UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
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:
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See Notes to Consolidated Financial Statements.
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13. Total comprehensive income (loss) for the three-months ended April 2, 2005, and April 3, 2004, was as follows:
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Highlights of Snap-on’s results of operations for the first quarters of 2005 and 2004 are as follows:
Total revenue in the first quarter of 2005 decreased $3.5 million from prior-year levels as lower financial services revenue of $7.1 million, largely due to the effects of higher interest rates and lower credit originations in Snap-on’s domestic financing business, was partially offset by a $3.6 million year-over-year increase in net sales. The $3.6 million increase in net sales includes $12.3 million of favorable currency translation partially offset by lower sales of $8.7 million, principally due to a lower number of U.S. dealer vans in operation in the first quarter of 2005.
Gross profit (defined as net sales less cost of goods sold) was $256.9 million, or 42.9% of net sales, in the first quarter of 2005, as compared to $249.3 million, or 41.9% of net sales, in the first quarter of 2004. Gross profit in the first quarter of 2005 increased $7.6 million or 100 basis points (100 basis points equals 1.0 percent) as a percentage of net sales. Benefits from lower costs, including benefits from efficiency and productivity initiatives and lower year-over-year restructuring costs of $7.4 million, as well as benefits from higher selling prices and $4.0 million from favorable currency translation, were partially offset by the impact of the lower sales, higher production costs as a result of U.S. manufacturing inefficiencies, and $6.8 million of higher steel costs. Restructuring costs included in “Cost of goods sold,” on the accompanying Consolidated Statements of Income, totaled $1.2 million in the first quarter of 2005, as compared to $8.6 million in the comparable prior-year period. Costs incurred in the first quarter of 2004 primarily related to the phase out of production at two U.S. hand-tool manufacturing facilities.
Operating expenses in the first quarter of 2005 decreased $6.8 million, or 90 basis points as a percentage of total revenue, from the first quarter of 2004. Benefits from efficiency and productivity initiatives and $6.0 million in lower year-over-year bad debt expense were partially offset by $5.3 million in higher year-over-year restructuring costs, $4.0 million of unfavorable currency translation and $3.0 million of costs to terminate a supplier relationship. Restructuring costs included in “Operating expenses,” on the accompanying Consolidated Statements of Income, totaled $6.6 million in the first quarter of 2005, as compared to $1.3 million in the comparable prior-year period. Costs incurred in the first quarter of 2005 primarily related to headcount reductions at multiple North American facilities.
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Interest expense of $5.9 million in the first quarter of 2005 was slightly higher than prior year due to the impact of higher year-over-year interest rates on comparable debt levels.
Other income (expense) – net was an expense of $0.9 million in the first quarter of 2005, as compared to an expense of $1.9 million in the first quarter of 2004. This line item includes the impact of all non-operating items such as interest income, hedging and currency exchange rate transactions gains and losses, minority interest and other miscellaneous non-operating items. Minority interest expense was $1.0 million in the first quarter of 2005, as compared to $1.2 million in the first quarter of 2004. The year-over-year change in other income (expense) includes $0.7 million in lower foreign exchange losses, $0.2 million of lower minority interest expense and $0.2 million of higher interest income due to the year-over-year increase in average cash on hand.
Snap-on’s effective tax rate was 35% in the first quarters of 2005 and 2004.
Exit and Disposal Activities: For a discussion of Snap-on’s exit and disposal activities, refer to Note 6 of the Consolidated Financial Statements.
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: (i) the Snap-on Dealer Group; (ii) the Commercial and Industrial Group; (iii) the Diagnostics and Information Group; and (iv) Financial Services. 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 and equipment repair services 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, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of SOC and Snap-on’s wholly owned finance subsidiaries in those international markets where Snap-on has dealer operations.
Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings, exclusive of financing activities and income taxes. Segment revenues are defined as total revenues, including both external customer revenue and intersegment revenue. Segment operating earnings are defined as segment revenues less cost of goods sold and operating expenses, including restructuring costs. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Intersegment amounts are eliminated to arrive at consolidated financial results.
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Due to changes in Snap-on’s management organization structure, Snap-on realigned its business segments during the first quarter of fiscal 2005. The primary changes include the transfer of Snap-on’s Technical Representative support organization from the Snap-on Dealer Group to the Diagnostics and Information Group and the segregation of Snap-on’s general corporate expenses from the operating earnings of the business segments. Prior to fiscal 2005, shared services and general corporate expenses and corporate assets were allocated to the business segments based on segment revenues. Beginning in fiscal 2005, the business segments are charged only for those shared services utilized by the business segment based on an estimate of the value of services provided; general corporate expenses and corporate assets are not allocated to the business segments. Corporate assets consist principally of those assets that are centrally managed including cash and cash equivalents, short-term investments, debt, pension assets and income taxes, as well as corporate real estate and related assets. Prior-year financial data by segment has been restated to reflect these reportable business segment realignments.
Total segment revenue in the first quarter of 2005 decreased $7.1 million, or 2.7%, over prior-year levels. The year-over-year revenue decrease reflects $9.9 million of lower sales, principally due to a lower average number of U.S. dealer vans in operation for the quarter coupled with product backlog from production inefficiencies, partially offset by $2.8 million of favorable currency translation. The number of U.S. dealer vans in operation at the end of the first quarter of 2005 was down 7% from the comparable prior-year level. In 2004, Snap-on tightened eligibility requirements and the recruiting standards for prospective dealers, aimed at improving the strength of its franchised dealer network. Snap-on expects to experience growth in the number of dealer vans in operation in the second half of 2005, along with a resulting improvement in sales activities, reflecting the continued strength in franchise applications. Sales in the company’s international dealer operations were up $1.4 million year over year due to favorable currency translation.
Segment gross profit for the first quarter of 2005 increased $3.8 million, or 270 basis points as a percentage of total segment revenue, from the same period last year primarily reflecting benefits from higher selling prices and $7.1 million in lower year-over-year restructuring costs, partially offset by the impact of the lower sales, higher production costs from U.S. manufacturing inefficiencies, and $3.3 million of higher steel costs. Operating expenses for the Snap-on Dealer Group increased $0.6 million year over year, up 120 basis points as a percentage of total segment revenue, including $3.0 million of costs to terminate a supplier relationship and $1.7 million in restructuring costs related to first-quarter 2005 severance actions. These increases to operating expenses were partially offset by $4.6 million of lower bad debt expense. As a result of these factors, segment operating earnings in the first quarter of 2005 increased $3.2 million, or 150 basis points as a percentage of total segment revenue, from the first quarter of 2004.
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Total segment revenue in the first quarter of 2005 increased $11.0 million, or 3.9%, over prior-year levels reflecting $8.7 million of favorable currency translation and $2.3 million from higher sales of tools for industrial and commercial applications in North America. Sales of power and torque tools were also up year over year, while sales of tools in Europe were down slightly. Worldwide equipment sales in the first quarter of 2005 also declined slightly from prior-year levels, partially reflecting the impact of the divestiture of a small vehicle lift business in Europe in the second quarter of 2004 and the absence, in 2005, of certain dealership program equipment sales made in 2004. Sales of equipment products in North America were essentially flat year over year.
Segment gross profit for the first quarter of 2005 increased $2.7 million, but decreased 30 basis points as a percentage of total segment revenue. Benefits from lower costs, including benefits from efficiency and productivity initiatives, as well as $2.5 million of favorable currency translation and benefits from higher pricing, were partially offset by $3.5 million of higher steel costs. Operating expenses for the Commercial and Industrial Group decreased $5.0 million, or 290 basis points as a percentage of total segment revenue. The decrease in operating expenses reflects benefits from efficiency and productivity initiatives and $2.4 million of lower bad debt expense. As a result, segment operating earnings in the first quarter of 2005 increased $7.7 million as compared to the first quarter of 2004.
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Total segment revenue in the first quarter of 2005 decreased $3.8 million, or 3.2%, from prior-year levels largely due to sales in the first quarter of 2004 for state emission program updates that were not repeated in 2005, partially offset by increased sales of handheld diagnostics products and $1.0 million of favorable currency translation.
Segment gross profit for the first quarter of 2005 increased $1.1 million, or 220 basis points as a percentage of total segment revenue, as the effect of the lower revenue was more than offset by an improved mix of higher-margin product sales year over year. Operating expenses for the Diagnostics and Information Group increased $1.0 million, or 190 basis points as a percentage of total revenue, primarily due to $1.0 million of restructuring costs related to first-quarter 2005 severance actions. As a result, segment operating earnings in the first quarter of 2005 were $9.3 million, or 8.1% of total segment revenue, in the first quarter of 2005, as compared to $9.2 million, or 7.8% of total revenue, in the comparable prior-year period.
Segment revenues were $14.1 million in the first quarter of 2005, down $7.1 million from prior-year levels, primarily due to a 19.3% year-over-year decline in credit originations in Snap-on’s domestic financing business. Operating earnings in the first quarter of 2005 were $4.3 million, down from $10.9 million in the first quarter of 2004, primarily reflecting the impact of higher interest rates and the lower number of credit originations.
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Snap-on’s general corporate expenses totaled $8.4 million in the first quarter of 2005, down from $11.3 million in the first quarter of 2004, as savings from cost reduction initiatives and benefits from mark-to-market adjustments on stock-based incentive plans were partially offset by $2.0 million in restructuring costs related to first-quarter 2005 severance actions.
Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. Snap-on believes that its cash from operations, coupled with its sources of borrowings, are sufficient to fund its anticipated requirements for working capital, scheduled debt repayments, capital expenditures and restructuring activities, acquisitions, common stock repurchases and dividend payments. Due to Snap-on’s credit rating over the years, external funds have been available at a reasonable cost. As of the date of the filing of this Form 10-Q, Snap-on’s long-term debt and commercial paper was rated A2 and P-1 by Moody’s Investors Service and A and A-1 by Standard & Poor’s. Snap-on believes that the strength of its balance sheet affords the company the financial flexibility to respond to both internal growth opportunities and those available through acquisitions.
The following discussion focuses on information included in the accompanying Consolidated Balance Sheets.
Snap-on has been focused on improving asset utilization by making more effective use of its investment in certain working capital items. Termed “working investment,’ the company uses this measure to assess management’s operating performance and effectiveness relative to those components of working capital that are more directly impacted by operational decisions. As of April 2, 2005, working investment (defined as accounts receivable – net of allowances plus inventories less accounts payable) of $697.9 million was up slightly from $689.0 million as of January 1, 2005 (fiscal 2004 year end). The following represents the company’s working investment position as of April 2, 2005, and January 1, 2005.
Accounts receivable at the end of the first quarter of 2005 was $550.3 million, up $8.3 million from fiscal year-end 2004 levels, largely reflecting the impact of seasonal sales increases and a slight deterioration in days sales outstanding from year-end levels, partially offset by a $9.1 million decrease from currency translation. At the end of the first quarter of 2005, days sales outstanding was 82 days, up from 81 days at January 1, 2005, largely due to higher sales in international markets with longer payment terms. Days sales outstanding at the end of the first quarter of 2004 was 87 days.
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Inventories totaled $348.6 million at the end of the first quarter of 2005, up $6.7 million from year-end 2004 levels primarily due to inventory increases in certain businesses in anticipation of future sales increases and the purchase of $1.3 million in inventory from a former supplier, partially offset by a $7.4 million decrease from currency translation. Inventories accounted for using the first-in, first-out (FIFO) method as of April 2, 2005, and January 1, 2005, approximated 64% and 65% of total inventories. All other inventories are generally accounted for using the LIFO cost method. The company’s LIFO reserve was $76.4 million at April 2, 2005, compared to $76.3 million at year-end 2004. Inventory turns (defined as the last 12 months of cost of goods sold divided by the quarter-end’s inventory balance) at April 2, 2005, were 3.8 turns, as compared to 3.9 turns at year-end 2004.
Total notes payable and long-term debt of $331.1 million as of April 2, 2005, and $331.0 million at year-end 2004 both include $100.0 million of current maturities of long-term debt for the company’s unsecured 6.625% notes that mature in their entirety on October 1, 2005. Notes payable to banks under bank lines of credit totaled $3.8 million and $2.5 million at April 2, 2005, and January 1, 2005. Snap-on also has $200 million of unsecured 6.25% long-term notes that mature in their entirety on August 15, 2011. Cash and cash equivalents were $145.4 million as of April 2, 2005, and $150.0 million at the end of fiscal 2004. The $4.6 million decrease in cash and cash equivalents from year-end 2004 primarily reflects the impacts of capital spending, share repurchases and dividend payments that more than offset the cash flows generated from operating activities.
Borrowings under commercial paper programs totaled $25.0 million at the end of both the first quarter of 2005 and at year-end 2004. On July 27, 2004, Snap-on entered into a five-year, $400 million multi-currency revolving credit facility that will terminate on July 27, 2009. The $400 million revolving credit facility’s financial covenant requires that Snap-on maintain a ratio of total debt to the sum of total debt plus shareholders’ equity of not greater than 0.60 to 1.00. As of the date of this document, Snap-on believes it is in compliance with all covenants of this revolving credit facility.
At April 2, 2005, Snap-on also had $20 million of unused committed bank lines of credit, of which $10 million expires on July 31, 2005, and $10 million expires on August 31, 2005. At April 2, 2005, Snap-on had approximately $395 million of unused available debt capacity under the terms of its revolving credit facilities and committed bank line of credit.
The following discussion focuses on information included in the accompanying Consolidated Statements of Cash Flows.
Cash flow provided from operating activities was $19.3 million in the first quarter of 2005. Cash flow from net earnings of $17.9 million, coupled with depreciation and amortization of $14.6 million and a net income tax refund of $6.2 million, were largely offset by a $22.4 million increase in working investment. Inventory increases during the quarter primarily occurred in anticipation of future sales expectations, while higher accounts receivable largely reflect the effect of higher sales in international markets that have longer payment terms and a slight increase in days sales outstanding. A decline in depreciation and amortization of $4.3 million year over year largely reflects the effect of accelerated depreciation related to the closing of the two U.S. hand-tool facilities in the first quarter of 2004. Cash flow from operating activities was $33.8 million in the first quarter of 2004. Cash flow from net earnings of $12.7 million, coupled with depreciation and amortization of $18.9 million, including the $4.3 million of accelerated depreciation discussed above, and a net income tax refund of $10.5 million was partially offset by a $3.0 million increase in working investment.
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Capital expenditures totaled $9.2 million in the first quarter of 2005, as compared with $7.3 million in the comparable prior-year period. Capital expenditures in 2005 included new product-related, quality, efficiency and cost reduction capital investments, as well as ongoing replacements of manufacturing and distribution facilities and equipment. Capital expenditures in 2005 also included $1.4 million for the acquisition of the manufacturing facility and other assets of a former supplier. Snap-on anticipates fiscal 2005 capital expenditures will be in a range of $42 million to $47 million, as compared to $38.7 million in fiscal 2004. Full-year depreciation and amortization is anticipated to be approximately $55 million in fiscal 2005, as compared to $61.0 million in fiscal 2004.
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 2005, Snap-on repurchased 225,000 shares of common stock for $7.7 million under its previously announced share repurchase programs. As of the end of the first quarter of 2005, Snap-on has remaining availability to repurchase up to an additional $127.8 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, without interruption or decline, since 1939. In the first quarter of 2005, Snap-on’s Board of Directors declared a quarterly dividend of $0.25 per share. Cash dividends paid totaled $14.5 million in the first quarter of 2005, as compared to $14.6 million in the first quarter of 2004.
Government Contract Matters:
On July 23, 2004, Snap-on reached an agreement with the U.S. Department of Justice to resolve the government audit, previously discussed in the company’s Annual Report on Form 10-K, relating to two contracts with the U.S. General Services Administration (“GSA”). Snap-on agreed to settle the claims over the interpretation and application of the price reduction and billing provisions of these two contracts for sales from March 1996 through the July 23, 2004, settlement date for $10 million. Snap-on incurred a pretax charge of $3.6 million, or $0.04 per diluted share in the second quarter of 2004 for costs not previously accrued. Snap-on remitted the $10 million cash settlement to the U.S. Department of Justice on August 5, 2004. On February 8, 2005, the GSA requested information from Snap-on to evaluate possible administrative action and, as of the date of this Form 10-Q, the company continues to have ongoing discussions and correspondence with the GSA regarding this matter.
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Snap-on’s disclosures of its critical accounting policies, which are contained in its 2004 Annual Report on Form 10-K for the fiscal year ended January 1, 2005, have not materially changed since that report was filed.
Snap-on will continue to emphasize efforts on improving customer service levels, particularly those relating to production issues in its U.S. hand tool plants, reducing complexities and associated costs throughout the worldwide organization, strengthening and growing its U.S. dealer van franchise system, delivering continued improvements in the Commercial and Industrial businesses, and further enhancing a leading marketplace position for diagnostics and information products. Improvements toward these objectives were achieved in the first quarter of 2005, and Snap-on expects further improvements going forward.
Further progress toward these objectives is expected to lead to improved levels of service and product deliveries to dealers and customers. In addition, as the effectiveness of its supply chain improves, Snap-on expects to experience growth in the number of dealer vans in operation in the second half of this year, reflecting the continued strength in franchise applications, along with a resulting improvement in sales activities.
Snap-on continues to expect net earnings to show an improving trend during 2005 and to exceed full-year 2004 earnings, despite costs associated with its improvement initiatives. As disclosed in the company’s 2004 Annual Report on Form 10-K, Snap-on estimates that full-year 2005 restructuring costs will total $20 million to $25 million. Benefits from prior actions, as well as ongoing continuous improvement initiatives, are anticipated to exceed the costs associated with those actions and provide future operating leverage from sales activities.
Safe Harbor: Statements in this document that are not historical facts, including statements (i) that include the words “expects,” “targets,” “plans,” “estimates,” “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 within the meaning of the Private Securities Litigation Reform Act of 1995. 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 any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and that management believes such assumptions and estimates to be reasonable as of the date of this document. However, these statements are subject to risks, uncertainties or other factors, including some events that may not be within the control of the company, that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement.
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These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections generally, and the timing and progress with which Snap-on can attain savings from cost reduction actions, including its ability to implement and complete planned reductions in workforce, achieve improvements in the company’s manufacturing footprint, successfully manage relationships with suppliers, achieve improvements in supply chain efficiencies, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and lost revenues. These risks also include uncertainties related to Snap-on’s ability to retain and attract dealers, capture new business, introduce successful new products, as well as its ability to withstand disruption arising from planned facility closures, or other labor interruptions, and external negative factors including terrorist disruptions on business; potential 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; the absence of significant changes in the current competitive environment, inflation, interest rates, legal proceedings, and energy and raw material supply and pricing (including steel and gasoline), supplier and contract manufacturer disruptions, the amount, rate and growth in Snap-on’s general and administrative expenses (e.g. health care and/or pension costs) or the material worsening of economic situations around the world, particularly in North America and/or Europe, its ability to increase prices due to higher raw material costs, and the effects of new accounting standards and/or legislation. In addition, investors should be aware that generally accepted accounting principles in the United States of America prescribe when a company should record an allowance for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when an allowance is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.
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 or regarded as a representation by the company or its management that the projected results will be achieved. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document.
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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 and is subject to certain risks inherent with foreign operations that include currency fluctuations and restrictions on movement of funds. 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 exposures. Snap-on’s financial position and results of operations have not been materially affected by such events to date. For additional information, see Note 8 to the Consolidated Financial Statements.
INTEREST RATE RISK MANAGEMENT: Snap-on’s interest rate risk management policies are designed to reduce the potential volatility of earnings that could arise from changes in interest rates. Through the use of interest rate swaps, Snap-on aims to stabilize funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s assets and liabilities. For additional information, see Note 8 to the Consolidated Financial Statements.
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 April 2, 2005, was$0.3 million on interest rate-sensitive financial instruments and $0.8 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.
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 its direct credit risk exposure, Snap-on also has credit risk exposure for certain SOC loan originations with recourse provisions against Snap-on (primarily for dealer van loans). At April 2, 2005, $13.8 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, see Note 5.
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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.
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.
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Snap-on maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries is timely communicated to the officers who certify Snap-on’s financial reports and to other members of senior management and the Board of Directors, as appropriate.
Under the supervision and with the participation of management, including Snap-on’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of this system of disclosure controls and procedures as of April 2, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the SEC.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the quarter ended April 2, 2005, that have materially affected, or are reasonably likely to materially affect, Snap-on’s internal control over disclosure controls and procedures.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error or fraud. Because of inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
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Please refer to Note 14 of the Consolidated Financial Statements for more information regarding legal proceedings.
The following chart discloses information regarding the shares of Snap-on’s common stock repurchased by the company during the first quarter of fiscal 2005, all of which were purchased pursuant to Board of Directors’ authorizations. 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 the company believes market conditions are favorable. The repurchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions.
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During the first quarter of 2005, Snap-on recorded costs associated with exit and disposal activities of $7.8 million. All of the $7.8 million in costs incurred for exit and disposal activities during the first quarter of 2005 qualified for accrual treatment. Costs associated with exit and disposal activities incurred in the first quarter of 2005 primarily related to headcount reductions at multiple North American facilities; the closure of a German hand-tool plant that was consolidated into the company’s Spanish operation; the elimination of one plant in Spain through further consolidation; and management realignment actions at various other Snap-on facilities.
Accrual usage of $2.4 million during the first quarter of 2005 reflects first quarter severance and related payments for the separation of approximately 400 employees in North America. Snap-on anticipates that the remaining severance accrual related to the first-quarter 2005 actions will be fully utilized by the end of 2005.
Snap-on also expects that it will incur approximately $15 million to $17 million of additional exit and disposal charges during the remainder of fiscal 2005.
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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.
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EXHIBIT INDEX
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