SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 29,1996 Commission File Number 1-7724 SNAP-ON INCORPORATED (Exact name of registrant as specified in its charter) Delaware 39-0622040 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10801 Corporate Drive, Kenosha, Wisconsin 53141-1430 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (414) 656-5200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class Outstanding at July 27, 1996 Common stock, $1 per value 40,795,598 shares
SNAP-ON INCORPORATED INDEX Page Part I. Financial Information Consolidated Statements of Earnings - Thirteen Weeks and Twenty-Six Weeks Ended June 29, 1996 and July 1, 1995 3 Consolidated Balance Sheets - June 29, 1996 and December 30, 1995 4-5 Consolidated Statements of Cash Flows - Twenty-Six Weeks Ended June 29, 1996 and July 1, 1995 6 Notes to Consolidated Financial Statements 7-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 Part II. Other Information 12
PART I. FINANCIAL INFORMATION SNAP-ON INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands except per share data) (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended June 29, July 1, June 29, July 1, 1996 1995 1996 1995 Net sales $384,554 $326,816 $728,918 $635,923 Cost of goods sold 190,425 159,569 360,960 309,407 ------- ------- ------- ------- Gross profit 194,129 167,247 367,958 326,516 Operating expenses 151,731 134,484 291,430 266,836 Net finance income (15,925) (16,242) (31,524) (32,116) ------- ------- ------- ------- Operating earnings 58,323 49,005 108,052 91,796 Interest expense (3,310) (3,069) (6,252) (5,077) Other income (expense) - net (207) 1,236 70 2,453 ------- ------- ------- ------- Earnings before income taxes 54,806 47,172 101,870 89,172 Income taxes 20,278 17,454 37,692 32,994 ------- ------- -------- -------- Net earnings $34,528 $29,718 $ 64,178 $ 56,178 ======= ======= ======== ======== Earnings per weighted average common share $ .85 $ .73 $ 1.58 $ 1.35 ====== ====== ======= ======= Dividends declared per common share $ .57 $ .54 $ .84 $ .81 ====== ====== ======= ======= Weighted average common shares outstanding 40,729 40,774 40,671 41,579 ====== ====== ====== ====== The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) June 29, December 30, 1996 1995 ASSETS Current Assets Cash and cash equivalents $ 26,570 $ 16,211 Accounts receivable, less allowances 609,357 610,064 Inventories: Finished stock 277,162 264,184 Work in process 42,543 39,977 Raw materials 59,725 56,191 Excess of current cost over LIFO cost (112,130) (109,918) ------- ------- Total inventory 267,300 250,434 Prepaid expenses and other assets 77,827 69,980 ------- ------- Total current assets 981,054 946,689 Property and equipment Land 25,753 22,875 Buildings and improvements 156,072 149,087 Machinery and equipment 306,621 296,916 ------- ------- 488,446 468,878 Accumulated depreciation (260,026) (248,811) ------- ------- Total property and equipment 228,420 220,067 Deferred income tax benefits 68,721 61,471 Intangible and other assets 210,870 132,746 ------- ------- Total assets $1,489,065 $1,360,973 ========== ========= The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) (Unaudited) June 29, December 30, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 68,623 $ 75,603 Notes payable 31,784 26,213 Dividends payable 12,247 - Accrued compensation 34,129 37,769 Dealer deposits 58,792 65,344 Accrued income taxes 30,809 16,106 Other accrued liabilities 133,741 115,040 ------- ------- Total current liabilities 370,125 336,075 Long-term debt 119,642 143,763 Deferred income taxes 5,908 4,760 Retiree health care benefits 82,288 80,665 Pension and other long-term liabilities 125,012 44,978 ------- ------- Total liabilities 702,975 610,241 SHAREHOLDERS' EQUITY Preferred stock - authorized 15,000,000 shares of $1 par value; none outstanding - - Common stock - authorized 125,000,000 shares of $1 par value; issued - June 29, 1996 - 43,931,800 shares December 30, 1995 - 43,571,363 shares 43,932 43,571 Additional contributed capital 85,924 74,250 Retained earnings 783,342 753,356 Foreign currency translation adjustment (14,481) (10,758) Treasury stock at cost - 3,108,700 and 3,047,200 shares (112,627) (109,687) -------- -------- Total shareholders' equity 786,090 750,732 --------- --------- Total liabilities and shareholder's equity $1,489,065 $1,360,973 ========= ========= The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Twenty-Six Weeks Ended June 29, July 1, 1996 1995 OPERATING ACTIVITIES Net earnings $ 64,178 $ 56,178 Adjustments to reconcile net earnings to net cash provided by: Depreciation 15,026 14,247 Amortization 2,360 1,739 Deferred income taxes 5,975 (9,594) (Gain) loss on sale of assets 310 (79) Changes in operating assets and liabilities: (Increase) decrease in receivables 12,385 (51,723) Increase in inventories (8,340) (11,918) Increase in prepaid expenses (1,300) (1,240) Decrease in accounts payable (9,021) (10,776) Increase in accruals, deposits and other long-term liabilities 6,917 32,923 ------- ------- Net cash provided by operating activities 88,490 19,757 INVESTING ACTIVITIES Capital expenditures (24,337) (11,773) Acquisitions of businesses (31,962) (19,923) Disposal of property and equipment 1,258 2,837 (Increase) decrease in other noncurrent assets 9,748 (3,366) ------- ------- Net cash used in investing activities (45,293) (32,225) FINANCING ACTIVITIES Payment of long-term debt (39,044) (150) Increase in long-term debt 14,700 4,089 Increase in notes payable 4,565 136,532 Purchase of treasury stock (2,940) (100,375) Proceeds from stock plans 12,035 5,853 Cash dividends paid (21,945) (22,282) ------- ------- Net cash used in financing activities (32,629) 23,667 Effect of exchange rate changes (209) (1,482) ------- ------- Increase in cash and cash equivalents 10,359 9,717 Cash and cash equivalents at beginning of year 16,211 9,015 ------- ------- Cash and cash equivalents at end of period $ 26,570 $ 18,732 ======= ======= The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 1. This report should be read in conjunction with the consolidated financial statements and related notes included in Snap-on Incorporated's Annual Report for the year ended December 30, 1995. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to a fair statement of financial condition and results of operations for the thirteen and twenty-six weeks ended June 29, 1996 have been made. Management also believes that the results of operations for the thirteen and twenty-six weeks ended June 29, 1996 are not necessarily indicative of the results to be expected for the full year. 2. Snap-on Incorporated normally declares and pays in cash four regular, quarterly dividends. However, the third quarter dividend in each year is declared in June, giving rise to two regular quarterly dividends appearing in the second quarter statements and correspondingly, three regular quarterly dividends appearing in the first twenty-six weeks' statements. 3. Income tax paid for the twenty-six week periods ended June 29, 1996 and July 1, 1995 was $31.2 million and $26.4 million. 4. Interest paid for the twenty-six week periods ended June 29, 1996 and July 1, 1995 was $6.9 million and $5.6 million. 5. On March 31, 1996, the Corporation acquired certain assets and liabilities of the Automotive Service Equipment Division of FMC Corporation. The acquired division was renamed the John Bean Company. John Bean designs, manufactures, and sells high-quality products for the under-car market. Pro forma results of operations are not shown as the effect would not be material. 6. Prior to the disposition of Systems Control, Inc. by a subsidiary of the Corporation on September 29, 1994, Systems Control, Inc.'s single- purpose subsidiaries, Tejas Testing Technology One, L.C. and Tejas Testing Technology Two, L.C. (the "Tejas Companies"), entered into two seven-year contracts with the Texas Natural Resources Conservation Commission ("TNRCC"), an agency of the State of Texas, to perform automotive emissions testing in the Dallas/Fort Worth and southeast regions of Texas in a centralized manner in accordance with the federal Environmental Protection Agency ("EPA") guidelines relating to "I/M 240" test-only facilities. The Corporation guaranteed payment (the "Guaranty") of the Tejas Companies' obligations under an Agreement for Lease and a seven-year Lease Agreement, each dated June 22, 1994, in the amount of approximately $98.8 million plus an interest factor (the "Lease Obligations"), pursuant to which the Tejas Companies leased the facilities (and associated testing equipment) necessary to perform the emissions-testing contracts. The Guaranty was assigned to the lessor's lenders (the "Lenders") as collateral. Pursuant to an Indemnity Agreement entered into as of September 29, 1994, the Tejas Companies agreed to reimburse the Corporation for any payments it made under the Guaranty. On May 1, 1995, the State of Texas enacted legislation designed to terminate the centralized testing program described in the emissions- testing contracts and directed the governor of the State of Texas to implement a new program after negotiations with the EPA. On September 12, 1995, the Tejas Companies filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Texas (Austin Division). The Tejas Companies have commenced litigation against the TNRCC and related entities to assert their rights with respect to the emissions-testing contracts, and the Corporation has intervened in such litigation to protect its interests. In addition, the Corporation is a creditor in the Tejas Companies' bankruptcy proceedings and will continue to take steps to protect its interests in such proceedings. The Corporation believes that it is probable that there will be developments, prior to the end of the 1997 Texas legislative session (approximately May 1997) to enable the Lease Obligations to ultimately be satisfied. The 1997 legislative session is scheduled to begin January 14, 1997. The primary basis for such a development arises under the original contracts to perform centralized emissions testing. Those contracts obligate the TNRCC to purchase the Tejas Companies' testing facilities or to reimburse costs that the Tejas Companies incurred in the construction and implementation of the centralized testing program and have not recovered through the sale of the testing facilities to a third party. Fulfillment of such obligations requires an appropriation of funds by the Texas Legislature, which is subject to the political process. The TNRCC is contractually obligated to seek such appropriation and has affirmed such obligation. The Tejas Companies are pursuing the cost reimbursement process described in the emissions-testing contracts. A second potential basis is that the TNRCC's obligation could be satisfied in part in various other ways including a sale of some or all of the facilities. The Corporation and the Lenders have been engaged in continuing discussions concerning this matter, and they have reached an agreement whereby the Lenders will forbear until at least December 31, 1996 from exercising their rights under the terms of the Guaranty to cause the Corporation to pay all Lease Obligations to the Lenders on an accelerated basis. The Corporation continues to make advances under the Guaranty of approximately $1.8 million per month. While the Lenders have agreed to forbear until at least December 31, 1996, given the delay in resolving this matter and other factors, the Corporation has recognized the remaining net obligation under the Guaranty of $67.5 million at June 29, 1996. This is included in Other Long-Term Liabilities on the accompanying consolidated balance sheet. In addition, the Corporation has recorded as assets the monthly advances and the other amounts expected to be received from the Tejas Companies under the Indemnity Agreement. These net receivables total $92.2 million at June 29, 1996 and are included in Intangible and Other Assets. Described previously are mechanisms by which the Tejas Companies may receive funds to enable them to satisfy their contractual obligation to the Corporation under the Indemnity Agreement. The Corporation believes that recovery of the recorded receivables from the Tejas Companies is probable, and it will make an ongoing assessment of the likelihood of realization of such receivables. Recognition of the liability and related asset described above will not result in any net loss recognition in the Company's consolidated financial statements at June 29, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview: The Corporation posted record sales, net earnings, and earnings per share for the second quarter and first six months of 1996. Net earnings for the second quarter of 1996 increased 16.2% over the year ago quarter on a net sales increase of 17.7%. For the first six months, 1996 net earnings increased 14.2% over the comparable 1995 period on a net sales increase of 14.6%. Earnings per share for the second quarter and first six months increased 16.4% and 17.0% over 1995 comparable periods. The second quarter's results benefited from several acquisitions and strong performance in the Corporation's North American tool and equipment businesses. The quarter's results also reflect continuing improvements in operating efficiencies and benefits from the Corporation's ongoing cost control programs. Sales: Net sales for the second quarter of 1996 were $384.6 million, an increase of 17.7% over second quarter 1995 sales of $326.8 million. Net sales for the first six months of 1996 were $728.9 million, an increase of 14.6% over 1995 six-month sales of $635.9 million. North American sales for the second quarter of 1996 were $294.5 million, an increase of 14.2% over second quarter 1995 sales of $257.8 million. North American sales for the first six months of 1996 were $553.6 million, an increase of 9.7% over six-month 1995 sales of $504.7 million. The second quarter's results reflect higher sales in both the dealer van channel and the industrial channel. In addition, the acquisition of the John Bean Company contributed to the second quarter increase. European sales for the second quarter of 1996 were $69.4 million, an increase of 46.4% over second quarter 1995 sales of $47.4 million. European sales for the first six months of 1996 were $136.3 million, an increase of 50.3% over six-month 1995 sales of $90.7 million. The second quarter's sales increase was due to the acquisitions of Herramientas Eurotools S.A. and the John Bean Company. Excluding acquisitions, sales decreased 7% for the second quarter. The temporary suspension of the United Kingdom's emissions testing program and a delay in new product introductions negatively affected the second quarter. The emissions testing program in the United Kingdom, and related equipment sales, are expected to resume in the third quarter of 1996. Other International sales for the second quarter of 1996 were $20.6 million, a decrease of 4.6% from second quarter 1995 sales of $21.6 million. Other International sales for the first six months of 1996 were $39.0 million, a decrease of 3.7% from six-month 1995 sales of $40.5 million. For the second quarter, sales in Japan were negatively affected by the strengthening of the U.S. dollar relative to the yen. Sales in Australia increased in the quarter. Excluding the negative effects of the yen, sales in this region would have reported an increase. Earnings: Earnings for the second quarter of 1996 were $34.5 million, an increase of 16.2% over second quarter 1995 earnings of $29.7 million. Second quarter earnings per share increased to $.85, a 16.4% increase over second quarter 1995 earnings per share of $.73. Earnings for the first six months of 1996 were $64.2 million, an increase of 14.2% over six-month 1995 earnings of $56.2 million. Earnings per share for the first six months of 1996 rose to $1.58 per share, a 17.0% increase over six-month 1995 earnings per share of $1.35. Operating expenses: As a percentage of net sales, second quarter total operating expenses decreased to 39.5% in 1996 from 41.2% in 1995. As a percentage of net sales, six-month operating expenses decreased to 40.0% in 1996 from 42.0% in 1995. Benefits from continuing general cost reduction activities, from facilities consolidations implemented over the past several years, and from a change in business mix because of recent acquisitions all contributed to the improvement. FINANCIAL CONDITION Liquidity: Cash and cash equivalents increased to $26.6 million at the end of the second quarter from $16.2 million at the end of 1995. Working capital was $610.9 million at the end of the second quarter versus $610.6 million at the end of 1995. At the end of the quarter, the Corporation had a $100 million revolving credit facility to support the issuance of commercial paper. In September 1994, the Corporation filed a registration statement with the Securities and Exchange Commission that allows the Corporation to issue from time to time up to $300 million of unsecured indebtedness. In October 1995, the Corporation issued $100 million of its notes to the public. The shelf registration gives the Corporation financing flexibility to operate the business. The Corporation has sufficient sources of liquidity to support current and future working capital requirements, finance capital expenditures and pay dividends. Accounts receivable: Accounts receivable decreased to $609.4 million at the end of the second quarter from $610.1 million at the end of 1995. In the first quarter of 1996, the Corporation executed an additional $50.0 million securitization of its receivables discussed below. In October 1995, the Corporation entered into agreements that provide for the sale, without recourse, of an undivided interest in a pool of certain of its accounts receivable to a third party financing institution. These agreements provide for a maximum of $150 million of such accounts receivable to be sold and remain outstanding at any one time. Under these agreements, $100.0 million of interest-bearing installments were sold, on a revolving basis, in October 1995. During the first quarter of 1996, the Corporation sold an additional $50.0 million of interest-bearing receivables under these agreements on a revolving basis. The proceeds were used to pay down debt, and for working capital and general corporate purposes. The majority of the Corporation's accounts receivable involve customers' extended credit and lease purchases of higher-value products. Other receivables include those from dealers, industrial customers, and government entities. Inventories: Inventories increased to $267.3 million at the end of the second quarter from $250.4 million at the end of 1995. The increase was primarily due to acquisitions. Liabilities: Total short-term and long-term debt was $151.5 million at the end of the second quarter compared with $170.9 million at the end of 1995. The decrease was due primarily to the $50.0 million of securitization of receivables discussed previously. Average shares outstanding: Average shares outstanding decreased to 40.7 million in 1996's second quarter compared with 40.8 million in last year's second quarter. For the first six months of 1996, average shares outstanding declined to 40.7 million versus 41.6 million in the comparable six months of 1995. During the first half of 1995, the Corporation completed a $100 million share repurchase program, thereby reducing the number of shares outstanding. Stock split and dividend increase: On June 28, 1996, the Corporation's Board of Directors declared an 11.1% increase in the quarterly dividend on common stock and approved a three- for-two stock split. The new quarterly dividend of $.30 per share, on a pre-split basis, is equivalent to an annual rate of $1.20 per share. On a post-split basis, the new quarterly dividend is equivalent to $.20 per share, or $.80 per share annually. The three-for-two stock split will result in one additional share issued for every two shares of the Corporation's stock outstanding. Cash will be distributed in lieu of fractional shares. Dividend payments and additional shares both will be distributed on September 10, 1996, to shareholders of record on August 20, 1996. Other matters: Refer to Note 6 for discussion of a guaranty of lease obligations relating to emissions testing facilities that were to be used under a contract with the State of Texas to perform testing services. Texas has terminated the program to conduct such testing services, and the Corporation is making payments monthly under such guaranty.
PART II. OTHER INFORMATION Item 6: Exhibits and reports on Form 8-K Item 6(a): Exhibits Exhibit 4.1 - Amendment to Rights Agreement dated as of June 28, 1996 (incorporated by reference to Exhibit 1.1 to the Corporation's Current Report on Form 8-A dated June 28, 1996 (Commission File No. 1-7724)) Exhibit 27 - Financial Data Schedule Item 6(b): Reports on Form 8-K No reports on Form 8-K for the three months ended June 29, 1996 were required to be filed.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Snap-on Incorporated has duly caused this report to be signed on its behalf by the undersigned duly authorized persons. SNAP-ON INCORPORATED Date: August 13, 1996 /s/ R. A. Cornog R. A. CORNOG (Chairman, President and Chief Executive Officer) Date: August 13, 1996 /s/ G. D. Johnson G. D. JOHNSON (Principal Accounting Officer and Controller)
EXHIBIT INDEX Exhibit No. Description 4.1 Amendment to Rights Agreement dated as of June 28, 1996 (incorporated by reference to Exhibit 1.1 to the Corporation's Current Report on Form 8-A dated June 28, 1996 (Commission File No. 1-7724)) 27 Financial Data Schedule