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Snap-On 10-Q 2011 Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one)
For the quarterly period ended April 2, 2011 OR
For the transition period from to Commission File Number 1-7724
(Exact name of registrant as specified in its charter)
(262) 656-5200 (Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
Table of ContentsTABLE OF CONTENTS
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Table of ContentsPART I. FINANCIAL INFORMATION Item 1: Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in millions, except per share data) (Unaudited)
See Notes to Condensed Consolidated Financial Statements
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Table of ContentsCONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in millions, except share data) (Unaudited)
See Notes to Condensed Consolidated Financial Statements
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Table of ContentsSNAP-ON INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in millions, except share data) (Unaudited)
See Notes to Condensed Consolidated Financial Statements
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Amounts in millions, except share data) (Unaudited) The following summarizes the changes in total shareholders’ equity for the three month period ending April 2, 2011:
The following summarizes the changes in total shareholders’ equity for the three month period ending April 3, 2010:
See Notes to Condensed Consolidated Financial Statements
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in millions) (Unaudited)
See Notes to Condensed Consolidated Financial Statements
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Table of ContentsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Amounts in millions) (Unaudited)
See Notes to Condensed Consolidated Financial Statements
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Table of ContentsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Summary of Accounting Policies Principles of consolidation and presentation These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Snap-on Incorporated’s (“Snap-on” or “the company”) 2010 Annual Report on Form 10-K for the fiscal year ended January 1, 2011. The company’s 2011 fiscal first quarter ended on April 2, 2011; the 2010 fiscal first quarter ended on April 3, 2010. The Condensed Consolidated Financial Statements include the accounts of Snap-on and its wholly-owned and majority-owned subsidiaries. Snap-on accounts for investments in unconsolidated affiliates where Snap-on has a greater than 20% but less than 50% ownership interest under the equity method of accounting. Investments in unconsolidated affiliates of $41.6 million as of April 2, 2011, and $39.4 million as of January 1, 2011 (“2010 year end”) are included in “Other assets” on the accompanying Condensed Consolidated Balance Sheets. Equity investment dividends received in the first quarter of 2010 totaled $2.0 million; no equity investment dividends were received in the first quarter of 2011. In the normal course of business, the company may purchase products or services from unconsolidated affiliates. Purchases from unconsolidated affiliates were $5.6 million and $4.7 million in the first quarters of 2011 and 2010, respectively. The Condensed Consolidated Financial Statements do not include the accounts of the company’s independent franchisees. Snap-on’s Condensed Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated. As previously disclosed, in the second quarter of 2010, Snap-on realigned its management organization and, as a result, its reportable business segments. The accompanying segment data has been restated to reflect these realignments. Refer to Note 16 for information on Snap-on’s reportable business segments. Snap-on Credit LLC (“SOC”) is the company’s financial services operation in the United States. Snap-on terminated its SOC financial services joint venture agreement with CIT Group Inc. (“CIT”) on July 16, 2009, and subsequently acquired CIT’s 50%-ownership interest in SOC. As a result, SOC became a wholly-owned subsidiary of Snap-on and Snap-on began providing financing for the majority of new loans originated by SOC; prior to July 16, 2009, substantially all of the loans originated by SOC were sold to CIT. As of both April 2, 2011, and January 1, 2011, “Other accrued liabilities” on the accompanying Condensed Consolidated Balance Sheets included $107.8 million of amounts withheld from payments made to CIT relating to ongoing business activities. The amount withheld relates to a dispute between the parties concerning various payments made during the course of the financial services joint venture. See Note 14 for further information. Certain prior year amounts were reclassified on the Condensed Consolidated Statements of Cash Flow to reflect the “Provision for losses on non-finance receivables” as part of “Net cash provided by operating activities;” previously non-cash provisions for losses on non-finance receivables were included in “(Increase) decrease in trade and other accounts receivable” as part of “Net cash provided by operating activities.” In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Condensed Consolidated Financial Statements for the three month periods ended April 2, 2011, and April 3, 2010, have been made. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Financial Instruments The fair value of the company’s derivative financial instruments is generally determined using quoted prices in active markets for similar assets and liabilities. The carrying value of the company’s non-derivative financial instruments either approximates fair value, due to their short-term nature, or fair value is based upon a discounted cash flow analysis or quoted market values. See Note 9 for further information on financial instruments. New Accounting Standards Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses The Financial Accounting Standards Board (“FASB”) issued a pronouncement in July 2010 that requires enhanced disclosures regarding the nature of credit risk inherent in an entity’s portfolio of financing receivables, how that risk is analyzed, and the changes, as well as the reasons for such changes, in the allowance for credit losses. The new disclosures, which require information regarding both financing receivables and the related allowances for credit losses at more disaggregated levels, became effective for Snap-on as of its 2010 fiscal year end. Specific disclosures regarding activities that occur during a reporting period, such as the disaggregated rollforward disclosures, became effective for Snap-on at the beginning of its 2011 fiscal year. The adoption of this guidance, which affects disclosures primarily related to Snap-on’s finance and contract receivables, did not have a significant impact on the company’s Condensed Consolidated Financial Statements. Fair Value Measurements and Disclosures The fair value measurements hierarchy gives the highest priority (“Level 1”) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (“Level 3”) to unobservable inputs. Fair value measurements primarily based on observable market information are given a “Level 2” priority. Previously released guidance on fair value measurements and disclosures was amended in January 2010. The amendment requires disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements. A portion of the amendment was effective for Snap-on at the beginning of its 2010 fiscal first quarter and requires the disclosure of transfers into and out of Level 1 and Level 2 fair value measurements; the amendment’s requirements related to Level 3 disclosures became effective for Snap-on at the beginning of its 2011 fiscal year. The adoption of this guidance, which affects new disclosures only, did not have a significant impact on the company’s Condensed Consolidated Financial Statements. Revenue Arrangements with Multiple Deliverables Previously released guidance on revenue arrangements with multiple deliverables was amended in October 2009; the amended guidance became effective for Snap-on at the beginning of its 2011 fiscal year. The amendment addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The amendment has been applied prospectively for new or materially modified arrangements; the adoption of this guidance did not have a significant impact on the company’s Condensed Consolidated Financial Statements. Certain Revenue Arrangements that Include Software Elements Previously released guidance on certain revenue arrangements that include software elements was amended in October 2009; the amended guidance became effective for Snap-on at the beginning of its 2011 fiscal year. The amendment removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a product’s essential functionality, and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The amendment has been applied prospectively for new or materially modified arrangements; the adoption of this guidance did not have a significant impact on the company’s Condensed Consolidated Financial Statements.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Note 2: Acquisitions On March 5, 2008, Snap-on acquired a 60% interest in Wanda Snap-on (Zhejiang) Co. Ltd, (now known as Snap-on Asia Manufacturing (Zhejiang) Co. Ltd. (“Xiaoshan”)) the company’s tool manufacturing operation in Xiaoshan, China. Snap-on acquired the remaining 40% redeemable noncontrolling interest in Xiaoshan for a purchase price of $7.7 million and $0.1 million of transaction costs on April 6, 2010. The acquisition of Xiaoshan is part of the company’s ongoing strategic initiatives to further expand its manufacturing presence in emerging growth markets and lower-cost regions. Note 3: Accounts Receivable Trade and Other Accounts Receivable Snap-on’s trade and other accounts receivable primarily arise from the sale of tools, diagnostics and equipment to a broad range of industrial and commercial customers and to Snap-on’s independent franchise van channel on a non-extended-term basis with payment terms generally ranging from 30 to 120 days. The components of Snap-on’s trade and other accounts receivable as of April 2, 2011, and January 1, 2011, are as follows:
Finance and Contract Receivables SOC originates extended-term finance and contract receivables on sales of Snap-on product sold through the U.S. franchisee and customer network and to Snap-on’s industrial and other customers; Snap-on’s foreign finance subsidiaries provide similar financing internationally. Interest income on finance and contract receivables is included in “Financial services revenue” on the accompanying Condensed Consolidated Statements of Earnings. Snap-on’s finance receivables are comprised of extended-term installment loans to technicians (i.e. franchisees’ customers) to enable them to purchase tools, diagnostics and equipment on an extended-term payment plan, generally with average payment terms of 32 months. Contract receivables, with payment terms of up to 10 years, are comprised of extended-term installment loans to a broad base of industrial and other customers worldwide, including shop owners, both independents and national chains, for their purchase of tools, diagnostics and equipment. Contract receivables also include extended-term installment loans to franchisees to meet a number of financing needs including van and truck leases, working capital loans, and loans to enable new franchisees to fund the purchase of the franchise. Finance and contract receivables are generally secured by the underlying tools, diagnostics or equipment financed and, for installment loans to franchisees, other franchisee assets. Snap-on did not purchase any finance or contract receivables during the three months ended April 2, 2011.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
The components of Snap-on’s current finance and contract receivables as of April 2, 2011, and January 1, 2011, are as follows:
The components of Snap-on’s finance and contract receivables with payment terms beyond one year as of April 2, 2011, and January 1, 2011, are as follows:
Delinquency is the primary indicator of credit quality for finance and contract receivables. Receivable balances are considered delinquent when contractual payments on the loans become 30 days past due. Finance receivables are generally placed on non-accrual status (nonaccrual of interest and other fees) (i) when a customer is placed on repossession status after being 90 days past due; (ii) upon receipt of notification of bankruptcy; (iii) upon the death of a customer; or (iv) in other instances in which management concludes collectability is not reasonably assured. Finance receivables that are considered nonperforming include receivables that are on non-accrual status and receivables that are generally 90 days past due.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Contract receivables are generally placed on non-accrual status (i) when a receivable is more than 90 days past due or at the point a customer’s account is placed on terminated status regardless of the delinquency status; (ii) upon the death of a customer; or (iii) in other instances in which management concludes collectability is not reasonably assured. Contract receivables that are considered nonperforming include receivables that are on non-accrual status and receivables that are generally more than 90 days past due. The accrual of interest and other fees is resumed when the finance or contract receivable becomes contractually current and collection of all remaining contractual amounts due is reasonably assured. Finance and contract receivables are evaluated for impairment on a collective basis. A receivable is impaired when it is probable that all amounts related to the receivable will not be collected according to the contractual terms of the loan agreement. Impaired receivables are covered by the company’s finance and contract allowances for doubtful accounts reserves and are charged-off against the reserves when appropriate. As of April 2, 2011, and January 1, 2011, there were $8.2 million and $7.4 million, respectively, of impaired finance receivables, and there were $0.4 million and $0.8 million, respectively, of impaired contract receivables. The aging of finance and contract receivables as of April 2, 2011, and January 1, 2011, is as follows:
The amount of performing and nonperforming finance and contract receivables based on payment activity as of April 2, 2011, and January 1, 2011, is as follows:
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
The amount of finance and contract receivables on non-accrual status as of April 2, 2011, and January 1, 2011, is as follows:
The following is a rollforward of the allowances for credit losses for finance and contract receivables for the three months ended April 2, 2011:
Prior to the termination of the company’s financial services joint venture with CIT, SOC sold substantially all new finance and contract loan originations to CIT on a limited recourse basis; SOC retained the right to service such loans for a contractual servicing fee. As of April 2, 2011, the remaining portfolio of receivables owned by CIT that is being serviced by SOC was approximately $216.2 million. Contractual servicing fees were $0.8 million for the three month period ended April 2, 2011, and $1.6 million for the three month period ended April 3, 2010. Note 4: Inventories Inventories by major classification were as follows:
Inventories accounted for using the first-in, first-out (“FIFO”) method as of both April 2, 2011, and January 1, 2011, approximated 64% of total inventories. The company accounts for its non-U.S. inventory on the FIFO basis. As of April 2, 2011, approximately 26% of the company’s U.S. inventory was accounted for using the FIFO basis and 74% was accounted for using the last-in, first-out (“LIFO”) basis. There were no LIFO inventory liquidations in the three month periods ended April 2, 2011, and April 3, 2010.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Note 5: Intangible and Other Assets The changes in the carrying amount of goodwill by segment for the three month period ended April 2, 2011, were as follows:
Additional disclosures related to other intangible assets are as follows:
Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, loss of key customers and/or changes in technology or markets, could require a provision for impairment of goodwill and/or other intangible assets in a future period. As of April 2, 2011, the company has no accumulated impairment losses. The weighted-average amortization periods related to other intangible assets are as follows:
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Snap-on is amortizing its customer relationships on an accelerated basis over a 16 year weighted-average life; the remaining intangibles are amortized on a straight-line basis. The weighted-average amortization period for all amortizable intangibles on a combined basis is 14 years. The company’s customer relationships generally have contractual terms of three to five years and are typically renewed without significant cost to the company. The weighted-average 16 year life for customer relationships is based on the company’s historical renewal experience. Intangible asset renewal costs are expensed as incurred. The aggregate amortization expense was $5.9 million in each of the three month periods ended April 2, 2011, and April 3, 2010. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated annual amortization expense is expected to be $23.1 million in 2011, $19.8 million in 2012, $13.9 million in 2013, $10.1 million in 2014, $9.4 million in 2015 and $9.2 million in 2016. The company has various insurance policies on the lives of certain former executive officers. Snap-on’s investment in these policies is recorded net of policy loans in “Other assets” on the accompanying Condensed Consolidated Balance Sheets. The policy loans carry a variable interest rate (currently at 5.49%), require interest only payments annually, and are collateralized by the cash value of the life insurance policies. The interest rate charged on the policy loans may be adjusted annually based on a corporate bond yield as published by Moody’s Investors Service. A summary of the net cash value of life insurance as of April 3, 2010, and January 2, 2010, is as follows:
Note 6: Exit and Disposal Activities Snap-on recorded costs associated with exit and disposal activities for the three month periods ended April 2, 2011, and April 3, 2010, as follows:
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Of the $3.0 million and $3.2 million of costs incurred during the three month periods ended April 2, 2011, and April 3, 2010, respectively, $1.0 million and $3.0 million, respectively, qualified for accrual treatment. Costs associated with exit and disposal activities in 2011 primarily related to headcount reductions from (i) the expected mid-2011 closure of the Newmarket, Canada, tool storage manufacturing facility; and (ii) various other management and realignment actions. Snap-on’s exit and disposal accrual activity for the first quarter of 2011 was as follows:
The majority of the exit and disposal accrual will be utilized in 2011; approximately $0.3 million of facility-related costs will extend beyond 2011 due to a longer-term lease obligation. Snap-on expects to fund the remaining cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the company’s existing credit facilities. The estimated costs for the exit and disposal activities were based on management’s best business judgment under prevailing circumstances. Note 7: Income Taxes Snap-on’s effective income tax rate on earnings attributable to Snap-on was 33.0% and 34.5% in the first three months of 2011 and 2010, respectively. The lower 2011 effective income tax rate is primarily attributable to the mix of earnings in the various taxing jurisdictions. For the three months ended April 2, 2011, Snap-on’s unrecognized tax benefits increased by $0.4 million primarily due to new tax positions expected to be taken in future tax filings and the accrual of interest on tax positions taken in prior years. Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. Snap-on and its subsidiaries are routinely examined by tax authorities in certain of these jurisdictions and it is reasonably possible that some of these examinations may be resolved within the next 12 months. Due to the potential resolution of these global examinations and the closing of the statutes of limitations in certain jurisdictions, it is reasonably possible that Snap-on’s gross unrecognized tax benefits may decrease by a range of zero to $2.2 million over the next 12 months.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Note 8: Short-term and Long-term Debt Short-term and long-term debt as of April 2, 2011, and January 1, 2011, consisted of the following:
* Includes fair value adjustments related to interest rate swaps. Snap-on has a five-year, $500 million multi-currency revolving credit facility that terminates on August 10, 2012; as of April 2, 2011, no amounts were outstanding under this facility. The $500 million revolving credit facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio of total debt to the sum of total debt plus shareholders’ equity of not greater than 0.60 to 1.00; or (ii) a ratio of total debt to the sum of net income plus interest expense, income taxes, depreciation, amortization and other non-cash or extraordinary charges for the preceding four fiscal quarters then ended of not greater than 3.50 to 1.00. As of April 2, 2011, the company’s actual ratios of 0.44 and 2.59, respectively, were both within the permitted ranges as set forth in this financial covenant. Snap-on also had $20 million of unused available debt capacity under its committed bank lines of credit as of April 2, 2011, including a $10 million line of credit that expires on July 26, 2011, and a $10 million line of credit that expires on August 28, 2011. Snap-on entered into a loan and servicing agreement on October 1, 2010, that provides for aggregate revolving credit commitments in the principal amount of up to $100 million (subject to borrowing base requirements). The loan and servicing agreement allows Snap-on to secure borrowings of up to $100 million through the pledging of finance receivables under a third-party sponsored asset-backed commercial paper conduit facility. As of April 2, 2011, no amounts were outstanding under this agreement. The agreement expires on September 30, 2011; however, it may be renewed once each year for an additional 364-day term upon request by Snap-on and subsequent concurrence by the lenders. In addition to the financial covenant required by the $500 million multi-currency revolving credit facility, discussed above, Snap-on’s debt agreements and credit facilities, including the October 1, 2010 loan and servicing agreement, also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of April 2, 2011, Snap-on was in compliance with all covenants of its debt agreements and credit facilities. Note 9: Financial Instruments Derivatives: All derivative instruments are reported in the Condensed Consolidated Financial Statements at fair value. Changes in the fair value of derivatives are recorded each period in earnings or on the accompanying Condensed Consolidated Balance Sheets, depending on whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments recorded in “Accumulated other comprehensive income (loss)” (“Accumulated OCI”) must be reclassified to earnings in the period in which earnings are affected by the underlying hedged item and the ineffective portion of all hedges must be recognized in earnings in the period that such portion is determined to be ineffective.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure; (ii) whether or not overall risk is being reduced; and (iii) if there is a correlation between the value of the derivative instrument and the underlying hedged item. On the date a derivative contract is entered into, Snap-on designates the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a natural hedging instrument whose change in fair value is recognized as an economic hedge against changes in the values of the hedged item. Snap-on does not use derivative instruments for speculative or trading purposes. The company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and therefore uses derivatives to manage financial exposures that occur in the normal course of business. The primary risks managed by using derivative instruments are foreign currency risk and interest rate risk. Foreign Currency Risk Management: Snap-on has significant international operations and is subject to certain risks inherent with foreign operations that include currency fluctuations and restrictions on the movement of funds. Foreign currency exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency, including intercompany loans denominated in foreign currencies. To manage these exposures, Snap-on identifies naturally offsetting positions and then purchases hedging instruments to protect the residual net exposures. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets. Foreign currency forward contracts are used to hedge the net exposures. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. Snap-on’s foreign currency forward contracts are typically not designated as hedges. The fair value changes of these contracts are reported in earnings as foreign exchange gain or loss, which is included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. At April 2, 2011, Snap-on had $198.1 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $105.1 million in euros, $76.9 million in Swedish kronor, $33.4 million in Australian dollars, $19.8 million in Singapore dollars, $14.4 million in British pounds, $4.7 million in Norwegian kroner, $4.0 million in South Korean won, $4.0 million in Mexican pesos, and $3.5 million in other currencies, and sell contracts comprised of $42.1 million in Canadian dollars, $17.4 million in Japanese yen, $4.5 million in Turkish lira, and $3.7 million in other currencies. At January 1, 2011, Snap-on had $209.6 million of net foreign currency forward buy contracts outstanding comprised of buy contracts including $105.2 million in euros, $80.6 million in Swedish kronor, $34.0 million in Australian dollars, $20.1 million in Singapore dollars, $19.3 million in British pounds, $5.3 million in Norwegian kroner, $4.0 million in South Korean won, $3.6 million in Mexican pesos, and $2.8 million in other currencies, and sell contracts including $40.4 million in Canadian dollars, $17.2 million in Japanese yen, $4.1 million in Turkish lira, and $3.6 million in other currencies. Interest Rate Risk Management: Snap-on aims to control funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s assets and liabilities through the use of interest rate swap agreements. Treasury lock agreements are used to manage potential changes in interest rates in anticipation of the issuance or sale of certain financial instruments. Interest Rate Swap Agreements: Snap-on enters into interest rate swap agreements (“interest rate swaps”) to manage interest costs and risks associated with changing interest rates associated with the company’s fixed rate borrowings. Interest rate swaps are accounted for as either cash flow hedges or fair value hedges. The differentials paid or received on interest rate swaps are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. For fair value hedges, the effective portion of the change in fair value of the derivative is recorded in “Current maturities of long-term debt” or “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The notional amount of interest rate swaps outstanding and designated as fair value hedges was $150.0 million as of both April 2, 2011, and January 1, 2011. No interest rate swaps classified as cash flow hedges were outstanding as of April 2, 2011, and January 1, 2011.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
Treasury Lock Agreements: Snap-on enters into treasury lock agreements (“treasury locks”) to manage the potential change in interest rates in anticipation of issuing fixed rate debt. Treasury locks are accounted for as cash flow hedges. The effective differentials paid or received on treasury locks related to the anticipated issuance of fixed rate debt are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The effective differentials paid or received on treasury locks related to finance receivables were recognized as adjustments to “Financial services revenue” on the accompanying Condensed Consolidated Statements of Earnings. There were no treasury locks outstanding as of both April 2, 2011, and January 1, 2011, and there were no treasury locks settled during either of the first quarters of 2011 or 2010. Fair Value Measurements: Snap-on has derivative assets and liabilities that are measured at Level 2 fair value on a recurring basis. The fair value of derivative instruments, including interest rate swaps and foreign currency forward contracts (“foreign currency forwards”), included within the Condensed Consolidated Balance Sheets as of April 2, 2011, and January 1, 2011, are as follows:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the six-month LIBOR swap rate for similar instruments. Foreign exchange forwards are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. The company did not have any assets or liabilities measured at Level 1 or Level 3, or implement any changes in its valuation techniques as of and for the quarter ended April 2, 2011.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
The effect of derivative instruments designated as fair value hedges as included in the Condensed Consolidated Statements of Earnings is as follows:
The effects of derivative instruments designated as cash flow hedges, including treasury locks and firm commitment agreements (“firm commitments”), as included in Accumulated OCI on the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Earnings are as follows:
The following table represents the effect of derivative instruments not designated as hedging instruments as included in the Condensed Consolidated Statements of Earnings:
Snap-on’s foreign currency forwards, as discussed above, are typically not designated as hedges for financial reporting purposes. The fair value changes of derivatives not designated as hedging instruments are reported in earnings as foreign exchange gain or loss in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. The $19.0 million derivative gain recognized in the first quarter of 2011 was mostly offset by transaction losses on net exposures of $18.6 million, resulting in a net foreign exchange gain of $0.4 million. The $12.1 million derivative loss recognized in the first quarter of 2010 was offset by transaction gains on net exposures of $12.3 million, resulting in a net foreign exchange gain of $0.2 million. The resulting net foreign exchange gains and losses are included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. See Note 15 for additional information on “Other income (expense) – net.” See the accompanying Condensed Consolidated Statements of Comprehensive Income for additional information on changes in comprehensive income.
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Table of ContentsSNAP-ON INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) (Unaudited)
As of April 2, 2011, the maximum maturity date of any fair value hedge was 11 years. During the next 12 months, Snap-on expects to reclassify into earnings net gains from Accumulated OCI of approximately $374,000 after tax at the time the underlying hedge transactions are realized. Counterparty Risk: Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its interest rate swap agreements and foreign currency forward contracts. Snap-on does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of the counterparties and enters into agreements only with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its counterparties, but cannot provide assurances. Fair Value of Financial Instruments: The fair values of financial instruments that do not approximate the carrying values in the financial statements are as follows:
The following methods and assumptions were used in estimating the fair value of financial instruments:
Note 10: Pension Plans Snap-on’s net pension expense included the following components:
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Snap-on expects to make contributions of approximately $10.2 million to its foreign pension plans and $1.4 million to its domestic pension plans in 2011. Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its domestic pension plans in 2011. Note 11: Postretirement Health Care Plans Snap-on’s net postretirement health care expense included the following components:
Note 12: Stock-Based Compensation The 2001 Incentive Stock and Awards Plan, as amended (“2001 Plan”), which was approved by shareholders, provides for the grant of stock options, performance share awards and restricted stock awards (which may be designated as “restricted stock units” or “RSUs”). As of April 2, 2011, the 2001 Plan had 903,971 shares available for future grants; the company uses treasury stock to deliver shares under the 2001 Plan. Net stock-based compensation expense was $5.9 million and $3.0 million for the three month periods ended April 2, 2011, and April 3, 2010, respectively. Cash received from option exercises during the three month periods ended April 2, 2011, and April 3, 2010, was $11.8 million and $2.0 million, respectively. The tax benefit realized from the exercise of share-based payment arrangements was $2.2 million and $0.3 million for the three month periods ended April 2, 2011, and April 3, 2010, respectively. Stock Options Stock options are granted with an exercise price equal to the market value of a share of common stock on the date of grant and have a contractual term of ten years. Stock option grants vest ratably on the first, second and third anniversaries of the date of grant.
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The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding stock option exercise behaviors for different participating groups to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option. The following weighted-average assumptions were used in calculating the fair value of stock options granted during the three month periods ended April 2, 2011, and April 3, 2010, using the Black-Scholes valuation model:
A summary of stock option activity as of and for the three month period ended April 2, 2011, is presented below:
* Weighted-average The weighted-average grant date fair value of options granted during the three month periods ended April 2, 2011, and April 3, 2010, was $15.80 and $10.88, respectively. The intrinsic value of options exercised during the three month periods ended April 2, 2011, and April 3, 2010, was $5.7 million and $0.8 million, respectively. The fair value of stock options vested was $4.4 million in each of the three month periods ended April 2, 2011, and April 3, 2010. As of April 2, 2011, there was $13.3 million of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the 2001 Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 2.5 years. Performance Awards Performance awards granted pursuant to the 2001 Plan are earned and expensed using the fair value of the award over a contractual term of three years based on the company’s performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the applicable performance period. For performance achieved above a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance shares initially awarded.
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Snap-on began granting performance-based units (designated as RSUs) in 2009; such awards have a one year performance period based on the results of the consolidated financial metrics of the company followed by a two year cliff vesting schedule. For performance achieved above a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of RSUs initially awarded. The fair value of these awards is estimated on the date of grant using the Black-Scholes valuation model. The company uses the vesting period of the performance awards as the expected term of the awards granted. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the performance award. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the length of time corresponding to the expected term of the performance award. The following weighted-average assumptions were used in calculating the fair value of performance awards granted during the three month periods ended April 2, 2011, and April 3, 2010, using the Black-Scholes valuation model:
The weighted-average grant date fair value of performance awards granted during the three month periods ended April 2, 2011, and April 3, 2010, was $58.94 and $41.01, respectively. No performance share awards were paid out during the three month periods ended April 2, 2011, and April 3, 2010. As performance share awards generally vest only at the end of the performance award period, no shares vested during the three month periods ended April 2, 2011, and April 3, 2010. Based on the company’s 2010 performance, 169,921 RSUs granted in 2010 were earned; assuming continued employment, these RSUs will vest in February 2013. Based on the company’s 2009 performance, 65,819 RSUs granted in 2009 were earned; assuming continued employment, these RSUs will vest in February 2012. As a result of employee retirements, a total of 6,133 of the RSUs earned in 2009 and 2010 vested pursuant to the terms of the related award agreements and were paid out in the first quarter of 2011. The changes to the company’s non-vested performance awards during the three month period ended April 2, 2011, are as follows:
* Weighted-average As of April 2, 2011, there was $19.7 million of unrecognized compensation cost related to non-vested performance awards granted under the 2001 Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 2.3 years.
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Stock Appreciation Rights (“SARs”) The company also issues SARs to certain key non-U.S. employees. SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant and have a contractual term of ten years and vest ratably on the first, second and third anniversaries of the date of grant. SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price. SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock value over the grant price is paid in cash and not in common stock. The fair value of SARs is remeasured each reporting period using the Black-Scholes valuation model. The company uses historical data regarding SARs exercise behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs. The following weighted-average assumptions were used in calculating the fair value of SARs granted during the three month periods ended April 2, 2011, and April 3, 2010, using the Black-Scholes valuation model:
The total intrinsic value of SARs exercised during the three month periods ended April 2, 2011, and April 3, 2010, was $1.4 million and $0.1 million, respectively. The total fair value of SARs vested during the three month periods ended April 2, 2011, and April 3, 2010, was $2.5 million and $1.3 million, respectively. Changes to the company’s non-vested SARs during the three month period ended April 2, 2011, are as follows:
* Weighted-average As of April 2, 2011, there was $5.1 million of unrecognized compensation cost related to non-vested SARs granted under the 2001 Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 2.3 years.
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Note 13: Earnings Per Share The shares used in the computation of the company’s basic and diluted earnings per common share are as follows:
The dilutive effect of the potential exercise of outstanding stock-based instruments to purchase common shares is calculated using the treasury stock method. Options to purchase 593,638 shares and 876,903 shares of Snap-on common stock for the three month periods ended April 2, 2011, and April 3, 2010, respectively, were not included in the computations of diluted earnings per share as the exercise price of the options was greater than the average market price of the common stock for the respective periods and the effect on earnings per share would be anti-dilutive. Note 14: Commitments and Contingencies Snap-on provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the sale is recorded. Snap-on calculates its accrual requirements based on historic warranty loss experience that is periodically adjusted for recent actual experience, including the timing of claims during the warranty period and actual costs incurred. The following summarizes Snap-on’s product warranty accrual activity for the three month periods ended April 2, 2011, and April 3, 2010:
Snap-on filed a notice of arbitration with the American Arbitration Association on January 8, 2010, concerning a dispute with CIT relating to various underpayments made during the course of their financial services joint venture (that was terminated in July 2009), in which Snap-on has alleged damages of approximately $115 million. As a result of the dispute, Snap-on has withheld certain amounts (totaling $107.8 million as of both April 2, 2011, and 2010 year end) from payments made to CIT relating to SOC’s ongoing business activities. CIT filed its response denying Snap-on’s claim and asserting certain claims against Snap-on for other matters relating to the joint venture on January 29, 2010. CIT’s claims allege damages in excess of $110 million, the majority of which relates to returning the amounts withheld by Snap-on. The $107.8 million retained by Snap-on as of April 2, 2011, is included in “Other accrued liabilities” on Snap-on’s April 2, 2011 Condensed Consolidated Balance Sheet. Discovery in the CIT matter is ongoing, with arbitration scheduled for the second quarter of 2011. At this time, no determination can be made as to the likely outcome of this dispute. Snap-on has credit risk exposure for certain SOC-originated contracts with recourse provisions related to franchisee van loans sold by SOC; as of April 2, 2011, and January 1, 2011, $15.2 million and $15.9 million, respectively, of franchisee loans contain a recourse provision to Snap-on if the loans become more than 90 days past due. The asset value of the collateral underlying these recourse loans would serve to mitigate Snap-on’s loss in the event of default. The estimated fair value of the guarantees for all loan originations with recourse as of April 2, 2011, was not material.
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Snap-on is 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 of these other legal matters will not have a material impact on Snap-on’s consolidated financial position, results of operations or cash flows. Note 15: Other Income (Expense) – Net “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings consists of the following:
Note 16: Segments Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. In the second quarter of 2010, as previously disclosed, Snap-on realigned its management organization and, as a result, its reportable business segments in an effort to better support the product and service needs of the company’s primary customer segments. Prior year segment financial data has been restated to reflect the reportable business segment realignments. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving automotive service technicians through the worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers, primarily owners and managers of independent repair shops and original equipment manufacturer (“OEM”) dealership service and repair shops, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s wholly-owned finance subsidiaries. Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. 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. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes, pension assets and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.
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Financial data by segment was as follows:
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Table of ContentsSNAP-ON INCORPORATED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations Caution Regarding Forward-Looking Statements: Statements in this document that are not historical facts, including statements that (i) are in the future tense; (ii) 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; (iii) are specifically identified as forward-looking; or (iv) describe 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 its Annual Report on Form 10-K for the fiscal year ended January 1, 2011, which are incorporated herein by reference, 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 efficiencies and savings from its Rapid Continuous Improvement and other cost reduction initiatives, 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 costs and/or 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, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, the potential need to provide further financing for the loans originated by Snap-on Credit LLC, the effects of litigation challenges and proceedings, including the pending dispute with CIT Group Inc., and external negative factors, including continuing uncertainty in world financial markets, weakness in certain areas of the global economy, and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, and the impact of energy and raw material supply and pricing, including steel and gasoline, the amount, rate and growth of Snap-on’s general and administrative expenses, including health care and postretirement costs (resulting from, among other matters, new U.S. health care legislation and reforms), the impacts of non-strategic business and/or product line rationalizations, and the effects on business as a result of new legislation and regulations and other world or local events outside Snap-on’s control, including terrorist disruptions. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law. In addition, investors should be aware that generally accepted accounting principles in the United States of America (“U.S. GAAP”) 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.
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RESULTS OF OPERATIONS Results of operations for the three month periods ended April 2, 2011, and April 3, 2010, are as follows:
NM: Not meaningful Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue. Net sales in the first quarter of 2011 of $693.7 million were up $72.1 million, or 11.6%, from 2010 levels; excluding $9.1 million of favorable currency translation, organic sales in the quarter increased 10.0% from 2010 levels. Snap-on has significant international operations and is subject to certain risks inherent with foreign operations, including foreign currency translation fluctuations. Gross profit in the first quarter of 2011 was $330.6 million as compared to $287.6 million in 2010. The $43.0 million gross profit increase is primarily due to higher sales and favorable manufacturing utilization as a result of increased production levels, continued savings from ongoing efficiency and productivity (collectively “Rapid Continuous Improvement” or “RCI”) initiatives, including benefits from restructuring actions, and $2.1 million of favorable foreign currency effects. In the first quarter of 2011, restructuring costs included in gross profit totaled $2.5 million as compared to $2.3 million last year. As a percentage of sales, gross margin of 47.7% in the first quarter of 2011 increased 140 basis points (100 basis points equals 1.0 percent) as compared to 46.3% in 2010.
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Operating expenses in the first quarter of 2011 were $243.3 million as compared to $215.9 million in 2010. The $27.4 million increase in year-over-year operating expenses is primarily due to higher volume-related and other expenses, $4.0 million of increased performance-based incentive compensation expense, $2.8 million of higher stock-based (including mark-to-market) compensation expense, $2.3 million of expected higher pension expense (largely due to the amortization of investment losses incurred in 2008 related to the company’s domestic pension plan assets) and $2.2 million of unfavorable foreign currency effects. These operating expense increases were partially offset by benefits from ongoing RCI and other cost reduction activities, including benefits from restructuring actions, and $1.5 million of lower bad debt expense. In the first quarter of 2011, restructuring costs included in operating expenses totaled $0.5 million as compared to $0.9 million last year. As a percentage of sales, operating expenses in the first quarter of 2011 were 35.1% as compared to 34.7% in the first quarter of 2010. Operating earnings from Financial Services was $12.5 million on revenue of $25.8 million in the first quarter of 2011, as compared with an operating loss of $1.7 million on revenue of $9.7 million in the first quarter of 2010. The year-over-year increase in both revenue and operating earnings primarily reflects the growth in the company’s on-book finance portfolio following the July 16, 2009 termination of the Snap-on Credit LLC (“SOC”) financial services operating agreement with CIT Group Inc. (“CIT”), after which Snap-on began providing financing for the majority of new contract and finance receivables originated by SOC. See Notes 1 and 3 to the Condensed Consolidated Financial Statements for further information on SOC. Consolidated operating earnings in the first quarter of 2011 of $99.8 million increased $29.8 million, or 42.6%, from $70.0 million in the first quarter of 2010, including $14.2 million of higher year-over-year operating earnings from financial services. As a percentage of revenues (net sales plus financial services revenue), operating earnings in the first quarter of 2011 improved 280 basis points to 13.9% as compared to 11.1% last year. Interest expense of $16.3 million in the first quarter of 2011 increased $2.3 million from the comparable prior-year period primarily due to higher average debt levels. See Note 8 to the Condensed Consolidated Financial Statements for information on Snap-on’s debt and credit facilities. Other income (expense) – net in the first quarters of 2011 and 2010 was income of $0.8 million and $0.3 million, respectively. Other income (expense) – net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 15 to the Condensed Consolidated Financial Statements for information on other income (expense) – net. Snap-on’s effective income tax rate on earnings attributable to Snap-on was 33.0% in the first quarter of 2011 and 34.5% in the first quarter of 2010. See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes. Net earnings attributable to Snap-on in the first quarter of 2011 were $56.2 million, or $0.96 per diluted share, as compared with $36.8 million, or $0.63 per diluted share, in the first quarter of 2010. Exit and Disposal Activities Snap-on recorded exit and disposal costs of $3.0 million in the first quarter of 2011 and $3.2 million of such costs in the first quarter of 2010. See Note 6 to the Condensed 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. In the second quarter of 2010, as previously disclosed, Snap-on
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realigned its management organization and, as a result, its reportable segments; prior year segment financial data was restated to reflect these reportable business segment realignments. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving automotive service technicians through the company’s worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers, primarily owners and managers of independent repair shops and original equipment manufacturer (“OEM”) dealership service and repair shops, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s wholly-owned finance subsidiaries. Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. 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. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes, pension assets and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results. Commercial & Industrial Group
Segment net sales of $272.4 million in the first quarter of 2011 increased $25.4 million, or 10.3%, from 2010 levels. Continued higher sales to customers in emerging markets, increased sales in the segment’s European-based hand tools business, and continued sales progress in the critical industries of aerospace and natural resources, more than offset lower year-over-year sales to the military. Excluding $4.4 million of favorable foreign currency translation, organic sales increased 8.4%. Segment gross profit of $103.6 million in the first quarter of 2011 was up $14.9 million, or 16.8%, from 2010 levels. The $14.9 million gross profit increase is primarily due to higher sales, favorable manufacturing utilization as a result of increased production levels, $2.8 million of savings from ongoing RCI and restructuring initiatives and $1.1 million of lower restructuring costs. As a result of these factors, gross margin of 38.0% for the first quarter of 2011 increased 210 basis points from 35.9% in the first quarter of 2010. Operating expenses of $72.0 million in the first quarter of 2011 were up $8.7 million from 2010 levels primarily due to higher volume-related and other expenses and $1.2 million of unfavorable foreign currency effects. As a percentage of sales, operating expenses in the first quarter of 2011 were 26.4% as compared to 25.6% in the first quarter of 2010. As a result of these factors, segment operating earnings of $31.6 million in the first quarter of 2011 increased $6.2 million from 2010 levels, including $1.1 million of unfavorable foreign currency effects. As a percentage of segment net sales, operating earnings for the Commercial & Industrial Group increased 130 basis points from 10.3% in the first quarter of 2010 to 11.6% in the first quarter of 2011.
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Snap-on Tools Group
Segment net sales of $282.0 million in the first quarter of 2011 increased $33.5 million, or 13.5%, from 2010 levels. Excluding $3.9 million of favorable foreign currency translation, organic sales increased $29.6 million, or 11.7%, year over year, primarily due to continued higher sales in the United States. Segment gross profit of $124.9 million in the first quarter of 2011 increased $19.7 million, or 18.7%, as compared to $105.2 million last year. The $19.7 million gross profit increase is primarily due to contributions from increased sales, favorable manufacturing utilization as a result of increased production levels and $1.7 million of favorable currency effects. These year-over-year gross profit increases were partially offset by $2.3 million of higher restructuring costs for the previously announced mid-2011 closure of Snap-on’s Newmarket, Canada, tool storage manufacturing facility; Snap-on is consolidating its North American tool storage manufacturing and distribution operations into its existing tool storage facility in Algona, Iowa. As a percentage of sales, gross margin of 44.3% in the first quarter of 2011 improved 200 basis points from 42.3% in the first quarter of 2010. Operating expenses of $87.8 million in the first quarter of 2011 increased $9.6 million from 2010 levels primarily due to higher volume-related and other expenses, $0.8 million of unfavorable currency effects and $0.4 million of higher restructuring costs, partially offset by $1.2 million of lower bad debt expense. As a percentage of sales, operating expenses in the first quarter of 2011 improved to 31.1% as compared to 31.4% in the first quarter of 2010. As a result of these factors, operating earnings for the Snap-on Tools Group of $37.1 million in the first quarter of 2011 increased $10.1 million from 2010 levels, including $0.9 million of favorable foreign currency effects. As a percentage of segment net sales, operating earnings for the Snap-on Tools Group increased 230 basis points from 10.9% in the first quarter of 2010 to 13.2% in the first quarter of 2011. Repair Systems & Information Group
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Table of ContentsSNAP-ON INCORPORATED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Segment net sales of $227.0 million in the first quarter of 2011 increased $24.9 million, or 12.3%, from 2010 levels. Excluding $1.1 million of favorable foreign currency translation, organic sales increased $23.8 million, or 11.7%, year over year, reflecting increased sales to repair shop owners and managers, including higher sales of undercar equipment and increased essential tool and facilitation program activity with automotive OEM dealerships. Segment gross profit of $102.1 million in the first quarter of 2011 increased $8.4 million, or 9.0%, from 2010 levels. The $8.4 million gross profit increase is primarily due to higher sales, $1.0 million of lower restructuring costs, and contributions from ongoing RCI initiatives. As a percentage of sales, gross margin of 45.0% in the first quarter of 2011 decreased 140 basis points from 46.4% in the first quarter of 2010 largely due to a shift in sales mix that included higher sales of undercar equipment and increased sales of essential tool and facilitation program sales to OEM dealerships. Operating expenses of $59.3 million in the first quarter of 2011 increased $2.6 million from 2010 levels primarily due to higher volume-related, product development and other expenses, partially offset by savings from ongoing RCI and restructuring initiatives and $0.5 million of lower restructuring costs. As a percentage of sales, operating expenses in the first quarter of 2011 improved 200 basis points to 26.1% from 28.1% in the first quarter of 2010. As a result of these factors, segment operating earnings of $42.8 million in the first quarter of 2011 increased $5.8 million from 2010 levels. As a percentage of segment net sales, operating earnings for the Repair Systems & Information Group increased 60 basis points from 18.3% in the first quarter of 2010 to 18.9% in the first quarter of 2011. Financial Services
NM: Not meaningful Segment operating earnings were $12.5 million on $25.8 million of revenue in the first quarter of 2011, as compared with an operating loss of $1.7 million on $9.7 million of revenue in the first quarter of 2010. The year-over-year increase in both revenue and operating earnings primarily reflects the growth in the company’s on-book finance portfolio following the July 16, 2009 termination of the joint venture agreement with CIT. Originations of $145.6 million in the first quarter of 2011 increased $28.4 million, or 24.2%, from comparable prior-year levels. The $14.2 million increase in year-over-year operating earnings from Financial Services included $0.2 million of favorable foreign currency effects. See Notes 1 and 3 to the Condensed Consolidated Financial Statements for further information on SOC. Corporate Snap-on’s general corporate expenses of $24.2 million in the first quarter of 2011 increased $6.5 million from $17.7 million in the first quarter of 2010 primarily due to $2.8 million of increased performance-based incentive compensation expense, $2.4 million of higher stock-based (including mark-to-market) compensation expense and $2.3 million of expected higher pension expense (largely due to the amortization of investment losses incurred in 2008 related to the company’s domestic pension plan assets).
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Non-GAAP Supplemental Data The supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing the operating performance of Snap-on’s non-financial services (“Operations”) and “Financial Services” businesses. The supplemental Operations data reflects the results of operations and financial position of Snap-on’s tools, diagnostics, equipment, software and other non-financial services operations with Financial Services on the equity method. The supplemental Financial Services data reflects the results of operations and financial position of Snap-on’s U.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings from Snap-on Incorporated and cash generated from operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Long-term debt for Operations includes the company’s third party external borrowings, net of intersegment borrowings to Financial Services. Income taxes are charged (credited) to Financial Services on the basis of the specific tax attributes generated by the U.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the Condensed Consolidated Financial Statements.
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Supplemental Consolidating Data – The supplemental Condensed Statements of Earnings information for the three month periods ended April 2, 2011, and April 3, 2010, are as follows:
* Snap-on Incorporated with Financial Services on the equity method.
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Table of ContentsSNAP-ON INCORPORATED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Supplemental Consolidating Data – The supplemental Condensed Balance Sheets information as of April 2, 2011, and January 1, 2011, are as follows:
* Snap-on Incorporated with Financial Services on the equity method. 38
Table of ContentsSNAP-ON INCORPORATED MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Supplemental Consolidating Data – Condensed Balance Sheets Information (continued):
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