UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For quarterly period ended June 29, 2002
Commission File Number 1-7724
SNAP-ON INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 39-0622040
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10801 Corporate Drive, Pleasant Prairie, Wisconsin 53158-1603
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (262) 656-5200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at July 27, 2002
- --------------------------------- -----------------------------
Common stock, $1 par value 58,351,758 shares
SNAP-ON INCORPORATED
INDEX
Page
Part I. Financial Information
Consolidated Statements of Earnings -
Three and Six Months Ended
June 29, 2002 and June 30, 2001 3
Consolidated Balance Sheets -
June 29, 2002 and December 29, 2001 4-5
Consolidated Statements of Cash Flows -
Six Months Ended
June 29, 2002 and June 30, 2001 6
Notes to Consolidated Financial Statements 7-16
Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-26
Quantitative and Qualitative Disclosures
About Market Risk 27-28
Part II. Other Information 29-30
2
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in millions except per share data)
(Unaudited)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales
Snap-on Dealer Group $ 274.6 $ 261.3 $ 530.6 $ 517.7
Commercial and Industrial Group 272.6 264.3 526.6 535.3
---------- --------- --------- ---------
547.2 525.6 1,057.2 1,053.0
Cost of goods sold (295.8) (286.3) (570.1) (570.0)
Operating expenses (202.8) (205.9) (400.7) (408.4)
Net finance income 8.8 7.9 16.1 20.0
Restructuring and other non-recurring charges (1.4) (14.4) (4.8) (14.4)
Interest expense (7.5) (9.2) (15.3) (18.1)
Other income (expense) - net (2.9) (1.6) (3.0) .3
---------- --------- --------- ---------
Earnings before income taxes 45.6 16.1 79.4 62.4
Income taxes 16.4 7.2 28.5 24.1
---------- --------- --------- ---------
Earnings before cumulative effect of a change in
accounting principle 29.2 8.9 50.9 38.3
Cumulative effect of a change in accounting principle
for goodwill in 2002 (net of tax of $0 million),
and for derivatives in 2001 (net of $1.6 million
tax benefit) -- -- 2.8 (2.5)
---------- --------- --------- ---------
Net earnings $ 29.2 $ 8.9 $ 53.7 $ 35.8
========== ========= ========= =========
Net earnings per share - basic and diluted:
Earnings before cumulative effect of a change in
accounting principle $ .50 $ .15 $ .87 $ .66
Cumulative effect of a change in accounting
principle, net of tax -- -- .05 (.05)
---------- --------- --------- ---------
Net earnings per share $ .50 $ .15 $ .92 $ .61
========== ========= ========= =========
Weighted-average shares outstanding:
Basic 58.2 57.9 58.1 57.8
Effect of dilutive options .5 .3 .5 .3
---------- --------- --------- ---------
Diluted 58.7 58.2 58.6 58.1
========== ========= ========= =========
Dividends declared per common share $ .48 $ .48 $ .72 $ .72
========== ========= ========= =========
See Notes to Consolidated Financial Statements.
3
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in millions except share data)
June 29, December 29,
2002 2001
------------- ------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 6.2 $ 6.7
Accounts receivable - net of allowances 636.4 615.2
Inventories
Finished goods 369.8 351.4
Work in process 51.2 41.5
Raw materials 88.9 77.2
Excess of current cost over LIFO cost (95.4) (94.9)
----------- -----------
Total inventory 414.5 375.2
Prepaid expenses and other assets 139.2 142.3
----------- -----------
Total current assets 1,196.3 1,139.4
Property and equipment
Land 24.1 23.4
Buildings and improvements 198.1 195.5
Machinery and equipment 528.4 501.3
---------- ----------
750.6 720.2
Accumulated depreciation (418.5) (392.5)
---------- ----------
Property and equipment - net 332.1 327.7
Deferred income tax benefits 29.0 27.7
Goodwill - net 356.0 331.2
Other intangibles - net 62.8 60.7
Other assets 98.4 87.6
----------- -----------
Total assets $ 2,074.6 $ 1,974.3
=========== ===========
See Notes to Consolidated Financial Statements.
4
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in millions except share data)
June 29, December 29,
2002 2001
-------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 203.1 $ 141.2
Notes payable and current maturities of long-term debt 19.7 29.1
Accrued compensation 60.0 58.7
Dealer deposits 47.2 42.0
Deferred subscription revenue 46.3 45.0
Accrued restructuring reserves 10.5 23.1
Other accrued liabilities 199.9 210.3
----------- ----------
Total current liabilities 586.7 549.4
Long-term debt 430.4 445.5
Deferred income taxes 27.8 24.7
Retiree health care benefits 93.0 92.7
Pension liability 58.7 54.5
Other long-term liabilities 27.5 31.7
----------- ----------
Total liabilities 1,224.1 1,198.5
----------- ----------
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 66,885,906 and 66,847,107 shares 66.9 66.8
Additional paid-in capital 81.5 108.0
Retained earnings 1,040.5 1,014.7
Accumulated other comprehensive income (loss) (81.9) (120.6)
Grantor stock trust at fair market value - 5,413,572
and 5,984,145 shares (160.0) (203.0)
Treasury stock at cost - 3,121,462 and 2,923,435 shares (96.5) (90.1)
----------- ----------
Total shareholders' equity 850.5 775.8
----------- ----------
Total liabilities and shareholders' equity $ 2,074.6 $ 1,974.3
=========== ==========
See Notes to Consolidated Financial Statements.
5
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Six Months Ended
--------------------------------
June 29, June 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net earnings $ 53.7 $ 35.8
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Cumulative effect of a change in accounting principle
(net of tax) for goodwill in 2002 and for derivatives in 2001 (2.8) 2.5
Depreciation 25.7 25.8
Amortization of goodwill - 6.9
Amortization of intangibles .8 1.9
Deferred income tax provision 22.9 3.5
Gain on sale of assets (.3) (.3)
Mark-to-market on cash flow hedges, net of tax (.7) (.8)
Restructuring and other non-recurring charges, net of tax 3.1 9.0
Changes in operating assets and liabilities, net of effects
of acquisitions:
(Increase) decrease in receivables (2.7) 11.2
(Increase) decrease in inventories (25.3) (38.0)
(Increase) decrease in prepaid and other assets (25.6) (19.0)
Increase (decrease) in accounts payable 57.0 3.1
Increase (decrease) in accruals and other liabilities (43.4) (15.3)
------- -------
Net cash provided by operating activities 62.4 26.3
INVESTING ACTIVITIES
Capital expenditures (26.3) (23.6)
Acquisitions of businesses - net of cash acquired (.8) (.9)
Disposal of property and equipment 4.1 4.5
------- -------
Net cash used in investing activities (23.0) (20.0)
FINANCING ACTIVITIES
Payment of long-term debt (2.8) (3.8)
Increase in long-term debt 2.2 .7
Increase (decrease) in short-term borrowings - net (22.6) 18.5
Purchase of treasury stock (6.4) (4.9)
Proceeds from stock purchase and option plans 16.5 11.7
Cash dividends paid (27.8) (27.7)
------- -------
Net cash used in financing activities (40.9) (5.5)
Effect of exchange rate changes on cash 1.0 (.4)
------- -------
Increase (decrease) in cash and cash equivalents (.5) .4
Cash and cash equivalents at beginning of period 6.7 6.1
------- -------
Cash and cash equivalents at end of period $ 6.2 $ 6.5
======= =======
Supplemental cash flow disclosures:
Cash paid for interest $ 15.3 $ 19.3
Cash paid (refunded) for income taxes $ (3.9) $ 11.6
See Notes to Consolidated Financial Statements.
6
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. This report should be read in conjunction with the consolidated financial
statements and related notes included in Snap-on Incorporated's
("Snap-on") Annual Report on Form 10-K for the year ended December 29,
2001.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments and adjustments related to restructuring and other
non-recurring charges) necessary to a fair statement of financial
condition and results of operations for the three and six months ended
June 29, 2002, have been made. Management also believes that the results
of operations for the three and six months ended June 29, 2002, are not
necessarily indicative of the results to be expected for the full year.
2. On December 30, 2001, the beginning of Snap-on's 2002 fiscal year, Snap-on
adopted Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets." This Statement is required to be
applied to all goodwill and other intangible assets recognized by the
corporation as of December 30, 2001, and it changes the subsequent
accounting for these assets in the following significant respects:
The provisions of SFAS No. 142 require that i) goodwill no longer be
amortized, ii) negative goodwill be recorded as a cumulative effect of an
accounting change as of the beginning of the 2002 fiscal year, iii) other
intangible assets be evaluated on an annual basis to determine whether
they have finite or indefinite useful lives, and iv) goodwill be evaluated
on an annual basis for impairment. Intangible assets determined to have
finite lives are amortized over those estimated lives, and intangible
assets that have indefinite useful lives are not amortized.
SFAS No. 142 sets forth a number of factors to be considered in
establishing the useful life of intangible assets. These factors include
product life cycles, market competition and other economic trends, as well
as the level of maintenance required to obtain future cash flows. The
useful lives of all intangible assets as of December 30, 2001, were
assessed using these criteria.
In accordance with the adoption provisions of SFAS No. 142, Snap-on
completed the transitional assessment of its other intangible assets in
evaluating and assigning a finite or indefinite useful life. Snap-on also
completed the transitional goodwill impairment evaluation required by this
standard, the results of which indicated that the carrying values of
goodwill and other intangibles are not impaired.
Snap-on recorded a cumulative effect of a change in accounting principle
transition adjustment that increased net earnings in the first quarter of
2002 by $2.8 million, on both a pretax and after-tax basis, from the
recognition of negative goodwill as prescribed by SFAS No. 142.
Snap-on ceased amortizing goodwill and certain other intangibles at the
beginning of its 2002 fiscal year as required by SFAS No. 142. The
following is a reconciliation of earnings before
7
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
cumulative effect of a change in accounting principle, net earnings, and
earnings per share data for the second quarter and six months ended June
30, 2001, reflecting the impact of this standard on prior-year reported
results as if SFAS No. 142 had been in effect during these periods.
Three Months Ended Six Months Ended
------------------------ --------------------
June 29, June 30, June 29, June 30,
(Amounts in millions except per share data) 2002 2001 2002 2001
--------- --------- --------- --------
Earnings before cumulative effect of a
change in accounting principle as reported: $29.2 $ 8.9 $50.9 $38.3
Goodwill amortization, net of tax - 3.0 - 5.9
Trademark amortization, net of tax - 0.2 - 0.4
----- ----- ----- -----
Adjusted earnings before cumulative effect item $29.2 $12.1 $50.9 $44.6
===== ===== ===== =====
Net earnings as reported: $29.2 $ 8.9 $53.7 $35.8
Goodwill amortization, net of tax - 3.0 - 5.9
Trademark amortization, net of tax - 0.2 - 0.4
----- ----- ----- -----
Adjusted net earnings $29.2 $12.1 $53.7 $42.1
===== ===== ===== =====
Earnings per share before cumulative effect of
a change in accounting
principle as reported:
Basic $0.50 $0.15 $0.87 $0.66
Diluted 0.50 0.15 0.87 0.66
Adjusted earnings per share before cumulative
effect item:
Basic $0.50 $0.21 $0.87 $0.77
Diluted 0.50 0.21 0.87 0.77
Net earnings per share as reported:
Basic $0.50 $0.15 $0.92 $0.61
Diluted 0.50 0.15 0.92 0.61
Adjusted earnings per share:
Basic $0.50 $0.21 $0.92 $0.72
Diluted 0.50 0.21 0.92 0.72
8
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Additional disclosures related to acquired intangible assets are as follows:
June 29, 2002 December 29, 2001
-------------------------------------- --------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
(Amounts in millions) Value Amortization Value Amortization
------------------ ---------------- ------------------ ----------------
Amortized Intangible Assets:
Trademarks $ 1.9 $ (.2) $ 1.7 $ (.2)
Patents 27.8 (7.3) 27.2 (6.3)
------ -------- ------ --------
Total 29.7 (7.5) 28.9 (6.5)
Unamortized Intangible Assets:
Trademarks 45.4 (4.8) 42.8 (4.5)
------ -------- ------ --------
Total Intangible Assets $75.1 $(12.3) $71.7 $(11.0)
===== ====== ===== ======
The weighted average amortization period for trademarks is 40 years, for
patents 16 years, and in total is 37 years.
Goodwill as of June 29, 2002, was $356.0 million, up $24.8 million from
year-end 2001 levels, reflecting an increase of $1.1 million from a
first-quarter 2002 acquisition and $23.7 million from currency translation
impacts.
The aggregate amortization expense for the three and six months ended June
29, 2002, was $.2 million and $.8 million. Total estimated annual
amortization expense expected for the fiscal years 2002 through 2006 is as
follows:
Estimated
Amortization
(Amounts in millions) Expense
-------------------
2002 $2.1
2003 1.9
2004 1.8
2005 1.8
2006 1.7
3. Snap-on announced in the second quarter of 2001 that it was taking
significant action to (i) reduce costs companywide to adjust to the slower
sales environment and (ii) improve operational performance in businesses
not earning acceptable financial returns. As a result of selective
rationalization and consolidation actions, Snap-on recorded $62.0 million
in pretax restructuring and other non-recurring charges in 2001 for
actions that include the consolidation or closure of 35 facilities, asset
write-downs and severance costs to effect a 6% reduction in workforce. The
$62.0 million charge includes restructuring charges of $40.3 million and
non-recurring charges of $21.7 million. The restructuring charge of $40.3
million includes $27.1 million for severance costs associated with the
planned elimination of 796 salaried and hourly positions, $6.0 million for
non-cancelable lease agreements, $5.9 million for facility asset
write-downs, and $1.3 million for exit-related legal and professional
services. The $21.7 million of other non-recurring charges includes $12.6
million for restructuring-related inventory write-downs and additional
inventory write-downs
9
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and warranty costs associated with Snap-on's exiting of an unprofitable
segment of the emissions-testing business, $8.4 million for management
transition costs associated with the appointment of Dale F. Elliott as
successor to the Chief Executive Officer position, and $.7 million for
equipment and employee relocation costs associated with the facility
consolidations.
Snap-on expects to incur an estimated $7 million in restructuring-related
costs in 2002 for the completion of its 2001 restructuring and other
activities. These costs do not qualify for restructuring accrual treatment
and are expensed as incurred.
In the second quarter of 2002, Snap-on incurred $1.4 million in
restructuring-related charges for employee and equipment relocation costs
and professional fees. For the first six months of 2002, Snap-on incurred
restructuring and non-recurring charges of $4.8 million, including $3.0
million related to the 2002 resignation of Snap-on's former Chief
Financial Officer and $1.8 million for employee and equipment relocation
costs.
The composition of Snap-on's restructuring charge activity for the second
quarter ended June 29, 2002, was as follows:
Restructuring Reserve Restructuring Reserve
As of March 30, 2002 Usage as of June 29, 2002
----------------------- --------- ---------------------
(Amounts in millions)
Severance costs $13.7 $ (4.2) $9.5
Facility consolidation
or closure costs 1.7 (.7) 1.0
----- ------ ------
Total restructuring reserves $15.4 $ (4.9) $10.5
===== ====== ======
The restructuring reserve usage for the second quarter ended June 29,
2002, of $4.9 million represents $4.2 million for severance payments
related to the separation of 91 employees and $.7 million for facility
consolidation or closure costs. The restructuring reserve usage for the
six months ended June 29, 2002, of $12.6 million represents $11.6 million
for severance payments related to the separation of 267 employees and $1.0
million for facility consolidation or closure costs. Of the $40.3 million
of restructuring reserves established in 2001, $29.8 million has been used
to date, consisting of $17.6 million for severance payments related to the
separation of 539 of the 796 identified employees, $6.3 million for
facility consolidation or closure costs related to 22 of the 35 facilities
identified, and $5.9 million for asset write-downs. Snap-on has funded and
expects to continue to fund the remaining cash requirements of its 2001
restructuring activities with cash flows from operations and borrowings
under the company's existing credit facilities. The specific restructuring
measures and estimated costs were based on management's best business
judgment under prevailing circumstances. Snap-on believes that the
restructuring reserve balance of $10.5 million as of June 29, 2002, is
adequate to complete all announced activities and anticipates that all
actions will be completed by the end of 2002.
4. Snap-on accounts for its hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
by SFAS No. 138. These standards require that all derivative instruments
be reported in the consolidated financial statements at fair value.
Changes in the fair value of derivatives are to be recorded each period in
earnings or "Accumulated other
10
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
comprehensive income (loss)," depending on the type of hedged transaction
and whether the derivative is designated and effective as part of a hedged
transaction. Gains or losses on derivative instruments reported in
"Accumulated other comprehensive income (loss)" must be reclassified as
earnings in the period in which earnings are affected by the underlying
hedged item, and the ineffective portion of all hedges must be recognized
in earnings in the current period.
In accordance with the provisions of SFAS No. 133, Snap-on recorded a
transition adjustment on December 31, 2000, the beginning of Snap-on's
2001 fiscal year, to recognize its derivative instruments at fair value,
and to recognize the difference between the carrying values and fair
values of related hedged assets and liabilities upon adoption of these
standards. The cumulative effect of this transition adjustment was to
decrease reported net income in the first quarter of 2001 by $2.5 million
after tax related to a hedge strategy that did not qualify for hedge
accounting under SFAS No. 133. Snap-on also recorded in the first quarter
of 2001 a transition adjustment of $1.2 million, after tax, in accumulated
other comprehensive income (loss) to recognize previously deferred net
gains on derivatives designated as cash flow hedges that qualify for hedge
accounting under SFAS No. 133.
Snap-on uses derivative instruments to manage well-defined interest rate
and foreign currency exposures. Snap-on does not use derivative
instruments for speculative or 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. On
the date a derivative contract is entered into, Snap-on designates the
derivative as either a fair value hedge, a cash flow hedge, a hedge of a
net investment in a foreign operation, or a natural hedging instrument
whose change in fair value is recognized as an economic hedge against
changes in the values of the hedged item.
Foreign Currency Derivative Instruments: Snap-on has operations in a
number of countries that have transactions outside their functional
currencies and, as a result, is exposed to changes in foreign currency
exchange rates. In addition, Snap-on hedges the anticipated repayment of
intercompany loans to foreign subsidiaries denominated in foreign
currencies. Snap-on manages most of these exposures on a consolidated
basis, which allows for netting of certain exposures to take advantage of
natural offsets. Forward exchange contracts are used to hedge the net
exposures. Gains or losses on net foreign currency hedges are intended to
offset losses or gains on the underlying net exposures in an effort to
reduce the earnings volatility resulting from fluctuating foreign currency
exchange rates.
At June 29, 2002, Snap-on had net outstanding foreign exchange forward
contracts totaling $193.7 million comprised of buy contracts of $75.5
million in Swedish kronor and sell contracts of $118.3 million in euros,
$74.5 million in British pounds, $38.6 million in Canadian dollars, $11.4
million in Singapore dollars, $6.3 million in Australian dollars, $5.8
million in Danish kronor, $4.8 million in Norwegian kronor and $9.5
million in other currencies. At December 29, 2001, Snap-on had net
outstanding foreign exchange forward contracts totaling $191.3 million
comprised of buy contracts of $55.1 million in Swedish kronor and sell
contracts of $113.6 million in euros, $73.8 million in British pounds,
$31.2 million in Canadian dollars, $8.8 million in Singapore dollars, $4.9
million in Danish kronor, $4.4 million in Australian dollars and $9.7
million in other currencies.
11
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The majority of Snap-on's forward exchange contracts do not qualify for
hedge accounting treatment under SFAS No. 133 and are therefore excluded
from the assessment of effectiveness. The fair value changes of these
contracts are reported in earnings as foreign exchange gain or loss, which
is included in "Other income (expense) - net" on the accompanying
Consolidated Statements of Earnings. Those forward exchange contracts that
qualify for hedge accounting treatment are accounted for as cash flow
hedges where the effective portion of the changes in fair value of the
derivative is recorded in "Accumulated other comprehensive income (loss)."
When the hedged item is realized in income, the gain or loss included in
"Accumulated other comprehensive income (loss)" is reclassified to income
in the same financial statement caption as the hedged item. The
ineffective portion of changes in fair value of the cash flow hedges are
reported in earnings as foreign exchange gain or loss, which is included
in "Other income (expense) - net" and which were not material.
Non-Derivative Instruments Designated in Hedging Relationships: Snap-on
uses non-U.S. dollar financing transactions as net investment hedges of
long-term investments in the corresponding foreign currency. Hedges that
meet the effectiveness requirements are accounted for under net investment
hedging rules. The effective portion of the net investment hedge of a
foreign operation is recorded in "Accumulated other comprehensive income
(loss)" as a cumulative translation adjustment. When applicable, the
ineffective portion of the net investment hedge is recorded in earnings as
foreign exchange gain or loss, which is included in "Other income
(expense) - net" and which were not material. At June 29, 2002, net losses
of $.7 million arising from effective hedges of net investments have been
reflected in the cumulative translation adjustment account as a component
of "Accumulated other comprehensive income (loss)."
Interest Rate Swap Agreements: Snap-on enters into interest rate swap
agreements to manage interest costs and risks associated with changing
interest rates. Interest rate swap agreements are accounted for as either
cash flow hedges or fair value hedges. The differentials paid or received
on interest rate swap agreements are accrued and recognized as adjustments
to interest expense. For fair value hedges the effective portion of the
change in fair value of the derivative is recorded in "Long-term Debt"
while any ineffective portion is recorded as an adjustment to interest
expense. For cash flow hedges the effective portion of the change in fair
value of the derivative is recorded in "Accumulated other comprehensive
income (loss)," while any ineffective portion is recorded as an adjustment
to interest expense. The notional amount of interest rate swaps was $50.0
million at June 29, 2002 and $25.0 million at December 29, 2001.
For all derivatives qualifying for hedge accounting under SFAS No. 133,
the net accumulated derivative loss at June 29, 2002, was $1.9 million,
after tax, and is reflected in "Accumulated other comprehensive income
(loss)." At June 29, 2002, the maximum maturity date of any cash flow
hedge and fair value hedge was approximately 33 months and 9.1 years,
respectively. During the next 12 months, Snap-on expects to reclassify
into earnings net losses from "Accumulated other comprehensive income
(loss)" of approximately $1.3 million after tax at the time the underlying
hedged transactions are realized.
During the second quarter ended June 29, 2002, cash flow hedge and fair
value hedge ineffectiveness was not material.
12
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Snap-on normally declares and pays in cash four regular, quarterly
dividends. However, the third quarter dividend in each year is declared in
June, giving rise to two regular quarterly dividends appearing in the
second quarter and, correspondingly, three regular dividends appearing in
the first six months' statements.
6. Basic and diluted earnings per share were computed by dividing net
earnings by the corresponding weighted-average common shares outstanding
for the period. The dilutive effect of the potential exercise of
outstanding options to purchase shares of common stock is calculated using
the treasury stock method.
7. Accounting Pronouncements:
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses significant issues regarding
the recognition, measurement, and reporting of costs that are associated
with exit and disposal activities, including restructuring activities that
are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes (1) costs related
to terminating a contract that is not a capital lease and (2) termination
benefits that employees who are involuntarily terminated receive under the
terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. SFAS No. 146
will be effective for exit or disposal activities that are initiated after
December 31, 2002.
On December 30, 2001, the beginning of the 2002 fiscal year, Snap-on
adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The statement provides a single accounting model for long-lived
assets to be disposed of. The effect of this change in accounting
principle was not material to Snap-on's financial position or results of
operations.
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets. The statement requires that the
fair value of a liability for an asset's retirement obligation be
recognized in the period in which it is incurred and capitalized as part
of the carrying amount of the long-lived asset. The statement will be
effective for fiscal years beginning after June 15, 2002. Snap-on believes
that the effects of this pronouncement will not be material to Snap-on's
financial position or results of operations.
8. Total comprehensive income for the three and six month periods ended June
29, 2002, and June 30, 2001, was as follows:
13
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended Six Months Ended
------------------------- ---------------------------------
June 29, June 30, June 29, June 30,
(Amounts in millions) 2002 2001 2002 2001
---------------- --------------- -------------- ---------------
Net earnings $ 29.2 $ 8.9 $ 53.7 $ 35.8
Foreign currency translation 46.6 (11.5) 39.5 (32.3)
Change in fair value of derivative
instruments, net of tax (2.9) .2 (.7) (.8)
--------- --------- ---------- -------
Total comprehensive income $ 72.9 $ (2.4) $ 92.5 $ 2.7
========= ========= ========== =======
9. On February 20, 1998, Snap-on filed a complaint alleging infringement of
certain of Snap-on's patents by Hunter Engineering Company ("Hunter").
Hunter counterclaimed, alleging infringement of certain of its patents and
one trademark. The parties settled claims related to several of the
patents and a contractual dispute. In April 2002, the court set a trial
date of October 14, 2002, regarding six patents, three belonging to
Snap-on and three belonging to Hunter. Since that time, the parties have
cross-licensed one patent on each side and settled the trademark action.
No pleadings related to the four patents set for trial contained specific
allegations of damages; however, in recently filed expert reports, Snap-on
claims damages in excess of $50 million and Hunter claims damages of less
than $30 million, exclusive of prejudgment interest, penalties for alleged
willful infringement and/or the value of injunctive relief. No trial date
has been set for the remaining patents pending in the above case. Although
management believes that Snap-on will prevail, it is not possible at this
time to predict the outcome of this matter with certainty. As a result,
Snap-on has not recorded any related gain or loss contingencies in its
financial statements. In addition, a March 2003 trial date has been set
for a case filed by Hunter in May 2002 involving two additional Hunter
patents, and Snap-on has moved to consolidate that case with the above
litigation. Specific allegations of damages relating to these two
additional patents do not appear in the pleading. Snap-on holds a vast
patent portfolio and vigorously prosecutes its claims and defends its
patents in the ordinary course of business.
Snap-on is involved in various other legal matters that are being defended
and handled in the ordinary course of business, and Snap-on maintains
accruals for such costs that are expected to be incurred. Although it is
not possible to predict the outcome of these other matters, management
believes that the results will not have a material impact on Snap-on's
financial statements.
During 2001, Snap-on entered into a binding arbitration process with SPX
Corporation related to infringement of patents. The arbitrator ruled in
favor of SPX and Snap-on paid damages of $44.0 million in January 2002 to
SPX.
10. Snap-on has two reportable segments: the Snap-on Dealer Group and the
Commercial and Industrial Group. These segments are based on the
organization structure used by management for making operating and
investment decisions and for assessing performance. The Snap-on Dealer
Group consists of Snap-on's business operations serving the worldwide
dealer van channel. The Commercial and Industrial Group consists of the
business operations serving the worldwide non-
14
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
dealer tool and equipment products businesses. These two segments derive
revenues primarily from the sale of tools and equipment.
Snap-on evaluates the performance of its operating segments based on
segment net sales and operating earnings. Snap-on defines operating
earnings for segment reporting purposes as Net Sales less Cost of Goods
Sold and Operating Expenses, excluding restructuring and non-recurring
charges. Snap-on accounts for intersegment sales and transfers based
primarily on standard costs established between the segments. Snap-on
allocates shared service expenses to those segments that utilize the
services based on their percentage of revenues from external sources.
Restructuring and other non-recurring charges are not allocated to the
reportable segments. Had it been Snap-on's policy to allocate
restructuring and other non-recurring charges to its reportable segments,
such charges of $1.4 million and $4.8 million for the three and six months
ended June 29, 2002, would have been allocated to the segments as follows:
Snap-on Dealer Group - $0 and $1.6 million, respectively, and Commercial
and Industrial Group - $1.4 million and $3.2 million, respectively. For
the three and six month periods ended June 30, 2001, charges of $14.4
million would have been allocated to the segments as follows: Snap-on
Dealer Group - $8.4 million for both periods and Commercial and Industrial
Group - $6.0 million for both periods.
Neither Snap-on nor any of its segments depends on any single customer,
small group of customers or government for more than 10% of its sales.
Financial data by segment was as follows:
Three Months Ended Six Months Ended
------------------------- ------------------------------
June 29, June 30, June 29, June 30,
(Amounts in millions) 2002 2001 2002 2001
------------ -------------- -------------- -------------
Net sales from external customers:
Snap-on Dealer Group $ 274.6 $ 261.3 $ 530.6 $ 517.7
Commercial and Industrial Group 272.6 264.3 526.6 535.3
---------- ----------- --------- ---------
Total net sales $ 547.2 $ 525.6 $ 1,057.2 $ 1,053.0
========= ========== ========= =========
Intersegment sales:
Snap-on Dealer Group $ .1 $ - $ .2 $ -
Commercial and Industrial Group 90.4 99.7 172.6 192.6
---------- ---------- --------- ---------
Total intersegment sales 90.5 99.7 172.8 192.6
Elimination of intersegment sales (90.5) (99.7) (172.8) (192.6)
--------- ---------- --------- ---------
Total consolidated intersegment sales $ - $ - $ - $ -
========= ========== ========= =========
15
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended Six Months Ended
--------------------------- -------------------------------
June 29, June 30, June 29, June 30,
(Amounts in millions) 2002 2001 2002 2001
---------------- -------------- -------------- -------------
Earnings:
Snap-on Dealer Group $ 27.5 $ 25.9 $ 57.5 $ 53.8
Commercial and Industrial Group 21.1 7.5 28.9 20.8
---------- ---------- --------- ----------
Segment operating earnings 48.6 33.4 86.4 74.6
Net finance income 8.8 7.9 16.1 20.0
Restructuring and other
non-recurring charges (1.4) (14.4) (4.8) (14.4)
Interest expense (7.5) (9.2) (15.3) (18.1)
Other income (expense) - net (2.9) (1.6) (3.0) .3
----------- ---------- --------- ----------
Total pre-tax earnings from
operations $ 45.6 $ 16.1 $ 79.4 $ 62.4
=========== ========== ========= ==========
As of
----------------------------------
June 29, December 29,
(Amounts in millions) 2002 2001
----------------------------------
Assets:
Snap-on Dealer Group $ 801.3 $ 823.3
Commercial and Industrial Group 1,209.7 1,120.6
--------- ---------
Total from reportable segments 2,011.0 1,943.9
Financial Services 81.4 82.0
Elimination of intersegment receivables (17.8) (51.6)
--------- ---------
Total assets $2,074.6 $1,974.3
========= =========
16
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Consolidated
Net sales were $547.2 million in the second quarter of 2002, an increase of
4.1% from the $525.6 million in the comparable prior-year period. For the first
six months of 2002, net sales were $1,057.2 million, up slightly compared to
$1,053.0 million in 2001. The year-over-year increase in net sales for the
second quarter of 2002 reflects strong sales in Snap-on's U.S. dealer business,
the success of new products worldwide and a modest gain in international
commercial and industrial operations, which offset the sluggish demand that
persists in many North American industrial sectors. Currency translation had a
negligible impact on 2002 second-quarter consolidated sales. The increase in
year-over-year net sales for the first six months of 2002 reflects strong sales
in the U.S. dealer business that were offset by continued soft demand for
equipment and a decline in sales of tools in the commercial and industrial
sector. Currency translation had a negative impact of 1% on 2002 year-to-date
consolidated sales.
Net earnings for the second quarter of 2002 were $29.2 million or $.50 per
diluted share, as compared with $8.9 million or $.15 per diluted share in 2001.
The increase in year-over-year net earnings includes the impact of higher sales
and improved margins, benefits from the elimination of goodwill and certain
other intangible amortization related to the fiscal-year 2002 adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," lower interest expense and higher net finance income.
Benefits from Snap-on's focus on Operational Fitness activities, including
benefits realized from its 2001 restructuring initiatives, were partially offset
by higher expenses associated with the company's "More Feet on the Street"
dealer expansion initiative, higher net pension costs and increased spending for
new products. Operational Fitness is Snap-on's focused initiative towards
improving the performance of its current business portfolio by continually
evaluating processes and practices to reduce waste and enhance operations. In
addition, 2001 second-quarter results were adversely impacted by the inclusion
of $20.5 million ($14.4 million after tax or $0.25 per diluted share) for
restructuring and other non-comparable costs (including management transition
costs and costs related to the termination of a European equipment supplier
arrangement).
Snap-on ceased amortizing goodwill and certain other intangibles at the
beginning of its 2002 fiscal year as prescribed by SFAS No. 142. Had this
standard been in effect for the second quarter of 2001, net earnings would have
been $12.1 million, or $.21 per diluted share. Snap-on has completed the
transitional goodwill and intangibles impairment evaluations required by SFAS
No. 142, the results of which indicated that the carrying values of goodwill and
other intangibles are not impaired. For more information on SFAS No. 142, refer
to Note 2 to the interim Consolidated Financial Statements.
In the 2002 second quarter, Snap-on incurred restructuring and other
non-recurring charges of $1.4 million ($.8 million after tax or $.01 per share)
for employee and equipment relocation costs and professional fees associated
with its previously announced 2001 restructuring activities. In the second
quarter of 2001 Snap-on incurred charges of $20.5 million, including
restructuring and other non-recurring charges of $14.4 million ($9.0 million
after tax or $.16 per share) for various exit-related costs, asset impairment
write-downs and management transition costs. Snap-on also incurred
non-comparable costs of $6.1
17
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
million (including $1.5 million in cost of goods sold and $4.6 million in
operating expenses) in the second quarter of 2001, primarily related to the
termination of a European equipment supplier arrangement.
Net earnings, before cumulative effect of a change in accounting principle, were
$50.9 million or $.87 per diluted share for the first six months of 2002, as
compared with $38.3 million or $.66 per diluted share in 2001. The increase in
earnings reflects modest sales growth, lower interest expense and benefits from
Operational Fitness activities, as well as benefits from the elimination of
goodwill and certain other intangible amortization under SFAS No. 142, offset by
lower net finance income, increased dealer expansion costs, higher net pension
costs and increased new product spending. In addition, 2001 results were
adversely impacted by the inclusion of $20.5 million ($14.4 million after tax or
$0.25 per diluted share) for restructuring and other non-comparable costs
(including management transition costs and costs related to the termination of a
European equipment supplier arrangement).
Snap-on ceased amortizing goodwill and certain other intangibles at the
beginning of its 2002 fiscal year as prescribed by SFAS No. 142. Had this
standard been in effect for the first six months of 2001, net earnings, before
cumulative effect item, would have been $44.6 million, or $.77 per diluted
share.
Net earnings for the first six months of 2002 were $53.7 million or $.92 per
diluted share in 2002, as compared with $35.8 million or $.61 per diluted share
in 2001. Snap-on recorded a cumulative effect of a change in accounting
principle transition adjustment that increased net earnings in the first quarter
of 2002 by $2.8 million, or $.05 per diluted share, on both a pretax and
after-tax basis, from the recognition of negative goodwill as required by SFAS
No. 142. In the first quarter of 2001, Snap-on recorded a cumulative effect of a
change in accounting principle transition adjustment that decreased net earnings
by $2.5 million after tax, or $.05 per diluted share, related to a hedge
strategy that did not qualify for hedge accounting under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Snap-on adopted
SFAS No. 133 at the beginning of its 2001 fiscal year. For more information on
SFAS No. 133, refer to Note 4.
Gross profit for the second quarter of 2002 was $251.4 million, up 5.1% from
$239.3 million in the prior-year period. As a percentage of sales, gross profit
margin in the second quarter of 2002 increased to 45.9%, as compared to 45.5% in
the comparable prior-year period. Gross profit for the first six months of 2002
was $487.1 million, up .8% from $483.0 million in the prior-year period. As a
percentage of sales, gross profit margin in the first six months of 2002
increased to 46.1%, as compared to 45.9% in the comparable prior-year period.
The increase in gross profit for both the second quarter and first six months of
2002 reflects benefits from Operational Fitness and restructuring activities,
including cost controls and continuous improvements in manufacturing operations.
In addition, non-comparable charges of $1.5 million related to the termination
of a European supplier arrangement in 2001 adversely impacted prior-year
margins.
Operating expenses for the second quarter of 2002 were $202.8 million, or 37.1%
of sales, as compared to $205.9 million, or 39.2%, in the comparable prior-year
period. The year-over-year improvement of $3.1 million in operating expenses
includes $3.8 million from the elimination of goodwill and certain other
intangible amortization under SFAS No. 142, the elimination of $4.6 million in
non-comparable costs incurred in 2001 related to the termination of a European
supplier arrangement, savings in 2002 from the fiscal 2001 restructuring
actions, reduced discretionary spending and other cost-cutting initiatives.
These decreases were partially offset by increased costs associated with
Snap-on's "More Feet on the Street" dealer expansion initiative, higher net
pension costs, increased spending for new product development and
18
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
higher bad debt provisions. The improvement in operating expenses as a
percentage of net sales reflects the positive leverage of higher sales on lower
operating expenses. Operating expenses for the first six months of 2002 were
$400.7 million, or 37.9% of sales, as compared to $408.4 million, or 38.8% of
sales, in the comparable prior-year period. The $7.7 million improvement in
year-over-year operating expenses includes $7.5 million from the elimination of
goodwill and certain other intangible amortization, the elimination of
non-comparable charges of $4.6 million incurred in 2001 related to the
termination of a European supplier agreement, savings in 2002 from the fiscal
2001 restructuring actions, reduced discretionary spending and other
cost-cutting initiatives. These decreases to operating expenses were partially
offset by an increase in expenses associated with Snap-on's dealer expansion
initiative, higher net pension costs, increased spending for new product
development and higher bad debt provisions, including $2.6 million for the first
quarter 2002 write-down of a receivable related to the closure of auto service
centers associated with a major retailer's bankruptcy.
Segment Results
Snap-on Dealer Group
In the worldwide Snap-on Dealer Group segment, net sales for the second quarter
of 2002 were $274.6 million, up 5.1% from the $261.3 million reported in the
comparable prior-year period. For the first six months of 2002, net sales were
$530.6 million, up 2.5% from $517.7 million in 2001. The increase in net sales
reflects strong sales in the U.S. dealer operations with continued strength in
tools and tool storage, the successful launch of new products, including new
hand-held diagnostics equipment, and the increased service and marketplace
coverage being achieved as a result of Snap-on's "More Feet on the Street"
dealer expansion initiative. Additionally, sales in the tech rep sales
organization were up year over year compared with depressed sales in the prior
year. Big-ticket sales through this channel had experienced significant
declines in the previous four quarters. In the second quarter of 2002, a net
increase of 55 dealers was achieved in the U.S. dealer business, primarily
through the use of second vans and second franchises, bringing the 2002
year-to-date total net increase to 116 dealers. The success of this initiative
is continuing to lead to improved customer service and marketplace penetration,
as well as higher sales. The strong U.S. dealer sales are being partially offset
by a decline in non-U.S. dealer operations. For both the second quarter and
first six months of 2002, stronger sales in the UK and Australia contributed
towards offsetting weakness experienced in Canada. Sales in Japan were also up
in the second quarter as compared to the comparable prior-year period, however
year-to-date sales were flat with prior year.
Segment earnings for the second quarter of 2002 increased 6.2% to $27.5 million
from $25.9 million in the second quarter of 2001, primarily reflecting the
higher sales volume. Segment earnings as a percentage of net sales improved
slightly to 10.0% from 9.9% in the prior year. On a year-to-date basis, segment
earnings increased 6.9% to $57.5 million from $53.8 million in the comparable
prior-year period, reflecting both higher sales volume and a better operating
margin. Segment earnings as a percentage of net sales improved to 10.8% from
10.4%. Operating margins continue to be slightly compressed due to the influence
of having non-U.S. dealer operations supplied by U.S. manufacturing facilities
and by Snap-on's focus on improving working capital management, particularly
increasing inventory turns. In addition, higher costs related to the "More Feet
on the Street" program and higher net pension expense were partially offset by
productivity savings and tight control on discretionary spending.
19
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Commercial and Industrial Group
In the Commercial and Industrial Group segment, net sales for the second quarter
increased to $272.6 million, or 3.1%, over the prior-year period of $264.3
million. The increase primarily reflects sales increases in facilitation
operations, information products, European equipment, and international
industrial tool markets, as well as a 1% benefit from favorable currency
translations. These increases were partially offset by the continued soft demand
in North America for industrial tools and big-ticket diagnostics and equipment.
For the first six months of 2002, net sales decreased 1.6% to $526.6 million
from the prior-year period of $535.3 million. The decrease in net sales
primarily reflects the weak demand for big-ticket capital goods equipment and
industrial tools and a negative 1% impact from unfavorable currency transition.
Sales of equipment worldwide and professional tools in the European and U.S.
industrial and commercial marketplace declined, reflecting the continued
softness in many industry sectors, such as automotive, electronics and
aerospace. Partially offsetting the decline was growth in the facilitation
business and the diagnostics and information business, primarily reflecting the
continued growth in information-based products.
Segment earnings for the second quarter of 2002 were $21.1 million, a
significant increase from $7.5 million a year ago. The operating margin improved
to 7.7% from 2.8% a year ago, reflecting benefits from restructuring and
Operational Fitness activities, the cessation of $3.5 million in goodwill and
other intangible amortization, and the absence of $5.9 million in non-comparable
charges incurred in 2001 primarily related to the termination of a European
equipment supplier arrangement. Segment earnings for the first six months of
2002 were $28.9 million compared to $20.8 million a year ago. The operating
margin improved to 5.5% from 3.9% a year ago, reflecting benefits from
restructuring and Operational Fitness activities, the cessation of $6.9 million
in goodwill and other intangible amortization, and the absence of $5.9 million
in non-comparable charges incurred in 2001. These items were partially offset by
a $2.6 million non-cash charge in the first quarter of 2002 for the write-down
of a receivable related to the closure of auto service centers associated with a
major retailer's bankruptcy, the unfavorable operating leverage related to lower
sales and inventory reduction initiatives, the effect of having manufacturing
operations based in strong currency countries, and continued investment spending
on new product research and development activities.
Restructuring and Non-Recurring Charges
Snap-on announced in the second quarter of 2001 that it was taking significant
action to (i) reduce costs companywide to adjust to the slower sales environment
and (ii) improve operational performance in businesses not earning acceptable
financial returns. As a result of selective rationalization and consolidation
actions, Snap-on recorded $62.0 million in pretax restructuring and other
non-recurring charges in 2001 for actions that include the consolidation or
closure of 35 facilities, asset write-downs and severance costs to effect a 6%
reduction in workforce. The $62.0 million charge includes restructuring charges
of $40.3 million and non-recurring charges of $21.7 million. The restructuring
charge of $40.3 million includes $27.1 million for severance costs associated
with the planned elimination of 796 salaried and hourly positions, $6.0 million
for non-cancelable lease agreements, $5.9 million for facility asset
write-downs, and $1.3 million for exit-related legal and professional services.
The $21.7 million of other non-recurring charges includes $12.6 million for
restructuring-related inventory write-downs and
20
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
additional inventory write-downs and warranty costs associated with Snap-on's
exiting of an unprofitable segment of the emissions-testing business, $8.4
million for management transition costs associated with the appointment of Dale
F. Elliott as successor to the Chief Executive Officer position, and $.7 million
for equipment and employee relocation costs associated with the facility
consolidations.
Snap-on expects to incur an estimated $7 million to $8 million in
restructuring-related costs in 2002 for the completion of its 2001 restructuring
and other activities. These costs do not qualify for restructuring accrual
treatment and are expensed as incurred.
In the second quarter of 2002, Snap-on incurred $1.4 million in
restructuring-related charges for employee and equipment relocation costs and
professional fees. For the first six months of 2002, Snap-on incurred
restructuring and non-recurring charges of $4.8 million, including $3.0 million
related to the 2002 resignation of Snap-on's former Chief Financial Officer and
$1.8 million for employee and equipment relocation costs.
The composition of Snap-on's restructuring charge activity for the second
quarter ended June 29, 2002, was as follows:
Restructuring Reserve Restructuring Reserve
As of March 30, 2002 Usage as of June 29, 2002
------------------------ --------- ---------------------
(Amounts in millions)
Severance costs $13.7 $ (4.2) $ 9.5
Facility consolidation
or closure costs 1.7 (.7) 1.0
----- ------- -----
Total restructuring reserves $15.4 $ (4.9) $10.5
===== ======= =====
The restructuring reserve usage for the second quarter ended June 29, 2002, of
$4.9 million represents $4.2 million for severance payments related to the
separation of 91 employees and $.7 million for facility consolidation or closure
costs. The restructuring reserve usage for the six months ended June 29, 2002,
of $12.6 million represents $11.6 million for severance payments related to the
separation of 267 employees and $1.0 million for facility consolidation or
closure costs. Of the $40.3 million of restructuring reserves established in
2001, $29.8 million has been used to date, consisting of $17.6 million for
severance payments related to the separation of 539 of the 796 identified
employees, $6.3 million for facility consolidation or closure costs related to
22 of the 35 facilities identified, and $5.9 million for asset write-downs.
Snap-on has funded and expects to fund the remaining cash requirements of its
2001 restructuring activities with cash flows from operations and borrowings
under the company's existing credit facilities. The specific restructuring
measures and estimated costs were based on management's best business judgment
under prevailing circumstances. Snap-on believes that the restructuring reserve
balance of $10.5 million as of June 29, 2002, is adequate to complete all
announced activities and anticipates that all actions will be completed by the
end of 2002.
21
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Other
Net finance income was $8.8 million in the second quarter of 2002, up $.9
million from $7.9 million in the comparable prior-year period. Higher
originations from growth in the U.S. dealer business contributed to the
increase. For the first six months of 2002, net finance income was $16.1
million, compared to $20.0 million in 2001. Although credit originations for the
first six months of 2002 have increased year over year, prior-year results
benefited from a highly favorable interest-rate environment.
Interest expense for the second quarter of 2002 was $7.5 million, a decrease of
$1.7 million from the prior-year period. For the first six months of 2002,
interest expense of $15.3 was down $2.8 million from $18.1 million in the prior
year. The reduction in interest expense in both the second quarter and
year-to-date periods is due to continued debt reduction funded by cash flow from
operating activities and lower interest rates relative to the comparable periods
in the prior year.
Other income (expense) - net was an expense of $2.9 million for the second
quarter of 2002 as compared to an expense of $1.6 million in the comparable 2001
period. For the first six months of 2002, other income (expense) - net was an
expense of $3.0 million, as compared to income of $.3 million. This line item
includes the impact of all non-operating items such as interest income, license
fees, adjustment for minority interests, disposal of fixed assets, hedging and
exchange rate transaction gains and losses, and other miscellaneous
non-operating items.
Snap-on's effective income tax rate, before cumulative effect, restructuring,
non-recurring and other non-comparable items, was 36.2% in the second quarter
and 35.9% in the first six months of 2002 and 36.3% in the second quarter and
36.4% in the first six months of 2001. Including these charges, Snap-on's
overall effective tax rate, before cumulative effect of accounting change was
36.0% for both the second quarter and first six months of 2002 and was 44.7% in
the second quarter of 2001 and 38.6% for the first six months of 2001.
FINANCIAL CONDITION
Cash and cash equivalents were $6.2 million at the end of the second quarter,
down $.5 million from $6.7 million at year-end 2001. Despite a $44.0 million
payment ($39.0 million net of tax benefit) in the first quarter of 2002 for the
December 2001 resolution of an arbitration matter, net cash provided by
operating activities increased to $62.4 million in the first six months of 2002,
compared with $26.3 million in the prior year, primarily due to better
management of working capital elements (particularly inventories and trade
payables). Working capital was $609.6 million at the end of the second quarter
of 2002, an increase of $19.6 million from $590.0 million at year-end 2001, and
a decrease of $88.1 million from $697.7 million in the second quarter of 2001.
The total-debt-to-total-capital ratio at the end of the second quarter of 2002
was 34.6%, as compared to 38.0% at year-end 2001 and 39.8% in the prior-year
period reflecting lower debt levels and increases in shareholder equity. Total
short-term and long-term debt was $450.1 million at the end of the second
quarter of 2002, as compared to $474.6 million at year end 2001 and $546.5
million at the end of the second quarter of 2001. Total debt levels decreased
$24.5 million from year end and $96.4 million from the second quarter of 2001,
reflecting the strengthened cash flow. Total capital was $1,300.6 million, up
$50.2 million from year-end 2001 and down $71.6 million from $1,372.2 million in
the prior-year period.
22
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
At June 29, 2002, Snap-on had $458 million of multi-currency revolving credit
facilities to support its commercial paper programs. In August 2001, Snap-on
issued $200 million of unsecured notes pursuant to a $300 million shelf
registration statement filed with the Securities and Exchange Commission in
1994. In October 1995, Snap-on issued $100 million of unsecured notes to the
public under this shelf registration statement. The August 2001 notes require
semiannual interest payments at the rate of 6.25% and mature in their entirety
on August 15, 2011. The October 1995 notes require semiannual interest payments
at a rate of 6.625% and mature in their entirety on October 1, 2005. The
proceeds from these issuances were used to repay a portion of Snap-on's
outstanding commercial paper and for working capital and general corporate
purposes. For additional information, see Note 8 entitled "Short-term and
Long-term Debt" on pages 35 and 36 of Snap-on's 2001 Annual Report.
Accounts receivable-net at the end of the second quarter were $636.4 million, up
$21.2 million from year-end 2001 levels and up $14.9 million from the prior
year, largely due to the increased sales volume and a slight increase in days
outstanding in certain international markets.
Inventories at the end of the second quarter of 2002 were $414.5 million, down
$25.7 million from $440.2 million at the end of second quarter 2001, but up from
2001 year end. Inventories have increased $39.3 million from year-end 2001
levels due to typical seasonal buildups and the impact of the weaker U.S. dollar
at quarter end. Inventory turns increased 4.4% in 2002 compared to 2001 (based
on a 12-month rolling average). The initiative to double inventory turns by 2005
remains on target, and progress is expected to continue throughout 2002.
Capital expenditures were $26.3 million in the first six months of 2002,
compared with $23.6 million in the comparable prior-year period. Investments
primarily included ongoing replacements and upgrades of manufacturing and
distribution facilities and equipment, restructuring-related and new
product-related capital investments. For the full-year, Snap-on anticipates 2002
capital expenditures will be in the range of $50 million to $55 million.
Full-year capital expenditures were $53.6 million in 2001.
Snap-on believes that its sources of borrowings, coupled with cash from
operations, are sufficient to support at anticipated levels its working capital
requirements, finance capital expenditures and restructuring activities, fund
acquisitions, repurchase common stock and pay dividends.
Snap-on has undertaken stock repurchases from time to time to prevent dilution
created by shares issued for employee and dealer stock purchase plans, stock
options, and other corporate purposes, as well as to repurchase shares when
market conditions are favorable. During the first six months of 2002, Snap-on
repurchased 200,000 shares of common stock for $6.4 million under its previously
announced share repurchase programs. As of the end of the second quarter of
2002, Snap-on has remaining availability to repurchase up to an additional $139
million in common stock pursuant to the board's authorizations. The purchase of
Snap-on common stock is at the company's discretion, subject to prevailing
financial and market conditions.
23
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Outlook: Snap-on expects that the prudent course near term is to maintain a
cautious view on recovery. Based on this cautious sales outlook and the typical
sequential seasonal sales decline, Snap-on expects to earn in the range of $0.45
to $0.50 per share in third-quarter net earnings. This includes the expected
negative impact associated with the approximately $1 to $2 million in remaining
costs for the completion of previously announced restructuring initiatives. For
the balance of the year, Snap-on believes it remains on track to achieve its
targeted $40 million in savings from its restructuring and cost control
activities and expects that approximately one-half of these savings will be
reinvested to support increased development of innovative new products and other
initiatives for profitable growth.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements and related notes contain information that
is pertinent to management's discussion and analysis. 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.
In December 2001, the Securities and Exchange Commission issued Financial
Reporting Release No. 60 ("FRR 60"), "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies," suggesting that companies provide
additional disclosure and commentary on those accounting policies considered
most critical in their Management's Discussion and Analysis of Financial
Condition and Results of Operations. The FRR 60 considers an accounting policy
to be critical if it is important to the company's financial condition and
results of operations and requires significant judgment and estimates on the
part of management in its application.
Snap-on believes that the following represent the critical accounting policies
of the company:
Allowance for Doubtful Accounts: Snap-on's accounts receivable are reported net
of bad debt reserves. Snap-on's bad debt reserve estimates are regularly
evaluated by management for adequacy and are established through charges to
operating expenses. The evaluations take into consideration various financial
and qualitative factors that may affect the customers' ability to pay. These
factors may include the customers' financial condition, collateral,
debt-servicing capacity, past payment experience and credit bureau information.
Snap-on regularly reviews the estimation process and adjusts the reserves as
appropriate. It is possible, however, that the accuracy of Snap-on's estimation
process could be adversely impacted if the financial condition of its customers
were to deteriorate.
Inventory Reserves: Snap-on's inventories, which are reported net of inventory
reserves, consist of manufactured products and merchandise for resale and 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 first-in, first-out (FIFO) method approximated 65% and 63% of total
inventory as of year-end 2001 and 2000. All other inventories are generally
determined using the last-in, first-out (LIFO) cost method. Snap-on values its
inventory at the lower of cost or market, and regularly reviews
24
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the book value of discontinued product lines and stock keeping units (SKUs) to
determine if these items are properly valued. If market value is less than cost,
the company establishes inventory reserves to write down the related inventory
to the lower of market or net realizable value. Snap-on regularly evaluates the
composition of its inventory to determine slow-moving and obsolete inventories
to determine if additional reserves are required. Changes in consumer purchasing
patterns, however, could result in the need for additional reserves.
Pension and Other Postretirement Benefits: Snap-on has significant pension and
postretirement benefit liabilities and costs that are developed from actuarial
valuations. Inherent in these valuations are key assumptions including discount
rates, expected return on plan assets and medical trend rates. Changes in these
assumptions are primarily influenced by factors outside of Snap-on's control and
can have a significant effect on the amounts reported in the financial
statements. Snap-on reviews its actuarial valuations annually and believes that
it may experience an increase in pension expense for 2003 due to lower than
expected returns on invested plan assets.
Commitments and Contingencies: Snap-on is subject to lawsuits and other claims
related to product and other matters that are being defended and handled in the
ordinary course of business. Snap-on maintains reserves for such costs that may
be incurred, which are determined on a case-by-case basis, taking into
consideration the likelihood of adverse judgments or outcomes, as well as the
potential range of probable loss. The reserves are monitored on an ongoing basis
and are updated for new developments or new information as appropriate.
Valuation of long-lived assets: Snap-on periodically evaluates its long-lived
assets for potential impairment. If impairment exists, an impairment loss is
recognized and the carrying amount of the asset is adjusted to its new
accounting basis. Judgments regarding the existence of impairment are based on
legal factors, market conditions and operational performance. Future events
could cause Snap-on to conclude that impairment exists. Snap-on uses the
undiscounted cash flow method to determine if potential impairment exists. If
impairment is determined to exist, its extent is measured using future
discounted cash flows. This requires management to make estimates and
assumptions regarding future income, working capital and discount rates, which
affect the impairment calculation.
Safe Harbor: Statements in this document that are not historical facts,
including statements (i) that include the words "expects," "targets,"
"believes," or "anticipates," or similar words that reference Snap-on or its
management; (ii) specifically identified as forward-looking; or (iii) describing
Snap-on's or management's future outlook, plans, objectives or goals, are
forward-looking statements. Snap-on or its representatives may also make similar
forward-looking statements from time to time orally or in writing. Snap-on
cautions the reader that these statements are subject to risks, uncertainties or
other factors that could cause (and in some cases have caused) actual results to
differ materially from those described in any such statement. Those important
factors include the validity of the assumptions set forth above and the timing
and progress with which Snap-on can continue to achieve further cost reductions
and achieve savings from its restructuring initiatives; Snap-on's ability to
retain and attract dealers and implement new programs; the success of new
products, and Snap-on's ability to withstand external negative factors including
terrorist disruptions on business; consequences of the change in public
accounting firms or a change in regulatory reporting requirements; changes in
trade, monetary and fiscal policies, laws and
25
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
regulations, or other activities of governments or their agencies; and the
absence of significant changes in the current competitive environment,
inflation, energy supply or pricing, legal proceedings, supplier disruptions,
currency fluctuations or the material worsening of economic and political
situations around the world.
These factors may not constitute all factors that could cause actual results to
differ materially from those discussed in any forward-looking statement. Snap-on
operates in a continually changing business environment and new factors emerge
from time to time. Snap-on cannot predict such factors nor can it assess the
impact, if any, of such factors on Snap-on's financial position or its results
of operations. Accordingly, forward-looking statements should not be relied upon
as a prediction of actual results. Snap-on disclaims any responsibility to
update any forward-looking statement provided in this document.
26
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market, Credit and Economic Risks
Market risk is the potential economic loss that may result from adverse changes
in the fair value of financial instruments. Snap-on is exposed to market risk
from changes in both foreign currency exchange rates and interest rates. Snap-on
monitors its exposure to these risks and manages the underlying economic
exposures through the use of financial instruments such as forward exchange
contracts and interest rate swap agreements. Snap-on does not use derivative
instruments for speculative or trading purposes. Snap-on's broad-based business
activities help to reduce the impact that volatility in any particular area or
related areas may have on its operating earnings as a whole. Snap-on's
management takes an active role in the risk management process and has developed
policies and procedures that require specific administrative and business
functions to assist in the identification, assessment and control of various
risks.
FOREIGN CURRENCY RISK MANAGEMENT: Snap-on has significant international
operations. Foreign exchange risk exists to the extent that Snap-on has payment
obligations or receipts denominated in currencies other than the functional
currency. To manage these exposures, Snap-on identifies naturally offsetting
positions and then purchases hedging instruments to protect the residual net
anticipated exposures. For additional information, refer to Note 4.
INTEREST RATE RISK MANAGEMENT: Snap-on's interest rate risk management policies
are designed to reduce the potential volatility of earnings that could arise
from changes in interest rates. Through the use of interest rate swaps, Snap-on
aims to stabilize funding costs by managing the exposure created by the
differing maturities and interest rate structures of Snap-on's assets and
liabilities. For additional information, refer to Note 4.
Snap-on 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. Snap-on's computations are based on the inter-relationships
among movements in various currencies and interest rates (variance/co-variance
technique). These inter-relationships were determined by observing interest rate
and foreign currency market changes over the preceding quarter.
The estimated maximum potential one-day loss in fair value, calculated using the
VAR model, at June 29, 2002, was $1.6 million on interest rate-sensitive
financial instruments and $1.7 million on foreign currency-sensitive financial
instruments. The VAR model is a risk management tool and does not purport to
represent actual losses in fair value that will be incurred by Snap-on, nor does
it consider the potential effect of favorable changes in market factors.
27
Item 3: Quantitative and Qualitative Disclosures About Market Risk (continued)
CREDIT RISK: Credit risk is the possibility of loss from a customer's failure to
make payments according to contract terms. Prior to granting a loan, each
customer is evaluated, taking into consideration the borrower's financial
condition, collateral, debt-servicing capacity, past payment experience, credit
bureau information and numerous other financial and qualitative factors that may
affect the borrower's ability to repay. Specific credit reviews and standard
industry credit scoring models are used in performing this evaluation. Loans
that have been granted are typically monitored through an asset-quality-review
process that closely monitors past due accounts and initiates collection actions
when appropriate. In addition to credit risk exposure from its on-balance-sheet
receivables, Snap-on also has credit risk exposure for certain loan originations
with recourse provisions from Snap-on Credit LLC ("the LLC"), a 50%-owned joint
venture with CIT Group, Inc. At June 29, 2002, $39.5 million of loans originated
by the LLC have a recourse provision to Snap-on if the receivables become more
than 90 days past due. In addition, there were $25.6 million of dealers'
customer-originated loans that have a primary recourse provision directly to the
dealer, with secondary recourse to Snap-on in the event of dealer default.
ECONOMIC RISK: Economic risk is the possibility of loss resulting from economic
instability in certain areas of the world. Economic instability from time to
time may cause Snap-on to react to such market conditions. The economic
uncertainty in Argentina prompted Snap-on to resize its operations there in
2001, shifting a portion of its manufacturing to other existing Snap-on
facilities. The Bahco Argentina facility will continue to operate with about
one-half of its previous workforce for the foreseeable future, manufacturing
product at a level to support its local market. Snap-on will continue to assess
Argentina's economic situation to determine if any future actions or impairment
write-downs are warranted.
As a result of the above market, credit and economic risks, net income and
revenues in any particular period may not be representative of full-year results
and may vary significantly from year to year and from quarter to quarter.
28
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Snap-on held its Annual Meeting of Shareholders on April 25, 2002. The
shareholders elected three members of Snap-on's Board of Directors, whose terms
were up for reelection, to serve until the Annual Meeting in the year 2005.
There were 63,827,036 outstanding shares eligible to vote. The persons elected
to the Corporation's Board of Directors, the number of votes cast for and the
number of votes withheld with respect to each of these persons are set forth
below:
Director For Withheld Term
Dale F. Elliott 56,699,596 584,778 2005
Lars Nyberg 56,657,847 626,527 2005
Richard F. Teerlink 56,479,273 805,101 2005
The terms of office for the following directors continue until the Annual
Meeting in the year set forth below:
Director Term
Leonard A. Hadley 2004
Frank S. Ptak 2004
Edward H. Rensi 2004
Bruce S. Chelberg 2003
Arthur L. Kelly 2003
Roxanne J. Decyk 2003
Jack D. Michaels 2003
Item 5. Other Information.
Snap-on operates on a fiscal, as opposed to a calendar, year and, as a result,
its second quarter Form 10-Q was due on August 13, 2002. Therefore, the
certification required to be filed with the SEC pursuant to Order 4-460 is not
due until November 12, 2002. For additional information on the certification
required by Order 4-460, please visit the SEC's website at www.sec.gov.
29
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K.
Item 6(a): Exhibits.
10(a) Form of Share and Performance Award Agreement and Form of Deferred
Share and Performance Award Agreement between the Corporation and
each of Dale F. Elliott, Michael F. Montemurro, Nicholas T. Pinchuk,
Susan F. Marrinan and Blaine A. Metzger dated April 1, 2002.
10(b) Letter Agreement between the Corporation and Nicholas T. Pinchuk
dated June 4, 2002.
(12) Computation of Ratio of Earnings to Fixed Charges
Item 6(b): Reports on Form 8-K Filed During the Reporting Period
During the second quarter of 2002, Snap-on reported on Form 8-K the following:
Date Filed Date of Report Item
- ---------- -------------- ----
June 21, 2002 June 21, 2002 Item 4. Change in Registrant's
Certifying Accountant
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Snap-on
Incorporated has duly caused this report to be signed on its behalf by the
undersigned duly authorized person.
SNAP-ON INCORPORATED
Date: August 13, 2002 /s/ Blaine A. Metzger
---------------- ------------------------------------------------------
Blaine A. Metzger, Acting Principal Financial Officer,
Principal Accounting Officer,
Vice President and Controller
31