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Snap-on Announces 2006 Third-quarter Results
KENOSHA, Wis., Oct 23, 2006 (BUSINESS WIRE) -- Snap-on Incorporated (NYSE:SNA), a leading global innovator, manufacturer and marketer of tools, diagnostics and equipment solutions for professional users, today announced third-quarter 2006 results.
-- Net sales of $599.5 million increased $45.4 million, or 8.2%, over prior year due primarily to increased sales in the OEM equipment solutions business, growth in emerging markets, higher sales of equipment, and increased sales to U.S. industrial customers.
-- Operating earnings of $46.2 million increased 7.9% over prior year, despite $9.7 million of higher stock-based and performance-based incentive compensation.
-- Net earnings were $28.2 million or $0.48 per share. Third-quarter 2005 net earnings of $21.0 million, or $0.36 per share, included $2.8 million, or $0.05 per share, of additional U.S. income tax expense related to the repatriation of foreign earnings under the American Jobs Creation Act.
"We are encouraged with the progress made to date in executing our strategic initiatives to improve customer service and satisfaction, strengthen our brands and improve our global supply chain," said Jack D. Michaels, Snap-on chairman, president and chief executive officer. "We believe our third-quarter performance reflects the continued progress being made against these objectives. I wish to thank our associates worldwide for their diligent efforts in achieving this performance."
Snap-on Tools Group operating earnings were $15.7 million for the third quarter of 2006 on segment sales of $243.9 million. This compares to operating earnings of $20.1 million on segment sales of $244.8 million in the prior year.
As a percentage of sales, operating earnings were 6.4% in the third quarter of 2006 compared with 8.2% in 2005. Operating earnings in 2006 were reduced by higher planned spending of $5.5 million to support the previously announced strategic supply chain and franchise improvement initiatives, the impact of a less favorable sales mix, and higher production and material costs. These decreases in year-over-year operating earnings were partially offset by $6.1 million of savings and productivity enhancements from rapid continuous improvement actions.
Sales of $243.9 million in the quarter were essentially flat with the $244.8 million reported a year ago. International sales in the quarter increased 2.1% year over year largely due to growth in the U.K. and favorable currency translation, while sales in North America were down 1.0%. In the United States, a 3.9% year-over-year decline in the average number of franchisees during the quarter was partially offset by a 2.0% increase in average sales per franchisee. The company believes the increase in average sales per franchisee is a result of the strategic initiatives being implemented to improve the franchise system. The company anticipates that the decline in the average number of franchisees will moderate over the next several quarters.
Commercial and Industrial Group operating earnings of $23.3 million in the third quarter of 2006 were up 30.9% year over year on segment sales of $287.0 million compared with operating earnings of $17.8 million on $262.4 million of segment sales a year ago.
Operating earnings as a percentage of sales increased to 8.1% in the third quarter of 2006 compared with 6.8% in 2005. The $5.5 million increase in operating earnings primarily reflects the impact of the higher sales volume and pricing, as well as benefits from ongoing cost reduction, low cost sourcing and continuous improvement actions, including benefits from prior restructuring actions. These increases in operating earnings were partially offset by continued investment spending related to the expansion of distribution and manufacturing in emerging markets and lower-cost regions.
Sales in the third quarter of 2006 were up 9.4% year over year (up 7.0% excluding currency) largely due to sales growth in emerging markets, higher worldwide sales of under-car equipment products, increased sales to U.S. industrial customers, and higher sales of power tools in the United States.
Diagnostics and Information Group operating earnings were $16.5 million on segment sales of $131.7 million in the third quarter of 2006 compared with $11.8 million of operating earnings on $100.4 million of segment sales a year ago.
Operating earnings of $16.5 million were up $4.7 million from the prior year driven primarily by higher year-over-year sales and benefits from improved productivity and previous cost reduction initiatives, partially offset by higher spending to support strategic growth initiatives. As a percentage of sales, operating earnings were 12.5% in the third quarter of 2006 compared with 11.8% in 2005.
Sales in the third quarter of 2006 increased $31.3 million year over year reflecting higher sales in the OEM equipment solutions business, as well as increased sales of handheld diagnostics and information products.
Financial Services operating earnings were $3.0 million on $11.3 million of revenue in the third quarter of 2006 compared with $3.6 million of operating earnings on $13.1 million of revenue a year ago. The decrease in operating earnings primarily reflects the impact of lower net interest spreads and lower originations.
Corporate general expenses of $12.3 million in the third quarter of 2006 were up from $10.5 million in 2005, primarily due to $6.4 million of increased stock-based and performance-based incentive compensation, partially offset by $3.8 million of benefits from cost reduction initiatives.
"We are pleased with the substantial improvements realized in our Commercial and Industrial and Diagnostics and Information businesses," said Michaels. "The focus on emerging markets, new products and rapid continuous improvement, combined with the progress being made on our Snap-on Tools' initiatives, supports our continued optimism about the opportunity for long-term profitable growth."
Outlook
Snap-on will continue to implement its 2006 strategic priorities, including its focus on product innovation, improving manufacturing costs and process effectiveness, growth initiatives in emerging markets, and its actions to further enhance value and service to Snap-on's franchisees and customers. The completion of the ProQuest Business Solutions acquisition, which was separately announced today, is expected to expand Snap-on's solutions offering for global automotive OEM dealerships, create new customer relationships and product integration opportunities, and accelerate earnings and cash flow growth.
As previously announced, the costs to enhance field support and for other franchise system initiatives in the Snap-on Tools Group are anticipated to be $5 million to $7 million in 2006, of which $4.5 million has been incurred to date. Snap-on continues to believe that the implementation of its other customer service and supply chain initiatives, along with new marketing programs, will require spending of $8 million to $10 million in 2006, of which $6.6 million has been incurred to date.
The company remains encouraged by the progress to date in the Commercial and Industrial and Diagnostics and Information segments. The Financial Services segment is expected to continue to be challenged by higher interest rates, and its operating results for full-year 2006 are expected to be lower than the results achieved a year ago. Based on these factors, Snap-on expects continued year-over-year earnings improvement in the fourth quarter of 2006.
On May 16, 2006, Snap-on disclosed that it had reached an agreement to settle certain legal matters related to certain then current and former franchisees on a class basis. The settlement contains provisions that allow Snap-on to terminate the settlement agreement if more than a specified percentage of certain franchisees elect to opt out of the class; based on the level of opt outs to date, those percentages will not be exceeded. The terms of the settlement are subject to final court approval, as well as other usual and customary conditions. The court's review and possible final approval of the proposed settlement, absent any appeal, are expected to occur in the fourth quarter of 2006. In connection with the resolution of this matter, Snap-on expects to pay an estimated $38.0 million to the claimants, including attorneys' fees, costs and expenses. This amount is subject to change depending on the actual number of claimants and the funds paid out as a result of the payment formulas included in the agreement.
Conference Call and Webcast at 10:00 a.m. Eastern Today
A discussion of this release will be webcast at 10:00 a.m. Eastern today, and a replay will be available for at least 10 days following the call. To access the webcast, visit www.snapon.com, click on Snap-on Corporate and then on Investor Events in the drop-down menu under Investor Information. Additional detail about Snap-on is also available on the Snap-on Web site.
Forward-looking Statements
Statements in this news release 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 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 this news release contains statements, including earnings projections, that are forward-looking in nature and were developed by management in good faith and, accordingly, are subject to risks and uncertainties regarding Snap-on's expected results that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. The company's actual results may differ materially from those described or contemplated in the forward-looking statements. Factors that may cause the company's actual results to differ materially from those contained in the forward-looking statements include those found in the company's reports filed with the Securities and Exchange Commission, including the information under the "Safe Harbor" and "Risk Factors" headings in its Annual Report on Form 10-K filing dated February 21, 2006, its Form 10-Q filing dated July 26, 2006, and in its Form 8-K filing dated July 27, 2005, all of which are incorporated herein by reference, and Snap-on's and ProQuest Company's ability to complete all conditions to the closing of Snap-on's acquisition of ProQuest Business Solutions, including receipt of all regulatory approvals, and Snap-on's ability to successfully integrate this business. Snap-on disclaims any responsibility to update any forward-looking statement provided in this news release.
SNAP-ON INCORPORATED
Consolidated Statements of Earnings
(Amounts in millions, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
--------------------- ---------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net sales $ 599.5 $ 554.1 $ 1,817.4 $ 1,745.2
Cost of goods sold (339.3) (306.9) (1,015.9) (972.5)
---------- ---------- ---------- ----------
Gross profit 260.2 247.2 801.5 772.7
---------- ---------- ---------- ----------
Financial services revenue 11.3 13.1 34.2 43.4
Financial services
expenses (8.3) (9.5) (26.2) (30.5)
---------- ---------- ---------- ----------
Operating income from
financial services 3.0 3.6 8.0 12.9
Operating expenses:
Selling, general and
administrative expenses (217.0) (208.0) (665.8) (661.2)
Litigation settlement - - (38.0) -
---------- ---------- ---------- ----------
Total operating expenses (217.0) (208.0) (703.8) (661.2)
---------- ---------- ---------- ----------
Operating earnings 46.2 42.8 105.7 124.4
Interest expense (4.5) (5.6) (13.6) (17.1)
Other income (expense) --
net 1.3 (0.5) 0.4 (2.2)
---------- ---------- ---------- ----------
Earnings before income
taxes 43.0 36.7 92.5 105.1
Income tax expense (14.8) (15.7) (30.4) (39.6)
---------- ---------- ---------- ----------
Net earnings $ 28.2 $ 21.0 $ 62.1 $ 65.5
========== ========== ========== ==========
Earnings per share:
Basic $ 0.48 $ 0.36 $ 1.07 $ 1.13
Diluted $ 0.48 $ 0.36 $ 1.05 $ 1.12
Weighted-average shares
outstanding:
Basic 58.2 57.9 58.2 57.8
Effect of dilutive
options 0.6 0.7 0.9 0.6
---------- ---------- ---------- ----------
Diluted 58.8 58.6 59.1 58.4
========== ========== ========== ==========
SNAP-ON INCORPORATED
Supplemental Segment Information
(Amounts in millions)
(unaudited)
Three Months Ended Nine Months Ended
--------------------- ---------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Net sales:
Snap-on Tools Group $ 243.9 $ 244.8 $ 763.4 $ 761.2
Commercial and Industrial
Group 287.0 262.4 874.2 851.0
Diagnostics and
Information Group 131.7 100.4 379.8 332.0
---------- ---------- ---------- ----------
Segment net sales 662.6 607.6 2,017.4 1,944.2
Intersegment eliminations (63.1) (53.5) (200.0) (199.0)
---------- ---------- ---------- ----------
Total net sales $ 599.5 $ 554.1 $ 1,817.4 $ 1,745.2
Financial services revenue 11.3 13.1 34.2 43.4
---------- ---------- ---------- ----------
Total revenues $ 610.8 $ 567.2 $ 1,851.6 $ 1,788.6
========== ========== ========== ==========
Operating earnings:
Snap-on Tools Group (a) $ 15.7 $ 20.1 $ 22.4 $ 61.6
Commercial and Industrial
Group 23.3 17.8 74.0 46.7
Diagnostics and
Information Group 16.5 11.8 40.6 34.8
Financial Services 3.0 3.6 8.0 12.9
---------- ---------- ---------- ----------
Segment operating earnings 58.5 53.3 145.0 156.0
Corporate (12.3) (10.5) (39.3) (31.6)
---------- ---------- ---------- ----------
Operating earnings $ 46.2 $ 42.8 $ 105.7 $ 124.4
Interest expense (4.5) (5.6) (13.6) (17.1)
Other income (expense) --
net 1.3 (0.5) 0.4 (2.2)
---------- ---------- ---------- ----------
Earnings before income
taxes $ 43.0 $ 36.7 $ 92.5 $ 105.1
========== ========== ========== ==========
(a) Year-to-date 2006 segment operating earnings of $22.4 million for
the Snap-on Tools Group includes the estimated $38.0 million pretax
litigation settlement charge recorded in the second quarter of 2006.
SNAP-ON INCORPORATED
Consolidated Statements of Cash Flows
(Amounts in millions)
(unaudited)
Three Months Ended
---------------------------
September 30, October 1,
2006 2005
------------- -------------
Operating activities
Net earnings $ 28.2 $ 21.0
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities:
Depreciation 11.0 11.6
Amortization of other intangibles 0.8 0.6
Stock-based compensation expense 4.8 -
Deferred income tax provision (benefit) (15.7) 6.6
Loss (gain) on sale of assets 0.1 (0.8)
Gain on mark to market for cash flow
hedges - (0.2)
Changes in operating assets and
liabilities:
(Increase) decrease in receivables 10.8 3.9
(Increase) decrease in inventories 0.4 39.2
(Increase) decrease in prepaid and other
assets 9.6 14.3
Increase (decrease) in accounts payable 14.8 (36.6)
Increase (decrease) in accruals and
other liabilities 12.1 6.0
------------- -------------
Net cash provided by operating activities 76.9 65.6
Investing activities
Capital expenditures (11.6) (8.8)
Proceeds from disposal of property and
equipment 0.2 2.5
------------- -------------
Net cash used in investing activities (11.4) (6.3)
Financing activities
Net increase (decrease) in short-term
borrowings 0.1 (0.1)
Purchase of treasury stock (25.2) (4.9)
Proceeds from stock purchase and option
plans 28.3 7.7
Excess tax benefits from stock-based
compensation 2.7 -
Cash dividends paid (15.9) (14.4)
------------- -------------
Net cash used in financing activities (10.0) (11.7)
Effect of exchange rate changes on cash
and cash equivalents 0.4 0.1
------------- -------------
Increase in cash and cash equivalents 55.9 47.7
Cash and cash equivalents at beginning of
period 190.1 130.6
------------- -------------
Cash and cash equivalents at end of period $ 246.0 $ 178.3
============= =============
Supplemental cash flow disclosures
Cash paid for interest $ (7.2) $ (6.8)
Net cash paid for income taxes (19.7) (1.1)
SNAP-ON INCORPORATED
Consolidated Statements of Cash Flows
(Amounts in millions)
(unaudited)
Nine Months Ended
-----------------------------
September 30, October 1,
2006 2005
------------- ---------------
Operating activities
Net earnings $ 62.1 $ 65.5
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities:
Depreciation 35.4 37.3
Amortization of other intangibles 1.6 2.3
Stock-based compensation expense 11.7 -
Deferred income tax provision
(benefit) (18.1) 10.6
Gain on sale of assets (0.3) (1.4)
Gain on mark to market for cash flow
hedges (0.2) (0.4)
Changes in operating assets and
liabilities:
(Increase) decrease in receivables (1.3) 10.0
(Increase) decrease in inventories (19.2) (2.4)
(Increase) decrease in prepaid and
other assets (5.4) 27.4
Increase (decrease) in accounts
payable 28.8 (51.3)
Increase (decrease) in accruals and
other liabilities 55.8 19.1
------------- ---------------
Net cash provided by operating
activities 150.9 116.7
Investing activities
Capital expenditures (31.5) (27.8)
Proceeds from disposal of property and
equipment 11.2 7.4
------------- ---------------
Net cash used in investing activities (20.3) (20.4)
Financing activities
Net decrease in short-term borrowings (8.4) (19.1)
Purchase of treasury stock (83.5) (17.6)
Proceeds from stock purchase and option
plans 74.3 19.4
Excess tax benefits from stock-based
compensation 8.8 -
Cash dividends paid (47.7) (43.3)
------------- ---------------
Net cash used in financing activities (56.5) (60.6)
Effect of exchange rate changes on cash
and cash equivalents 1.5 (7.4)
------------- ---------------
Increase in cash and cash equivalents 75.6 28.3
Cash and cash equivalents at beginning
of period 170.4 150.0
------------- ---------------
Cash and cash equivalents at end of
period $ 246.0 $ 178.3
============= ===============
Supplemental cash flow disclosures
Cash paid for interest $ (15.0) $ (17.6)
Net cash refunded (paid) for income
taxes (35.7) 3.9
SNAP-ON INCORPORATED
Consolidated Balance Sheets
(Amounts in millions)
(unaudited)
September 30, December 31,
2006 2005
-------------- -------------
Assets
Cash and cash equivalents $ 246.0 $ 170.4
Accounts receivable -- net of allowances 502.4 485.9
Inventories 312.6 283.2
Deferred income tax benefits 81.4 76.3
Prepaid expenses and other assets 69.4 57.1
-------------- -------------
Total current assets 1,211.8 1,072.9
Property and equipment -- net 279.9 295.5
Deferred income tax benefits 66.8 57.8
Goodwill 419.6 398.3
Other intangibles -- net 65.2 64.0
Pension assets 20.7 20.6
Other assets 105.5 99.3
-------------- -------------
Total Assets $ 2,169.5 $ 2,008.4
============== =============
Liabilities
Accounts payable $ 168.0 $ 135.4
Notes payable and current maturities
of long-term debt 17.7 24.8
Accrued benefits 32.7 35.4
Accrued compensation 75.4 62.2
Franchisee deposits 43.3 44.4
Deferred subscription revenue 19.0 26.6
Income taxes 36.5 33.1
Accrued litigation settlement 38.0 -
Other accrued liabilities 169.4 144.2
-------------- -------------
Total current liabilities 600.0 506.1
Long-term debt 198.1 201.7
Deferred income taxes 73.1 75.3
Retiree health care benefits 89.3 90.8
Pension liabilities 107.1 92.7
Other long-term liabilities 70.5 79.6
-------------- -------------
Total Liabilities 1,138.1 1,046.2
-------------- -------------
Shareholders' Equity
Common stock 67.1 67.0
Additional paid-in capital 120.8 113.3
Retained earnings 1,158.2 1,143.8
Accumulated other comprehensive income
(loss) (8.4) (56.6)
Grantor Stock Trust at fair market value (37.8) (120.3)
Treasury stock at cost (268.5) (185.0)
-------------- -------------
Total Shareholders' Equity 1,031.4 962.2
-------------- -------------
Total Liabilities and Shareholders'
Equity $ 2,169.5 $ 2,008.4
============== =============
SNAP-ON INCORPORATED
Reconciliation of Non-GAAP Financial Measures
(Amounts in millions, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
---------------------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
1) Operating earnings
As reported $ 46.2 $ 42.8 $ 105.7 $ 124.4
Litigation settlement
pretax - - 38.0 -
--------- --------- --------- ---------
As adjusted $ 46.2 $ 42.8 $ 143.7 $ 124.4
========= ========= ========= =========
2) Net earnings
As reported $ 28.2 $ 21.0 $ 62.1 $ 65.5
Litigation settlement, net
of tax of $14.6 million - - 23.4 -
U.S. tax impact from
repatriation of foreign
earnings - 2.8 - 2.8
--------- --------- --------- ---------
As adjusted $ 28.2 $ 23.8 $ 85.5 $ 68.3
========= ========= ========= =========
Diluted EPS
As reported $ 0.48 $ 0.36 $ 1.05 $ 1.12
Litigation settlement, net
of tax of $14.6 million - - 0.40 -
U.S. tax impact from
repatriation of foreign
earnings - 0.05 - 0.05
--------- --------- --------- ---------
As adjusted $ 0.48 $ 0.41 $ 1.45 $ 1.17
========= ========= ========= =========
3) Snap-on Tools Group
Segment operating earnings,
as reported $ 15.7 $ 20.1 $ 22.4 $ 61.6
Litigation settlement
pretax - - 38.0 -
--------- --------- --------- ---------
As adjusted $ 15.7 $ 20.1 $ 60.4 $ 61.6
========= ========= ========= =========
Snap-on is providing the above reconciliation of non-GAAP financial
measures as management believes that these non-GAAP measures provide
a more meaningful year-over-year comparison of the company's 2006
operating performance. The non-GAAP measures exclude the estimated
$38.0 million pretax litigation settlement charge recorded in the
second quarter of 2006 in the Snap-on Tools Group, and the impact of
the higher U.S. income tax expense recorded in the third quarter of
2005 related to the repatriation of foreign earnings under the
American Jobs Creation Act.
SOURCE: Snap-on Incorporated
Snap-on Incorporated
Martin M. Ellen, 262-656-6462 (Investors)
Richard Secor, 262-656-5561 (Media)
www.snapon.com