having a market value equivalent to two times the current purchase
price. The effect of the rights is to cause ownership dilution to a person or
group attempting to acquire the Corporation without approval of the
Corporation's board of directors. The rights expire on November 3, 2007, and may
be redeemed by the Corporation at a price of $.01 per right under certain
circumstances.
At the end of the second quarter of 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.
Note 12 - Commitments and Contingencies
The Corporation has entered into certain operating lease agreements on
facilities and computer equipment, which extend for varying amounts of time.
The Corporation's lease commitments require future payments as follows:
Year Ending (Amounts in thousands)
- -----------------------------------------------
1999 $24,331
2000 17,304
2001 10,425
2002 5,316
2003 4,252
2004 and thereafter 2,875
- -----------------------------------------------
Rent expenses for worldwide facilities and computer equipment were $22.7
million, $18.6 million and $18.0 million in 1998, 1997 and 1996.
Tejas Testing Technology One, L.C. and Tejas Testing Technology Two, L.C. (the
"Tejas Companies"), former subsidiaries of the Corporation, previously entered
into contracts with the Texas Natural Resources Conservation Commission
("TNRCC"), an agency of the State of Texas, to perform automotive emissions
testing services. The Corporation guaranteed payment (the "Guaranty") of the
Tejas Companies' obligations under a seven-year lease agreement in the amount of
approximately $98.8 million plus an interest factor, pursuant to which the Tejas
Companies leased the facilities necessary to perform the contracts. The Guaranty
was assigned to the lessor's lenders. The Tejas Companies agreed to indemnify
the Corporation for any payments it must make under the Guaranty.
The State of Texas subsequently terminated the emissions program described in
the contracts. The Tejas Companies filed for bankruptcy and commenced litigation
in state and federal court against the TNRCC and related entities. The
Corporation has recorded as assets the net amounts paid under the Guaranty,
which are expected to be received from the State of Texas pursuant to a
settlement agreement approved by the U.S. Bankruptcy Court. 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 January 2,
1999. This amount is included in Intangible
[36 Snap-on Incorporated 1998 Annual Report]
<PAGE>
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
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 infringe- ment 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 Court has set a trial date
of April 5, 1999, for the non-patent claims. No trial date has yet been set for
the 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.
Note 13 - Segments
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 1997 and 1996 has been restated from the prior
years' presentation in order to conform to the 1998 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.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Corporation evaluates the performance of its operating
segments based on operating income. 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 percentages 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.
Neither the Corporation nor any of its segments depends on any single customer,
small group of customers or government for more than 10% of its sales.
<PAGE>
Financial data by segment is as follows:
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Revenues from external customers
North America Transportation $ 845,828 $ 836,032 $ 786,609
North America Other 457,255 468,692 341,194
Europe 393,460 279,684 271,957
International 76,094 87,807 85,519
- -----------------------------------------------------------------------------
Total from reportable segments $1,772,637 $1,672,215 $1,485,279
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Intersegment revenues
North America Transportation $ 11 $ 71 $ 6
North America Other 285,157 317,962 221,625
Europe 8,932 3,539 764
International 37,280 27,937 25,812
- -----------------------------------------------------------------------------
Total from reportable segments 331,380 349,509 248,207
Elimination of
intersegment revenue (331,380) (349,509) (248,207)
- -----------------------------------------------------------------------------
Total consolidated
intersegment revenue $ - $ - $ -
=============================================================================
[37 Snap-on Incorporated 1998 Annual Report]
<PAGE>
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Operating income
North America Transportation $ 34,176 $ 70,205 $ 48,592
North America Other 70,909 98,143 84,764
Europe 3,205 16,539 11,800
International 9,775 8,759 11,101
Financial Services 65,933 71,891 64,269
- -----------------------------------------------------------------------------
Total from reportable segments 183,998 265,537 220,526
Corporate restructuring and
other non-recurring charge (149,863) - -
- -----------------------------------------------------------------------------
Consolidated operating income 34,135 265,537 220,526
Interest expense (21,254) (17,654) (12,649)
Other income (expense) - net (2,041) (9,207) 776
- -----------------------------------------------------------------------------
Total consolidated earnings
before taxes $ 10,840 $ 238,676 $ 208,653
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Total assets
North America Transportation $ 517,334 $ 523,342 $ 436,101
North America Other 565,174 618,813 395,742
Europe 406,257 288,899 213,912
International 37,012 39,012 39,293
Financial Services 231,092 254,903 420,931
- -----------------------------------------------------------------------------
Total from reportable segments 1,756,869 1,724,969 1,505,979
Elimination of
intersegment receivables (145,065) (168,910) (121,112)
Unallocated corporate assets 63,116 85,298 135,921
- -----------------------------------------------------------------------------
Total consolidated net assets $1,674,920 $1,641,357 $1,520,788
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Depreciation and amortization
North America Transportation $ 16,530 $ 11,824 $ 12,864
North America Other 18,161 18,884 11,781
Europe 8,453 5,391 5,609
International 1,314 1,973 1,434
Financial Services 527 305 191
- -----------------------------------------------------------------------------
Total from reportable segments $ 44,985 $ 38,377 $ 31,879
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Capital expenditures
North America Transportation $ 7,155 $ 6,643 $ 5,704
North America Other 14,193 25,202 3,361
Europe 6,398 9,058 11,741
International 1,841 1,929 831
Financial Services 1,229 2,113 3
- -----------------------------------------------------------------------------
Total from reportable segments 30,816 44,945 21,640
Unallocated corporate
capital expenditures 15,963 10,497 30,693
- -----------------------------------------------------------------------------
Total consolidated
capital expenditures $ 46,779 $ 55,442 $ 52,333
=============================================================================
<PAGE>
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Geographic information
Revenues*
United States $1,239,970 $1,221,790 $1,051,587
All other countries 532,667 450,425 433,692
- -----------------------------------------------------------------------------
Total revenues $1,772,637 $1,672,215 $1,485,279
=============================================================================
Long-lived assets
United States $ 445,987 $ 491,514 $ 384,375
All other countries 88,962 72,435 63,676
- -----------------------------------------------------------------------------
Total long-lived assets $534,949 $ 563,949 $ 448,051
=============================================================================
*Revenues are attributed to countries based on the origin of the sale.
Products and services: The Corporation derives revenue from a broad line of
products and complementary services that can be divided into two groups: tools
and equipment. The following table shows the consolidated sales of these product
groups in the last three years:
1998 1997 1996
- ---------------------------------------------------------------------------
Tools $ 918,492 $ 918,238 $ 857,083
Equipment 854,145 753,977 628,196
- ---------------------------------------------------------------------------
Total $1,772,637 $1,672,215 $1,485,279
===========================================================================
Note 14 - Restructuring
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.
During 1998, the Corporation recorded pre-tax charges of $149.9 million. This
amount consists of $73.1 million of restructuring charges and $76.8 million of
other non-recurring charges.
[38 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The composition of the Corporation's $75.6 million restructuring charges is as
follows:
<TABLE>
<CAPTION>
Original Write-down Restructuring
Restructuring Additions of Assets Reserves as of
(Amounts in thousands) Reserves to Reserves to Fair Value Cash Payments January 2, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Expenditures for
<S> <C> <C> <C> <C> <C>
severance and other exit costs $ 21,105 $1,969 $ - $ (6,569) $ 16,505
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 3,478 357 (3,835) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total restructuring reserves $ 70,483 $2,624 $ (40,373) $ (6,569) $ 26,165
==================================================================================================================================
</TABLE>
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 eliminations and streamlining operations. As of
January 2, 1999, 509 employees have separated from the Corporation, and
severance payments of $4.4 million have been made. The Corporation has adjusted
property, plant and equipment and other assets to net realizable value through
an additional $3.8 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.
As part of Project Simplify, the Corporation has recorded other non-recurring
charges in the amount of $76.8 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 $7.2 million.
A portion of the charge taken in the third quarter for the reduction of $50.9
million of SKUs included an estimated $10 million ($.10 per share after tax)
LIFO benefit which was based on projected reductions in inventory levels by
year-end. These projected inventory reductions were not achieved, as such the
benefit was reversed in the fourth quarter. 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 represents attorneys fees and, in some cases,
the likely cost to settle certain disputes which predated the commencement of
Project Simplify. Although management expected to vigorously and successfully
pursue the disputes, it was decided to pursue settlement of them to avoid the
distraction and conserve management's time in order to focus on the operational
issues involved in Project Simplify. Transitional costs, which are comprised of
accelerated depreciation of computer equipment that was abandoned during the
fourth quarter ($2.5 million), employee incentives ($1.0 million), relocation
costs ($1.2 million) and professional services ($2.5 million), do not qualify
for restructuring accrual treatment and are therefore expensed when incurred.
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.
Shown below is a breakdown of charges by segment; these charges have not been
allocated to reportable segments:
(Amounts in thousands) Restructuring Non-recurring Total
- -------------------------------------------------------------------------------
North America Transportation $ 9,661 $13,576 $ 23,237
North America Other 51,810 51,046 102,856
Europe 7,900 4,789 12,689
International 2,836 4,841 7,677
Financial Services 900 2,504 3,404
- -------------------------------------------------------------------------------
Total $73,107 $76,756 $149,863
================================================================================
<PAGE>
Note 15 - Subsequent Events
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"). The entity is 50% owned by each
company. 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.
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 exper-tise to the LLC with a view to increasing originations by the
LLC. Newcourt will be paid a 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 sold to
Newcourt its entire portfolio of U.S. installment accounts receivable, including
existing extended credit 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
credit customer accounts receivable portfolio based on the same pricing formula.
As a result, this gain will be recognized over a two-year period.
[39 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Quarterly Financial Information
Unaudited
(Amounts in thousands except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales
First quarter $ 426,429 $ 375,299 $ 344,364
Second quarter 442,176 409,231 384,554
Third quarter 427,272 391,162 347,202
Fourth quarter 476,760 496,523 409,159
- --------------------------------------------------------------------------------
$1,772,637 $1,672,215 $1,485,279
================================================================================
Gross profit
First quarter $ 211,545 $ 192,967 $ 173,829
Second quarter 204,690 207,667 194,129
Third quarter 151,526 199,294 176,478
Fourth quarter 195,553 243,900 206,348
- --------------------------------------------------------------------------------
$ 763,314 $ 843,828 $ 750,784
================================================================================
Net earnings (loss)
First quarter $ 33,926 $ 33,854 $ 29,650
Second quarter 22,661 38,971 34,528
Third quarter (72,460)** 35,514 30,765
Fourth quarter 11,094*** 42,027 36,508
- --------------------------------------------------------------------------------
$(4,779) $150,366 $131,451
================================================================================
Earnings (loss) per weighted
average common share - basic*
First quarter $ .57 $ .56 $ .49
Second quarter .38 .64 .56
Third quarter (1.23)** .58 .51
Fourth quarter .19*** .69 .60
- --------------------------------------------------------------------------------
$ (.08) $ 2.47 $ 2.16
================================================================================
Earnings (loss) per weighted
average common share - diluted*
First quarter $ .56 $ .55 $ .48
Second quarter .38 .63 .56
Third quarter (1.23)** .58 .50
Fourth quarter .19*** .68 .59
- --------------------------------------------------------------------------------
$ (.08) $ 2.44 $ 2.13
================================================================================
* Adjusted for the three-for-two stock split in 1996. Earnings per share are
calculated on a quarterly basis and, as such, the amounts may not total
calculated full-year earnings (loss) per share.
** Third quarter 1998 results include $130.6 million of pre-tax restructuring
and other non-recurring charges ($95.0 million after taxes). The aggregate
earnings per share impact of these items was $1.59 after taxes.
*** Fourth quarter 1998 results include $19.3 million of pre-tax restructuring
and other non-recurring charges ($12.7 million after taxes) and a $14.1 million
reduction in inventory ($9.0 million after taxes). The aggregate earnings per
share impact of these items was $.37 per diluted share and $.37 per basic share.
[Two bar graphs follow this text. The first is titled "Shareholders' Equity per
Share." It shows the shareholders' equity per share of the Corporation's common
stock (in dollars) for each of fiscal years 1994 through 1998, as follows:
94 - $11.91
95 - $12.35
96 - $13.62
97 - $14.74
98 - $12.98
The second graph is titled "Common Stock Price Range." It shows the price range
of the Corporation's common stock (in dollars) for each of fiscal years 1994
through 1998, as follows:
94 - $29.58 - 19.33
95 - $31.50 - 20.67
96 - $38.25 - 27.33
97 - $46.31 - 34.25
98 - $46.44 - 25.50
The information in both of the preceding two graphs is adjusted for the
two-for-one stock split in 1996.]
<PAGE>
Six-year Data
<TABLE>
<CAPTION>
Amounts in thousands except share data) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Summary of operations
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,772,637 $1,672,215 $1,485,279 $1,292,125 $1,194,296 $1,132,010
Gross profit 763,314 843,828 750,784 663,491 608,837 595,728
Operating expenses 705,811 650,182 594,527 538,021 510,361 509,910
Net finance income 65,933 71,891 64,269 63,174 60,458 61,115
Operating income 34,135 265,537 220,526 188,644 158,934 146,933
Interest expense 21,254 17,654 12,649 13,327 10,806 11,198
Other income (expense) - net (2,041) (9,207) 776 4,572 5,541 756
Pre-tax earnings 10,840 238,676 208,653 179,889 153,669 136,491
Income taxes 15,619 88,310 77,202 66,559 55,355 50,679
Net earnings (loss) (4,779) 150,366 131,451 113,330 98,314 85,812
- ------------------------------------------------------------------------------------------------------------------------
Financial position
Current assets $1,079,832 $1,021,709 $1,017,324 $ 946,689 $ 873,020 $ 854,598
Current liabilities 458,053 352,530 341,371 336,075 237,869 308,037
Working capital 621,779 669,179 675,953 610,614 635,151 546,561
Accounts receivable 554,703 539,589 651,739 610,064 568,378 539,949
Inventories 375,436 373,155 269,750 250,434 229,037 249,102
Property and equipment - net 272,030 265,765 245,294 220,067 209,142 224,810
Total assets 1,674,920 1,641,357 1,520,788 1,360,973 1,234,905 1,218,933
Long-term debt 246,644 151,016 149,804 143,763 108,980 99,683
Shareholders' equity 762,267 892,137 828,161 750,732 766,398 701,663
- ------------------------------------------------------------------------------------------------------------------------
Common share summary*
Net earnings (loss) per share - basic $ (.08) $ 2.47 $ 2.16 $ 1.84 $ 1.53 $ 1.34
Cash dividends paid per share .86 .82 .76 .72 .72 .72
Shareholders' equity per share 12.98 14.74 13.62 12.35 11.91 10.99
Weighted average
shares outstanding - basic 59,219,564 60,845,467 60,967,865 61,510,500 64,187,874 63,856,175
- ------------------------------------------------------------------------------------------------------------------------
Other financial statistics
Cash dividends paid $ 50,977 $ 49,888 $ 46,323 $ 44,113 $ 46,197 $ 45,942
Dividends paid as a percent
of net earnings N/M 33.2% 35.2% 38.9% 47.0% 53.5%
Capital expenditures 46,779 55,442 52,333 31,581 41,788 33,248
Depreciation and amortization 44,985 38,377 31,879 31,534 29,632 32,131
Current ratio 2.4 2.9 3.0 2.8 3.7 2.8
Percent of total debt to total capital 30.8% 16.4% 17.3% 18.5% 13.5% 19.3%
Effective tax rate 144.1% 37.0% 37.0% 37.0% 36.0% 37.1%
Operating income as a percent
of net sales 1.9% 15.9% 14.8% 14.6% 13.3% 13.0%
Net earnings (loss) as a percent
of net sales (0.3)% 9.0% 8.9% 8.8% 8.2% 7.6%
Return on average
shareholders' equity (0.6)% 17.5% 16.7% 14.9% 13.4% 12.6%
Shareholders of record 11,514 10,738 10,556 9,657 9,292 9,047
Common stock price range* 46.44-25.50 46.31-34.25 38.25-27.33 31.50-20.67 29.58-19.33 29.67-20.33
- ------------------------------------------------------------------------------------------------------------------------
*Adjusted for the three-for-two stock split in 1996.
1998 results include $149.9 million of pre-tax restructuring and other
non-recurring charges ($107.6 million after taxes) and a $14.1 million reduction
in inventory ($9.0 million after taxes). The aggregate earnings per share impact
of these items was $1.95 after taxes.
N/M = not meaningful.
</TABLE>
[41 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Responsibility for Financial Reporting
The management of Snap-on Incorporated is responsible for the preparation and
integrity of all financial statements and other information contained in this
Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and necessarily include
amounts based on judgments and estimates by management giving due consideration
to materiality. The Corporation maintains internal control systems designed to
provide reasonable assurance that the Corporation's financial records reflect
the transactions of the Corporation and that its assets are protected from loss
or unauthorized use. A staff of internal auditors conducts operational and
financial audits to evaluate the adequacy of internal controls and accounting
practices.
The Corporation's consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report thereon appears
below. As part of their audit of the Corporation's consolidated financial
statements, Arthur Andersen LLP considered the Corporation's system of internal
control to the extent they deemed necessary to determine the nature, timing and
extent of their audit tests. Management has made available to Arthur Andersen
LLP the Corporation's financial records and related data.
The audit committee of the board of directors is responsible for reviewing and
evaluating the overall performance of the Corporation's financial reporting and
accounting practices. The committee meets periodically and independently with
management, internal auditors and the independent public accountants to discuss
the Corporation's internal accounting controls, auditing and financial reporting
matters. The internal auditors and independent public accountants have
unrestricted access to the audit committee.
[Robert A. Cornog's Signature] [Donald S. Huml's Signature]
Robert A. Cornog Donald S. Huml
Chairman, President and Senior Vice President -
Chief Executive Officer Finance and Chief Financial Officer
Report of Independent Public Accountants
To the Board of Directors and
Shareholders of Snap-on Incorporated:
We have audited the accompanying consolidated balance sheets of Snap-on
Incorporated (a Delaware Corporation) and subsidiaries as of January 2, 1999,
and January 3, 1998, and the related consolidated statements of earnings,
shareholders' equity and comprehensive income, and cash flows for each of the
three years in the period ended January 2, 1999. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Snap-on
Incorporated and subsidiaries as of January 2, 1999, and January 3, 1998, and
the consolidated results of its operations and cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles.
[Arthur Andersen's Signature]
Arthur Andersen LLP
Chicago, Illinois
February 2, 1999
[42 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Investor Information
Common Stock High/Low Prices
Quarter 1998 1997
- ---------------------------------------------------
First $46.22-$37.19 $42.38-$34.25
Second 46.44- 34.38 41.00- 35.25
Third 37.50- 25.50 44.88- 39.19
Fourth 36.00- 28.88 46.31- 41.50
- ---------------------------------------------------
Dividends Paid per Common Share
Quarter 1998 1997
- ---------------------------------------------------
First $.21 $.20
Second .21 .20
Third .22 .21
Fourth .22 .21
- ---------------------------------------------------
Total $.86 $.82
===================================================
Exchange Listing
Snap-on Incorporated's common stock is listed on the New York Stock Exchange
under the ticker symbol SNA.
Transfer Agent and Registrar
First Chicago Trust Company of New York
P. O. Box 2500
Jersey City, New Jersey 07303-2500
or
525 Washington Boulevard
Jersey City, New Jersey 07310
Shareholder Inquiries
Shareholders with questions may call the Transfer Agent, First Chicago Trust
Company of New York, toll-free at 1-800-446-2617 or e-mail at [email protected].
The deaf and hearing-impaired may call 201-222-4955.
Dividend Record and Pay Dates for 1999
Quarter Record Date Pay Date
- -----------------------------------------------------
First February 17 March 10
Second May 20 June 10
Third August 20 September 10
Fourth November 19 December 10
- -----------------------------------------------------
Dividend Reinvestment
and Direct Stock Purchase Plan
Investors may purchase stock directly from the company and increase their
investment through a no-commission dividend reinvestment and direct stock
purchase plan. For information write to:
First Chicago Trust Company of New York
Snap-on Dividend Reinvestment and Direct Stock Purchase Plan
P. O. Box 2598
Jersey City, New Jersey 07303-2598
Or call: 1-800-446-2617
Form 10-K and Other Financial Publications
These publications are available without charge. Contact the public relations
department at P. O. Box 1430, Kenosha, Wisconsin 53141-1430, call 414-656-4808
(recorded message), e-mail [email protected], or visit our web site.
Web Site
Snap-on's web site contains the most recent 10-Qs, 10-Ks, news releases,
quarterly reports, annual report financials, and information about Snap-on's
dividend reinvestment and direct stock purchase plan. Our address is
www.snapon.com.
Analyst Contact
Securities analysts and other investors seeking information about the
corporation should contact the investor relations department at 414-656-6488.
Independent Auditors
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
312-580-0033
Annual Meeting
The Annual Meeting of Shareholders will be held at the Radisson Hotel &
Conference Center Kenosha, 11800 - 108th Street, Pleasant Prairie, Wisconsin, at
10 a.m. on Friday, April 23, 1999.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K/A of our report dated February 2, 1999 included in
the Corporation's previously filed Registration Statement File Nos. 2-53663,
2-53578, 33-7471, 33-22417, 33-37924, 33-39660, 33-57898, 33-55607, 33-58939,
33-58943, 333-14769, 333-21277, 333-21285 and 333-41359. It should be noted that
we have not audited any financial statements of the Corporation subsequent to
January 2, 1999 or performed any audit procedures subsequent to the date of our
report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 28, 2000
