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 March 29, 2003
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
incorporation or organization) Identification No.)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class Outstanding at April 25, 2003
- -------------------------- -----------------------------
Common stock, $1 par value 58,189,891 shares
SNAP-ON INCORPORATED
INDEX
Page
----
Part I. Financial Information
Consolidated Statements of Earnings -
Three Months Ended
March 29, 2003, and March 30, 2002 3
Consolidated Balance Sheets -
March 29, 2003, and December 28, 2002 4-5
Consolidated Statements of Cash Flows -
Three Months Ended
March 29, 2003, and March 30, 2002 6
Notes to Consolidated Financial Statements 7-19
Management's Discussion and Analysis of
Financial Condition and Results of Operations 20-31
Quantitative and Qualitative Disclosures
About Market Risk 32-33
Controls and Procedures 33
Part II. Other Information 34-35
Signatures 36
Certifications 37-38
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
--------------------------
March 29, March 30,
2003 2002
--------- ---------
Net sales $ 543.1 $ 510.0
Cost of goods sold (297.7) (274.3)
---------- ----------
Gross profit 245.4 235.7
Operating expenses (212.9) (201.3)
Net finance income 10.5 7.3
---------- ----------
Operating earnings 43.0 41.7
Interest expense (6.4) (7.8)
Other income (expense) - net (3.7) (.1)
---------- ----------
Earnings before income taxes 32.9 33.8
Income taxes 11.5 12.1
---------- ----------
Earnings before cumulative effect of a change in
accounting principle 21.4 21.7
Cumulative effect of a change in accounting principle
for goodwill, net of tax - 2.8
---------- ----------
Net earnings $ 21.4 $ 24.5
========== ==========
Net earnings per share - basic and diluted:
Earnings before cumulative effect of a change in
accounting principle $ .37 $ .37
Cumulative effect of a change in accounting
principle, net of tax - .05
---------- ----------
Net earnings per share $ .37 $ .42
========== ==========
Weighted-average shares outstanding:
Basic 58.2 58.0
Effect of dilutive options .1 .7
---------- ----------
Diluted 58.3 58.7
========== ==========
Dividends declared per common share $ .25 $ .24
========== ==========
See Notes to Consolidated Financial Statements.
3
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in millions except share data)
March 29, December 28,
2003 2002
----------- ------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 15.4 $ 18.4
Accounts receivable - net of allowances 561.0 556.2
Inventories
Finished goods 328.0 337.5
Work in process 43.7 42.0
Raw materials 91.2 86.2
Excess of current cost over LIFO cost (94.7) (95.8)
--------- --------
Total inventory 368.2 369.9
Prepaid expenses and other assets 120.5 106.5
--------- --------
Total current assets 1,065.1 1,051.0
Property and equipment
Land 24.4 23.8
Buildings and improvements 208.0 202.9
Machinery and equipment 556.0 541.8
-------- --------
788.4 768.5
Accumulated depreciation (455.3) (438.3)
-------- --------
Property and equipment - net 333.1 330.2
Deferred income tax benefits 61.7 60.9
Goodwill - net 375.7 366.4
Other intangibles - net 66.1 65.7
Other assets 121.8 119.9
-------- --------
Total assets $2,023.5 $1,994.1
======== ========
See Notes to Consolidated Financial Statements.
4
SNAP-ON INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in millions except share data)
March 29, December 28,
2003 2002
----------- -------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 180.3 $ 170.9
Notes payable and current maturities of long-term debt 54.7 56.4
Accrued compensation 38.5 44.4
Dealer deposits 45.2 46.1
Deferred subscription revenue 29.3 42.5
Income taxes 41.9 29.8
Other accrued liabilities 179.6 162.3
-------- --------
Total current liabilities 569.5 552.4
Long-term debt 304.2 304.3
Deferred income taxes 32.8 33.6
Retiree health care benefits 94.3 94.0
Pension liability 122.0 136.6
Other long-term liabilities 43.2 42.8
-------- --------
Total liabilities 1,166.0 1,163.7
-------- --------
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 66,913,305 and 66,897,506 shares 66.9 66.9
Additional paid-in capital 59.3 72.9
Retained earnings 1,071.3 1,064.2
Accumulated other comprehensive income (loss) (101.4) (123.8)
Grantor stock trust at fair market value - 5,280,635
and 5,321,977 shares (132.6) (147.5)
Treasury stock at cost - 3,476,462 and 3,326,462 shares (106.0) (102.3)
-------- --------
Total shareholders' equity 857.5 830.4
-------- --------
Total liabilities and shareholders' equity $2,023.5 $1,994.1
======== ========
See Notes to Consolidated Financial Statements.
5
SNAP-ON INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
Three Months Ended
------------------------------
March 29, March 30,
2003 2002
--------- ---------
OPERATING ACTIVITIES
Net earnings $ 21.4 $ 24.5
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 - (2.8)
Depreciation 14.2 13.3
Amortization of intangibles .5 .6
Deferred income tax provision (2.9) 20.4
Gain on sale of assets - (.3)
(Gain) loss on mark to market for cash flow hedges (.8) 2.1
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in receivables 4.8 (15.7)
(Increase) decrease in inventories 8.5 (15.1)
(Increase) decrease in prepaid and other assets (21.9) (9.5)
Increase (decrease) in accounts payable 7.4 38.5
Increase (decrease) in accruals and other liabilities (12.6) (50.6)
------- -------
Net cash provided by operating activities 18.6 5.4
INVESTING ACTIVITIES
Capital expenditures (6.2) (13.9)
Acquisitions of businesses - net of cash acquired .1 (.8)
Proceeds from disposal of property and equipment .5 4.0
------- -------
Net cash used in investing activities (5.6) (10.7)
FINANCING ACTIVITIES
Payment of long-term debt - (2.1)
Increase in long-term debt - .9
Net increase (decrease) in short-term borrowings (.4) 15.0
Purchase of treasury stock (3.8) (3.2)
Proceeds from stock purchase and option plans 1.4 7.4
Cash dividends paid (14.3) (13.9)
------- -------
Net cash provided by (used in) financing activities (17.1) 4.1
Effect of exchange rate changes on cash 1.1 (.1)
------- -------
Decrease in cash and cash equivalents (3.0) (1.3)
Cash and cash equivalents at beginning of period 18.4 6.7
------- -------
Cash and cash equivalents at end of period $ 15.4 $ 5.4
======= ========
Supplemental cash flow disclosures:
Cash paid for interest $ 7.6 $ 9.3
Cash paid (refunded) for income taxes $ .7 $ (4.6)
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"
or "the company") Annual Report on Form 10-K for the year ended December
28, 2002.
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 months ended March 29, 2003, have
been made. Management also believes that the results of operations for the
three months ended March 29, 2003, are not necessarily indicative of the
results to be expected for the full year. Certain prior-year amounts have
been reclassified to conform to the current-year presentation.
2. The Financial Accounting Standards Board ("FASB") issued interpretation
("FIN") No. 46, "Consolidation of Variable Interest Entities" (an
interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements") in January 2003, which becomes effective for Snap-on
at the beginning of its 2003 third quarter. FIN No. 46 provides
consolidation guidance regarding the identification of variable interest
entities ("VIE") for which control is achieved through means other than
through voting rights. FIN No. 46 provides guidance in determining if a
business enterprise is the primary beneficiary of a VIE and whether or not
that business enterprise should consolidate the VIE for financial reporting
purposes. FIN No. 46 applies to a VIE in which equity investors of the VIE,
if any, do not have the characteristics of a controlling interest or do not
have sufficient equity at risk for the VIE to finance its activities
independently. FIN No. 46 requires each enterprise involved with a special
purpose entity to determine whether it provides financial support to the
special purpose entity through a variable interest. Variable interests may
arise from financial instruments, service contracts, minority ownership
interests or other arrangements. If an entity holds a majority of the
variable interests, or a significant variable interest that is considerably
more than any other party's variable interest, then that entity would be
the primary beneficiary and would be required to include the assets,
liabilities and results of operations of the special purpose entity in its
consolidated financial statements.
Snap-on has not completed its evaluation of FIN No. 46 and, as a result,
has not concluded on the impact the adoption may have on the company's
financial position or results of operations. If it is determined that
Snap-on Credit LLC ("SOC"), a 50%-owned financial services joint venture
that is accounted for using the equity method, qualifies as a VIE, then
Snap-on may be required to include the assets and liabilities (or some
portion thereof) of SOC in its consolidated financial statements beginning
in the third quarter of 2003. As of March 31, 2003, and December 31, 2002,
SOC had total assets of $42.4 million and $45.3 million. For additional
information, refer to Note 6.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 requires a guarantor to recognize a
liability for the fair value of the obligation that it has undertaken in
issuing a guarantee at the inception of a guarantee. FIN No. 45 also
addresses the disclosure requirements that a guarantor must include in its
financial statements for guarantees issued. Snap-on adopted the disclosure
provisions of FIN No. 45 as of its 2002 fiscal year end. The recognition
and
7
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
measurement provisions of this interpretation are applicable to guarantees
issued or modified after December 28, 2002. Refer to Notes 6 and 12 for
additional information.
3. Accounts receivable include trade accounts receivable, installment
receivables and dealer financing. Current gross installment receivables
amounted to $52.7 million and $49.5 million at March 29, 2003, and December
28, 2002, and include $8.7 million and $8.1 million of unearned finance
charges. The components of Snap-on's current accounts receivable were as
follows:
March 29, 2003 December 28, 2002
-------------- -----------------
(Amounts in millions)
Trade accounts receivable $523.2 $497.0
Installment receivables 44.0 41.4
Other accounts receivable 38.5 59.0
------ ------
Total 605.7 597.4
Allowance for doubtful accounts (44.7) (41.2)
------ ------
Total accounts receivable - net $561.0 $556.2
====== ======
The long-term portion of accounts receivable is classified in "Other
assets" on the accompanying Consolidated Balance Sheets and is comprised of
installment and dealer financing receivables with credit terms that are due
beyond one year. Long-term gross installment receivables amounted to $47.1
million and $45.2 million at March 29, 2003, and December 28, 2002, and
include $8.5 million and $7.9 million of unearned finance charges.
4. 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 applies to all
goodwill and other intangible assets recognized by the corporation as of
December 30, 2001. In accordance with SFAS No. 142, 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.
Additional disclosures related to acquired intangible assets are as
follows:
March 29, 2003 December 28, 2002
------------------------------------ --------------------------------------
Gross Gross
(Amounts in millions) Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
---------------- ----------------- ------------------ ----------------
Amortized intangible assets:
Trademarks $ 4.3 $ (.3) $ 3.9 $ (.3)
Patents 29.7 (9.4) 29.4 (8.3)
------ -------- ------ --------
Total 34.0 (9.7) 33.3 (8.6)
Unamortized intangible assets:
Trademarks 41.8 - 41.0 -
------ -------- ------ --------
Total intangible assets $ 75.8 $ (9.7) $ 74.3 $ (8.6)
====== ======== ====== ========
8
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The weighted-average amortization period is 35 years for trademarks and 16
years for patents. The weighted-average amortization period for trademarks
and patents on a combined basis is 19 years.
Amortization expense for the three months ended March 29, 2003, and March
30, 2002, was $.5 million and $.6 million. Total estimated annual
amortization expense expected for each of the next five fiscal years, based
on current levels of other intangible assets, is $1.6 million.
Goodwill was $375.7 million and $366.4 million at March 29, 2003, and
December 28, 2002, reflecting currency translation impacts.
5. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with 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 accounted for pursuant to the guidance
that the Emerging Issues Task Force ("EITF") 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)." SFAS No. 146 nullifies EITF Issue No. 94-3 and requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, rather than at the date of the
entity's commitment to an exit plan. This statement is effective for exit
and disposal activities that are initiated after December 28, 2002. Snap-on
adopted SFAS No. 146 at the beginning of its 2003 fiscal year.
Snap-on recorded restructuring charges of $2.5 million in the first quarter
of 2003, including $2.4 million for severance costs to effect consolidation
initiatives and management realignment actions and $.1 million for facility
consolidation or closure costs. These restructuring charges are included in
"Cost of goods sold" ($1.8 million) and "Operating expenses" ($.7 million)
on the accompanying Consolidated Statements of Earnings. The restructuring
reserve usage of $2.8 million for the first quarter ended March 29, 2003,
was for severance payments related to the separation of 183 employees.
During the first quarter of 2003, Snap-on completed its restructuring
actions initiated in the fourth quarter of 2002 and Snap-on anticipates
that the remaining cash severance payments related to the fourth-quarter
2002 actions will be made in the second quarter of 2003.
The composition of Snap-on's restructuring charge activity for the first
quarter ended March 29, 2003, was as follows:
Balance at Balance at
(Amounts in millions) December 28, 2002 Additions Usage March 29, 2003
- ------------------------------------------------------------------------------------------------------
Severance costs $ 2.9 $ 2.4 $(2.8) $ 2.5
Facility consolidation or
closure costs - .1 - .1
- ------------------------------------------------------------------------------------------------------
Total $ 2.9 $ 2.5 $(2.8) $ 2.6
===== ===== ===== =====
9
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Snap-on has funded and expects to continue to fund the remaining cash
requirements of its restructuring activities with cash flows from
operations and borrowings under its existing credit facilities. The
specific restructuring measures and estimated costs were based on
management's best business judgment under prevailing circumstances. If
future events warrant changes to the reserve, such adjustments will be
reflected as either "Cost of goods sold" or "Operating expenses," as
appropriate, in the applicable Consolidated Statements of Earnings.
6. SOC is an unconsolidated 50%-owned joint venture between Snap-on and The
CIT Group, Inc. ("CIT"). SOC was formed as a limited liability company with
member contributions totaling $2.0 million, and commenced operations on
January 3, 1999. As of March 29, 2003, Snap-on's equity investment in SOC
totaled approximately $3.9 million. SOC provides a broad range of financial
services to Snap-on's U.S. dealer and customer network and to Snap-on's
industrial and other customers. Snap-on also provides financing
internationally through its wholly owned credit subsidiaries, the results
of which are included in Snap-on's Consolidated Financial Statements.
Snap-on receives royalty and management fee income from SOC based on the
volume of financings originated by SOC. Snap-on also shares with CIT
ratably in any residual net profit or loss of the joint venture after
operating expenses, including royalty and management fees, interest costs
and credit loss provisions.
SOC sells substantially all of its originated contracts (through
asset-securitization transactions) on a limited recourse basis to CIT, net
of certain fees. SOC continues to service these contracts for an estimated
market rate-servicing fee.
SOC establishes a reserve for all contract receivables sold to CIT, and
SOC's credit losses on the sold contract receivables are limited to the
extent of the reserve. SOC also establishes a prepayment reserve to cover
amounts due to CIT as a result of early prepayments by customers on loans
sold to CIT. Loan losses on the contract receivables retained by SOC were
not material in any year.
Snap-on has credit risk exposure for certain loans that SOC originates with
recourse provisions against Snap-on. At March 29, 2003, and December 28,
2002, $29.4 million and $32.1 million of loans, with terms ranging from six
months to ten years, originated by SOC have a primary recourse provision to
Snap-on if the loans become more than 90 days past due. During the first
quarter of 2003, $.4 million of such loans were purchased by Snap-on.
10
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The recognition and measurement provisions of FIN No. 45 became effective
for guarantees issued or modified by Snap-on after December 28, 2002.
During the first quarter of 2003, $4.9 million of loans with recourse
provision to Snap-on were originated by SOC. The maximum potential amount
of future payments that Snap-on could be required to make under the
guarantee provisions for these loans as of March 29, 2003, is $4.9 million.
The asset value of the collateral underlying the recourse loans issued in
2003 that would serve to mitigate Snap-on's loss in the event of default
was approximately $3.0 million as of March 29, 2003. Snap-on has
established a reserve for the estimated fair market value of the guarantee
of loans originated with recourse in the first quarter of 2003.
SOC maintains a $25 million bank line of credit for working capital
purposes, of which Snap-on is a 60% guarantor and CIT is a 40% guarantor.
Borrowings under this facility totaled $7.0 million and $11.0 million at
March 29, 2003 and December 28, 2002. SOC's bank line of credit has an
expiration date of May 31, 2003. To date, there have been no draws upon
this guarantee.
The maximum exposure to Snap-on as of March 29, 2003, and December 28,
2002, related to SOC was the $3.9 million and $2.7 million equity
investment plus the guarantee on SOC's line of credit and the recourse
obligations on customer financings discussed above.
Summarized financial information of SOC as of March 31, 2003, and December
31, 2002, and for the quarters ended March 31, 2003, and March 31, 2002, is
as follows:
March 31, December 31,
2003 2002
---- ----
(Amounts in millions)
Cash and cash equivalents $ 3.7 $ 5.4
Receivables, net of allowances 12.3 13.4
Servicing receivable 7.7 7.6
Due from members 11.0 10.9
Other assets 7.7 8.0
----- -----
$42.4 $45.3
===== =====
Payable to members $11.2 $12.4
Reserves for contract receivables sold 8.9 8.3
Other accrued liabilities 8.0 8.6
Short-term borrowings 7.0 11.0
Members' equity 7.3 5.0
----- -----
$42.4 $45.3
===== =====
11
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Three Months Ended
------------------
March 31,
---------
(Amounts in millions)
Revenues: 2003 2002
---- ----
Gain on sale of contract
receivables sold $15.9 $13.3
Servicing fee income 2.4 2.3
Other income .1 .1
----- -----
Total revenues 18.4 15.7
Expenses:
Royalty fees 5.9 5.4
Salaries and benefits 4.1 3.8
Management fees 2.9 2.7
Other 3.1 3.1
----- -----
Total expenses 16.0 15.0
----- -----
Net income $ 2.4 $ .7
===== =====
7. Notes payable and long-term debt of Snap-on at March 29, 2003, totaled
$358.9 million, down $1.8 million from the $360.7 million reported at
year-end 2002. Notes payable to banks under bank lines of credit totaled
$21.1 million and $22.3 million at March 29, 2003 and December 28, 2002. At
March 29, 2003 and December 28, 2002, Snap-on had commercial paper
outstanding denominated in U.S. dollars of $25.0 million and Japanese yen
with a U.S. dollar value of $7.9 million.
At March 29, 2003, Snap-on had $408 million of multi-currency revolving
credit facilities that serve to provide back-up liquidity for its
commercial paper programs. These facilities include a $200 million, 364-day
revolving credit facility with a one-year term-out option that terminates
on August 8, 2003. The term-out option allows Snap-on to elect to borrow
under the credit facility for an additional year after the termination
date. These facilities also include a five-year, $208 million revolving
credit facility that terminates on August 20, 2005. At the end of March
2003 and year-end 2002, Snap-on was in compliance with all covenants of the
revolving credit facilities and there were no borrowings under either
revolving credit facility. In addition, at March 29, 2003, Snap-on had an
unused committed $20 million bank line of credit that expires on August 1,
2003.
8. 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 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
12
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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 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 March 29, 2003, Snap-on had net outstanding foreign exchange forward
contracts totaling $135.0 million comprised of buy contracts of $71.3
million in Swedish kronor and sell contracts of $94.5 million in euros,
$56.5 million in British pounds, $26.2 million in Canadian dollars, $11.2
million in Singapore dollars, $4.9 million in Australian dollars, $3.6
million in Danish kronor, $3.4 million in Japanese yen, $3.3 million in
Norwegian kronor, $2.8 million in Mexican pesos and $.1 million net buy
contracts in other currencies. At December 28, 2002, Snap-on had net
outstanding foreign exchange forward contracts totaling $161.9 million
comprised of buy contracts of $52.5 million in Swedish kronor and sell
contracts of $103.8 million in euros, $59.1 million in British pounds,
$31.2 million in Canadian dollars, $7.5 million in Singapore dollars, $3.0
million in Danish kronor, $2.5 million in Australian dollars, $3.7 million
in Mexican pesos and $3.6 million in other currencies.
Snap-on classifies the majority of its forward exchange contracts as
natural hedges and therefore these contracts are 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
13
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
"Other income (expense) - net," and were not material for the three months
ended March 29, 2003, and March 30, 2002.
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". These ineffective portions were not material for the three months
ended March 29, 2003, and March 30, 2002. At March 29, 2003, net losses of
$.1 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 March 29, 2003 and December 28, 2002, and included $25.0 million
of fair value hedges and $25.0 million of cash flow hedges.
For all cash flow hedges qualifying for hedge accounting under SFAS No.
133, the net accumulated derivative loss at March 29, 2003, was $4.1
million, after tax, and is reflected in "Accumulated other comprehensive
income (loss)." Changes in the fair value of derivative financial
instruments qualifying for hedge accounting under SFAS No. 133, are
reflected as derivative assets or liabilities with the corresponding gains
or losses reflected in earnings in the period of change. An offsetting gain
or loss is also reflected in earnings based upon the changes of the fair
value of the debt instrument being hedged. For all fair value hedges
qualifying for hedge accounting under SFAS No. 133, the net accumulated
derivative gain at March 29, 2003, was $3.4 million. At March 29, 2003, the
maximum maturity date of any cash flow hedge and fair value hedge was
approximately 2 years and 8 years, respectively. During the next 12 months,
Snap-on expects to reclassify into earnings net losses from "Accumulated
other comprehensive income (loss)" of approximately $1.6 million after tax
at the time the underlying hedged transactions are realized.
During the first quarter ended March 29, 2003, cash flow hedge and fair
value hedge ineffectiveness was not material.
14
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Snap-on has stock option plans for directors, officers and key employees,
with expiration dates on the options ranging from 2003 to 2013 and vesting
periods ranging from immediate to three years. The plans provide that
options be granted at exercise prices equal to market value on the date the
option is granted.
Snap-on accounts for its stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." In
accordance with the provisions of APB Opinion No. 25, no compensation
expense was recorded for stock options as all options granted had an
exercise price equal to the market value of the underlying common stock on
the measurement date. For restricted stock and stock appreciation rights
awards, Snap-on recorded compensation expense in the respective periods as
appropriate.
Snap-on adopted the disclosure provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123," as of December 28, 2002. The following table
illustrates the effect on net earnings and earnings per share as if Snap-on
had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation using the Black-Scholes option-pricing model.
Three Months Ended
----------------------
March 29, March 30,
(Amounts in millions except per share data) 2003 2002
--------- ---------
Net earnings, as reported $21.4 $24.5
Add: Stock-based employee compensation expense
included in reported net income,
net of related tax effects .6 .5
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (1.8) (1.9)
----- -----
Pro forma net earnings $20.2 $23.1
===== =====
Net earnings per share - basic:
As reported $ .37 $ .42
Pro forma .35 .40
Net earnings per share - diluted:
As reported .37 .42
Pro forma .35 .39
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
15
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. 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. Snap-on had dilutive shares as of March 29, 2003,
and March 30, 2002, of 58,742 shares and 687,534 shares, respectively.
Options to purchase 5,851,169 shares and 1,615,774 shares of Snap-on common
stock at March 29, 2003, and March 30, 2002, were not included in the
computation of diluted earnings per share as the exercise prices of the
options was greater than the average market price of the common stock for
the respective period and the effect on earnings per share would be
anti-dilutive.
11. Total comprehensive income for the three-months ended March 29, 2003, and
March 30, 2002, was as follows:
Three Months Ended
------------------
March 29, March 30,
(Amounts in millions) 2003 2002
--------- ---------
Net earnings $ 21.4 $ 24.5
Foreign currency translation 23.1 (7.1)
Change in fair value of derivative
instruments, net of tax (.7) 2.1
------- -------
Total comprehensive income $ 43.8 $ 19.5
======= =======
12. Snap-on has various corporate and government customers worldwide that
purchase Snap-on products pursuant to multi-year contracts. These contracts
can include a variety of terms and are periodically subject to audit by the
customers for compliance. Snap-on currently has two contracts being audited
by government auditors. Snap-on is also involved in various other legal
matters that are being defended and handled in the ordinary course of
business. Snap-on maintains accruals for such costs that it expects to
incur with regard to these matters. Although it is not possible to predict
the outcome of these matters, management believes that the results will not
have a material impact on Snap-on's financial statements.
16
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Snap-on provides product warranties for specific product lines and accrues
for estimated future warranty cost in the period in which the sale is
recorded. Snap-on calculates its reserve requirements based on historic
warranty loss experience that is periodically adjusted for recent actual
experience. The following is an analysis of Snap-on's product warranty
reserve for the first three months of 2003 and 2002:
March 29, March 30,
(Amounts in millions) 2003 2002
--------- ---------
Warranty reserve:
Beginning of year $ 11.6 $ 8.2
Additions 2.8 3.5
Usage (2.9) (3.1)
------ ------
End of period $ 11.5 $ 8.6
====== ======
13. Snap-on's business segments are based on the organization structure used by
management for making operating and investment decisions and for assessing
performance. Snap-on's reportable business segments include the following:
(i) the Snap-on Dealer Group; (ii) the Commercial and Industrial Group; and
(iii) the Diagnostics and Information Group. The Snap-on Dealer Group
consists of Snap-on's business operations serving the worldwide franchised
dealer van channel. The Commercial and Industrial Group consists of the
business operations providing tools and equipment products to a broad range
of industrial and commercial customers worldwide through direct,
distributor and other non-franchised distribution channels. The Diagnostics
and Information Group consists of the business operations providing
diagnostics equipment, vehicle-service information, business management
systems, equipment repair services and other solutions for vehicle service
to customers in the worldwide vehicle service and repair marketplace.
Snap-on evaluates the performance of its operating segments based on
segment net sales and operating earnings. Segment net sales are defined as
total net sales, including both net sales to external customers and
intersegment sales. Segment operating earnings are defined as net sales
less cost of goods sold and operating expenses, including applicable
restructuring and other non-recurring charges. Snap-on began allocating
restructuring and other non-recurring charges to its reportable segments in
fiscal 2003. Prior to fiscal 2003, Snap-on did not allocate such charges to
the reportable segments. As a result, all prior-year segment information
presented herein has been restated to conform to the 2003 presentation.
Snap-on accounts for intersegment sales and transfers based primarily on
standard costs with reasonable mark-ups established between the segments.
Snap-on allocates shared services expenses to those segments that utilize
the services based on a percentage of either cost of goods sold or segment
net sales, as appropriate.
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.
17
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial data by segment was as follows:
Three Months Ended
------------------
March 29, March 30,
(Amounts in millions) 2003 2002
--------- ---------
Net sales to external customers:
Snap-on Dealer Group $ 259.2 $ 256.5
Commercial and Industrial Group 243.4 214.9
Diagnostics and Information Group 40.5 38.6
--------- ---------
Total net sales to external customers $ 543.1 $ 510.0
========= =========
Intersegment sales:
Snap-on Dealer Group $ 5.7 $ 3.8
Commercial and Industrial Group 29.3 29.9
Diagnostics and Information Group 35.9 42.7
--------- ---------
Total intersegment sales $ 70.9 $ 76.4
========= =========
Total net sales:
Snap-on Dealer Group $ 264.9 $ 260.3
Commercial and Industrial Group 272.7 244.8
Diagnostics and Information Group 76.4 81.3
--------- ---------
Segment net sales 614.0 586.4
Intersegment eliminations (70.9) (76.4)
--------- ---------
Total consolidated net sales $ 543.1 $ 510.0
========= =========
Operating earnings:
Snap-on Dealer Group $ 23.6 $ 26.4
Commercial and Industrial Group 6.1 6.6
Diagnostics and Information Group 2.8 1.4
--------- ---------
Segment operating earnings 32.5 34.4
Net finance income 10.5 7.3
--------- ---------
Operating earnings 43.0 41.7
Interest expense (6.4) (7.8)
Other income (expense) - net (3.7) (.1)
--------- ---------
Earnings before income taxes $ 32.9 $ 33.8
========= =========
18
SNAP-ON INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
-----------------------------
March 29, December 28,
(Amounts in millions) 2003 2002
--------- ------------
Assets:
Snap-on Dealer Group $ 738.6 $ 759.7
Commercial and Industrial Group 1,043.1 1,010.7
Diagnostics and Information Group 205.2 198.5
-------- --------
Total from reportable segments 1,986.9 1,968.9
Financial Services 104.4 82.5
Elimination of intersegment receivables (67.8) (57.3)
-------- --------
Total assets $2,023.5 $1,994.1
======== ========
19
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 $543.1 million in the first quarter of 2003, up $33.1 million, or
6.5%, from the $510.0 million in the prior-year period. Of the year-over-year
increase, $28.6 million, or 5.6%, was from the favorable impact of currency
translation. Absent currency translation impacts, sales increased $4.5 million,
or 0.9%, year over year. Sales increases in the worldwide dealer, equipment and
facilitation businesses, as well as contributions from favorable net pricing,
new product introductions and acquisitions, were largely offset by declines in
the sales of industrial tools worldwide and big-ticket diagnostics equipment.
Net earnings were $21.4 million, or $.37 per diluted share, for the first
quarter of 2003, as compared with net earnings of $24.5 million, or $.42 per
diluted share, for the first quarter of 2003. Net earnings in the first quarter
of 2002 included a net gain of $2.8 million, or $.05 per diluted share, for the
cumulative effect of an accounting change associated with Snap-on's adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Snap-on adopted SFAS No. 142 on December 30, 2001,
which was the beginning of Snap-on's 2002 fiscal year. Net earnings, before the
cumulative effect of the change in accounting principle in 2002, were $21.7
million, or $.37 per diluted share.
Operating results for the first quarter of 2003 included expenses of $2.5
million for continuous improvement initiatives, including severance and other
costs associated with consolidation and realignment actions at certain
manufacturing and other facilities. Snap-on also incurred higher year-over-year
pension, other retirement and insurance costs of approximately $5.0 million in
the first quarter of 2003. Partially offsetting these expense increases was $3.2
million in higher year-over-year net finance income, primarily as a result of
higher credit originations and continued favorable interest rates. Earnings in
the first quarter of 2002 included restructuring-related charges of $3.0 million
related to the 2002 resignation of Snap-on's former chief financial officer and
$.4 million for employee and equipment relocation costs to finalize the
company's fiscal 2001 restructuring initiatives. These costs did not qualify for
restructuring accrual treatment and were expensed as incurred, and are included
in "Operating expenses" on the accompanying Consolidated Statements of Earnings.
In the first quarter of 2002, Snap-on also incurred a $2.6 million write-down of
a receivable related to the closure of auto service centers associated with a
major retailer's bankruptcy.
Gross profit for the first quarter of 2003 was $245.4 million, up $9.7 million,
or 4.1%, from $235.7 million in the prior-year period. Gross profit in the first
quarter of 2003 benefited from favorable net currency impacts of $9.7 million
and savings from Snap-on's restructuring and Operational Fitness activities of
$4.2 million. These benefits were partially offset by higher costs for
continuous improvement initiatives of $1.8 million and higher pension, other
retirement and insurance costs of $.8 million. In addition, benefits from the
success of new product introductions and favorable net pricing were offset by
the impacts of unfavorable sales mix, lower production volumes associated with
improving
20
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
inventory turns in a slow sales environment and general cost increases. As a
percentage of sales, gross profit margin was 45.2% in the first quarter of 2003,
versus 46.2% in the first quarter of 2002.
Operating expenses for the first quarter of 2003 were $212.9 million, or 39.2%
of sales, as compared to $201.3 million, or 39.5% of sales, in the prior-year
period. The $11.6 million increase in year-over-year operating expenses
primarily includes unfavorable currency translation impacts of $8.8 million,
higher pension, other retirement and insurance costs of $4.2 million, general
and acquisition-related cost increases of $4.6 million, higher allowances for
bad debts of $2.7 million, increased costs of $1.6 million for the "More Feet on
the Street" dealer expansion and enhancement initiative, costs for continuous
improvement initiatives of $.7 million, and higher new product development
spending of $.5 million. These year-over-year increases were partially offset by
savings of $4.8 million from Snap-on's restructuring and Operational Fitness
activities. The year-over-year operating expense comparison benefited from the
absence of $6.0 million in costs incurred in the first quarter of 2002 that
included $3.0 million related to the 2002 resignation of Snap-on's former chief
financial officer, $2.6 million for the write-down of a receivable related to
the closure of auto service centers associated with a major retailer's
bankruptcy, and $.4 million for employee and equipment relocation transition
costs to finalize the company's fiscal 2001 restructuring actions.
Segment Results
- ---------------
Snap-on's business segments are based on the organization structure used by
management for making operating and investment decisions and for assessing
performance. Snap-on's business segments include: (i) the Snap-on Dealer Group,
(ii) the Commercial and Industrial Group, and (iii) the Diagnostics and
Information Group. The Snap-on Dealer Group consists of Snap-on's business
operations serving the worldwide franchised dealer van channel. The Commercial
and Industrial Group consists of the business operations providing tools and
equipment products to a broad range of industrial and commercial customers
worldwide through direct, distributor and other non-franchised distribution
channels. The Diagnostics and Information Group consists of the business
operations providing diagnostics equipment, vehicle service information,
business management systems, equipment repair services and other solutions for
customers in the worldwide vehicle service and repair marketplace.
Snap-on evaluates the performance of its operating segments based on segment net
sales and operating earnings. Segment net sales are defined as total net sales,
including both net sales to external customers and intersegment sales. Segment
earnings are defined as segment net sales less cost of goods sold and operating
expenses, including restructuring and other non-recurring charges as applicable.
Snap-on began allocating restructuring and other non-recurring charges to its
reportable segments in fiscal 2003. Prior to fiscal 2003, Snap-on did not
allocate such charges to the reportable segments. As a result, all prior-year
segment information presented herein has been restated to conform to the 2003
presentation. Snap-on accounts for intersegment sales and transfers based
primarily on standard costs with reasonable mark-ups established between the
segments. Snap-on allocates shared services expenses to those segments that
utilize the services based on a percentage of either cost of goods sold or
segment net sales, as appropriate.
21
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following discussion focuses on Snap-on's net sales and operating earnings
by reportable segment.
Three Months Ended
------------------------------------
March 29, March 30,
(Amounts in millions) 2003 2002
----------------- --------------
Total net sales:
Snap-on Dealer Group $264.9 $260.3
Commercial and Industrial Group 272.7 244.8
Diagnostics and Information Group 76.4 81.3
------ ------
Segment net sales 614.0 586.4
Intersegment eliminations (70.9) (76.4)
------ ------
Total consolidated net sales $543.1 $510.0
====== ======
Operating earnings:
Snap-on Dealer Group $ 23.6 $ 26.4
Commercial and Industrial Group 6.1 6.6
Diagnostics and Information Group 2.8 1.4
------ ------
Segment operating earnings 32.5 34.4
Net finance income 10.5 7.3
------ ------
Operating earnings 43.0 41.7
Interest expense (6.4) (7.8)
Other income (expense) - net (3.7) (.1)
------ ------
Earnings before income taxes $ 32.9 $ 33.8
====== ======
Snap-on Dealer Group
In the worldwide Snap-on Dealer Group, segment net sales for the first quarter
of 2003 were $264.9 million, up $4.6 million, or 1.8%, from $260.3 million in
the comparable prior-year period. Excluding currency translation impacts,
segment net sales increased $3.3 million, or 1.3%, year over year in the first
quarter, reflecting sales gains by dealers to end-user customers, including
increases in sales of tools, tool storage and handheld diagnostics, as well as
the negative impact on sales from improving inventory turns within the dealer
network. The resulting leaner inventory position of dealers reflects Snap-on's
continued focus on the More Feet on the Street dealer expansion and enhancement
initiative. Snap-on successfully achieved its 10% goal for expanding the number
of U.S. dealers by the end of 2002, and Snap-on expects the U.S. dealer network
to continue to grow at a rate of 2% - 4% annually. The More Feet on the Street
initiative provides new opportunities for increased service and marketplace
coverage through net additions of dealers and provides a means of enhancement
for successful existing Snap-on dealers through second vans and second
franchises. In the international markets, sales growth was achieved in the U.K.,
Australia and Canada.
22
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
In 2002, Snap-on began focusing its dealers on the importance of better working
capital management, including improving inventory turns and tightening of credit
terms. Sales to end-user customers showed steady growth in 2002 and the first
quarter of 2003, although sales of Snap-on product to dealers were lower as
dealers actively worked to reduce their inventory levels. The improved working
capital position of its dealers reflects Snap-on's continued focus on enhancing
the business proposition for, and the strength of, its dealers under the More
Feet on the Street initiative. End-market demand for tools and tool storage
products remained strong as sell-through by the dealers was up slightly when
compared with the first quarter of 2002, despite the negative effect of severe
winter weather in certain parts of the United States that hindered dealers'
sales activity when compared with the prior year.
Segment earnings for the Dealer Group for the first quarter of 2003 were $23.6
million, down from $26.4 million in the first quarter of 2002, as benefits from
productivity savings and tighter control on discretionary spending of $1.2
million were more than offset by higher year-over-year costs incurred for
continuous improvement initiatives of $.4 million, higher bad debt reserves of
$1.6 million, and $1.7 million for continued investment in the More Feet on the
Street program. The year-over-year increase in costs incurred related to the
More Feet on the Street program includes higher dealer turnover costs to remove
low-performing dealers, as well as higher costs for new dealer training,
recruiting and other dealer expansion costs. In addition, benefits from the
success of new product introductions and favorable net pricing in the first
quarter of 2003 were offset by the impacts of lower production volumes
associated with improving inventory turns in a slow sales environment, general
cost increases and increased pension, other retirement and insurance costs. As a
percentage of segment net sales, segment earnings were 8.9% in the first quarter
of 2003, as compared to 10.1% in the comparable prior-year period.
Commercial and Industrial Group
In the Commercial and Industrial Group, segment net sales for the first quarter
of 2003 increased to $272.7 million, up $27.9 million, or 11.4%, over the
prior-year period of $244.8 million, primarily due to currency translation.
Excluding currency translation benefits, year-over-year sales were up $1.7
million, or 0.7%, largely due to growth in the company's facilitation business
for new vehicle dealerships and higher sales worldwide of equipment for the
vehicle-service marketplace, reflecting the success of new products in the wheel
balancer, tire changer and wheel alignment lines over the past three years. This
growth was partially offset by sales declines in the industrial tools
marketplace, principally in North America, reflecting the continued adverse
impact of weak economic conditions in such sectors as aerospace and aviation,
general manufacturing and capital goods.
Segment earnings for the Commercial and Industrial Group for the first quarter
of 2003 were $6.1 million, down from the $6.6 million reported in the first
quarter of 2002. Savings of $6.5 million from Snap-on's fiscal 2002
restructuring and Operational Fitness activities, along with lower
year-over-year restructuring-related costs of $1.3 million, were offset by
increases in pension, other retirement and insurance costs of $1.9 million,
general cost increases of $1.6 million, increased bad debt reserves of $1.0
million, and lower manufacturing cost absorption of $.6 million. Unfavorable
sales mix also adversely impacted year-over-year segment earnings by
approximately $3.0 million, as the unfavorable earnings effect from lower sales
of high-margin industrial tools was not offset by the sales increases in
lower-margin operations. As a
23
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
percentage of segment net sales, segment earnings were 2.2% in the first quarter
of 2003, as compared to 2.7% in the comparable prior-year period.
Diagnostics and Information Group
In the Diagnostics and Information Group, segment net sales for the first
quarter of 2003 were $76.4 million, down $4.9 million, or 6.0%, as compared to
$81.3 million in the first quarter of 2002. Excluding favorable currency impacts
of $2.8 million, year-over-year segment net sales were down $7.7 million, or
9.3%. The year-over-year sales decline is principally attributable to a decline
in intersegment sales. Increased sales of information and handheld diagnostics
products were offset by lower sales of big-ticket diagnostics equipment, both in
direct sales to national accounts and in intersegment sales of products sold
through the Dealer Group's technical representatives ("tech rep") organization.
Segment earnings for the Diagnostics and Information Group for the first quarter
of 2003 were $2.8 million, as compared to $1.4 million in the first quarter of
last year. As a percentage of net segment sales, operating margin in the
Diagnostics and Information Group improved from 1.7% in the first quarter of
2002 to 3.7% in the first quarter of 2003. The increase in both year-over-year
segment earnings and operating margin reflects benefits of $1.3 million from
productivity improvements and cost savings realized from restructuring and
ongoing cost-reduction efforts, including the completion of the realignment of
production capabilities in certain European equipment lines and contributions of
$1.1 million from favorable net pricing and new product sales. In addition,
segment earnings for the first quarter of 2003 reflect lower bad debt expense
due to the absence of the $2.6 million write-down of a receivable in the first
quarter of 2002 related to the closure of auto service centers associated with a
major retailer's bankruptcy. These year-over-year increases in operating
earnings were partially offset by the margin impact of the lower sales volumes
and lower manufacturing cost absorption of $3.3 million, and higher costs for
pension and other retirement costs of $.4 million.
Other
- -----
Net finance income was $10.5 million in the first quarter of 2003, up $3.2
million from $7.3 million in the prior-year period. Higher year-over-year credit
originations of 7.5%, primarily related to the U.S. dealer business, as well as
improved interest-rate spreads on originated loans, contributed to the increase.
Interest expense was $6.4 million in the first quarter of 2003, down $1.4
million from $7.8 million in the first quarter of 2002. The decline reflects the
impact of both lower average interest rates and debt levels due to strong cash
flow from operating activities.
Other income (expense)-net was an expense of $3.7 million for the first quarter
of 2003, as compared to expense of $.1 million in the comparable prior-year
period. This line item includes the impact of all non-operating items such as
interest income, license fees, minority interests, hedging and exchange rate
transaction gains and losses, and other miscellaneous non-operating items. Other
expense increased $3.6 million in the first quarter of 2003 over the prior-year
level largely reflecting $2.5 million of
24
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
foreign exchange losses and $.5 million for higher minority interest expense.
Minority interest expense for the first quarter of 2003 was $.7 million, as
compared to $.2 million for the first quarter of 2002.
Snap-on's effective income tax rate was 35.0% in the first quarter of 2003 and
36.0% in the first quarter of 2002.
Exit or Disposal Activities
- ---------------------------
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with 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 accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") 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)." SFAS No. 146 nullifies EITF Issue No. 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, rather than at the date of the entity's
commitment to an exit plan. This statement is effective for exit and disposal
activities that are initiated after December 28, 2002. Snap-on adopted SFAS No.
146 at the beginning of its 2003 fiscal year.
Snap-on recorded restructuring charges of $2.5 million in the first quarter of
2003, including $2.4 million for severance costs to effect consolidation
initiatives and management realignment actions and $.1 million for facility
consolidation or closure costs. These restructuring charges are included in
"Cost of goods sold" ($1.8 million) and "Operating expenses" ($.7 million) on
the accompanying Consolidated Statements of Earnings. The restructuring reserve
usage of $2.8 million for the first quarter ended March 29, 2003, was for
severance payments related to the separation of 183 employees. During the first
quarter of 2003, Snap-on completed its restructuring actions initiated in the
fourth quarter of 2002 and Snap-on anticipates that the remaining cash severance
payments related to the fourth-quarter 2002 actions will be made in the second
quarter of 2003.
The composition of Snap-on's restructuring charge activity for the first quarter
ended March 29, 2003, was as follows:
Balance at Balance at
(Amounts in millions) December 28, 2002 Additions Usage March 29, 2003
- ----------------------------------------------------------------------------------------------------
Severance costs $ 2.9 $ 2.4 $(2.8) $ 2.5
Facility consolidation or
closure costs - .1 - .1
- ----------------------------------------------------------------------------------------------------
Total $ 2.9 $ 2.5 $(2.8) $ 2.6
===== ===== ===== =====
25
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Snap-on has funded and expects to continue to fund the remaining cash
requirements of its restructuring activities with cash flows from operations and
borrowings under its existing credit facilities. The specific restructuring
measures and estimated costs were based on management's best business judgment
under prevailing circumstances. If future events warrant changes to the reserve,
such adjustments will be reflected as either "Cost of goods sold" or "Operating
expenses," as appropriate, in the applicable Consolidated Statements of
Earnings.
FINANCIAL CONDITION
Cash flow provided from operating activities was $18.6 million in the first
quarter of 2003, including a $20.7 million benefit from a reduction in working
investment (inventories plus accounts receivable less accounts payable). Cash
flow from operating activities in the first quarter of 2003 included a pension
plan contribution of $10 million. Snap-on currently expects that its remaining
required minimum pension plan contribution for the balance of 2003 will be
approximately $10 million. Snap-on also expects that its full-year 2003 pension
expense will increase by approximately $17 million over 2002 levels. Cash flow
from operating activities in 2002 was $5.4 million, including a $44.0 million
payment ($27.9 million net of tax benefit) for the December 2001 resolution of
an arbitration matter, partially offset by a reduction in working investment.
Total notes payable and long-term debt was $358.9 million at the end of the
first quarter of 2003, as compared to $360.7 million at year-end 2002 and $488.2
million at the end of the first quarter of 2002. First-quarter 2003 total debt
levels have decreased $129.3 million from the end of the first quarter of 2002,
reflecting Snap-on's increased cash flow. Cash and cash equivalents were $15.4
million and $5.4 million at the end of the first quarters of 2003 and 2002,
respectively.
The ratio of Snap-on's total net debt (defined as total debt less cash and cash
equivalents) to total invested capital (defined as total net debt plus
shareholders' equity) was 28.6% at the end of the first quarter of 2003,
compared to 29.2% at year-end 2002 and 38.1% at the end of the first quarter of
2002. The improvement in this ratio reflects lower debt levels and increased
shareholders' equity. This ratio may vary from time to time as the company
issues commercial paper to fund seasonal working capital requirements and to the
extent that the company uses debt to fund acquisitions. Snap-on expects that its
total net debt to total capital ratio will target 30% - 35% in the long term,
however, in the near term, this ratio is expected to remain below 30%. Total
invested capital was $1,201.0 million, up $28.3 million from year-end 2002 and
down $67.5 million from the end of the first quarter of 2002.
Borrowings under commercial paper programs totaled $32.9 million at both the end
of the first quarter of 2003 and at year-end 2002. At March 29, 2003, Snap-on
had $408 million of multi-currency revolving
26
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
credit facilities that provide back-up liquidity for its commercial paper
programs. These facilities include a $200 million, 364-day revolving credit
facility with a one-year term-out option that terminates on August 8, 2003. The
term-out option allows Snap-on to elect to borrow under the credit facility for
an additional year after the termination date. These facilities also include a
five-year, $208 million revolving credit facility that terminates on August 20,
2005. As of March 29, 2003, and December 28, 2002, Snap-on was in compliance
with all covenants of its revolving credit facilities and there were no
borrowings under any revolving credit facility. The most restrictive financial
covenant requires that Snap-on maintain a total debt to total capital (defined
as total debt plus shareholders' equity) ratio that does not exceed 60%. The
company's total debt to total capital ratio, computed as defined by the
financial covenant, was 29.5% at March 29, 2003, and 30.3% at December 28, 2002.
At March 29, 2003, Snap-on also had an unused committed $20 million bank line of
credit that expires on August 1, 2003.
At March 29, 2003, Snap-on had cash and cash equivalents of $15.4 million and
approximately $395 million of unused available debt capacity under the terms of
its revolving credit facilities and committed bank line of credit.
Working investment as of March 29, 2003, was $748.9 million, down $6.3 million
from the $755.2 million as of year-end 2002, despite an increase of $14.4
million from currency translation effects. The working investment measure is
used by Snap-on in assessing management performance and effectiveness related to
working capital.
Current accounts receivable-net at the end of the first quarter of 2003 was
$561.0 million, up $4.8 million from year-end 2002 levels, including an increase
of $9.6 million for currency translation effects. Excluding currency translation
impacts, accounts receivable-current was down $4.8 million from year-end 2002
levels. Year over year, accounts receivable-current was down $27.3 million from
the first quarter of 2002, primarily due to Snap-on's continued emphasis on
reducing days sales outstanding. As of the end of the first quarter of 2003,
days sales outstanding improved to 93 days from 104 days for the comparable
prior-year period. Additionally, the allowance for doubtful accounts increased
from $41.2 million at year-end 2002 to $44.7 million at the end of the first
quarter of 2003.
Inventories totaled $368.2 million at the end of the 2003 first quarter, down
$18.6 million from the end of the first quarter of 2002, and down $1.7 million
(or $8.5 million, after excluding currency translation impacts) from year-end
2002 levels. The inventory decline in the first quarter, typically a period in
which Snap-on has traditionally built inventories to support seasonal sales
levels, reflects Snap-on's continued focus on improving working investment
levels. Inventories accounted for using the first-in, first-out (FIFO) method
approximated 65% of total inventories as of year-end 2002. All other inventories
are generally accounted for using the last-in, first-out (LIFO) cost method. As
a result of the lower inventory levels, the company's LIFO reserve declined from
$95.8 million at December 28, 2002, to $94.7 million at March 29, 2003. As
compared to the first quarter of 2002, inventory turns have improved from 2.7
turns to 3.1 turns.
Capital expenditures of $6.2 million in the first quarter of 2003 were down from
the $13.9 million expended in the first quarter of 2002, reflecting tighter
spending control in light of the continued weak economy. Investments primarily
included new product-related, quality and cost reduction capital investments, as
well as ongoing replacements of manufacturing and distribution facilities and
equipment. Snap-on anticipates fiscal 2003 capital expenditures will be in the
range of $45 million to $50 million, of which approximately two-thirds is
expected to be used for investments relating to new products, quality
enhancement or cost reduction. Capital expenditures in fiscal 2002 totaled $45.8
million.
27
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Snap-on has undertaken stock repurchases from time to time to offset 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 quarter of 2003, Snap-on
repurchased 150,000 shares of common stock for $3.8 million under its previously
announced share repurchase programs. As of the end of the first quarter of 2003,
Snap-on has remaining availability to repurchase up to an additional $138
million in common stock pursuant to the Board of Directors' authorizations. The
purchase of Snap-on common stock is at the company's discretion, subject to
prevailing financial and market conditions.
Snap-on has paid consecutive quarterly cash dividends since 1939. In the fourth
quarter of 2002, the company's Board of Directors declared a $.01 per share
increase in the company's quarterly dividend on its common stock. The new
quarterly dividend of $.25 per share represents a 4.2% increase over the
previous quarterly dividend of $.24 per share. Cash dividends paid totaled $14.3
million in the first quarter of 2003, as compared to $13.9 million in the first
quarter of 2002.
Snap-on believes that its cash from operations, coupled with its sources of
borrowings, are sufficient to support its anticipated requirements for working
capital, capital expenditures and continuous improvement activities,
acquisitions, common stock repurchases and dividend payments.
OTHER MATTERS
Accounting Pronouncements: In January 2003, the FASB issued interpretation
("FIN") No. 46, "Consolidation of Variable Interest Entities" (an interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements"),
which becomes effective for Snap-on at the beginning of its 2003 third quarter.
FIN No. 46 provides guidance regarding the identification of variable interest
entities ("VIE") for which control is achieved through means other than through
voting rights. FIN No. 46 provides guidance in determining if a business
enterprise is the primary beneficiary of a VIE and whether or not that business
enterprise should consolidate the VIE for financial reporting purposes. FIN No.
46 applies to a VIE in which equity investors of the VIE, if any, do not have
the characteristics of a controlling interest or do not have sufficient equity
at risk for the VIE to finance its activities independently. FIN No. 46 requires
each enterprise involved with a special purpose entity to determine whether it
provides financial support to the special purpose entity through a variable
interest. Variable interests may arise from financial instruments, service
contracts, minority ownership interests or other arrangements. If an entity
holds a majority of the variable interest, or a significant variable interest
that is considerably more than any other party's variable interest, then that
entity would be the primary beneficiary and would be required to include the
assets, liabilities and results of operations of the special purpose entity in
its consolidated financial statements.
Snap-on has not completed its evaluation of FIN No. 46 and, as a result, has not
concluded on the impact the adoption may have on the company's financial
position or results of operations. If it is determined that Snap-on Credit LLC
("SOC"), a 50%-owned financial services joint venture that is accounted for
using the equity method, qualifies as a VIE, then Snap-on may be required to
include the assets and liabilities (or some portion thereof) of SOC in its
consolidated financial statements
28
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
beginning in the third quarter of 2003. As of March 31, 2003, and December 31,
2002, SOC had total assets of $42.4 million and $45.3 million. For additional
information, refer to Note 6.
29
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CRITICAL ACCOUNTING POLICIES
Snap-on's disclosures of its critical accounting policies, which are contained
in its Annual Report on Form 10-K for the year ended December 28, 2002, have not
materially changed since that report was filed.
OUTLOOK
During the second quarter, and throughout 2003, Snap-on will continue to
emphasize the consistent and broad application of its Driven to Deliver(TM)
business process and, in particular, the implementation of lean operating
practices. Generating strong cash flow and further strengthening its balance
sheet also remain key priorities for the year.
At the present time, Snap-on continues to expect steady demand by
vehicle-service technicians. Snap-on believes that the concern regarding
possible increases in oil and gasoline prices has receded at the end of the
first quarter, but there is still little indication of a general economic
improvement in the second quarter. Based on this broad economic outlook for the
industrial and capital goods marketplace, and assuming (i) no significant change
in oil and gasoline prices, (ii) the steady end-user demand in the dealer
business, (iii) the continued introduction of successful new products, (iv) the
positive effect of 53 weeks in the 2003 fiscal year, and (v) ongoing savings
from its restructuring and Operational Fitness initiatives, Snap-on still
expects to achieve higher sales and improved profitability in 2003 leading to an
approximate 10% - 15% increase in earnings per share for the full year,
consistent with its outlook announced at the beginning of 2003.
The full-year earnings expectation recognizes that Snap-on is incurring higher
pension, other retirement and insurance costs, expects to continue to invest in
new product development and incur costs to implement business and process
improvements identified through the adoption of lean operating practices and
other rationalization activities. This full-year earnings outlook also considers
that Snap-on expects to continue to experience some further U.S. dealer
inventory reductions in the second quarter. As a result, Snap-on expects a
substantial part of its full-year earnings growth to occur in the second half of
2003.
Safe Harbor: Statements in this document that are not historical facts,
including statements (i) that include the words "expects," "believes,"
"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, estimates, 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 and bases set
forth above and the timing and progress with which Snap-on can continue to
achieve savings from its cost reduction and other Operational Fitness
initiatives; Snap-on's capability to retain and attract dealers and effectively
implement new programs; its ability to capture new business; the success of new
products and other
30
SNAP-ON INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Profitable Growth initiatives; Snap-on's ability to withstand external negative
factors including terrorist disruptions on business; changes in trade, monetary
and fiscal policies, regulatory reporting requirements, laws and regulations, or
other activities of governments or their agencies, including military actions
and such aftermath that might occur; Snap-on's ability to grow the U.S. dealer
network; differences between the actual and estimated return on pension plan
assets; and the absence of significant changes in inflation, the current
competitive environment, 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.
31
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 attempts to manage 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 in an attempt to protect the
residual net anticipated exposures. For additional information, refer to Note 8.
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 better manage funding costs of the differing maturities and interest
rate structures of Snap-on's assets and liabilities. For additional information,
refer to Note 8.
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 March 29, 2003, was $.9 million on interest rate-sensitive
financial instruments and $.8 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.
32
CREDIT RISK: Credit risk is the possibility of loss from a customer's failure to
make payments according to contract terms. Prior to granting credit, each
customer is evaluated, taking into consideration the borrower's financial
condition, collateral, debt-servicing capacity, past payment experience, credit
bureau information, and 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 SOC, a 50%-owned financial services joint venture,
that is accounted for using the equity method. At March 29, 2003, $29.4 million
of loans originated by SOC have a recourse provision to Snap-on if the loans
become more than 90 days past due. For additional information on SOC, refer to
Note 6.
ECONOMIC RISK: Economic risk is the possibility of loss resulting from economic
instability in certain areas of the world. Snap-on continually monitors its
exposure in these markets. Snap-on's Commercial and Industrial Group includes a
Bahco Group AB ("Bahco") hand-tool manufacturing facility in Argentina with net
assets of approximately $8.9 million as of March 29, 2003. Due to economic
instability in Argentina, Snap-on resized its operations there in 2001. The
Bahco Argentina facility continues to produce sockets and wrenches for both the
domestic and export markets, including Latin America and Europe, and export
sales are generally invoiced in U.S. dollars. 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.
Inflation has not had a significant impact on the company.
Item 4: Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), within 90
days prior to the filing date of this Quarterly Report on Form 10-Q, an
evaluation was carried out under the supervision and with the participation of
Snap-on's management, including its President and Chief Executive Officer and
its Senior Vice President - Finance and Chief Financial Officer, of the
effectiveness of the design and operation of Snap-on's disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act). Based upon
their evaluation of these disclosure controls and procedures, the President and
Chief Executive Officer and the Senior Vice President - Finance and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective as of the date of such evaluation to ensure that material information
relating to Snap-on, including its consolidated subsidiaries, was made known to
them by others within those entities, particularly during the period in which
this Quarterly Report on Form 10-Q was being prepared.
(b) Changes in Internal Controls. There were not any significant changes in
Snap-on's internal controls or other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
33
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Item 6(a): Exhibits
- --------------------
Exhibit 10(a) Snap-on Incorporated Deferred Compensation Plan (as amended
through January 23, 2003)
Exhibit 10(b) Snap-on Incorporated 2002 Executive Management Incentive Program
Exhibit 10(c) Snap-on Incorporated 2003 Executive Qualitative Incentive Program
Exhibit 10(d) Form of Share and Performance Award Agreement and Form of
Deferred Share and Performance Award Agreement between the
company and each of Dale F. Elliott, Martin M. Ellen, Michael F.
Montemurro, Nicholas T. Pinchuk, Alan T. Biland, Jeffrey N.
Eggert, Susan F. Marrinan and Blaine A. Metzger
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. This certification accompanies the
issuer's Quarterly Report on Form 10-Q and is not filed as
provided in SEC Release Nos. 33-8212, 34-47551 and IC-25967,
dated March 21, 2003.
Exhibit 99.2 Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. This certification accompanies
the issuer's Quarterly Report on Form 10-Q and is not filed as
provided in SEC Release Nos. 33-8212, 34-47551 and IC-25967,
dated March 21, 2003.
34
Item 6(b): Reports on Form 8-K Filed During the Reporting Period
- -----------------------------------------------------------------
During the first quarter of 2003, Snap-on reported on Form 8-K the following:
Date Filed Date of Report Item
- ---------- -------------- ----
January 22, 2003 January 22, 2003 Snap-on filed a press release entitled "Snap-on Reports
Fourth-quarter EPS of $0.56 and Full-year 2002 EPS of $1.81;
Strong 2002 Cash Flow Benefits from Operational Fitness
Initiatives; 10% - 15% Earnings Growth Expected for 2003."
March 5, 2003 March 5, 2003 Snap-on filed its Annual Report on Form 10-K for the year
ended December 28, 2002, and furnished copies, pursuant to
Item 9 of Form 8-K, of the certifications required pursuant
to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley
Act of 2002) for Snap-on's Annual Report on Form 10-K for
the year ended December 28, 2002.
35
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: May 9, 2003 /s/ Martin M. Ellen
---------------- ---------------------------------------------
Martin M. Ellen, Principal Financial Officer,
Chief Financial Officer,
Senior Vice President - Finance
36
CERTIFICATIONS
I, Dale F. Elliott, Chief Executive Officer of Snap-on Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Snap-on Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Dale F. Elliott
- ---------------------------
Dale F. Elliott
Chief Executive Officer
37
I, Martin M. Ellen, Principal Financial Officer of Snap-on Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Snap-on Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Martin M. Ellen
- ---------------------------
Martin M. Ellen
Principal Financial Officer
38
EXHIBIT INDEX
Exhibit No. Exhibit
10(a) Snap-on Incorporated Deferred Compensation Plan (as amended
through January 23, 2003)
10(b) Snap-on Incorporated 2002 Executive Management Incentive
Program
10(c) Snap-on Incorporated 2003 Executive Qualitative Incentive
Program
10(d) Form of Share and Performance Award Agreement and Form of
Deferred Share and Performance Award Agreement between the
company and each of Dale F. Elliott, Martin M. Ellen, Michael
F. Montemurro, Nicholas T. Pinchuk, Alan T. Biland, Jeffrey N.
Eggert, Susan F. Marrinan and Blaine A. Metzger
12 Computation of Ratio of Earnings to Fixed Charges
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. This certification accompanies the
issuer's Quarterly Report on Form 10-Q and is not filed as
provided in SEC Release Nos. 33-8212, 34-47551 and IC-25967,
dated March 21, 2003.
99.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. This certification accompanies the
issuer's Quarterly Report on Form 10-Q and is not filed as
provided in SEC Release Nos. 33-8212, 34-47551 and IC-25967,
dated March 21, 2003.
39