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As Of Filer Filing As/For/On Docs:Pgs Issuer Agent 2/20/07 Snap on Inc 10-K 12/30/06 9:360 Merrill Corp-MD/FA
Document/Exhibit Description Pages Size 1: 10-K Annual Report HTML 1,618K 2: EX-10.(O) Material Contract HTML 8K 3: EX-12 Statement re: Computation of Ratios HTML 32K 4: EX-21 Subsidiaries of the Registrant HTML 8K 5: EX-23 Consent of Experts or Counsel HTML 7K 6: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 10K 7: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 10K 8: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) HTML 9K 9: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) HTML 9K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2006, or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-7724
(Exact name of registrant as specified in its charter)
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39-0622040 |
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(State of incorporation) |
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(I.R.S. Employer Identification No.) |
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2801 80th Street, Kenosha, Wisconsin |
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53143 |
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(Address of principal executive offices) |
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(Zip code) |
(262) 656-5200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
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Common stock, $1.00 par value |
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New York Stock Exchange |
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Preferred stock purchase rights |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer x Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (July 1, 2006) was: $2,338,681,912
The number of shares of Common Stock ($1.00 par value) of the registrant outstanding as of February 15, 2007, was 58,900,490 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates by reference certain information that will be set forth in Snap-on’s Proxy Statement, which is expected to first be mailed to shareholders on or around March 13, 2007, prepared for the Annual Meeting of Shareholders scheduled for April 26, 2007.
2
Safe Harbor
Statements in this document that are not historical facts, including statements (i) that include the words “expects,” “plans,” “targets,” “estimates,” “believes,” “anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”) 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 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 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. 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. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in this Annual Report on Form 10-K and in Snap-on’s Form 8-K/A filed on January 9, 2007, could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.
These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, 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 reductions in workforce, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, 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 cost and lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby enhance their sales and profitability, introduce successful new products, successfully integrate acquisitions (including the company’s November 28, 2006, acquisition of ProQuest Business Solutions), as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, litigation challenges and external negative factors including significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations; and the impact of legal proceedings, energy and raw material supply and pricing (including steel and gasoline), the amount, rate and growth of Snap-on’s general and administrative expenses (e.g. health care and/or pension costs), and terrorist disruptions on business. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document.
In addition, investors should be aware that generally accepted accounting principles prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.
3
Snap-on was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of tools, diagnostics and equipment solutions for professional users. Product lines include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle manufacturers, dealerships and repair centers, as well as customers in industry, government, agriculture and construction. Snap-on also derives income from various financing programs to facilitate the sales of its products.
Snap-on markets its products and brands through multiple distribution sales channels in more than 125 countries. Snap-on’s largest geographic markets include the United States, Australia, Canada, China, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom. The originator of the mobile franchise van tool distribution channel in the automotive repair segment, Snap-on also reaches its customers through company direct, distributor and Internet channels.
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 Tools Group (formerly the Snap-on Dealer Group); (ii) the Commercial & Industrial Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. In the first quarter of 2006, the company changed the name of the Snap-on Dealer Group segment to the Snap-on Tools Group. The organization structure used by management did not change and the segment name change did not impact previously disclosed segment net sales, operating earnings, identifiable assets or other amounts or disclosures. The Snap-on Tools Group consists of Snap-on’s business operations serving the worldwide franchise van channel (“franchisees”). The Commercial & 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-franchise distribution channels. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, electronic parts catalogs, business management systems, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. The Diagnostics & Information Group includes, on a prospective basis, the impact of the November 28, 2006, acquisition of ProQuest Business Solutions. Financial Services consists of the business operations of Snap-on Credit LLC (“SOC”), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. (“CIT”), and Snap-on’s wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations. See Note 17 to the Consolidated Financial Statements for information on business segments and foreign operations. See Note 2 to the Consolidated Financial Statements for information on the ProQuest Business Solutions acquisition.
Snap-on evaluates the performance of its operating segments based on segment net sales and operating earnings, exclusive of financing activities and income taxes. Segment net sales are defined as total net sales, including both external customer revenue and intersegment revenue. Segment operating earnings are defined as segment net sales 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.
On November 28, 2006, Snap-on acquired the ProQuest Business Solutions business and certain net assets (collectively “ProQuest Business Solutions” or “business solutions”) from ProQuest Company for a preliminary purchase price of approximately $516 million (including $8 million of estimated transaction costs) and the assumption of approximately $19 million of debt. ProQuest Business Solutions is a world leader in automotive parts and service information. Its products are aimed at helping original equipment manufacturers (“OEMs”) and their dealers enhance their service operations. Business solutions’ products include integrated software, services and systems that transform complex technical data for parts catalogs into easily accessed electronic information (electronic parts catalogs). Other products and services include warranty management systems and analytics to help dealerships manage and track performance. Over 33,000 automotive dealerships around the world use business solutions’ electronic parts catalogs, which are available in 26 different languages and support 15 automotive manufacturers and 31 brands. Business solutions’ products are also sold to over 85,000 dealers in the power equipment and power sports markets. See Snap-on’s Form 8-K filing dated November 28, 2006 (as amended January 9, 2007), and Note 2 to the Consolidated Financial Statements for further information on the ProQuest Business Solutions acquisition.
4
Information Available on the Company’s Web site
Additional information regarding Snap-on and its products is available on the company’s Web site at www.snapon.com. Snap-on is not including the information contained on its Web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Snap-on’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements on Schedule 14A, Current Reports on Form 8-K, and any amendments to those reports, are made available to the public at no charge, other than an investor’s own Internet access charges, through the Investor Information section of the company’s Web site at www.snapon.com/investor. Snap-on makes such material available on its Web site as soon as reasonably practical after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Copies of any materials the company files with the SEC can also be obtained free of charge through the SEC’s Web site at www.sec.gov. The SEC’s Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC’s Public Reference Room at 1-800-732-0330. In addition, the company’s (i) charters for the Audit, Corporate Governance and Nominating, and Organization and Executive Compensation committees of the company’s Board of Directors, (ii) Corporate Governance Guidelines, and (iii) Code of Business Conduct and Ethics are available on Snap-on’s Web site. Snap-on will also post any amendments to these documents, or information about any waivers granted to directors or executive officers with respect to the Code of Business Conduct and Ethics, on the company’s Web site at www.snapon.com. These documents are also available in print upon written request directed to the Corporate Secretary, 2801 80th Street, Kenosha, Wisconsin 53143.
Products and Services
Snap-on offers a broad line of products and complementary services that are grouped into two product categories, tools and equipment, described below. Further product line information is not presented as it is not practicable to do so. The following table shows the consolidated net sales of these product categories for the last three years:
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Net Sales |
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(Amounts in millions) |
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2006 |
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2005 |
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2004 |
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Product Category: |
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Tools |
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$ |
1,428.9 |
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$ |
1,412.9 |
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$ |
1,358.9 |
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Equipment |
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1,044.5 |
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895.7 |
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970.2 |
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$ |
2,473.4 |
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$ |
2,308.6 |
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$ |
2,329.1 |
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The tools product categoryincludes hand tools, power tools and tool storage products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets, saws and cutting tools, pruning tools, torque measuring instruments and other similar products. Power tools include pneumatic (air), cordless (battery) and corded (electric) tools such as impact wrenches, ratchets, chisels, drills, sanders, polishers and similar products. Tool storage units include tool chests, roll cabinets and other similar products. The majority of products are manufactured by Snap-on, and in completing the product line, other items are purchased from external manufacturers.
The equipment product category includes solutions for the diagnosis and service of automotive and industrial equipment. Products include engine analyzers, air conditioning service equipment, brake service equipment, fluid exchange equipment, wheel balancing and alignment equipment, transmission troubleshooting equipment, safety testing equipment, battery chargers, lifts and hoists, diagnostics equipment, and service and collision repair equipment. Also included are service and repair information products, diagnostic services, electronic parts catalogs, business management systems, point-of-sale systems, integrated systems for vehicle service shops, equipment repair services, purchasing facilitation services, and warranty management systems and analytics to help dealerships manage and track performance. Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs for its customers, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on.
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Tools and equipment are marketed under a number of brand names and trademarks, many of which are well known in the vehicle service and industrial markets served. Some of the majortrade names and trademarks and the products and services with which they are associated include the following:
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Names |
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Products and Services |
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Snap-on |
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Hand tools, power tools, tool storage units, diagnostics, certain equipment and related accessories, mobile tool stores, Web sites, and related services |
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Acesa |
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Hand tools |
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ATI |
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Tools and equipment |
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BAHCO |
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Hand tools |
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Blackhawk |
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Collision repair equipment |
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Blue-Point |
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Hand tools, power tools, tool storage units, certain equipment and related accessories |
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Cartec |
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Safety testing and other equipment |
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CDI |
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Torque measuring instruments |
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Equipment Solutions |
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Vehicle manufacturer facilitation services |
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Fish and Hook |
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Hand tools |
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Hofmann |
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Wheel balancers, lifts, tire changers and aligners |
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Irimo |
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Hand tools |
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John Bean |
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Under car and wheel service equipment |
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Kansas Jack |
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Collision repair equipment |
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Lindstrom |
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Hand tools |
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Mitchell1 |
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Repair and service information and shop management systems |
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Nexiq |
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Diagnostics |
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Palmera |
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Hand tools |
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Pradines |
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Hand tools |
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ProQuest* |
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Electronic parts catalogs, warranty management systems and analytics |
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ShopKey |
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Repair and service information and shop management systems |
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Sioux |
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Power tools |
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Sun |
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Diagnostics and service equipment |
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Williams |
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Hand tools |
* Snap-on is licensed to use the ProQuest brand and trademark pursuant to the business solutions purchase agreement.
In addition to its sales of tool, diagnostic, service and equipment solutions, Snap-on also generates revenue from various financing activities that include (i) loans to franchisees; (ii) loans to the franchisees’ customer network; and (iii) loans to Snap-on’s industrial and other customers for the purchase of tools and equipment on an extended-term payment plan.
Franchise fee revenue, including nominal, non-refundable initial and ongoing monthly fees (primarily for sales and business training and marketing and product promotion programs), is recognized as the fees are earned.
Sales and Distribution
Snap-on markets and distributes its products and related services principally to professionaltool and equipment users around the world. The two largest market sectors are the vehicle service and repair sector and the industrial sector.
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Vehicle Service and Repair Sector
The vehicle service and repair sector has three main customer groups: professional technicians who purchase tools and equipment for themselves; vehicle service and repair shop owners and managers - including independent shops, national chains and automotive dealerships - who purchase equipment for use by multiple technicians within a service or repair facility; and vehicle manufacturers.
Snap-on provides innovative tool, equipment solutions and business solutions, as well as technical sales support and training, to meet technicians’ evolving needs. Snap-on’s franchise van distribution system offers technicians the convenience of purchasing quality tools with minimal disruption of their work routine. Snap-on also provides owners and managers of shops, where technicians work, with tools, diagnostics equipment, repair and service information, including electronic parts catalogs, and shop management products. Through its equipment solutions business, Snap-on provides OEMs with products and services including tools, consulting services and facilitation services. Snap-on’s facilitation services include product procurement, distribution, and administrative support to customers for their dealership equipment programs.
Major challenges for Snap-on and the vehicle service and repair sector include the increasing rate of technological change within motor vehicles, vehicle population growth, vehicle life and the resulting impact on the businesses of both our suppliers and customers that is necessitated by such change. Snap-on believes it is a meaningful participant in the market sector for vehicle service and repair.
Industrial Sector
Snap-on markets its products to a wide variety of industrial customers including industrial maintenance and repair operations; manufacturing and assembly facilities; various government agencies and facilities; schools; and OEMs that require instrumentation or service tools and equipment for their products.
Major challenges in the industrial sector include a highly competitive, cost-conscious environment, and a trend toward customers making many of their tool purchases through one integrated supplier. Snap-on believes it is a meaningful participant in the market sector for industrial tools and equipment.
Distribution Channels
Snap-on serves customers primarily through the following channels of distribution: the mobile franchise van channel, company direct sales, distributors and e-commerce. The following discussion summarizes Snap-on’s general approach for each channel, and is not intended to be all-inclusive.
Franchisees
In the United States, the majority of sales to the vehicle service and repair sector are conducted through Snap-on’s franchisees. Snap-on’s franchisees primarily serve vehicle service technicians and vehicle service shop owners, generally providing weekly contact at the customer’s place of business. Franchisees’ sales are concentrated in hand and power tools, tool storage units and small diagnostic and shop equipment, which can easily be transported in a van and demonstrated during a brief sales call. Franchisees purchase Snap-on’s products at a discount from suggested list prices and resell them at prices established by the franchisee. Although some franchisees have sales areas defined by other methods, most U.S. franchisees are provided a list of places of business that serves as the basis of the franchisee’s sales route.
Since 1991, new U.S. franchisees, and a majority of the pre-1991 U.S. franchisees, have been enrolled as franchisees of Snap-on. Snap-on began offering, in 2001, a trial franchise option to potential U.S. franchisees that do not meet the franchise qualification requirements. Trial franchisees typically have less upfront investment and are provided an initial base level of consigned inventory from Snap-on to assist them in gaining experience and building equity toward the future purchase of a standard franchise. Snap-on also provides certain franchisees the opportunity to add vans to their franchise or to add a limited number of franchises. Snap-on charges nominal initial and ongoing monthly license fees. At 2006 year end, 3,308 U.S. franchisees (approximately 95%) were enrolled as franchisees, or employed by franchisees, as compared with 3,498 U.S. franchisees (approximately 95%) at year-end 2005. Through SOC, financing is available to franchisees, which includes van and truck leases, working capital loans, and loans to enable new franchisees to fund the purchase of the franchise. While Snap-on offers financing to qualified
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franchisees and their customers through SOC and its wholly owned international finance subsidiaries, the decision to finance through Snap-on or another financing entity is solely at the election of the customer.
Snap-on has replicated its U.S. franchise van distribution model in certain other countries including Australia, Canada, Germany, Japan, the Netherlands, South Africa and the United Kingdom. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians and shop owners. Snap-on markets products in certain other countries through its subsidiary, Snap-on Tools International, LLC, which sells to foreign distributors under license or contract with Snap-on. Internationally, Snap-on offers financing to its franchisees and customer networks through its wholly owned finance subsidiaries.
Snap-on supports its franchisees with a field organization of regional offices, franchise performance support teams, Diagnostic Sales Developers (“DSDs”), service centers and distribution centers. Snap-on also provides sales and business training, and marketing and product promotion programs, as well as customer and franchisee financing programs through SOC and its wholly owned international finance operations, all of which are designed to strengthen franchisee sales. In the United States and Canada, the National Franchise Advisory Council and the Snap-on Tools Canadian Franchise Advisory Council, both of which are composed of franchisees that are elected by franchisees, assist Snap-on in identifying and implementing enhancements to the franchise program.
In the United States, franchisees work closely with DSDs. The DSD specialists demonstrate and sell higher-price-point diagnostics and vehicle service shop management information systems. DSDs work independently and with franchisees to identify and generate sales leads among vehicle service shop owners and managers. DSDs are Snap-on employees who are compensated primarily on the basis of commission; a franchisee receives a brokerage fee from certain sales made by the DSDs to the franchisee’s customers. Most products sold through the franchisee and DSDs are sold under the Snap-on, Blue-Point, and Sun brand names.
Company Direct Sales
In the United States, a significant proportion of shop equipment sales under the Sun, John Bean and Blackhawk brandsand information products under the Mitchell1 brand are made by a direct sales force that has responsibility for national accounts. As the vehicle service and repair sector consolidates (with more business conducted by national chains, automotive dealerships and franchised service centers), the company believes these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of equipment and diagnostic products and services. Snap-on also sells these products and services directly to OEMs. John Bean and Blackhawk brands are sold directly to end customers primarily through sales leads generated from franchisees and DSDs.
Snap-on brand tools and equipment are marketed to industrial and governmental customers in the United States through both industrial sales representatives, who are employees, and independent industrial distributors. In most markets outside the United States, industrial sales are conducted through independent distributors. The sales representatives focus on industrial customers whose main purchase criteria are quality and service. At the end of 2006, Snap-on had industrial sales representatives in the United States, Australia, Canada, Japan, Mexico, Puerto Rico and some European countries, with the United States representing the majority of Snap-on’s total industrial sales.
Business solutions sells automotive and power equipment products both domestically and internationally through an internal sales force. Products and services are marketed to two targeted groups: OEMs and individual dealerships. To effectively reach the large OEMs, such as General Motors Corporation, DaimlerChrysler AG, Ford Motor Company, and Toyota Motor Corporation, business solutions has deployed a team of business development professionals in the world’s principal automotive centers in the United States, the United Kingdom, Germany and Japan. In the United States and Canada, automotive and power equipment products and services are sold directly to individual dealerships using an experienced sales force.
Distributors
Sales of certain tools and equipment are made through independent vehicle service and industrial distributors who purchase the items from Snap-on and resell them to the end users. Hand tools under the Bahco, Fish and Hook (design), Pradines and Lindstrom brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Wheel
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service and other vehicle service equipment are sold through distributors primarily under brands including Hofmann and Kansas Jack. Hand tools under the Irimo, Palmera and Acesa brands and power tools under the Sioux brand, are differentiated from those products sold through the franchisee, DSD and direct sales channels. Sun-branded equipment is marketed through distributors in South America and Asia, and through both a direct sales force and distributors in Europe.
E-commerce
Snap-on’s e-commerce development initiatives allow Snap-on to combine the capabilities of the Internet with Snap-on’s existing brand sales and distribution strengths to reach new and under-served customer segments. Snap-on offers current and prospective customers online, around-the-clock access to purchase Snap-on and Blue-Point products through its public Internet Web site at www.snapon.com. The site features an online catalog containing nearly 14,000 products, including Snap-on hand tools, power tools, tool storage units and diagnostic equipment available to consumers and professionals in the United States, the United Kingdom, Canada and Australia. At the end of 2006, Snap-on had more than 370,000 registered users, including approximately 32,000 industrial accounts. E-commerce and certain other system enhancement initiatives are designed to improve productivity and further leverage the one-on-one relationships and service Snap-on has with its current and prospective customers. Through business-to-business and business-to-consumer capabilities, Snap-on and its franchisees are enhancing communications with customers on a real-time, 24-hour, 7-day a week basis.
Competition
Snap-on competes on the basis of its product quality and performance, product line breadth and depth, service, brand awareness and imagery, and technological innovation. While no single company competes with Snap-on across all of its product lines and distribution channels, various companies compete in one or more product categories and/or distribution channels.
Snap-on believes it is a leading manufacturer and distributor of professional tools, diagnostics and equipment solutions, offering the broadest line of these products to the vehicle service industry. The major competitors selling to professional technicians in the automotive service and repair sector through the mobile van channel include MAC Tools (The Stanley Works), Matco (Danaher Corporation), and Cornwell. Snap-on also competes with companies that sell tools and equipment to automotive technicians through non-mobile van distributors including department stores (such as Sears Holding Corp./Craftsman Roebuck and Co.), home centers (such as The Home Depot, Inc. and Lowes Companies, Inc.), auto parts supply outlets (such as NAPA, AutoZone, Inc. and The Pep Boys), and tool supply warehouses/distributorships (such as Ace Tool, Stampede and ICN). Within the power tools category, Snap-on’s major competitors include Ingersoll-Rand Co. Limited, Black & Decker Corp., Robert Bosch Tool Corp., Makita Corp., Chicago Pneumatic (Atlas Copco), and Milwaukee Electric (Techtronic Industries Co. Ltd.). In the industrial sector, major competitors include Armstrong (Danaher Corporation), Proto (The Stanley Works), Irwin (Newell Rubbermaid, Inc.), Cooper Industries, Ltd., and Westward (W.W. Grainger, Inc.). The major competitors selling diagnostics and shop equipment and information to shop owners and managers in the vehicle service and repair sector include Corghi S.p.A., Fluke and Hennessy (Danaher Corporation), Robinair and OTC (SPX Corporation), Hunter Engineering, Rotary Lift and Chief Automotive (Dover Corporation), Car-O-Liner, Lexcom GmbH, Infomedia Ltd., Enigma, ALLDATA (AutoZone, Inc.), and the proprietary diagnostic and information systems of OEMs.
Raw Materials and Purchased Product
Snap-on’s supply of raw materials and purchased components are generally and readily available from numerous suppliers. During 2005 and 2006, Snap-on experienced higher pricing related to certain grades and alloys of steel. Snap-on has secured an ample supply of both bar and coil steel for the near future to ensure stable supply to meet material demands. While Snap-on believes that steel prices will continue to remain high for 2007, the company does not anticipate experiencing any significant pricing or availability issues with regards to 2007 steel purchases.
Patents, Trademarks and Other Intellectual Property
Snap-on vigorously pursues and relies on patent protection to protect its intellectual property and its position in its markets. As of December 30, 2006, Snap-on and its subsidiaries held over 700 active and pending patents in the United
9
States and over 1,600 active and pending patents outside of the United States. Sales relating to any single patent did not represent a material portion of Snap-on’s revenues in the last three years.
Examples of products that have features or designs that benefit from patent protection include wheel alignment systems, wheel balancers, sealed ratchets, electronic torque instruments, ratcheting screwdrivers, emissions-sensing devices and diagnostic equipment.
Much of the technology used in the manufacture of vehicle service tools and equipment is in the public domain. Snap-on relies primarily on trade secret protection to protect proprietary processes used in manufacturing. Methods and processes are patented when appropriate. Copyright protection is also utilized when appropriate.
Trademarks used by Snap-on are of continuing importance to Snap-on in the marketplace. Trademarks have been registered in the United States and more than 100 other countries, and additional applications for trademark registrations are pending. Snap-on vigorously polices proper use of its trademarks. Snap-on’s right to manufacture and sell certain products is dependent upon licenses from others; however, these products under license do not represent a material portion of Snap-on’s net sales.
Domain names have become a valuable corporate asset for companies around the world, including Snap-on. Domain names often contain a trademark or service mark or even a corporate name and are often considered intellectual property. The recognition and value of the Snap-on name, trademark, and domain name are core strengths of the company. Snap-on monitors new developments in top-level domains and country-code domains in order to preserve Snap-on’s right to relevant domain names.
Snap-on is selectively and strategically licensing the Snap-on brand to carefully selected manufacturing and distribution companies, including apparel, work boots and a variety of other goods, in order to further build equity and market presence for the company’s strongest brand.
Environment
Snap-on is subject to various environmental laws, ordinances, regulations, and other requirements of government authorities in the United States and other nations. At Snap-on, these environmental liabilities are managed through the Snap-on Environmental, Hygiene, and Safety Management System (“EH & SMS”), which is applied worldwide. The system is based upon continual improvement and is certified to ISO 14001:1996 and OHSAS 18001:1999, verified through Det Norske Veritas (DNV) Certification, Inc.
Snap-on believes that it complies with applicable environmental control requirements in its operations. Expenditures on environmental matters through EH & SMS have not had, and Snap-on does not for the foreseeable future expect them to have, a material effect upon Snap-on’s capital expenditures, earnings or competitive position.
Employees
At the end of January 2007, Snap-on employed approximately 12,400 people compared to approximately 11,400 people at the end of January 2006. The year-over-year increase in employees primarily reflects the 2006 acquisition of ProQuest Business Solutions, partially offset by the impact of restructuring-related and management realignment actions at various Snap-on facilities.
Approximately 3,200 employees, or 26% of Snap-on’s worldwide workforce, are represented by unions and/or covered under collective bargaining agreements. Approximately 1,560 employees are covered under agreements expiring in 2007. In recent years, Snap-on has not experienced any significant work slow-downs, stoppages or other labor disruptions.
The number of covered union employees whose contracts expire within the next five years is approximately 1,560 in 2007; 1,630 in 2008; 20 in 2009; and zero in both 2010 and 2011.
There can be no assurance that future contracts with Snap-on’s unions will be renegotiated upon terms acceptable to Snap-on.
10
Working Capital
As most of Snap-on’s business is not seasonal and its inventory needs are relatively constant, no unusual working capital needs arise during the year. Snap-on does not have a significant backlog of orders at December 30, 2006.
Snap-on’s financial condition and use of working capital are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Neither Snap-on nor any of its segments, except Financial Services, depend on any single customer, small group of customers or government for any material part of its revenues. As a result of SOC’s relationship with CIT, Snap-on’s Financial Services business segment depends on CIT for more than 10% of its revenues.
In evaluating the company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect the company’s business, operating results and/or financial condition, as well as adversely affect the value of an investment in the company’s common stock. In addition to the following disclosures, please refer to the other information contained in this report, including the consolidated financial statements and the related notes.
The success of Snap-on’s mobile van tool distribution business depends on the success of its franchisees.
Approximately 41% of our 2006 revenues were generated by the Snap-on Tools Group, which consists of Snap-on’s business operations serving the worldwide franchise van channel. Except in limited circumstances, each of our mobile tool vans is operated by a franchisee pursuant to a franchise agreement. Snap-on’s success is dependent on its relationships with franchisees, individually and collectively, as they are the primary sales and service link between the company and vehicle service and repair technicians, who are an important class of end users for Snap-on’s products and services. If our franchisees are not successful, or if we do not maintain an effective relationship with our franchisees, the delivery of products, the collection of receivables and/or our relationship with end users could be adversely affected and thereby negatively impact our financial results.
In addition, if we are unable to maintain effective relationships with franchisees, the company or the franchisees may choose to terminate the relationship, which may result in (i) open routes in which end-use customers are not provided reliable service; (ii) litigation resulting from termination; and/or (iii) reduced collections or increased write-offs of franchisee receivables owed to Snap-on. As Snap-on has over 4,800 franchisees worldwide and most of these franchise relationships are governed by contract, it is not uncommon for litigation to result from the termination of these relationships.
The steps taken to restructure operations, rationalize operating footprint, lower operating expenses, and achieve greater efficiencies in the supply chain could disrupt business.
We have taken steps in the past, and expect to take additional steps in 2007, intended to improve customer service and to drive further efficiencies and reduce costs, some of which could be disruptive to our business. These actions, collectively across our operating groups, are focused on the following:
· Continue on the company’s existing path to improve and transform global manufacturing and the supply chain into a market-demand-based replenishment system, with lower costs;
· Continue to enhance service and value to Snap-on’s franchisees and customers;
· Continue to invest in initiatives focused on building a strong sales and operating presence in emerging growth markets;
· Continue to implement rapid continuous improvement (RCI) activities throughout the organization to drive further efficiencies and reduce costs;
· Continue to invest in developing and marketing new, innovative, higher-value-added products and advanced technologies; and
· Extend Snap-on’s products and services into additional markets or to new customers.
Specific initiatives in each of these areas are underway. Snap-on believes that by executing on these focus areas, along with a continued commitment to new innovative products and rapid continuous improvement to drive lower costs, the company and its franchisees will realize stronger growth and profitability. However,
11
failure to succeed in the implementation of any or all of these actions could result in our being unable to achieve our financial goals and could be disruptive to the business.
In addition, reductions to headcount and other cost reduction measures may result in the loss of technical expertise that could adversely affect our research and development efforts and ability to meet product development schedules. Efforts to reduce components of expense could result in the recording of charges for inventory and technology-related write-offs, workforce reduction costs or other charges relating to the consolidation of facilities. If we were to incur a substantial charge to further these efforts, our earnings (or loss) per share would be adversely affected in such period. If we are unable to effectively manage our cost reduction and restructuring efforts, our business, results of operations and financial condition could be harmed.
Risks associated with the integration of Snap-on’s acquisition of ProQuest Business Solutions (or other future acquisitions) could have an adverse impact on Snap-on’s results of operations and financial position.
We completed the acquisition of ProQuest Business Solutions on November 28, 2006. If our integration of this business is not successful, it could adversely affect our earnings, cash flow and share price. The acquisition also involves risks and uncertainties that include:
· Retaining the customers of business solutions and achieving the expected benefits of the acquisition, including (i) accelerating earnings and cash flows; (ii) expanding our existing product offerings into the global automotive OEM dealership segment; and (iii) creating new customer relationships and product integration opportunities;
· Losing key employees of business solutions;
· Incurring additional debt, earnings dilution and contingent liabilities;
· Implementing and maintaining consistent standards, controls, procedures, policies and information systems; and
· Diverting management’s attention from other business concerns.
ProQuest Company, the predecessor parent company of ProQuest Business Solutions, is the subject of an ongoing accounting review by the SEC. ProQuest Company has announced that this review will result in the restatement of previously reported earnings when it files its 2005 Annual Report on Form 10-K with the SEC. In connection with Snap-on’s acquisition of the ProQuest Business Solutions segment, ProQuest Company prepared financial statements of ProQuest Business Solutions on a stand-alone basis as of and for the year ended December 31, 2005. ProQuest Company’s independent auditors audited those financial statements and Snap-on filed those audited financial statements with the SEC in a Current Report on Form 8-K/A dated January 9, 2007, which amended the company’s Current Report on Form 8-K dated November 28, 2006. Because ProQuest Company’s restated financial statements are not yet finalized and the ProQuest Company SEC investigation is ongoing, we cannot assure that when ProQuest Company files its restated results they will not contain additional information that could impact the ProQuest Business Solutions’ audited stand-alone financial statements. Snap-on will evaluate any new information and if it is material, the information could result in the company’s need to amend its Form 8-K/A filing to restate the ProQuest Business Solutions’ financial statements.
Information technology infrastructure is critical to supporting business objectives.
We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.
In association with initiatives to better integrate business units, rationalize operating footprint and improve responsiveness to franchisees and customers, Snap-on is replacing and enhancing its existing global Enterprise Resource Planning (ERP) management information system. The integration, implementation and deployment of new information technology processes and a common information infrastructure, which began in 2006, is expected to cover a period of several years. We could experience disruptions in our business as we implement the system enhancements, including the possibility that the new system may not perform as expected, which could have an adverse effect on our business and results of operations.
12
The recognition of impairment charges on goodwill would adversely impact future financial position and results of operations.
We are required to perform impairment tests on our goodwill balance annually or at any time when events occur, which could impact the value of our business segments. Our determination of whether impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes could require a provision for impairment in a future period that could substantially affect our reported earnings and reduce our consolidated net worth and shareholders’ equity.
Business interruptions for franchisees could adversely impact operating results.
Franchisees have historically experienced business interruptions due to adverse weather conditions or other extraordinary events, such as hurricanes in the southern United States and wild fires in California. To the extent our franchisees experience future similar events, our operating results may be adversely impacted.
Exposure to credit risks of customers and resellers may make it difficult to collect receivables and could adversely affect operating results and financial condition.
Industry and economic conditions have the potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, such write-downs or write-offs would negatively affect our operating results for the period in which they occur and, if large, could have a material adverse effect on our operating results and financial condition.
Failure to maintain effective distribution of products and services could adversely impact revenue, gross margin and profitability.
We use a variety of distribution methods to sell our products and services. Successfully managing the interaction of our distribution efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.
Risks associated with the disruption of manufacturing operations could adversely affect profitability or competitive position.
We manufacture a significant portion of the products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, lack of raw material or component availability, destruction of or damage to any facility (including natural disasters, use and storage of hazardous materials or other events), or other reasons, could have a material adverse effect on our business, financial condition and results of operations.
The inability to provide acceptable financing alternatives to end-user customers and franchisees could adversely impact operating results.
An integral component of Snap-on’s business and profitability is its ability to provide financing alternatives to end-user customers and franchisees which, for its domestic financing operations, are managed through a joint venture with CIT. Historically, CIT has been the exclusive purchaser of the credit and installment financing arranged by SOC. A deterioration of the relationship between the joint venture partners, or if the joint venture should be unexpectedly dissolved, could have an adverse impact on Snap-on’s results of operations and ability to provide financing to end-user customers and franchisees in the United States. Adverse fluctuations in interest rates and/or the ability to provide competitive financing programs could also have an adverse impact on Snap-on’s revenue and profitability.
The global tool and equipment industry is competitive.
We face strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressures from competitors and customers are increasing. In general, as a manufacturer and marketer of premium products and services, the expectations of Snap-on’s customers and its franchisees are high and increasing. Any inability to maintain customer satisfaction could diminish Snap-on’s premium image and reputation and could result in a lessening of its ability to command premium
13
pricing. We expect that the level of competition will remain high in the future, which could limit our ability to maintain or increase market share or profitability.
The inability to continue to introduce new products that respond to customer needs and achieve market acceptance could result in lower revenues and reduced profitability.
Sales from new products represent a significant portion of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete effectively unless we continue to enhance existing products or introduce new products to the marketplace in a timely manner. Product improvements and new product introductions require significant financial and other resources including significant planning, design, development, and testing at the technological, product, and manufacturing process levels. Our competitors’ new products may beat our products to market, be more effective with more features, be less expensive than our products, and/or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
Raw material and energy price fluctuations and shortages (including steel and various fuel sources) could adversely affect the ability to obtain needed manufacturing materials and could adversely affect results of operations.
The principal raw material used in the manufacture of our products is steel, which we purchase in competitive, price-sensitive markets. To meet Snap-on’s high quality standards, our steel needs range from specialized alloys, which are available only from a limited group of approved suppliers, to commodity types of alloys. These raw materials have historically exhibited price and demand cyclicality. Some of these materials have been, and in the future may be, in short supply. As some steel alloys require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. Additionally, unexpected price increases could result in higher prices to our customers or an erosion of the margins on our products.
We believe our ability to sell our products is also dependent on the number of vehicles on the road, the number of miles driven and the general aging of vehicles. These factors affect the frequency, type and amount of service and repair performed on vehicles by technicians, and therefore affect the demand for the number of technicians, the prosperity of the technicians and, subsequently, the demand technicians have for our tools, other products and services, and the value technicians place on those products and services. To the extent that gasoline prices increase, consumers may turn to other, non-gasoline based, methods of transportation, including more frequent use of public transportation. A decrease in the use of gasoline consuming vehicles may lead to fewer repairs and less demand for our products.
Foreign operations are subject to currency exchange and political risks that could adversely affect results of operations.
Approximately 44% of our revenues in 2006 were generated outside of the United States. Future growth rates and success of our business depends in large part on continued growth in our non-U.S. operations, including growth in emerging markets. Numerous risks and uncertainties affect our non-U.S. operations. These risks and uncertainties include political, economic and social instability, including acts of war, civil disturbance or acts of terrorism, local labor conditions, changes in government policies and regulations, including imposition or increases in withholding and other taxes on remittances and other payments by international subsidiaries, and enforcement of contract and intellectual property rights. We are also affected by changes in foreign currency exchange rates, inflation rates and interest rates. Additionally, cash generated in non-U.S. jurisdictions may be difficult to transfer to the United States in a tax-efficient manner.
Failure to adequately protect intellectual property could adversely affect business.
Intellectual property rights are an important and integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.
14
The inability to successfully defend claims from taxing authorities could adversely affect operating results and financial position.
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions, as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.
Failure to attract and retain qualified personnel could lead to a loss of revenue and/or profitability.
Snap-on’s success depends, in part, on the efforts and abilities of its senior management team and other key employees. Their skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract and retain members of our senior management team and other key employees could have a negative effect on our operating results.
Failure to achieve expected investment returns on pension plan assets could adversely impact our results of operations, financial position and cash flow.
Snap-on sponsors various pension benefit plans. The assets of the pension plan are broadly diversified in an attempt to mitigate the risk of a large loss. The assets are invested in equity securities, fixed income securities, real estate and other real assets, and money market instruments. Required funding for the company’s defined benefit pension plans is determined in accordance with guidelines set forth in the federal Employee Retirement Income Security Act (ERISA). Additional contributions to enhance the funded status of the pension plans can be made at the company’s discretion. However, there can be no assurance that the value of the pension plan assets, or the investment returns on those plan assets, will be sufficient to meet the future benefit obligations of such plans. In addition, during periods of adverse investment market conditions and declining interest rates, the company may be required to make additional cash contributions to the plans that would reduce our financial flexibility. See Note 12 to the Consolidated Financial Statements for further information on the company’s pension benefit plans.
Our defined benefit pension plan obligations are affected by changes in market interest rates. Significant fluctuations in market interest rates will add volatility to our pension plan obligations. Declining market interest rates will increase our pension plan obligations. While our plan assets are broadly diversified, there is inherent market risks associated with investments. If adverse market conditions develop, our plan assets could incur a loss. The combination of declining market interest rates and plan asset investment losses may adversely impact our financial position and results of operations.
The company’s defined benefit pension expense is calculated by netting five factors: service cost; interest on projected benefit obligations; the expected return on plan assets; the amortization of prior service costs; and the effects of actuarial gains and losses. The accounting for pensions involves the estimation of a number of factors that are highly uncertain. Certain factors, such as the interest cost and the expected return on plan assets are impacted by changes in market interest rates and the value of plan assets. A significant decrease in market interest rates and a decrease in the fair value of plan assets would increase net pension expense and may adversely affect the company’s future results of operations.
Item 1B: Unresolved Staff Comments
None.
Snap-on maintains leased and owned manufacturing, warehouse, distribution and office facilities throughout the world. Snap-on believes that its facilities currently in use are suitable and have adequate capacity to meet its present and foreseeable future demand. Snap-on’s facilities in the United States occupy approximately 4.2 million square feet, of which 72% is owned, including its corporate and general office facility located in Kenosha, Wisconsin. Snap-on’s facilities outside the United States occupy approximately 4.6 million square feet, of which approximately 70% is owned. Certain Snap-on facilities are leased through operating lease agreements. See Note 16 to the Consolidated Financial Statements for information on the company’s operating leases. Snap-on management continually monitors the company’s capacity needs and makes adjustments as dictated by market and other conditions.
15
The following table provides information about each of Snap-on’s principal manufacturing locations and distribution centers (exceeding 50,000 square feet) as of December 30, 2006:
|
Location |
|
Type of Property |
|
Owned/Leased |
|
Segment* |
|
U.S. Locations: |
|
|
|
|
|
|
|
Elkmont, Alabama |
|
Manufacturing |
|
Owned |
|
SOT |
|
Conway, Arkansas |
|
Manufacturing |
|
Owned |
|
C&I |
|
City of Industry, California |
|
Manufacturing |
|
Leased |
|
C&I |
|
Escondido, California |
|
Manufacturing |
|
Leased |
|
C&I |
|
Poway, California |
|
Manufacturing and distribution |
|
Leased |
|
D&I |
|
San Jose, California |
|
Manufacturing |
|
Leased |
|
D&I |
|
Columbus, Georgia |
|
Distribution |
|
Owned |
|
C&I |
|
Crystal Lake, Illinois |
|
Distribution |
|
Owned and Leased |
|
SOT |
|
Algona, Iowa |
|
Manufacturing |
|
Owned |
|
SOT |
|
Olive Branch, Mississippi |
|
Distribution |
|
Owned |
|
SOT |
|
Carson City, Nevada |
|
Distribution |
|
Owned and Leased |
|
SOT |
|
Murphy, North Carolina |
|
Manufacturing and distribution |
|
Owned |
|
C&I |
|
Robesonia, Pennsylvania |
|
Distribution |
|
Owned |
|
SOT |
|
Elizabethton, Tennessee |
|
Manufacturing |
|
Owned |
|
SOT |
|
Johnson City, Tennessee** |
|
Manufacturing |
|
Owned |
|
SOT |
|
Kenosha, Wisconsin |
|
Distribution and corporate |
|
Owned |
|
SOT, C&I, D&I |
|
Milwaukee, Wisconsin |
|
Manufacturing |
|
Owned |
|
SOT |
|
|
|
|
|
|
|
|
|
Non-U.S. Locations: |
|
|
|
|
|
|
|
Santo Tome, Argentina |
|
Manufacturing |
|
Owned |
|
C&I |
|
Minsk, Belarus |
|
Manufacturing |
|
Leased |
|
C&I |
|
Santa Barbara D’oeste, Brazil |
|
Manufacturing and distribution |
|
Owned |
|
C&I |
|
Mississauga, Canada |
|
Manufacturing |
|
Leased |
|
C&I |
|
Newmarket, Canada |
|
Manufacturing and distribution |
|
Owned |
|
SOT |
|
Kunshan, China |
|
Manufacturing |
|
Owned |
|
C&I |
|
Kettering, England |
|
Distribution |
|
Owned |
|
SOT and C&I |
|
Rotherham, England |
|
Manufacturing |
|
Leased |
|
C&I |
|
Bourges, France |
|
Manufacturing and distribution |
|
Leased |
|
C&I |
|
Unterneukirchen, Germany |
|
Manufacturing |
|
Leased |
|
C&I |
|
Sopron, Hungary |
|
Manufacturing |
|
Owned |
|
C&I |
|
Correggio, Italy |
|
Manufacturing |
|
Owned |
|
C&I |
|
Tokyo, Japan |
|
Distribution |
|
Leased |
|
SOT |
|
Helmond, the Netherlands |
|
Distribution |
|
Owned |
|
C&I |
|
Vila do Conde, Portugal |
|
Manufacturing |
|
Owned |
|
C&I |
|
Irun, Spain |
|
Manufacturing |
|
Owned |
|
C&I |
|
Vitoria, Spain |
|
Manufacturing and distribution |
|
Owned |
|
C&I |
|
Bollnäs, Sweden |
|
Manufacturing |
|
Owned |
|
C&I |
|
Edsbyn, Sweden |
|
Manufacturing |
|
Owned |
|
C&I |
|
Enköping, Sweden |
|
Manufacturing |
|
Owned |
|
C&I |
|
Lidköping, Sweden |
|
Manufacturing |
|
Owned |
|
C&I |
|
Sandviken, Sweden |
|
Distribution |
|
Leased |
|
C&I |
* Segment abbreviations:
SOT – Snap-on Tools Group
C&I – Commercial & Industrial Group
D&I – Diagnostics & Information Group
** Subsequent to year-end 2006, the company announced that it expects to close the Johnson City manufacturing facility in mid 2007.
The company announced that it expects to close its Enköping, Sweden, and Johnson City, Tennessee, manufacturing facilities in 2007. The company phased out production at its Mt. Carmel, Illinois, and Kenosha, Wisconsin, manufacturing facilities in March 2004. The company’s former corporate office located in Pleasant Prairie, Wisconsin, is currently leased to a third party with an option to purchase. The Mt. Carmel facility is currently for sale.
16
On May 16, 2006, Snap-on reached an agreement to settle certain legal matters related to certain then current and former franchisees on a class basis. The court gave its final approval to the class settlement on October 27, 2006. Under the terms of the settlement, Snap-on agreed to make payments to claimants and class counsel, plus incur certain other costs and expenses. Snap-on recorded a $38.0 million pretax charge in the second quarter of 2006 representing its best estimate to settle these legal matters. Snap-on disbursed funds of approximately $14 million for related legal fees, settlements and other expenses in the fourth quarter of 2006, and the company expects to disburse additional amounts, including amounts to the class claimants, beginning in the first quarter of 2007. Snap-on has not admitted any wrongdoing by way of this settlement.
On July 23, 2004, Snap-on reached an agreement with the U.S. Department of Justice to resolve a government audit 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 $10.0 million. Snap-on remitted the $10.0 million cash settlement to the U.S. Department of Justice on August 5, 2004. On August 5, 2005, the GSA notified the company that it would take no administrative action against Snap-on in connection with the Federal Supply Schedule contracts referred to above. The company considers the matter closed.
Snap-on is also involved in various other legal matters that are being litigated and/or settled in the ordinary course of business. Although it is not possible to predict the outcome of these other legal matters, management believes that the results will not have a material impact on Snap-on’s consolidated financial position or results of operations.
Snap-on held over 2,300 active or pending patents as of December 30, 2006, and Snap-on vigorously prosecutes its claims and defends its patents in the ordinary course of business.
Item 4: Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended December 30, 2006.
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
At December 30, 2006, Snap-on had 58,578,319 shares of common stock outstanding. This consists of 58,170,834 shares considered outstanding for purposes of computing earnings per share and an additional 407,485 shares held in the Grantor Stock Trust, which are considered outstanding for voting purposes but not for purposes of computing earnings per share.
Snap-on’s stock is listed on the New York Stock Exchange under the ticker symbol “SNA.” As of February 15, 2007, there were 7,532 registered holders of Snap-on common stock.
Snap-on’s common stock high and low prices, as of the close of business, for the last two fiscal years by quarter were as follows:
|
|
Common Stock High/Low Prices |
|
|||||||||||
|
|
|
2006 |
|
2005 |
|
||||||||
|
Quarter |
|
High |
|
Low |
|
High |
|
Low |
|
||||
|
First |
|
$ |
40.13 |
|
$ |
37.39 |
|
$ |
35.20 |
|
$ |
31.16 |
|
|
Second |
|
41.99 |
|
37.43 |
|
34.88 |
|
30.70 |
|
||||
|
Third |
|
44.63 |
|
36.39 |
|
37.33 |
|
33.97 |
|
||||
|
Fourth |
|
48.31 |
|
44.80 |
|
38.54 |
|
35.00 |
|
||||
17
Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. The company increased its quarterly dividend to $0.27 per share ($1.08 per share for the year) in 2006; quarterly dividends declared in 2005 and 2004 were $0.25 per share ($1.00 per share for the year). Cash dividends paid in 2006, 2005 and 2004 totaled $63.6 million, $57.8 million and $57.7 million. Snap-on’s Board of Directors monitors and evaluates the company’s dividend practice quarterly and the Board may elect to increase, decrease or not pay a dividend on Snap-on common stock based upon the company’s financial condition, results of operations, cash requirements and future prospects of Snap-on and other factors deemed relevant by the Board.
See Note 14 to the Consolidated Financial Statements for information on securities authorized for issuance under equity compensation plans.
The following chart discloses information regarding the shares of Snap-on’s common stock repurchased by the company during the fourth quarter of fiscal 2006, all of which were purchased pursuant to Board of Directors’ authorizations that the company has publicly announced. 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.
Issuer Purchases of Equity Securities
|
Period |
|
Total |
|
Average |
|
Total Number of |
|
Approximate |
|
||
|
10/01/06 to 10/28/06 |
|
— |
|
— |
|
— |
|
$ |
170.3 million |
|
|
|
10/29/06 to 11/25/06 |
|
— |
|
— |
|
— |
|
$ |
171.8 million |
|
|
|
11/26/06 to 12/30/06 |
|
550,000 |
|
$ |
47.73 |
|
550,000 |
|
$ |
152.1 million |
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Total/Average |
|
550,000 |
|
$ |
47.73 |
|
550,000 |
|
N/A |
|
|
* Subject to further adjustment pursuant to the 1996 Authorization described below, as of December 30, 2006, the approximate value of shares that may yet be purchased pursuant to the three outstanding Board of Directors’ authorizations discussed below is $152.1 million.
· In its Annual Report on Form 10-K for the fiscal year ended December 28, 1996, the company disclosed that the company’s Board authorized the company to repurchase shares of the company’s common stock from time to time in the open market or in privately negotiated transactions (the “1996 Authorization”). The 1996 Authorization allows the repurchase of up to the number of shares issued or delivered from treasury from time to time under the various plans the company has in place that call for the issuance of the company’s common stock. Because the number of shares that are purchased pursuant to the 1996 Authorization will change from time to time as (i) the company issues shares under its various plans and (ii) shares are repurchased pursuant to this authorization, the number of shares authorized to be repurchased will vary from time to time. The 1996 Authorization will expire when terminated by the company’s Board. When calculating the approximate value of shares that the company may yet purchase under the 1996 Authorization, the company assumed a price of $47.15, $47.74 and $47.64 per share of common stock as of the end of the fiscal 2006 months ended October 28, November 25 and December 30, respectively.
· On June 29, 1998, the company announced that the company’s Board authorized the repurchase of an aggregate of $100 million of the company’s common stock (the “1998 Authorization”). The 1998 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the company’s Board.
· On February 3, 1999, the company announced that the company’s Board authorized the repurchase of an aggregate of $50 million of the company’s common stock (the “1999 Authorization”). The 1999 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the company’s Board.
18
During 2006, the company repurchased 2,616,618 shares of common stock.
See Note 18 to the Consolidated Financial Statements for the additional Quarterly Financial Information required by Item 5.
Five-year Stock Performance Graph
The graph below illustrates the cumulative total shareholder return on Snap-on Common Stock since 2001, assuming that dividends are reinvested. The graph compares Snap-on’s performance to that of the Standard & Poor’s 500 Stock Index (“S&P 500”) and a Peer Group.
Snap-on Incorporated Total Shareholder Return (1)
|
Fiscal Year Ended (2) |
|
Snap-on |
|
Peer Group (3) |
|
S&P 500 |
|
|||
|
|
$ |
100.00 |
|
$ |
100.00 |
|
$ |
100.00 |
|
|
|
|
86.29 |
|
96.88 |
|
77.90 |
|
||||
|
|
102.51 |
|
122.08 |
|
100.25 |
|
||||
|
|
112.74 |
|
147.43 |
|
111.15 |
|
||||
|
|
126.81 |
|
152.95 |
|
116.61 |
|
||||
|
|
165.04 |
|
179.00 |
|
135.03 |
|
||||
(1) Assumes $100 was invested on December 31, 2001, and that dividends were reinvested quarterly.
(2) The company’s fiscal year ends on the Saturday closest to December 31 of each year, the fiscal year end is assumed to be December 31 for ease of calculation.
(3) The Peer Group includes: Black & Decker Corporation, Cooper Industries, Inc., Danaher Corporation, Emerson Electric Co., Fortune Brands, Inc., Genuine Parts Company, Newell Rubbermaid Inc., Pentair, Inc., SPX Corporation, The Stanley Works and W.W. Grainger, Inc.
19
Item 6: Selected Financial Data
The selected financial data presented below has been derived from, and should be read in conjunction with, the respective historical consolidated financial statements of the company, including the notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Five-year Data |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|||||
|
(Amounts in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Results of Operations |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net sales |
|
$ |
2,473.4 |
|
$ |
2,308.6 |
|
$ |
2,329.1 |
|
$ |
2,233.2 |
|
$ |
2,109.1 |
|
|
Gross profit |
|
1,085.9 |
|
1,019.9 |
|
1,009.3 |
|
964.7 |
|
964.9 |
|
|||||
|
Financial services revenue |
|
49.0 |
|
53.6 |
|
78.1 |
|
— |
|
— |
|
|||||
|
Financial services expenses |
|
36.0 |
|
37.9 |
|
44.0 |
|
— |
|
— |
|
|||||
|
Operating expenses |
|
934.0 |
|
867.6 |
|
901.1 |
|
858.4 |
|
804.3 |
|
|||||
|
Operating earnings |
|
164.9 |
|
168.0 |
|
142.3 |
|
150.1 |
|
198.3 |
|
|||||
|
Interest expense |
|
20.6 |
|
21.7 |
|
23.0 |
|
24.4 |
|
28.7 |
|
|||||
|
Earnings from continuing operations |
|
145.9 |
|
148.0 |
|
120.4 |
|
116.7 |
|
161.2 |
|
|||||
|
Income taxes |
|
45.8 |
|
55.1 |
|
38.7 |
|
38.0 |
|
58.0 |
|
|||||
|
Cumulative effect, net of taxes |
|
— |
|
— |
|
— |
|
— |
|
2.8 |
|
|||||
|
Net earnings |
|
100.1 |
|
92.9 |
|
81.7 |
|
78.7 |
|
106.0 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Cash and cash equivalents |
|
$ |
63.4 |
|
$ |
170.4 |
|
$ |
150.0 |
|
$ |
96.1 |
|
$ |
18.4 |
|
|
Accounts receivable current - net |
|
559.2 |
|
485.9 |
|
542.0 |
|
546.8 |
|
556.2 |
|
|||||
|
Inventories |
|
323.0 |
|
283.2 |
|
341.9 |
|
351.1 |
|
369.9 |
|
|||||
|
Current assets |
|
1,113.2 |
|
1,072.9 |
|
1,192.6 |
|
1,131.7 |
|
1,051.0 |
|
|||||
|
Property and equipment - net |
|
297.1 |
|
295.5 |
|
313.6 |
|
328.6 |
|
330.2 |
|
|||||
|
Total assets |
|
2,654.5 |
|
2,008.4 |
|
2,290.1 |
|
2,138.5 |
|
1,994.1 |
|
|||||
|
Accounts payable |
|
178.8 |
|
135.4 |
|
194.9 |
|
189.7 |
|
170.9 |
|
|||||
|
Current liabilities |
|
682.0 |
|
506.1 |
|
674.2 |
|
567.2 |
|
552.4 |
|
|||||
|
Long-term debt |
|
505.6 |
|
201.7 |
|
203.2 |
|
303.0 |
|
304.3 |
|
|||||
|
Total debt |
|
549.2 |
|
226.5 |
|
331.0 |
|
333.2 |
|
360.7 |
|
|||||
|
Total shareholders’ equity |
|
1,076.3 |
|
962.2 |
|
1,110.7 |
|
1,010.9 |
|
830.4 |
|
|||||
|
Working capital |
|
431.2 |
|
566.8 |
|
518.4 |
|
564.5 |
|
498.6 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Common Share Summary |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Average shares outstanding - diluted |
|
59.2 |
|
58.4 |
|
58.3 |
|
58.4 |
|
58.5 |
|
|||||
|
Net earnings per share - basic |
|
$ |
1.72 |
|
$ |
1.61 |
|
$ |
1.41 |
|
$ |
1.35 |
|
$ |
1.82 |
|
|
Net earnings per share - diluted |
|
1.69 |
|
1.59 |
|
1.40 |
|
1.35 |
|
1.81 |
|
|||||
|
Cash dividends paid per share |
|
1.08 |
|
1.00 |
|
1.00 |
|
1.00 |
|
0.97 |
|
|||||
|
Shareholders’ equity per basic share |
|
18.46 |
|
16.65 |
|
19.20 |
|
17.37 |
|
14.27 |
|
|||||
|
Fiscal year-end per share price |
|
47.64 |
|
37.56 |
|
34.36 |
|
31.80 |
|
27.72 |
|
|||||
· 2006 operating expenses and operating earnings include a $38.0 million pretax charge ($23.4 million after tax or $0.40 per diluted share) to settle certain legal matters related to certain then current and former franchisees. Results in 2006 also include the impact of the company’s acquisition of ProQuest Business Solutions for the period from November 28, 2006, to year end.
· Total shareholders’ equity of $1,076.3 million at year-end 2006 includes an $89.0 million reduction from the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R).” See Notes 1, 12 and 13 to the Consolidated Financial Statements for information on the company’s adoption of SFAS No. 158.
· In conjunction with the consolidation of SOC at the beginning of 2004, financial services revenue consists of SOC’s sales of originated contracts and service fee income, as well as installment contract revenue and franchisee loan receivable revenue derived from SOC and Snap-on’s wholly owned international finance operations. As Snap-on consolidated SOC on a prospective basis, previously issued financial statements have not been restated. See Notes 1 and 7 to the Consolidated Financial Statements for further information on SOC.
· 2002 results include a $2.8 million pretax gain ($2.8 million after tax or $0.05 per diluted share) for the cumulative effect of a change in accounting principle for goodwill. Snap-on ceased amortizing goodwill and certain other intangible assets in 2002 in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.”
20
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management Overview
Snap-on continued implementing its strategic initiatives in 2006 to create long-term value for the company’s shareholders, associates, franchisees and other distributor partners across all of its business segments.
During 2006, measurable progress was realized. Net sales grew 7.1% year over year, driven largely by growth in the Diagnostics & Information Group’s equipment solutions business, which provides essential diagnostics and equipment to original equipment manufacturers (“OEMs”) and their dealerships, as well as growth in emerging markets in the Commercial & Industrial Group. Operating earnings of $164.9 million in 2006 decreased $3.1 million from 2005 levels, largely due to a $38.0 million pretax franchisee litigation settlement charge recorded in the Snap-on Tools Group; Snap-on has not admitted any wrongdoing by way of this settlement. See Note 16 to the Consolidated Financial Statements for information on the litigation settlement.
On November 28, 2006, Snap-on acquired the ProQuest Business Solutions business and certain net assets (hereinafter referred to as “ProQuest Business Solutions” or “business solutions”) from ProQuest Company for a preliminary purchase price of approximately $516 million (including $8 million of estimated transaction costs) and the assumption of approximately $19 million of debt. The acquisition of ProQuest Business Solutions, a world leader in automotive parts and service information, expanded the company’s Diagnostics & Information Group’s product offerings. Business solutions’ products, which are aimed at helping OEMs and their dealerships enhance their service operations, include integrated software, services and systems that transform complex technical data for parts catalogs into easily accessed electronic information in the form of electronic parts catalogs. Other business solutions’ products and services include warranty and management systems and analytics to help dealerships manage and track performance. Over 33,000 automotive dealerships worldwide use business solutions’ electronic parts catalogs, which are available in 26 different languages and support 15 automotive manufacturers and 31 brands. Business solutions’ products are also sold to over 85,000 dealers in the power equipment and power sports markets. Snap-on believes that the strategic acquisition of ProQuest Business Solutions positions the company to add value for global OEMs and enhance the productivity and profitability of OEM dealerships, while affording growth opportunities for Snap-on’s other customers, associates and shareholders.
While progress in 2006 has been encouraging, the company believes there is still much more to be done to improve operating performance and profitability. The strategic priorities and plans for 2007 will continue to build on the improvement initiatives already underway to achieve long-term profitable growth through increased sales and further lowering of costs.
In the Snap-on Tools Group, considerable progress was made in strengthening its operating and financial performance. Strategic priorities in 2006 focused on efforts to enhance Snap-on’s responsiveness to its franchisees and customers and to strengthen the financial and operating performance of both the franchisees and the company.
Through improvements in the company’s supply chain and the transition to a market-demand based replenishment system, Snap-on’s complete and on-time delivery rate for the top 88% of demanded stock keeping units (“SKUs”) improved to 93% in 2006, with a goal to achieve a 99% complete and on-time delivery rate on all SKUs by the end of 2007. The Snap-on Tools Group also completed the transformation of its field support system to a “team-based” organization in 2006, which is designed to provide more specialized and focused support to its franchisees. The company also implemented “pull marketing” efforts, such as increased media advertising, van merchandising and online Web site and e-news, to generate product excitement and drive increased traffic to the franchisee van. In addition, the Snap-on Tools Group also revamped its warehouse distribution program and launched a new mid-tier product line aimed at capturing additional customers and capitalizing on more purchase occasions.
Segment net sales in the Snap-on Tools Group in 2006 were up 3.1% over 2005 levels, primarily due to a significant fourth-quarter sales increase in the United States, combined with continued growth in international sales. Despite the sales increase and savings realized from Rapid Continuous Improvement (“RCI”) activities, operating earnings in 2006 of $37.6 million were negatively impacted by the $38.0 million pretax franchisee litigation settlement charge discussed above and by $13.3 million of higher planned costs to support the strategic supply chain and franchise system initiatives.
21
The Snap-on Tools Group 2007 strategic priorities will continue to build on the progress made in enhancing the franchise proposition and improving the supply chain, with specific initiatives focused on the following:
· Continue to improve franchisee profitability;
· Expand pull marketing initiatives;
· Capture additional customers;
· Improve service and value to franchisees and their customers; and
· Build on efforts to improve the supply chain through investments in manufacturing and extensive use of RCI.
By executing on these focus areas, along with a continued commitment to new, innovative products and the use of RCI to drive lower costs, Snap-on continues to believe that the company and its franchisees will continue to realize stronger growth and profitability.
In the Commercial & Industrial Group, progress continues to be made in improving operating performance. Segment net sales in 2006 were up 5.6%, while operating earnings were up 52.6%. Gross profit as a percentage of net sales increased 170 basis points (100 basis points equals 1.0 percent), or $41.2 million, over 2005 levels, reflecting higher sales and pricing, including sales growth in emerging markets, and improved productivity and efficiency savings. Benefits from ongoing cost reduction and RCI actions, including increased production and sourcing of materials from lower-cost regions and facilities, were major contributors to the year-over-year earnings improvement. As a result of continued sales growth, as well as improved levels of customer service and savings from productivity, RCI and restructuring activities, operating earnings as a percentage of net sales in 2006 increased 270 basis points, or $36.6 million, over 2005 levels.
The Commercial & Industrial Group will continue to build on the following strategic priorities in 2007:
· Continue to invest in emerging market growth initiatives, such as China, India and Eastern Europe;
· Increase market share in industrial tools through continued improvements in fill rates and product innovation, and by reaching new customers;
· Continue to invest in productivity-enhancing products that utilize advanced technology; and
· Continue to rationalize the Group’s operating footprint and shift manufacturing activities to lower cost regions.
In the Diagnostics & Information Group, significant progress continues to be realized from the strategic focus on creating an integrated “information with instrumentation” business. The Diagnostics & Information Group’s focus on RCI has resulted in a solid financial and operating platform. The recent acquisition of business solutions, with its ability to consolidate and transform complex manufacturer data from disparate sources into cohesive, integrated and highly customized systems, was an important strategic addition for the company. By integrating the complementary capabilities of business solutions with Snap-on’s other Diagnostics & Information product offerings, Snap-on believes that it has enhanced its ability to add value for global OEMs and their dealerships.
Snap-on acquired ProQuest Business Solutions for a preliminary purchase price of approximately $516 million (including $8 million of estimated transaction costs) and the assumption of approximately $19 million of debt. Snap-on funded the acquisition through the issuance of approximately $305 million of commercial paper and with available cash on hand. The excess of the fair value of the assets and liabilities acquired resulted in the recording of $344.6 million of goodwill, on a preliminary basis. The preliminary purchase price allocation is based upon the estimated fair values of the assets and liabilities acquired, and are subject to change upon the completion of the purchase accounting. The preliminary purchase price is also subject to a working capital adjustment that is expected to be finalized in the first six months of 2007. The Diagnostics & Information Group includes the impact of the November 28, 2006, acquisition of ProQuest Business Solutions on a prospective basis.
The Diagnostics & Information Group will build on the following strategic priorities in 2007:
· Continued growth in the base businesses and emerging markets;
· Successfully integrate the ProQuest Business Solutions acquisition;
· Leverage the opportunities afforded from the ProQuest Business Solutions acquisition to drive further innovation and growth;
· Continued focus on reducing complexity and structural costs; and
· Achieving faster product-development cycles.
22
Segment net sales in 2006 were up 21.2% largely due to sales growth in the OEM equipment solutions business. Operating earnings in 2006 increased $15.0 million, or 32%, driven by higher year-over-year sales and an ongoing focus on RCI and cost reduction. For the approximate five-week period from the November 28, 2006, acquisition date through year end, the ProQuest Business Solutions acquisition contributed $20.4 million to 2006 sales and $4.8 million to operating earnings.
Cash Flows
In 2006, Snap-on continued to deliver strong cash flow from operations. Cash generated from operating activities was $203.4 million in 2006. The company used available cash on hand to fund, in part, approximately $203 million of the preliminary purchase price of the ProQuest Business Solutions acquisition, pay dividends totaling $63.6 million, repurchase over 2.6 million shares of Snap-on common stock for $109.8 million, and invest $50.5 million in capital expenditures. In conjunction with its purchase of ProQuest Business Solutions, Snap-on also issued approximately $305 million of commercial paper; these commercial paper borrowings were repaid, in part, with proceeds from a $300 million long-term debt offering completed by the company on January 12, 2007. See Note 2 to the Consolidated Financial Statements for further information on the ProQuest Business Solutions acquisition and Note 10 for additional information on the commercial paper borrowings and January 2007 debt offering.
Results of Operations
Fiscal 2006 vs. Fiscal 2005
Results of operations for the fiscal years ended December 30, 2006, and December 31, 2005, are as follows:
|
(Amounts in millions) |
|
2006 |
|
2005 |
|
Increase/ |
|
|||||||||
|
Net sales |
|
$ |
2,473.4 |
|
100.0 |
% |
$ |
2,308.6 |
|
100.0 |
% |
$ |
164.8 |
|
7.1 |
% |
|
Cost of goods sold |
|
1,387.5 |
|
56.1 |
% |
1,288.7 |
|
55.8 |
% |
98.8 |
|
7.7 |
% |
|||
|
Gross profit |
|
1,085.9 |
|
43.9 |
% |
1,019.9 |
|
44.2 |
% |
66.0 |
|
6.5 |
% |
|||
|
Financial services revenue |
|
49.0 |
|
100.0 |
% |
53.6 |
|
100.0 |
% |
(4.6 |
) |
-8.6 |
% |
|||
|
Financial services expenses |
|
36.0 |
|
73.5 |
% |
37.9 |
|
70.7 |
% |
(1.9 |
) |
-5.0 |
% |
|||
|
Operating income from financial services |
|
13.0 |
|
26.5 |
% |
15.7 |
|
29.3 |
% |
(2.7 |
) |
-17.2 |
% |
|||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Selling, general and administrative |
|
896.0 |
|
36.2 |
% |
867.6 |
|
37.6 |
% |
28.4 |
|
3.3 |
% |
|||
|
Litigation settlement |
|
38.0 |
|
1.6 |
% |
— |
|
— |
|
38.0 |
|
N/M |
|
|||
|
Total operating expenses |
|
934.0 |
|
37.8 |
% |
867.6 |
|
37.6 |
% |
66.4 |
|
7.7 |
% |
|||
|
Operating earnings |
|
164.9 |
|
6.5 |
% |
168.0 |
|
7.1 |
% |
(3.1 |
) |
-1.8 |
% |
|||
|
Interest expense |
|
20.6 |
|
0.8 |
% |
21.7 |
|
0.9 |
% |
(1.1 |
) |
-5.1 |
% |
|||
|
Other (income) expense - net |
|
(1.6 |
) |
-0.1 |
% |
(1.7 |
) |
-0.1 |
% |
(0.1 |
) |
-5.9 |
% |
|||
|
Earnings before income taxes |
|
145.9 |
|
5.8 |
% |
148.0 |
|
6.3 |
% |
(2.1 |
) |
-1.4 |
% |
|||
|
Income tax expense |
|
45.8 |
|
1.8 |
% |
55.1 |
|
2.4 |
% |
(9.3 |
) |
-16.9 |
% |
|||
|
Net earnings |
|
$ |
100.1 |
|
4.0 |
% |
$ |
92.9 |
|
3.9 |
% |
$ |
7.2 |
|
7.8 |
% |
NM = not meaningful
Note: Certain 2005 amounts have been reclassified to conform to the 2006 income statement presentation.
Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue.
23
Net sales in 2006 increased $164.8 million, or 7.1%, from 2005 levels, including $11.3 million from currency translation. The increase in net sales includes higher sales in the Diagnostics & Information Group’s OEM equipment solutions business, and $20.4 million of sales for the approximate five-week period following the company’s November 28, 2006, acquisition of ProQuest Business Solutions. Sales in the Commercial & Industrial Group also increased year over year primarily due to higher sales of tools for U.S. commercial and industrial applications, improved worldwide sales of equipment products, along with continued growth in emerging markets. Sales in the Snap-on Tools Group increased $30.5 million, or 3.1%, over 2005 levels, reflecting sales increases in both the North American and international franchise operations. See Note 2 to the Consolidated Financial Statements for information on the ProQuest Business Solutions acquisition.
Gross profit was $1,085.9 million, or 43.9% of net sales, in 2006, as compared to $1,019.9 million, or 44.2% of net sales, in 2005. The $66.0 million increase in 2006 gross profit primarily reflects benefits from higher sales and pricing, as well as benefits from lower costs, including benefits from efficiency, productivity and cost reduction initiatives of $34.9 million. The year-over-year increase in gross profit also includes $11.5 million from the fourth-quarter 2006 acquisition of ProQuest Business Solutions and $4.2 million of currency translation. These increases in gross profit were partially offset by higher year-over-year production costs of $22.6 million, and “last-in, first-out” (“LIFO”) and other inventory expenses of $11.2 million, including a $1.0 million charge related to LIFO inventories in 2006 versus a comparable $8.8 million benefit in 2005. Restructuring costs included in “Cost of goods sold” totaled $12.1 million in 2006, as compared to $3.0 million in 2005. The 30 basis point (100 basis points equals 1.0 percent) decline in year-over-year gross profit as a percentage of net sales also reflects the impact of a shift in product mix that included higher 2006 sales (and lower relative gross margin) in the OEM equipment solutions business.
Financial services operating income was $13.0 million on $49.0 million of revenue in 2006, as compared with $15.7 million of operating income on $53.6 million of revenue in 2005. The decrease in operating income primarily reflects the impact of lower net interest spreads, partially offset by higher levels of originations.
Operating expenses in 2006 were $934.0 million, as compared to $867.6 million in 2005. The $66.4 million increase in 2006 operating expenses is primarily due to the recording of a $38.0 million pretax charge in the second quarter of 2006 related to the settlement of franchisee litigation matters. Operating expenses in 2006 also included $22.8 million in higher spending for strategic growth initiatives and $22.0 million of higher stock-based and performance-based incentive compensation, including $6.3 million in costs associated with the January 1, 2006, adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” on a prospective basis. The year-over-year increase in 2006 operating expenses also includes $6.7 million of operating expenses from the acquisition of ProQuest Business Solutions and $2.7 million of currency translation. These increases in operating expenses were partially offset by benefits from efficiency and productivity initiatives of $15.3 million, as well as the absence of $3.0 million of costs incurred in 2005 to terminate a supplier relationship. Restructuring costs included in “Operating expenses” totaled $9.6 million in 2006, as compared to $15.4 million in 2005. See Note 16 to the Consolidated Financial Statements for information on the $38.0 million pretax franchisee litigation settlement.
Interest expense of $20.6 million in 2006 was slightly lower than the $21.7 million incurred in 2005 primarily due to lower average debt levels, including the October 3, 2005, repayment of $100 million of unsecured 6.625% notes. The year-over-year decrease in interest expense was partially offset by the impacts of higher interest rates and $1.8 million of interest expense in 2006 related to the issuance of approximately $305 million of commercial paper obligations to finance, in part, the November 28, 2006, acquisition of ProQuest Business Solutions. See Note 2 to the Consolidated Financial Statements for information on the ProQuest Business Solutions acquisition and Note 10 for information on the commercial paper borrowings.
Other income (expense) – net was income of $1.6 million in 2006, as compared to income of $1.7 million in 2005. This line item includes the impact of all non-operating items such as interest income, minority interest, hedging and currency exchange rate transaction gains and losses, and other miscellaneous non-operating items. Benefits from higher year-over-year interest income were offset by foreign exchange losses in 2006, as compared to foreign exchange gains in 2005. Minority interest expense was $3.7 million in 2006, as compared to $3.6 million in 2005.
Snap-on’s effective tax rate was 31.4% in 2006, as compared with 37.2% in the prior year. The lower effective tax rate in 2006 primarily reflects the mix of U.S. and non-U.S. earnings, including the impacts of the $38.0 million pretax franchisee litigation settlement charge tax effected at a higher U.S. tax rate, and the reversal of foreign income tax valuation allowances as a result of foreign restructuring and other activities. Snap-on’s effective tax rate of 37.2% in 2005 included $3.3 million of additional U.S. income tax expense related to the repatriation of accumulated foreign earnings under the American Jobs Creation Act of 2004 (“the AJCA”). Under the provisions of the AJCA, Snap-on repatriated approximately $93 million of
24
qualifying dividends during the second half of 2005. See Note 9 to the Consolidated Financial Statements for further information on income taxes.
Net earnings in 2006 were $100.1 million, or $1.69 per diluted share, including a $23.4 million after-tax charge ($0.40 per diluted share) related to the resolution of the franchisee litigation settlement, as compared with net earnings of $92.9 million, or $1.59 per diluted share, in 2005.
Exit or Disposal Activities
See Note 8 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.
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 reportable business segments include: (i) the Snap-on Tools Group (formerly known as the Snap-on Dealer Group); (ii) the Commercial & Industrial Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Commercial & 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-franchise distribution channels. The Diagnostics & Information Group consists of the business operations providing diagnostics applications, electronic parts catalogs, vehicle service information, business management systems, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. The Diagnostics & Information Group includes the impact of the November 28, 2006, acquisition of ProQuest Business Solutions on a prospective basis. Financial Services consists of the business operations of Snap-on Credit LLC (“SOC”), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. (“CIT”), and Snap-on’s wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations. See Note 7 to the Consolidated Financial Statements for information on SOC.
Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings. For the Snap-on Tools, Commercial & Industrial, and Diagnostics & Information Groups, segment net sales include both external and intersegment sales. 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.
Snap-on Tools Group
|
(Amounts in millions) |
|
2006 |
|
2005 |
|
Increase/ |
|
|||||||||
|
Segment net sales |
|
$ |
1,025.0 |
|
100.0 |
% |
$ |
994.5 |
|
100.0 |
% |
$ |
30.5 |
|
3.1 |
% |
|
Cost of goods sold |
|
577.3 |
|
56.3 |
% |
548.9 |
|
55.2 |
% |
28.4 |
|
5.2 |
% |
|||
|
Gross profit |
|
447.7 |
|
43.7 |
% |
445.6 |
|
44.8 |
% |
2.1 |
|
0.5 |
% |
|||
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Selling, general and administrative |
|
372.1 |
|
36.3 |
% |
363.4 |
|
36.5 |
% |
8.7 |
|
2.4 |
% |
|||
|
Litigation settlement |
|
38.0 |
|
3.7 |
% |
— |
|
— |
|
38.0 |
|
NM |
|
|||
|
Total operating expenses |
|
410.1 |
|
40.0 |
% |
363.4 |
|
36.5 |
% |
46.7 |
|
12.9 |
% |
|||
|
Segment operating earnings |
|
$ |
37.6 |
|
3.7 |
% |
$ |
82.2 |
|
8.3 |
% |
$ |
(44.6 |
) |
-54.3 |
% |
NM = not meaningful
Segment net sales in 2006 increased $30.5 million from 2005 levels including $28.4 million of higher sales and $2.1 million of currency translation. Sales in the North American franchise operations were up 3.1% over 2005 levels, primarily driven by a significant year-over-year increase in fourth-quarter U.S. sales, partially offset by a lower average number of U.S. franchisees in 2006. The average number of U.S. franchisees in 2006 was down 3.0% from 2005 levels. As the company continues implementing its strategic initiatives to improve the franchise system, it anticipates that the decline in the number of U.S. franchisees will moderate. In 2006,
25
international sales were up 3.1% from 2005 levels, largely due to strong sales growth in the United Kingdom and Australia, and currency translation.
Segment gross profit of $447.7 million in 2006 was up slightly from $445.6 million in 2005. The $2.1 million increase in 2006 gross profit primarily reflects the higher sales and selling prices, as well as lower costs of $17.3 million from efficiency and productivity initiatives. These increases were partially offset by higher production costs, and $10.5 million of increased year-over-year LIFO and other inventory expenses, including a $1.0 million charge related to LIFO inventories in 2006, versus a comparable $8.8 million benefit in 2005. Snap-on also incurred $2.0 million of higher restructuring costs in 2006 primarily related to the expected mid-2007 closure of its Johnson City, Tennessee, hand tool facility. Snap-on expects to phase out production at the Johnson City facility and transfer production to other Snap-on hand tool facilities and suppliers. Gross profit as a percentage of segment sales was 43.7%, down 110 basis points from 44.8% in the prior year. Operating expenses in 2006 were up $46.7 million from prior-year levels, primarily due to the $38.0 million pretax franchisee litigation settlement charge, $13.3 million of higher costs, including $1.7 million of restructuring-related costs, to support strategic supply chain and franchise system initiatives, and $5.5 million of higher performance-based incentive compensation. These increases were partially offset by $4.6 million of benefits from cost reduction initiatives and the absence of $3.0 million of costs incurred in 2005 to terminate a supplier relationship. As a result of these factors, segment operating earnings declined $44.6 million from 2005 levels.
Commercial & Industrial Group
|
(Amounts in millions) |
|
2006 |
|
2005 |
|
Increase/ |
|
|||||||||
|
External net sales |
|
$ |
1,048.6 |
|
88.0 |
% |
$ |
1,009.0 |
|
89.4 |
% |
$ |
39.6 |
|
3.9 |
% |
|
Intersegment net sales |
|
143.4 |
|
12.0 |
% |
120.2 |
|
10.6 |
% |
23.2 |
|
19.3 |
% |
|||
|
Segment net sales |
|
1,192.0 |
|
100.0 |
% |
1,129.2 |
|
100.0 |
% |
62.8 |
|
5.6 |
% |
|||
|
Cost of goods sold |
|
756.3 |
|
63.4 |
% |
734.7 |
|
65.1 |
% |
21.6 |
|
2.9 |
% |
|||
|
Gross profit |
|
435.7 |
|
36.6 |
% |
394.5 |
|
34.9 |
% |
41.2 |
|
10.4 |
% |
|||
|
Operating expenses |
|
329.5 |
|
27.7 |
% |
324.9 |
|
28.7 |
% |
4.6 |
|
1.4 |
% |
|||
|
Segment operating earnings |
|
$ |
106.2 |
|
8.9 |
% |
$ |
69.6 |
|
6.2 |
% |
$ |
36.6 |
|
52.6 |
% |
Segment net sales in 2006 increased $62.8 million, or 5.6%, from 2005 levels due to $54.9 million of higher sales and $7.9 million of currency translation. The $54.9 million sales increase primarily reflects growth in emerging markets, higher worldwide equipment and power tool sales, and increased sales of tools for U.S. commercial and industrial applications.
Segment gross profit of $435.7 million in 2006 was up $41.2 million, or 170 basis points as a percentage of segment sales, over 2005 levels. The improvement in 2006 gross profit primarily reflects benefits from increased sales of higher-margin products and improved pricing, savings of $16.7 million from productivity and efficiency initiatives, including increased production and sourcing of materials from lower-cost regions and facilities, and $2.4 million of currency translation. These improvements were partially offset by $5.7 million of higher restructuring costs, primarily related to manufacturing footprint initiatives in Europe, and $3.7 million of higher material and production costs. Operating expenses increased $4.6 million, but decreased 100 basis points as a percentage of segment sales, from 2005 levels. The operating expense increase includes higher sales related expenses, $6.7 million of increased spending to support the expansion of Snap-on’s sales and manufacturing presence in emerging growth markets and lower-cost regions, higher performance-based incentive compensation of $2.1 million, and $1.6 million of currency translation. These increases were partially offset by $6.5 million of benefits from efficiency and productivity initiatives and $3.6 million of lower restructuring costs. As a result of these factors, segment operating earnings in 2006 increased $36.6 million over 2005 levels.
26
Diagnostics & Information Group
|
(Amounts in millions) |
|
2006 |
|
2005 |
|
Increase/ |
|
|||||||||
|
External net sales |
|
$ |
399.8 |
|
76.2 |
% |
$ |
305.1 |
|
70.5 |
% |
$ |
94.7 |
|
31.0 |
% |
|
Intersegment net sales |
|
124.7 |
|
23.8 |
% |
127.6 |
|
29.5 |
% |
(2.9 |
) |
-2.3 |
% |
|||
|
Segment net sales |
|
524.5 |
|
100.0 |
% |
432.7 |
|
100.0 |
% |
91.8 |
|
21.2 |
% |
|||
|
Cost of goods sold |
|
322.0 |
|
61.4 |
% |
252.9 |
|
58.4 |
% |
69.1 |
|
27.3 |
% |
|||
|
Gross profit |
|
202.5 |
|
38.6 |
% |
179.8 |
|
41.6 |
% |
22.7 |
|
12.6 |
% |
|||
|
Operating expenses |
|
140.6 |
|
26.8 |
% |
132.9 |
|
30.8 |
% |
7.7 |
|
5.8 |
% |
|||
|
Segment operating earnings |
|
$ |
61.9 |
|
11.8 |
% |
$ |
46.9 |
|
10.8 |
% |
$ |
15.0 |
|
32.0 |
% |
Segment net sales of $524.5 million in 2006 increased $91.8 million, or 21.2%, from 2005 levels, largely due to higher sales in the OEM equipment solutions business, $20.4 million of incremental sales for the approximate five-week period following the company’s November 28, 2006, acquisition of ProQuest Business Solutions, and increased sales of Mitchell1TM information products. Currency translation contributed $1.8 million to the year-over-year sales increase.
Segment gross profit of $202.5 million in 2006 was up $22.7 million from 2005 levels primarily due to the higher sales, including $11.5 million from the ProQuest Business Solutions acquisition, and $2.2 million of benefits from efficiency and productivity initiatives, partially offset by $1.4 million of higher restructuring costs. As a percentage of segment net sales, gross profit margin of 38.6% was down 300 basis points from 2005 levels, reflecting a shift in product mix that included higher 2006 sales (and lower relative gross margin) in the OEM equipment solutions business. Operating expenses in 2006 of $140.6 million were up $7.7 million from 2005 levels. The increase in year-over-year operating expenses primarily includes $6.7 million of operating expenses from the ProQuest Business Solutions acquisition and $4.5 million of higher spending to support strategic growth initiatives, partially offset by $3.3 million of benefits from efficiency and productivity initiatives. As a result of these factors, segment operating earnings in 2006 increased $15.0 million over 2005 levels.
Financial Services
|
(Amounts in millions) |
|
2006 |
|
2005 |
|
Increase/ |
|
|||||||||
|
Financial services revenue |
|
$ |
49.0 |
|
100.0 |
% |
$ |
53.6 |
|
100.0 |
% |
$ |
(4.6 |
) |
-8.6 |
% |
|
Financial services expenses |
|
36.0 |
|
73.5 |
% |
37.9 |
|
70.7 |
% |
(1.9 |
) |
-5.0 |
% |
|||
|
Segment operating income |
|
$ |
13.0 |
|
26.5 |
% |
$ |
15.7 |
|
29.3 |
% |
$ |
(2.7 |
) |
-17.2 |
% |
Note: Certain 2005 amounts have been reclassified to conform to the 2006 income statement presentation.
Operating income was $13.0 million on $49.0 million of revenue in 2006, as compared with $15.7 million of operating income on $53.6 million of revenue in 2005. The decrease in operating income primarily reflects the impact of lower net interest spreads, partially offset by a 2.9% increase in year-over-year originations.
Corporate
Snap-on’s general corporate expenses totaled $53.8 million in 2006, up from $46.4 million in 2005, primarily due to $15.2 million of increased stock-based and performance-based incentive compensation, including $6.3 million from the January 1, 2006, adoption of SFAS No. 123(R). Increased expenses in 2006 also included $4.2 million of higher insurance and other costs. These increases in expenses were partially offset by $9.5 million of benefits from cost reduction initiatives. See Note 14 to the Consolidated Financial Statements for information on the company’s adoption of SFAS No. 123(R).
27
Fourth Quarter
Results of operations for the quarters ended December 30, 2006, and December 31, 2005, are as follows:
|
|
Three Months Ended |
|
Increase/ |
|
||||||||||||
|
(Amounts in millions) |
|
|
|
(Decrease) |
|
|||||||||||
|
Net sales |
|
$ |
656.0 |
|
100.0 |
% |
$ |
563.4 |
|
100.0 |
% |
$ |
92.6 |
|
16.4 |
% |
|
Cost of goods sold |
|
371.6 |
|
56.6 |
% |
316.2 |
|
56.1 |
% |
55.4 |
|
17.5 |
% |
|||
|
Gross profit |
|
284.4 |
|
43.4 |
% |
247.2 |
|
43.9 |
% |
37.2 |
|
15.0 |
% |
|||
|
Financial services revenue |
|
14.8 |
|
100.0 |
% |
10.2 |
|
100.0 |
% |
4.6 |
|
45.1 |
% |
|||
|
Financial services expenses |
|
9.8 |
|
66.2 |
% |
7.4 |
|
72.5 |
% |
2.4 |
|
32.4 |
% |
|||
|
Operating income from financial services |
|
5.0 |
|
33.8 |
% |
2.8 |
|
27.5 |
% |
2.2 |
|
78.6 |
% |
|||
|
Operating expenses |
|
230.2 |
|
35.1 |
% |
206.4 |
|
36.6 |
% |
23.8 |
|
11.5 |
% |
|||
|
Operating earnings |
|
59.2 |
|
8.8 |
% |
43.6 |
|
7.6 |
% |
15.6 |
|
35.8 |
% |
|||
|
Interest expense |
|
7.0 |
|
1.0 |
% |
4.6 |
|
0.8 |
% |
2.4 |
|
52.2 |
% |
|||
|
Other (income) expense - net |
|
(1.2 |
) |
-0.2 |
% |
(3.9 |
) |
-0.7 |
% |
(2.7 |
) |
-69.2 |
% |
|||
|
Earnings before income taxes |
|
53.4 |
|
8.0 |
% |
42.9 |
|
7.5 |
% |
10.5 |
|
24.5 |
% |
|||
|
Income tax expense |
|
15.4 |
|
2.3 |
% |
15.5 |
|
2.7 |
% |
(0.1 |
) |
-0.6 |
% |
|||
|
Net earnings |
|
$ |
38.0 |
|
5.7 |
% |
$ |
27.4 |
|
4.8 |
% |
$ |
10.6 |
|
38.7 |
% |
Note: Certain 2005 amounts have been reclassified to conform to the 2006 income statement presentation.
Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue.
Net sales in the fourth quarter of 2006 increased $92.6 million, or 16.4%, from 2005 levels, including $15.9 million from currency translation. The $92.6 million increase in net sales includes higher sales in the Diagnostics & Information Group’s OEM equipment solutions business, and $20.4 million of sales for the approximate five-week period from the company’s November 28, 2006, acquisition of ProQuest Business Solutions. Sales in the Commercial & Industrial Group also increased year over year primarily due to higher sales of equipment worldwide, increased sales of professional tools in Europe, higher sales of power tools, and continued strong sales growth in emerging markets. Sales in the Snap-on Tools Group increased $28.3 million, or 12.1%, over 2005 levels, largely driven by strong U.S. sales increases in the North American franchise operations and higher international sales.
Gross profit in 2006 was $284.4 million, or 43.4% of net sales, as compared to $247.2 million, or 43.9% of net sales, in 2005. The $37.2 million improvement in 2006 gross profit primarily reflects benefits from higher sales and pricing, as well as benefits from lower costs, including savings from efficiency, productivity and cost reduction initiatives of $11.3 million, and $6.0 million of lower restructuring costs. The acquisition of ProQuest Business Solutions contributed $11.5 million to the year-over-year increase in fourth quarter gross profit, and currency translation contributed $6.2 million. These increases were partially offset by a shift in product mix that included higher sales (and lower relative gross margin) in the OEM equipment solutions business, $4.9 million of increased production and material costs, and $11.8 million of higher year-over-year LIFO related inventory expenses (charges of $4.1 million in 2006 and benefits of $7.7 million in 2005).
Operating expenses in 2006 were $230.2 million, as compared to $206.4 million in 2005. The $23.8 million increase primarily includes $6.7 million of operating expenses from the business solutions acquisition, $5.5 million in higher costs for strategic growth initiatives, $4.3 million of currency translation, $2.8 million of higher stock-based and performance-based incentive compensation, and increased volume-related expenses.
Interest expense of $7.0 million in 2006 was up $2.4 million from 2005 levels, primarily due to $1.8 million of higher interest expense related to the issuance of approximately $305 million of commercial paper obligations to finance, in part, the November 28, 2006, acquisition of business solutions, and higher year-over-year interest rates. See Note 2 to the Consolidated Financial Statements for further information on the
28
ProQuest Business Solutions acquisition and Note 10 for additional information on the commercial paper borrowings.
Other income (expense) – net was income of $1.2 million in 2006, as compared to income of $3.9 million in 2005. The decrease in other income (expense) – net is primarily due to unfavorable year-over-year foreign exchange transaction losses and higher minority interest expense in 2006, partially offset by higher interest income.
Snap-on’s effective tax rate was 28.8% in 2006, as compared with 36.1% in the prior year. The lower effective tax rate in 2006 primarily reflects the reversal of certain foreign income tax valuation allowances. Snap-on’s effective tax rate of 36.1% in the fourth quarter of 2005 included $0.5 million of additional U.S. income tax expense as the actual amount of foreign dividends repatriated under the AJCA during 2005 was approximately $18 million higher than earlier estimates. See Note 9 to the Consolidated Financial Statements for further information on income taxes.
Snap-on Tools Group
|
|
Three Months Ended |
|
Increase/ |
|
||||||||||||
|
(Amounts in millions) |
|
|
|
(Decrease) |
|
|||||||||||
|
Segment net sales |
|
$ |
261.6 |
|
100.0 |
% |
$ |
233.3 |
|
100.0 |
% |
$ |
28.3 |
|
12.1 |
% |
|
Cost of goods sold |
|
154.5 |
|
59.1 |
% |
130.4 |
|
55.9 |
% |
24.1 |
|
18.5 |
% |
|||
|
Gross profit |
|
107.1 |
|
40.9 |
% |
102.9 |
|
44.1 |
% |
4.2 |
|
4.1 |
% |
|||
|
Operating expenses |
|
91.9 |
|
35.1 |
% |
82.3 |
|
35.3 |
% |
9.6 |
|
11.7 |
% |
|||
|
Segment operating earnings |
|
$ |
15.2 |
|
5.8 |
% |
$ |
20.6 |
|
8.8 |
% |
$ |
(5.4 |
) |
-26.2 |
% |
Segment net sales in the fourth quarter of 2006 increased $28.3 million, or 12.1%, from 2005 levels, including $25.6 million of higher sales and $2.7 million of currency translation. In North America, sales increased 11.7% year over year. Snap-on believes the $28.3 million sales increase largely reflects the progress being made in its efforts to improve both the franchise system and order-fill rates though the global supply chain. Sales in the international franchise operations increased 14.0% year over year, largely due to growth in the United Kingdom and Australia, and currency translation.
Segment gross profit of $107.1 million in 2006 was up $4.2 million over 2005 levels primarily due to the higher sales and selling prices, lower costs of $5.9 million from efficiency and productivity initiatives, and $1.1 million of currency translation. These increases were partially offset by $11.8 million of higher year-over-year LIFO related inventory expenses (charges of $4.1 million in 2006 and benefits of $7.7 million in 2005), $4.6 million of higher production, material and other costs, and $2.1 million of increased restructuring costs related to the expected mid-2007 closure of the company’s Johnson City hand tool facility. Operating expenses in 2006 were up $9.6 million from prior-year levels primarily due to higher volume-related expenses, as well as $2.2 million of higher costs to support strategic supply chain and franchise system initiatives, $1.3 million of increased performance-based compensation expense, $0.6 million of currency translation, and $0.5 million of higher year-over-year restructuring costs. As a result of these factors, segment operating earnings in the fourth quarter of 2006 declined $5.4 million from 2005 levels.
29
Commercial & Industrial Group
|
|
Three Months Ended |
|
Increase/ |
|
||||||||||||
|
(Amounts in millions) |
|
|
|
(Decrease) |
|
|||||||||||
|
External net sales |
|
$ |
278.4 |
|
87.6 |
% |
$ |
254.3 |
|
91.4 |
% |
$ |
24.1 |
|
9.5 |
% |
|
Intersegment net sales |
|
39.4 |
|
12.4 |
% |
23.9 |
|
8.6 |
% |
15.5 |
|
64.9 |
% |
|||
|
Segment net sales |
|
317.8 |
|
100.0 |
% |
278.2 |
|
100.0 |
% |
39.6 |
|
14.2 |
% |
|||
|
Cost of goods sold |
|
201.2 |
|
63.3 |
% |
178.1 |
|
64.0 |
% |
23.1 |
|
13.0 |
% |
|||
|
Gross profit |
|
116.6 |
|
36.7 |
% |
100.1 |
|
36.0 |
% |
16.5 |
|
16.5 |
% |
|||
|
Operating expenses |
|
84.4 |
|
26.6 |
% |
77.2 |
|
27.8 |
% |
7.2 |
|
9.3 |
% |
|||
|
Segment operating earnings |
|
$ |
32.2 |
|
10.1 |
% |
$ |
22.9 |
|
8.2 |
% |
$ |
9.3 |
|
40.6 |
% |
Segment net sales in the fourth quarter of 2006 increased $39.6 million, or 14.2%, from 2005 levels, including $28.1 million of higher sales and $11.5 million of currency translation. The $28.1 million sales increase primarily reflects higher sales of equipment products worldwide, increased sales of professional tools in Europe, higher sales of power tools, and continued strong sales growth in emerging markets.
Segment gross profit of $116.6 million in 2006 was up $16.5 million over 2005 levels. The improvement in gross profit primarily reflects benefits from increased sales of higher-margin products and improved pricing, savings of $5.4 million from productivity and efficiency initiatives, including increased production and sourcing of materials from lower-cost regions and facilities, and $4.4