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 April 4, 1998 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, 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 May 2, 1998 Common stock, $1 per value 59,186,810 shares
SNAP-ON INCORPORATED INDEX Page Part I. Financial Information Consolidated Statements of Earnings - Thirteen Weeks Ended April 4, 1998 and March 29, 1997 3 Consolidated Balance Sheets - April 4, 1998 and January 3, 1998 4-5 Consolidated Statements of Cash Flows - Thirteen Weeks Ended April 4, 1998 and March 29, 1997 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 April 4, March 29, 1998 1997 Net sales $426,429 $375,299 Cost of goods sold 214,884 182,332 ---------- --------- Gross profit 211,545 192,967 Operating expenses 170,832 151,319 ---------- --------- Operating profit before net finance income 40,713 41,648 Net finance income 16,979 17,465 ---------- --------- Operating earnings 57,692 59,113 Interest expense (4,033) (4,381) Other income (expense) - net (650) (995) ---------- --------- Earnings before income taxes 53,009 53,737 ---------- --------- Income taxes 19,083 19,883 ---------- --------- Net earnings $ 33,926 $ 33,854 ========== ========= Earnings per weighted average common share - basic $ .57 $ .56 ========== ========= Earnings per weighted average common share - diluted $ .56 $ .55 ========== ========== Weighted average common shares outstanding - basic 59,894 60,855 Effect of dilutive options 863 823 ---------- ---------- Weighted average common shares outstanding - diluted 60,757 61,678 ========== ========== Dividend declared per common shares $ .21 $ .20 ========== ========== The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share data) (Unaudited) April 4, January 3, 1998 1998 ASSETS Current Assets Cash and cash equivalents $ 8,990 $ 25,679 Accounts receivable, less allowances 548,432 539,589 Inventories Finished stock 399,180 366,324 Work in process 46,086 42,384 Raw materials 74,291 66,008 Excess of current cost over LIFO cost (98,902) (101,561) --------- ---------- Total inventory 420,655 373,155 Prepaid expenses and other assets 92,516 83,286 --------- ---------- Total current assets 1,070,593 1,021,709 Property and equipment Land 23,817 23,980 Buildings and improvements 163,569 163,596 Machinery and equipment 350,254 341,875 --------- --------- 537,640 529,451 Accumulated depreciation (271,134) (263,686) --------- --------- Total property and equipment 266,506 265,765 Deferred income tax benefits 57,104 55,699 Intangible and other assets 267,683 298,184 --------- -------- Total assets $1,661,886 $1,641,357 ========= ========= The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share data) (Unaudited) April 4, January 3, 1998 1998 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 95,939 $ 91,553 Notes payable and current maturities of long-term debt 58,165 23,951 Accrued compensation 33,234 43,712 Dealer deposits 42,142 43,848 Accrued income taxes 28,963 14,831 Deferred subscription revenue 29,209 29,265 Other accrued liabilities 103,086 105,370 ---------- ----------- Total current liabilities 390,738 352,530 Long-term debt 204,191 151,016 Deferred income taxes 12,173 11,824 Retiree health care benefits 87,402 86,936 Pension and other long-term liabilities 101,019 146,914 ----------- ----------- Total liabilities 795,523 749,220 SHAREHOLDERS' EQUITY Preferred stock - authorized 15,000,000 shares of $1 par value; none outstanding - - Common stock - authorized 250,000,000 shares of $1 par value; issued - April 4, 1998 - 66,523,085 shares January 3, 1998 - 66,472,127 shares 66,523 66,472 Additional contributed capital 83,896 82,758 Retained earnings 960,245 938,963 Foreign currency translation adjustment (30,825) (30,385) Treasury stock at cost - 7,111,313 and 5,956,313 shares (213,476) (165,671) ---------- ---------- Total shareholders' equity 866,363 892,137 ---------- ---------- Total liabilities and shareholders' equity $1,661,886 $1,641,357 ========== ========== The accompanying notes are an integral part of these statements.
SNAP-ON INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Thirteen Weeks Ended April 4, March 29, 1998 1997 OPERATING ACTIVITIES Net earnings $ 33,926 $ 33,854 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 8,561 7,829 Amortization 2,108 1,383 Deferred income taxes (361) (9,535) (Gain) on sale of assets (63) (39) Changes in operating assets and liabilities: (Increase) decrease in receivables (9,121) 1,395 (Increase) in inventories (47,966) (28,272) (Increase) decrease in prepaid and other assets 32,670 (4,268) Increase in accounts payable 4,691 6,392 Increase (decrease) in accruals and other liabilities (50,089) 16,378 ---------- ---------- Net cash (used in) provided by operating activities (25,644) 25,117 INVESTING ACTIVITIES Capital expenditures (10,034) (11,459) Acquisitions of businesses (10,102) (48,965) Disposal of property and equipment 314 368 ----------- --------- Net cash used in investing activities (19,822) (60,056) FINANCING ACTIVITIES Payment of long-term debt (359) (7,755) Increase in long-term debt 5,236 - Increase short-term borrowings-net 83,169 46,861 Purchase of treasury stock (47,805) (417) Proceeds from stock plans 1,189 2,481 Cash dividends paid (12,644) (12,173) ---------- ----------- Net cash provided by financing activities 28,786 28,997 Effect of exchange rate changes (9) (279) ---------- ---------- Decrease in cash and cash equivalents (16,689) (6,221) Cash and cash equivalents at beginning of period 25,679 15,350 ---------- ----------- Cash and cash equivalents at end of period $ 8,990 $ 9,129 ========== =========== 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 January 3, 1998. 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 weeks ended April 4, 1998 have been made. Management also believes that the results of operations for the thirteen weeks ended April 4, 1998 are not necessarily indicative of the results to be expected for the full year. 2. Income tax paid for the thirteen-week period ended April 4, 1998 and March 29, 1997 was $5.3 million and $6.6 million. 3. Interest paid for the thirteen-week period ended April 4, 1998 and March 29, 1997 was $5.8 million and $2.6 million. 4. During the first quarter, the Corporation acquired an additional 10 percent interest in The Thomson Corporation's Mitchell Repair Information business. The Corporation is obligated to purchase the remaining 40 percent of Mitchell Repair Information Company within the next four years. Subsequent to quarter end, a subsidiary of the Corporation commenced a tender offer for all outstanding common shares of Hein-Werner Corporation at a net price of $12.60 per share in cash. The offer is scheduled to expire on June 1, 1998 unless extended. Consummation of the offer is subject to there having been validly tendered, and not withdrawn prior to the expiration of the offer, a number of shares which constitute at least 66-2/3% of the shares outstanding on a fully diluted basis, the expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and other customary conditions. 5. 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 shares of common stock is calculated using the treasury stock method. 6. In the first quarter of 1998, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Total comprehensive income, consisting of net earnings and foreign currency translation adjustments, amounted to $33.5 million and $26.1 million for the thirteen-week period ended April 4, 1998 and March 29, 1997. The Financial Accounting Standards Board (FASB) has issued two accounting pronouncements which the Corporation will adopt in the fourth quarter of 1998. FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" and Statement No. 132 "Employers' Disclosures about Pensions and Other Postretirement." The Corporation is currently evaluating the impact of these pronouncements; however, it does not anticipate that the adoption of these statements will have a material impact on results of operations or financial position. 7. The Corporation uses derivative instruments to manage well-defined interest rate and foreign currency exposures. The Corporation does not use derivative instruments for trading purposes. The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure, (ii) whether or not overall risk is being reduced and (iii) if there is a correlation between the value of the derivative instrument and the underlying obligation. Interest Rate Derivative Instruments: The Corporation enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates. The differentials paid or received on interest rate agreements are accrued and recognized as adjustments to interest expense. Gains and losses realized upon settlement of these agreements are deferred and amortized to interest expense over a period relevant to the agreement if the underlying hedged instrument remains outstanding, or immediately if the underlying hedged instrument is settled. Foreign Currency Derivative Instruments: The Corporation has operations in a number of countries and has intercompany transactions among them and, as a result, is exposed to changes in foreign currency exchange rates. The Corporation manages most of these exposures on a consolidated basis, which allows netting certain exposures to take advantage of any natural offsets. To the extent the net exposures are hedged, forward contracts are used. Gains and/or losses on these foreign currency hedges are included in income in the period in which the exchange rates change. Gains and/or losses have not been material to the consolidated financial statements. 8. Tejas Testing Technology One, L.C. and Tejas Testing Technology Two, L.C. (the "Tejas Companies"), former subsidiaries of the Corporation, previously entered into contracts with the Texas Natural Resources Conservation Commission ("TNRCC"), an agency of the State of Texas, to perform automotive emissions testing services. The Corporation guaranteed payment (the "Guaranty") of the Tejas Companies' obligations under a seven-year lease agreement in the amount of approximately $98.8 million plus an interest factor, pursuant to which the Tejas Companies leased the facilities necessary to perform the contracts. The Guaranty was assigned to the lessor's lenders (the "Lenders"). The Tejas Companies agreed to indemnify the Corporation for any payments it must make under the Guaranty. The State of Texas subsequently terminated the emissions program described in the contracts. The Tejas Companies filed for bankruptcy, and commenced litigation in state and federal court against the TNRCC and related entities. The Corporation has recorded as assets the net amounts paid under the guaranty, which are expected to be received from the State of Texas pursuant to a settlement agreement approved by the U.S. Bankruptcy Court. These net receivables total $55.8 million as of April 4, 1998 and are included in Intangible and Other Assets on the accompanying Consolidated Balance Sheets. The Corporation expects to receive $19.0 million toward the net receivable in settlement payments by May 31, 1999, which payments have been appropriated by the Texas Legislature. The Corporation expects to receive further payments in an amount sufficient to satisfy the balance of the net receivables by August 31, 2001, which payments are subject to appropriation. The Corporation believes that ultimate recovery of the net receivables is probable. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview: The Corporation posted increases in first quarter sales, net earnings and earnings per share. Net earnings for the first quarter of 1998 increased .2% over the year ago quarter on a net sales increase of 13.6%. Earnings per share for the first quarter increased 1.8% over the 1997 comparable period. Sales: Net sales for the first quarter 1998 increased 13.6%. The negative effect of foreign currency translation reduced the sales increase by two percentage points. Net sales for the quarter were a record $426.4 million, up from $375.3 million in the first quarter of 1997. North American sales for the first quarter of 1998 were $325.3 million, an increase of 15.7% over first quarter 1997 sales of $281.2 million. Excluding acquisitions, sales rose 14%. Strong hand tool sales, revenues from emissions-testing equipment, and growth in ShopKey information and shop management software all contributed to the increase. In addition, sales in both the industrial channel and the Equipment Solutions equipment facilitation and distribution business grew at a faster rate than that of the region overall. European sales for the first quarter of 1998 were $83.3 million, an increase of 10.6% over first quarter 1997 sales of $75.3 million. In local currency, sales increased 17%. Acquisitions and higher tool sales in most countries were positive contributors. Excluding acquisitions, sales were 14% lower because of the negative effects of currency translation and difficult comparisons against the year-ago period. Other sales for the first quarter of 1998 were $17.8 million, a decrease of 5.4% from first quarter 1997 sales of $18.8 million. Sales in local currency rose 5%, with gains reported in both Japan and Australia. Weakness in the developing economies of Asia hurt results in this region; however, the Corporation's present exposure to the economic uncertainty in this region is not material to its consolidated results or financial position. Earnings: Net earnings for the first quarter were $33.9 million, compared with $33.8 million for the comparable 1997 period. Diluted per share earnings rose 1.8% to $.56, compared with $.55 per share in the first quarter a year ago while basic per share earnings also rose 1.8% to $.57, compared with $.56 per share in the first quarter a year ago. Operating expenses: As a percentage of net sales, first quarter total operating expenses decreased to 40.1% in 1998 from 40.3% in the same period of 1997. Finance income: Finance income for the first quarter of 1998 was $17.0 million, a decrease of 2.8% from first quarter 1997 finance income of $17.5 million. Growth in extended credit financings, in origination fees from third-party lease transactions, and in financing programs outside the United States offset much of the decrease in income related to the asset securitizations and lease portfolio sale effected in 1997. FINANCIAL CONDITION Liquidity: Cash and cash equivalents decreased to $9.0 million at the end of the first quarter from $25.7 million at the end of 1997. Working capital increased to $679.9 million at first quarter end, from $669.2 million at the end of 1997. During the quarter, the Corporation raised its commercial paper program to $175 million, which is supported by revolving credit facilities. 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 believes it has sufficient sources of liquidity to support working capital requirements, finance capital expenditures and pay dividends. Accounts receivable: Accounts receivable increased 1.6% to $548.4 million at the end of the first quarter, compared with $539.6 million at the end of 1997. 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 12.7% to $420.7 million in the 1998 first quarter, compared with $373.2 million at the end of 1997. Total inventory includes emissions-testing equipment which is expected to be delivered over the next several quarters and a significantly higher build of air conditioning equipment for this year's season, reflecting the company's stronger presence in this category. Liabilities: Total short-term and long-term debt was $262.4 million at the end of the first quarter, compared with $175.0 million at the end of 1997. Funding requirements for the repurchase of common stock, an acquisition and working capital needs were responsible for the higher debt levels. Average shares outstanding: Average shares outstanding for diluted EPS in 1998's first quarter were 60.8 million shares versus 61.7 in last year's first quarter. For basic EPS, average shares were 59.9 million compared with 60.9 million in 1997. Share repurchase: On June 27, 1997, the Corporation's board of directors authorized the repurchase of $100 million of the Corporation's common stock over a two-year period. In 1996, the Corporation's board of directors authorized the repurchase of stock in an amount equivalent to that necessary to prevent dilution created by shares issued for stock options, employee and dealer stock purchase plans, and other corporate purposes. The Corporation repurchased 1,155,000 shares of its common stock in the first quarter of 1998. Foreign currency: The Corporation operates in a number of countries and, as a result, is exposed to changes in exchange rates. Most of these exposures are managed on a consolidated basis to take advantage of natural offsets through netting. To the extent that the net exposures are hedged, forward contracts are used. Refer to note 7 for a discussion of the Corporation's accounting policies for the use of derivative instruments. Other Matters: The Corporation is conducting a comprehensive review of its products, computer systems and software to identify those that may require modification so that they will function properly in the Year 2000. This review is being conducted through a committee, which has the responsibility to identify, evaluate and implement necessary changes to achieve a Year 2000 date conversion with no disruption to business operations. The committee has communicated with suppliers, dealers, financial institutions and others with whom the Corporation does business, to coordinate the Year 2000 conversion. Conversion efforts are under way, and for a significant portion of the Corporation's internal systems this conversion is an incidental consequence of the ongoing implementation of a new enterprise-wide client/server computing system in North America. However, some internal testing and conversion is required at other geographic locations. Based upon its review and analysis to date, the Corporation believes that the Year 2000 conversion will not have a material effect on the Corporation's financial position or results of operations. Safe Harbor: Statements in this document that are not historical facts, including statements (i) that include the words "believes," "expects," "anticipates" or "estimates" or words of similar importance with reference to the Corporation or management, (ii) specifically identified as forward- looking, or (iii) describing the Corporation's or management's future plans, objectives or goals, are forward-looking statements. The Corporation or its representatives may also make similar forward-looking statements from time to time orally or in writing. The Corporation cautions the reader that these statements are subject to risks, uncertainties and other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Those important factors include the delay in implementation of State emissions programs or delay in delivery of products related to such programs, a weakening of sales of hand tools and other products in those states where the Corporation is undertaking a large emissions-testing equipment sales and service effort, and the achievement of productivity improvements and cost reductions. These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. The Corporation operates in a continually changing business environment and new factors emerge from time to time. The Corporation cannot predict such factors nor can it assess the impact, if any, of such factors on the Corporation or its results. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. PART II. OTHER INFORMATION Item 6: Exhibits and reports on Form 8-K Item 6(a): Exhibits Exhibit 10(a) Amended and Restated Snap-on Incorporated Directors' 1993 Fee Plan as of April 24, 1998 Exhibit 27 Financial Data Schedule Item 6(b): Reports on Form 8-K Filed During the Reporting Period Date Filed Date of Report Item February 20, 1998 February 17, 1998 Item 5. The Corporation and Tejas Testing Technologies completed an agreement, approved by the U.S. Bankruptcy Court in Austin, Texas, that fully satisfied the Corporation's liability related to a loan guaranty by the Corporation of certain Tejas lease obligations. March 17, 1998 March 17, 1998 Item 5. The Corporation filed those portions of its fiscal 1997 Annual Report to Shareholders that the Corporation has incorporated by reference into and filed as Exhibit 13 to its Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
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: May 19, 1998 /s/ R. A. Cornog R. A. CORNOG (Chairman, President and Chief Executive Officer) Date: May 19, 1998 /s/ N. T. Smith N. T. SMITH (Principal Accounting Officer and Controller)
EXHIBIT INDEX Exhibit No. Description 10(a) Amended and Restated Snap-on Incorporated Directors' 1993 Fee Plan as of April 24, 1998 27 Financial Data Schedule