-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Opg2rSnJZHpv+Ldrp+d5bxB0YC/AYycVn2YGOsVGkyz/+kfZkqyydGNHqhBSbxE5 k1ailYIzx9DOiUP+8J6rZg== 0000897069-02-000231.txt : 20020415 0000897069-02-000231.hdr.sgml : 20020415 ACCESSION NUMBER: 0000897069-02-000231 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011229 FILED AS OF DATE: 20020325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SNAP ON INC CENTRAL INDEX KEY: 0000091440 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 390622040 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07724 FILM NUMBER: 02584462 BUSINESS ADDRESS: STREET 1: 10801 CORPORATE DRIVE CITY: KENOSHA STATE: WI ZIP: 53141-1430 BUSINESS PHONE: 4146565200 MAIL ADDRESS: STREET 1: 10801 CORPORATE DRIVE CITY: KENOSHA STATE: WI ZIP: 53141 FORMER COMPANY: FORMER CONFORMED NAME: SNAP ON TOOLS CORP DATE OF NAME CHANGE: 19920703 10-K405 1 pdm280a.txt FORM 10-K/405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-7724 SNAP-ON INCORPORATED (Exact name of registrant as specified in its charter) Delaware 39-0622040 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10801 Corporate Drive, Pleasant Prairie, Wisconsin 53158-1603 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (262) 656-5200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered - ------------------- ------------------------------------ Common stock, $1 par value New York Stock Exchange Preferred stock purchase rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of the registrant at February 25, 2002: $1,957,473,238 Number of shares outstanding of each of the registrant's classes of common stock at February 25, 2002: Common stock, $1 par value, 58,037,218 shares Documents incorporated by reference - ----------------------------------- Portions of Snap-on's Annual Report to Shareholders for the fiscal year ended December 29, 2001, are incorporated by reference into Parts I, II and IV of this report. Portions of Snap-on's Proxy Statement, dated March 15, 2002, prepared for the Annual Meeting of Shareholders scheduled for April 25, 2002, are incorporated by reference into Part III of this report. TABLE OF CONTENTS Page ---- PART I Item 1. Business.......................................................3 Item 2. Properties....................................................10 Item 3. Legal Proceedings.............................................12 Item 4. Submission of Matters to a Vote of Security Holders...........12 Item 4.1 Executive Officers of the Registrant..........................12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................................13 Item 6. Selected Financial Data.......................................13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................13 Item 7A. Qualitative and Quantitative Disclosures About Market Risk....13 Item 8. Financial Statements and Supplementary Data...................14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................14 PART III Item 10. Directors and Executive Officers of the Registrant............15 Item 11. Executive Compensation........................................15 Item 12. Security Ownership of Certain Beneficial Owners and Management...............................................15 Item 13. Certain Relationships and Related Transactions................15 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................16 Signature Pages..............................................................17 Exhibit Index................................................................19 2 PART I Item 1: Business Snap-on Incorporated ("Snap-on") was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of high-quality tool, diagnostic and equipment solutions for professional tool and equipment users. Snap-on's mission is to delight its customers - professional tool and equipment users worldwide - by providing innovative, productivity-enhancing products, services and solutions. Product lines include hand and power tools, tool storage, shop equipment, saws and cutting tools, pruning tools, under-hood diagnostics equipment, under-car equipment, safety-testing equipment, collision repair equipment, vehicle service information, business management systems, repair services, and other solutions for vehicle service, industrial, government and agricultural customers, and commercial applications, including construction and electrical. Snap-on's customers include professional automotive technicians, shop owners, franchised and chain vehicle service centers, vehicle and equipment manufacturers and other industrial, agricultural, and commercial tool and equipment users worldwide. Snap-on markets its products and brands through multiple distribution channels in more than 150 countries. Snap-on's largest geographic markets include the United States, Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom. The originator of the dealer van distribution channel, Snap-on also reaches its customers through company direct and distributor channels. Snap-on began selling product via the Internet in 2000 as part of its "Store Without Walls" vision, which offers both current and prospective customers online, around-the-clock access to purchase Snap-on(R) products. Snap-on has two business segments: the Snap-on Dealer Group, which serves the worldwide dealer van channel, and the Commercial and Industrial Group, which serves the non-dealer tool and equipment products businesses. Snap-on's segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. These two segments derive revenues primarily from the sale of tools and equipment. In addition to its manufacturing, marketing and distribution operations, Snap-on also offers extended-credit financing for the purchase of its products through it wholly owned credit subsidiaries and through a 50%-owned financial services joint venture. For additional information about Snap-on's business segments, customers, domestic and international operations and products and services, see Note 17 entitled "Segments" on pages 43 and 44 of Snap-on's 2001 Annual Report, incorporated herein by reference. Products and Services Snap-on derives revenue from the manufacture, marketing and distribution of its products and related services. Snap-on's two business segments offer a broad line of products and complementary services that can be divided into two groups: tools and equipment. The following table shows the consolidated sales of these product groups in the last three years: Product Group Net Sales --------------------------------------------- (Amounts in millions) 2001 2000 1999 ------------ ------------ ------------- Tools $1,291.1 $1,343.5 $1,149.3 Equipment 804.6 832.2 796.3 ------------ ------------ ------------- $2,095.7 $2,175.7 $1,945.6 ============ ============ ============= The tools product group includes hand tools, power tools and tool storage products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets, saws and cutting tools, pruning tools and other similar products. Power tools include pneumatic (air), cordless (battery) and corded (electric) tools such as impact wrenches, ratchets, chisels, drills, sanders, polishers and similar products. Tool storage units include tool chests, roll cabinets and other similar products. The majority of products are manufactured by Snap-on and in completing the product line, some items are purchased from external manufacturers. 3 The equipment product group includes hardware and software solutions for the diagnosis and service of automotive and industrial equipment. Products include engine analyzers, air conditioning service equipment, brake service equipment, wheel balancing and alignment equipment, transmission troubleshooting equipment, safety-testing equipment, battery chargers, lifts and hoists, diagnostics equipment service and collision repair equipment. Also included are service and repair information products, online diagnostics services, management systems, point-of-sale systems, integrated systems for vehicle repair shops, and purchasing facilitation services. Snap-on supports the sale of its diagnostics and shop equipment by offering training programs, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on. Tools and equipment are marketed under a number of brand names and trademarks, many of which are well known in the vehicle service and industrial markets served. Some of the major trade names and trademarks and the products and services with which they are associated include the following: Trademarks Products and Services ---------- ---------------------- Snap-on Hand tools, power tools, tool storage units, diagnostics and certain equipment Blue-Point Hand tools, power tools, tool storage units Acesa Hand tools BAHCO Hand tools Fish and Hook (design) Hand tools Irimo Hand tools Lindstrom Hand tools Palmera Hand tools Pradines Hand tools Williams Hand tools ATI Tools and equipment Sioux Power tools Sun Diagnostics and service equipment White Equipment to recover, recycle and recharge refrigerant in vehicle air-conditioning systems and other fluid handling equipment John Bean Under-car and wheel-service equipment Wheeltronic Hoists and lifts for vehicle service shops Texo Hoists and lifts for vehicle service shops Hofmann Wheel balancers, lifts, tire changers and aligners G.S. Wheel-service equipment Cartec Safety-testing and other equipment Blackhawk Collision repair equipment Brewco Collision repair equipment Mitchell Repair and service information and shop management systems 4 Trademarks Products and Services ---------- --------------------- ShopKey Repair and service information and shop management systems EquiServ Equipment maintenance and service Equipment Solutions Vehicle manufacturer facilitation services Income is also derived from the financing of Snap-on's products through a 50%-owned financial services joint venture and through its wholly owned credit subsidiaries. Snap-on utilizes various financing programs to facilitate the sales of its products. To reduce asset intensity from financing activities, Snap-on established a joint venture in January 1999 with Newcourt Financial USA Inc. ("Newcourt") now CIT Group, Inc., which was subsequently acquired by Tyco International Ltd. The joint venture, Snap-on Credit LLC ("the LLC"), is a 50%-owned joint venture that provides financial services to Snap-on's U.S. dealer and customer network and to Snap-on's industrial and other customers. As a result of establishing the joint venture, Snap-on effectively outsourced to the LLC its domestic captive credit function that was previously managed by a wholly owned Snap-on subsidiary, Snap-on Credit Corporation. Additional information about the LLC is provided in Note 7 entitled "Snap-on Credit LLC Joint Venture" on pages 34 and 35 of Snap-on's 2001 Annual Report, incorporated herein by reference. The LLC originates loans primarily in three ways. Extended-term contracts are offered to technicians to enable them to purchase tools and equipment on an extended-term payment plan, generally with an average term of 32 months. Lease financing is offered to shop owners, both independents and national chains, who purchase equipment items. The duration of lease contracts is often two to five years. Financing options are also made available to dealers to meet a number of financing needs, including van and truck leases, working capital loans and loans to enable new dealers to fund the purchase of the franchise. The duration of these contracts can be up to 10 years. These loans are secured by the underlying tools or equipment financed and other dealer assets. Currently, the majority of finance income is derived from the vehicle service industry in North America. Internationally, Snap-on continues to directly provide financing to its dealer and customer network through its wholly owned credit subsidiaries. Distribution and Sales Snap-on markets and distributes its products and related services principally to professional tool and equipment users around the world. The largest two market sectors are the vehicle service and repair sector, and the industrial sector. Vehicle Service and Repair Sector The vehicle service and repair sector has three main customer groups: professional technicians who purchase tools and equipment for themselves; service and repair shop owners and managers - including independent shops, national chains and automotive dealerships - who purchase equipment for use by multiple technicians within a service or repair facility; and vehicle manufacturers. Snap-on provides innovative tool and equipment solutions, as well as technical sales support and training, to meet technicians' evolving needs. Snap-on's dealer van distribution system offers technicians the convenience of purchasing quality tools with minimal disruption of their work routine. Snap-on also serves owners and managers of shops where technicians work with tools, diagnostics equipment, repair and service information, and shop management products. Snap-on provides vehicle manufacturers with products and services including tools, consulting services and facilitation services. Snap-on's facilitation services include product procurement, distribution and administrative support to customers for their dealerships' equipment programs. Major challenges for Snap-on and the vehicle service and repair industry include the increasing rate of technological change within motor vehicles and the resulting impact on the businesses of both suppliers and customers that is necessitated by such change. 5 Industrial Sector Snap-on markets its products to a wide variety of industrial customers including industrial maintenance and repair facilities; manufacturing and assembly operations; government facilities; schools; and original equipment manufacturers that require instrumentation or service tools and equipment for their products. Major challenges in the industrial sector include a highly competitive, cost-conscious environment, and a trend toward customers making all of their tool purchases through one integrated supplier. Snap-on believes it is currently a meaningful participant in the market sector for industrial tools and equipment. Distribution Channels Snap-on serves customers primarily through three channels of distribution: dealer and tech representatives ("reps"), company direct sales and distributors. The following discussion represents Snap-on's general approach in each channel, and is not intended to be all-inclusive. Dealer and Tech Rep Organizations In the United States, the majority of sales to the vehicle repair industry are conducted through Snap-on's dealer network and its tech rep organization. Snap-on's mobile dealer van network ("dealers") primarily covers vehicle service technicians and shop owners, providing weekly contact at the customer's place of business. Dealers' sales are concentrated in hand and power tools, tool storage units and small diagnostic and shop equipment, which can easily be transported in a van and demonstrated during a brief sales call. Dealers purchase Snap-on's products at a discount from suggested retail prices and resell them at prices of the dealer's choosing. Although some dealers have sales areas defined by other methods, most U.S. dealers are provided a list of places of business that serves as the basis of the dealer's sales route. Since 1991, all new U.S. dealers, and a majority of the pre-1991 U.S. dealers, have been enrolled as franchisees of Snap-on. Snap-on also provides franchisees the opportunity to add a second van to their franchise. Snap-on charges nominal initial and ongoing monthly license fees. Through the LLC, financial assistance is provided to franchised dealers, which could include financing for initial license fees, inventory, the van, revolving accounts receivable, equipment, fixtures, other expenses and an initial checking account deposit. At year-end 2001, approximately 92% or 3,207 of all U.S. dealers were enrolled as franchisees, versus approximately 91% or 3,083 dealers in 2000. Snap-on supports its dealers with an extensive field organization of branch offices, field managers, and service and distribution centers. Snap-on also provides sales training, customer and dealer financial assistance, and marketing and product promotion programs to strengthen dealer sales. In the United States, a National Dealer Advisory Council, composed of and elected by dealers, assists Snap-on in identifying and implementing enhancements to the franchise program. In the United States, dealers are supported by the tech rep employee sales force. Tech reps are specialists who demonstrate and sell higher-price-point diagnostics and shop equipment, as well as shop management information systems. Tech reps work independently and with dealers to identify and generate sales leads among vehicle service shop owners. Tech reps are compensated primarily on the basis of commission; dealers receive a brokerage fee from certain sales made by the tech reps to the dealer's customers. Most products sold through the dealer and tech rep organization are sold under the Snap-on or Sun brand names. Snap-on has replicated its U.S. dealer van method of distribution in certain other countries, including Australia, Canada, Germany, Mexico, Benelux Countries, South Africa, Japan and the United Kingdom. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians and shop owners. Snap-on markets products in certain other countries through its subsidiary, Snap-on Tools International, Ltd., which sells to foreign distributors under license or contract with Snap-on. 6 Company Direct Sales In the United States, a growing proportion of shop equipment sales under the Sun, John Bean, Wheeltronic, White and Hofmann brands are made by a direct sales force that has responsibility for national accounts. As the automotive service and repair industry consolidates (with more business conducted by national chains, automotive dealerships and franchised service centers), these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of equipment and diagnostic products and services. Snap-on also sells these products and services directly to vehicle manufacturers. Tools and equipment are marketed to industrial and governmental customers in the United States through industrial sales representatives, who are employees, and independent industrial distributors. In most markets outside the United States, industrial sales are conducted through distributors. The sales representatives focus on industrial customers whose main purchase criteria are quality and service. At the end of 2001, Snap-on had industrial sales representatives in the United States, Australia, Canada, Japan, Mexico, Puerto Rico and some European countries, with the United States representing the majority of Snap-on's total industrial sales. Distributors Sales of certain tools and equipment are made through vehicle service and industrial distributors who purchase the items from Snap-on and resell them to the end users. Products supplied by Bahco, under the Bahco, Fish and Hook (design), Sandflex, Pradines and Lindstrom brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Under-car and other vehicle service equipment, sold through distributors primarily under brands including John Bean and Hofmann, as well as hand tools under the Irimo, Palmera and Acesa brands, are differentiated from those products sold through the dealer, tech rep and direct sales channels. Sun-branded equipment is marketed through distributors in South America and Asia, and through both a direct sales force and distributors in Europe. E-commerce Snap-on's e-commerce development initiatives are expected to allow Snap-on to match the capabilities of the Internet with Snap-on's existing brand sales and distribution strengths and to reach new and under-served customer segments. Snap-on began selling product via the Internet in 2000 as part of its "Store Without Walls" vision, which offers both current and prospective customers online, around-the-clock access to purchase Snap-on(R) products through its public Web site, snapon.com. The site features an online catalog containing more than 14,000 products, including Snap-on hand tools, power tools, tool storage units and diagnostic equipment available to consumers and professionals in the United States. In 2001, Snap-on extended online sales to select new regions of the world, and by the end of the year approximately 70,000 customers had registered on the site, including more than 6,700 industrial accounts. In addition to its public website, Snap-on will begin to host individual dealer Web sites in 2002 to help dealers extend their industry-leading service. These initiatives, and other system enhancements under development, are designed to further leverage the one-on-one relationships and service Snap-on has with its current as well as prospective customers. Through the development of its business-to-business and business-to-consumer capabilities, Snap-on and its dealers will be enlarging communications with customers on a real-time, 24-hour, 7-days a week basis. 7 Competition Snap-on competes on the basis of its product quality, service, brand awareness and technological innovation. While no one company competes with Snap-on across all of its product lines and distribution channels, various companies compete in one or more product categories and/or distribution channels. Snap-on believes that it is a leading manufacturer and distributor of tools and equipment, offering the broadest line of these products to the vehicle service industry. The major competitors selling to professional technicians in the vehicle service and repair sector through the mobile van channel include MAC Tools (The Stanley Works) and Matco (Danaher Corporation). Snap-on also competes with companies that sell through non-mobile van distributors including Facom (Fimalac), Sears, Roebuck and Co. and The Stanley Works. In the industrial sector, major competitors include Armstrong (Danaher Corporation), Cooper Industries, Inc. and Proto (The Stanley Works). The major competitors selling diagnostics and shop equipment to shop owners in the vehicle service and repair sector include Corghi S.p.A., Facom (Fimalac), Hennessy (Danaher Corporation), Hunter Engineering, OTC and Robinair (SPX Corporation), and Rotary and Chief Automotive (Dover Corporation). Raw Materials and Purchased Product Snap-on's supply of raw materials (including various grades and alloys of steel bars and sheets) and purchased components are readily available from numerous suppliers. Approximately 83% of 2001 consolidated net sales consisted of products manufactured by Snap-on, while the remaining 17% consisted of products purchased from outside suppliers. No single supplier's products accounted for a material portion of 2001 consolidated net sales. Patents, Trademarks and Other Intellectual Property Snap-on vigorously pursues and relies on patent protection to protect its inventions and its position in its markets. As of December 29, 2001, Snap-on and its subsidiaries held 1,343 patents worldwide. No sales relating to any single patent represented a material portion of Snap-on's revenues in 2001. Examples of products that have features or designs that benefit from patent protection include engine analyzers, serrated jaw open-end wrenches, wheel alignment systems, wheel balancers, sealed ratchets, electronic torque wrenches, ratcheting screwdrivers, emissions-sensing devices and air conditioning equipment. Much of the technology used in the manufacture of vehicle service tools and equipment is in the public domain. Snap-on relies primarily on trade secret protection to protect proprietary processes used in manufacturing. Methods and processes are patented when appropriate. Copyright protection is also utilized when appropriate. Trademarks used by Snap-on are of continuing importance to Snap-on in the marketplace. Trademarks have been registered in the United States and more than 100 other countries, and additional applications for trademark registrations are pending. Snap-on vigorously polices proper use of its trademarks. Snap-on's right to manufacture and sell certain products is dependent upon licenses from others, however, these products do not represent a material portion of Snap-on's sales. 8 Working Capital Because most of Snap-on's business is not seasonal and its inventory needs are relatively constant, no unusual working capital needs arise during the year. Snap-on's financial condition and use of working capital is discussed in "Management's Discussion and Analysis," on pages 23 through 25 of Snap-on's 2001 Annual Report and is incorporated herein by reference. Snap-on does not depend on any single customer, small group of customers or government for any material part of its sales, and has no significant backlog of orders. Environment Snap-on complies with applicable environmental control requirements in its operations. Compliance has not had, and Snap-on does not for the foreseeable future expect it to have, a material effect upon Snap-on's capital expenditures, earnings or competitive position. Employees At the end of February 2002, Snap-on employed approximately 13,500 people, of whom approximately 40% are engaged in manufacturing activities. 9 Item 2: Properties Snap-on maintains both leased and owned manufacturing, warehouse distribution and office facilities throughout the world. Snap-on believes that its facilities are well maintained and have adequate capacity to meet its present and foreseeable future demand. Snap-on's U.S. facilities occupy approximately 4.4 million square feet, of which 73% is owned, including its corporate and general offices located in Pleasant Prairie and Kenosha, Wisconsin. Snap-on's facilities outside the United States contain approximately 4.0 million square feet, of which 68% is owned. During 2001, through its restructuring efforts, Snap-on recorded charges for the consolidation or closure of 35 facilities, comprised of nine manufacturing or distribution facilities and 26 sales or administrative offices. The following table provides information about each of Snap-on's principal manufacturing locations and distribution centers (exceeding 50,000 square feet): Location Type of property Owned/Leased - -------- ---------------- ------------ U.S. Locations: Conway, Arkansas Manufacturing Owned City of Industry, California Manufacturing Leased Escondido, California Manufacturing Owned Poway, California Distribution and manufacturing Leased San Jose, California Manufacturing Leased Columbus, Georgia Distribution Owned Crystal Lake, Illinois Distribution Owned Mt. Carmel, Illinois Manufacturing Owned Algona, Iowa Manufacturing Owned Sioux City, Iowa Manufacturing Owned Olive Branch, Mississippi Distribution Leased and owned Carson City, Nevada Distribution Leased and owned Murphy, North Carolina Manufacturing Leased Robesonia, Pennsylvania Distribution Owned Elizabethton, Tennessee Manufacturing Owned Johnson City, Tennessee Manufacturing Owned Elkhorn, Wisconsin Manufacturing Owned Kenosha, Wisconsin Manufacturing Owned Milwaukee, Wisconsin Manufacturing Owned Non-U.S. Locations: Santo Tome, Argentina Manufacturing Owned Santa Barbara D'oeste, Brazil Manufacturing Owned Mississauga, Canada Manufacturing Leased Newmarket, Canada Distribution and manufacturing Owned Kettering, England Distribution Owned Rotherham, England Manufacturing Owned King's Lynn, England Distribution and manufacturing Owned Pfungstadt, Germany Manufacturing Leased Unterneukirchen, Germany Manufacturing Leased 10 Location Type of property Owned/Leased - -------- ---------------- ------------ Wuppertal, Germany Manufacturing Leased Sopron, Hungary Manufacturing Owned Correggio, Italy Manufacturing Owned Juarez, Mexico Manufacturing Leased Helmond, the Netherlands Distribution Owned Veenendaal, the Netherlands Distribution Leased Vila do Conde, Portugal Manufacturing Owned Irun, Spain Manufacturing Owned Urretxu, Spain Manufacturing Owned Vitorio, Spain Distribution and manufacturing Owned Bollnas, Sweden Manufacturing Owned Edsbyn, Sweden Manufacturing Owned Enkoping, Sweden Manufacturing Owned Lidkoping, Sweden Manufacturing Owned Sandviken, Sweden Distribution Leased 11 Item 3: Legal Proceedings During 2001, Snap-on entered into a binding arbitration process with SPX Corporation related to infringement of patents. The arbitrator ruled in favor of SPX and Snap-on paid damages of $44.0 million in January 2002 to SPX. Further information is described in Note 15 entitled "Commitments and Contingencies" on page 42 of Snap-on's 2001 Annual Report, which is incorporated herein by reference. Item 4: Submission of Matters to a Vote of Security Holders There was no matter submitted to a vote of the shareholders during the fourth quarter of the fiscal year ending December 29, 2001. Item 4.1: Executive Officers of the Registrant The executive officers of Snap-on, their ages as of December 29, 2001, their titles as of that date and positions held during the last five years are listed below. Robert A. Cornog (61) - Chairman since July 1991. President and Chief Executive Officer from July 1991 to April 2001. A Director since 1982. Dale F. Elliott (47) - President and Chief Executive Officer since April 2001. President - Diagnostics and Industrial from October 1998 to April 2001. President - Snap-on Industrial from February 1995 to October 1998. Prior to joining Snap-on, he was Vice President - Marketing at S-B Power Tool, a joint venture between the Skil division of Emerson Electric and then Robert Bosch GmbH from June 1984 to January 1995. A Director since 2001. Frederick D. Hay (57) - Senior Vice President - Operations since October 1998. Senior Vice President - Transportation from February 1996 to October 1998. Prior to joining Snap-on, he was President of the Interior Systems and Components Division of UT Automotive, a business unit of United Technologies Corporation, from December 1989 to January 1996. Donald S. Huml (55) - Senior Vice President - Finance and Chief Financial Officer since August 1994. Prior to joining Snap-on, he was Vice President and Chief Financial Officer of Saint-Gobain Corporation from December 1990 to August 1994. Michael F. Montemurro (53) - Senior Vice President and President - Worldwide Snap-on Dealer Group since November 2000. Senior Vice President - Transportation since October 1998. Senior Vice President - Financial Services and Administration from August 1994 to October 1998. Senior Vice President - Financial Services, Administration and Chief Financial Officer from April 1994 to August 1994. Senior Vice President - Finance and Chief Financial Officer from March 1990 to April 1994. Blaine A. Metzger (45) - Vice President and Controller since May 2001. Prior to joining Snap-on, he was Chief Financial Officer for Crenlo, Inc. a division of Dover Corporation from August 2000 to April 2001 and Vice President Financial Planning, Reporting and Finance Centers for CNH Global N.V. from November 1999 to March 2000. Prior to serving as vice president at CNH Global, he held several financial management positions at Case Corporation beginning in 1990. Susan F. Marrinan (53) - Vice President, Secretary and General Counsel since January 1992. There is no family relationship among the executive officers and there has been no involvement in legal proceedings during the past five years that would be material to the evaluation of the ability or integrity of any of the executive officers. Executive officers may be elected by the board of directors or appointed by the Chief Executive Officer at the regular meeting of the board of directors that follows the Annual Shareholders' Meeting, which is held in April each year, and at such other times as new positions are created or vacancies must be filled. 12 PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters Snap-on has undertaken stock repurchases from time to time to prevent dilution created by shares issued for employee and dealer stock purchase plans, stock options, and other corporate purposes, as well as to repurchase shares when market conditions are favorable. Snap-on repurchased 400,000 shares in 2001, following the repurchase of 1,019,500 shares in 2000 and 492,800 shares in 1999. Since 1997, Snap-on's board of directors has authorized the repurchase of up to $250 million of Snap-on's common stock. As of the end of 2001, Snap-on has remaining availability to repurchase up to an additional $133 million in common stock pursuant to the board's authorizations. The purchase of Snap-on common stock is at the company's discretion, subject to prevailing financial and market conditions. Since 1995, Snap-on has repurchased 9,989,583 shares. In 2001, Snap-on's average common stock repurchase price was $28.14. At December 29, 2001, Snap-on had 63,923,672 shares of common stock outstanding. This consists of 57,939,527 shares considered outstanding for purposes of computing earnings per share and an additional 5,984,145 shares held in a Grantor Stock Trust, which are considered outstanding for voting purposes but not for purposes of computing earnings per share. Snap-on's stock is listed on the New York Stock Exchange under the ticker symbol SNA. As of December 29, 2001, there were 10,819 registered holders of Snap-on common stock. Snap-on's common stock high and low prices for the last two years by quarter were as follows: Common Stock High/Low Prices - Unaudited (Amounts in dollars) Quarter 2001 2000 - ------------- ----------------------- ---------------------- High Low High Low ---------- --------- -------- --------- First $30.75 $27.38 $27.69 $20.88 Second $30.93 $24.16 $30.31 $24.38 Third $27.31 $21.65 $32.44 $21.81 Fourth $34.21 $21.68 $28.50 $21.00 Additional information required by Item 5 is contained in the section entitled "Quarterly Financial Information" on page 45 of Snap-on's 2001 Annual Report and is incorporated herein by reference. Item 6: Selected Financial Data The information required by Item 6 is contained in the section entitled "Six-year Data" on page 46 of Snap-on's 2001 Annual Report and is incorporated herein by reference. Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by Item 7 is contained in the section entitled "Management's Discussion and Analysis" on pages 17 through 27 of Snap-on's 2001 Annual Report and is incorporated herein by reference. Item 7A: Qualitative and Quantitative Disclosures About Market Risk The information required by Item 7A is contained in the section entitled "Market, Credit and Economic Risks" on pages 25 and 26 and in Note 10 entitled "Financial Instruments" on pages 37 and 38 of Snap-on's 2001 Annual Report and is incorporated herein by reference. 13 Item 8: Financial Statements and Supplementary Data Financial statements and supplementary data required by Item 8 is contained in Snap-on's 2001 Annual Report appearing in the sections entitled "Consolidated Statements of Earnings" on page 28, "Consolidated Balance Sheets" on page 29, "Consolidated Statements of Shareholders' Equity and Comprehensive Income" on page 30, "Consolidated Statements of Cash Flows" on page 31, "Notes to Consolidated Financial Statements" on pages 32 through 44, "Quarterly Financial Information" appearing on page 45, and "Report of Independent Public Accountants" on page 47, and is incorporated herein by reference. Snap-on's 2001 earnings before cumulative effect of a change in accounting principle and related earnings per share by quarter were as follows: Earnings - Unaudited (Amounts in millions except per share data) Earnings (loss) before Earnings (loss) Earnings (loss) Quarter Cumulative Effect per Share - Basic per Share - Diluted - -------- -------------------- ------------------- --------------------- First $ 29.4 $ .51 $ .51 Second $ 8.9 $ .15 $ .15 Third $ .6 $ .01 $ .01 Fourth $ (17.4) $ (.30) $ (.30) Additionally, Snap-on's gross profit for the last two years by quarter was as follows: Gross Profit* - Unaudited (Amounts in millions) Quarter 2001 2000 - ------------- ------------ ------------ First $243.7 $248.9 Second $239.3 $264.8 Third $222.4 $233.0 Fourth $243.6 $250.1 *Gross Profit equals net sales less cost of goods sold and cost of goods sold - non-recurring charges. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 14 PART III Item 10: Directors and Executive Officers of the Registrant The identification of Snap-on's directors as required by Item 10 is contained in Snap-on's Proxy Statement, dated March 15, 2002, in the section entitled "Proposal to be Voted on: Election of Directors" on page 4 and in the section entitled "Board of Directors-Directors Not Standing for Election" on page 5, and is incorporated herein by reference. With respect to information about Snap-on's executive officers, see Item 4.1, "Executive Officers of the Registrant," at the end of Part I of this report. The disclosure concerning Section 16(a) filing compliance pursuant to Item 405 of Regulation S-K is contained in Snap-on's Proxy Statement, dated March 15, 2002, in the section entitled "Other Information" on page 24, and is incorporated herein by reference. Item 11: Executive Compensation The information required by Item 11 is contained in Snap-on's Proxy Statement, dated March 15, 2002, in the section entitled "Executive Compensation" on pages 15 through 20 and in the section entitled "Other Information" on pages 21 through 24, and is incorporated herein by reference. Item 12: Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is contained in Snap-on's Proxy Statement, dated March 15, 2002, in the section entitled "Security Ownership of Management and Certain Beneficial Owners" contained on pages 8 and 9, and is incorporated herein by reference. Item 13: Certain Relationships and Related Transactions None. 15 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K Item 14(a): Documents filed as part of this report: 1. List of Financial Statements The following consolidated financial statements of Snap-on and the Report of Independent Public Accountants thereon, contained on pages 28 through 44 and on page 47 of Snap-on's 2001 Annual Report to its shareholders for the year ended December 29, 2001, are incorporated by reference in Item 8 of this report: Consolidated Statements of Earnings for the years ended December 29, 2001, December 30, 2000, and January 1, 2000. Consolidated Balance Sheets as of December 29, 2001, and December 30, 2000. Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 29, 2001, December 30, 2000, and January 1, 2000. Consolidated Statements of Cash Flows for the years ended December 29, 2001, December 30, 2000, and January 1, 2000. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. 2. Financial Statement Schedules The following consolidated financial statement schedules of Snap-on are included in Item 14(d) as a separate section of this report: Schedule II Valuation and Qualifying Accounts and Reserves - page 22 herein. Report of Independent Public Accountants on Financial Statement Schedule - page 23 herein. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are inapplicable and, therefore, have been omitted, or are included in Snap-on's 2001 Annual Report in the Notes to Consolidated Financial Statements for the years ended December 29, 2001, December 30, 2000, and January 1, 2000, which are incorporated by reference in Item 8 of this report. 3. List of Exhibits The exhibits filed with or incorporated by reference in this report are as specified in the exhibit index under Item 14(c) - pages 19 through 21 herein. Item 14(b): Reports on Form 8-K During the fourth quarter of 2001, there were no matters reported on Form 8-K. Subsequent to year-end, Snap-on reported on Form 8-K the following: Date Filed Date of Report Item - ---------- -------------- ---- January 4, 2002 December 28, 2001 Item 5. Snap-on filed a press release announcing the conclusion of the arbitration with SPX. 16 SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, Snap-on has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SNAP-ON INCORPORATED By: /s/ Dale F. Elliott Date: March 22, 2002 ------------------------------------------------------ -------------- Dale F. Elliott, President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Snap-on and in the capacities as indicated. /s/ Dale F. Elliott Date: March 22, 2002 ------------------------------------------------------ -------------- Dale F. Elliott, President and Chief Executive Officer and Director /s/ Donald S. Huml Date: March 22, 2002 ------------------------------------------------------ -------------- Donald S. Huml, Principal Financial Officer, and Senior Vice President - Finance /s/ Blaine A. Metzger Date: March 22, 2002 ------------------------------------------------------ -------------- Blaine A. Metzger, Principal Accounting Officer, Vice President and Controller 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Snap-on and in the capacities as indicated. By: /s/ Bruce S. Chelberg Date: March 22, 2002 ------------------------------------------------------ -------------- Bruce S. Chelberg, Director By: /s/ Robert A. Cornog Date: March 22, 2002 ------------------------------------------------------ -------------- Robert A. Cornog, Chairman of the Board of Directors By: /s/ Roxanne J. Decyk Date: March 22, 2002 ------------------------------------------------------ -------------- Roxanne J. Decyk, Director By: /s/ Leonard A. Hadley Date: March 22, 2002 ------------------------------------------------------ -------------- Leonard A. Hadley, Director By: /s/ Arthur L. Kelly Date: March 22, 2002 ------------------------------------------------------ -------------- Arthur L. Kelly, Director By: /s/ George W. Mead Date: March 22, 2002 ------------------------------------------------------ -------------- George W. Mead, Director By: /s/ Jack D. Michaels Date: March 22, 2002 ------------------------------------------------------ -------------- Jack D. Michaels, Director By: /s/ Frank S. Ptak Date: March 22, 2002 ------------------------------------------------------ -------------- Frank S. Ptak, Director By: /s/ Edward H. Rensi Date: March 22, 2002 ------------------------------------------------------ -------------- Edward H. Rensi, Director By: /s/ Richard F. Teerlink Date: March 22, 2002 ------------------------------------------------------ -------------- Richard F. Teerlink, Director By: Date: ------------------------------------------------------ --------------- Lars Nyberg, Director* *Lars Nyberg was not a director during 2001. He first became a director in February 2002, and is listed here because he was a director at the time of filing. Under the circumstances, as a majority of the directors had signed, he was not required to sign and the Company did not request him to sign this document. 18 EXHIBIT INDEX Item 14(c): Exhibits (3) (a) Restated Certificate of Incorporation of the Corporation as amended through April 25, 1997 (incorporated by reference to Exhibit 3(a) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 2, 1998 (Commission File No. 1-7724)) (b) Bylaws of the Corporation, effective as of January 26, 1996 (incorporated by reference to Exhibit 3(b) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 1996 (Commission File No. 1-7724)) (4) (a) Rights Agreement between the Corporation and First Chicago Trust Company of New York, effective as of August 22, 1997 (incorporated by reference to Snap-on's Form 8-A12B dated October 17, 1997 (Commission File No. 1-7724)) (b) Amendment No. 1 to the Rights Agreement dated as of September 24, 2001 between the Corporation and EquiServe Trust Company, N.A. (successor to First Chicago Trust Company of New York) (incorporated by reference to Snap-on's Form 8-A/A dated September 26, 2001 (Commission File No. 1-7724)) Snap-on and its subsidiaries have no long-term debt agreement for which the related outstanding debt exceeds 10% of consolidated total assets as of December 29, 2001. Copies of debt instruments for which the related debt is less than 10% of consolidated total assets will be furnished to the Commission upon request. (10) Material Contracts (a) Amended and Restated Snap-on Incorporated 1986 Incentive Stock Program (incorporated by reference to Exhibit 10(a) of Snap-on's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (Commission File No. 1-7724))* (b) Snap-on Incorporated 2001 Incentive Stock and Awards Plan (incorporated by reference to Appendix B to Snap-on's Proxy Statement on Schedule 14A filed on March 16, 2001 (Commission File No. 1-7724))* (c) Form of Restated Senior Officer Agreement between the Corporation and each of Dale F. Elliott, Frederick D. Hay, Donald S. Huml and Michael F. Montemurro (incorporated by reference to Exhibit 10(b) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-7724))* (d) Form of Restated Executive Agreement between the Corporation and each of Alan T. Biland, Sharon M. Brady, Richard V. Caskey, Jeffrey N. Eggert, Gary S. Henning, Nicholas L. Loffredo, Denis J. Loverine, Susan F. Marrinan and Blaine A. Metzger (incorporated by reference to Exhibit 10(b) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-7724))* (e) Deferred Compensation Waiver and Insurance Benefit Agreement between the Corporation and Robert A. Cornog dated January 30, 1998 (incorporated by reference to Exhibit 10(d) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 2, 1999 (Commission File No. 1-7724))* (f) Deferred Compensation Waiver and Insurance Benefit Agreement between the Corporation and Branko M. Beronja dated December 21, 1998 (incorporated by reference to Exhibit 10(e) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 2, 1999 (Commission File No. 1-7724))* (g) Deferred Compensation Waiver and Insurance Benefit Agreement between the Corporation and Frederick D. Hay dated September 27, 1999 (incorporated by reference to Exhibit 10(f) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (Commission File No. 1-7724))* 19 (h) Form of Indemnification Agreement between the Corporation and each of the Directors, Frederick D. Hay, Donald S. Huml, Susan F. Marrinan and Michael F. Montemurro effective October 24, 1997 (incorporated by reference to Exhibit 3(a) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 2, 1998 (Commission File No. 1-7724))* (i) Amended and Restated Snap-on Incorporated Directors' 1993 Fee Plan (incorporated by reference to Exhibit 10(h) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (Commission File No. 1-7724))* (j) Snap-on Incorporated Deferred Compensation Plan (as amended through March 13, 2002)*# (k) Snap-on Incorporated Supplemental Retirement Plan for Officers (incorporated by reference to Exhibit 10(j) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (Commission File No. 1-7724))* (l) Amended and Restated Benefit Trust Agreement between the Corporation and The Northern Trust Company, dated as of July 2, 1998 and amended and restated as of March 17, 2000 (incorporated by reference to Snap-on's Form 8-K dated March 17, 2000 (Commission File No. 1-7724)) (m) Form of Deferred Award Agreement between the Corporation and each of Robert A. Cornog, Alan T. Biland, Dale F. Elliott, Gary S. Henning, Frederick D. Hay, Donald S. Huml, Michael F. Montemurro and Susan F. Marrinan, dated March 1, 1999 and Form of Restricted Stock Agreement between the Corporation and David E. Cox, dated March 1, 1999 (incorporated by reference to Exhibit 10(l) to Snap-on's Annual Report on Form 10-K for the fiscal year ended January 1, 2000 (Commission File No. 1-7724))* (n) Five-year Credit Agreement between the Corporation and Salomon Smith Barney Inc., Banc One Capital Markets Inc. and the First National Bank of Chicago (incorporated by reference to Exhibit 10(a) to Snap-on's report on Form 10-Q for the quarterly period ended October 2, 1999 (Commission File No. 1-7724)) (o) 364-Day Credit Agreement between the Corporation and Salomon Smith Barney Inc., Banc One Capital Markets Inc. and the First National Bank of Chicago (incorporated by reference to Exhibit 10(a) to Snap-on's report on Form 10-Q for the quarterly period ended October 2, 1999 (Commission File No. 1-7724)) (p) Amended and Restated 364-Day Credit Agreement between the Corporation and Salomon Smith Barney Inc., Banc One Capital Markets, Inc., Citibank, N.A. and Bank One, N.A. (incorporated by reference to Exhibit 10.1 to Snap-on's report on Form 10-Q for the quarter ended September 29, 2001 (Commission File No. 1-7724)) (q) Amended and Restated Five Year Credit Agreement between the Corporation and Salomon Smith Barney Inc., Banc One Capital Markets Inc., Citibank, N.A. and Bank One, N.A. (incorporated by reference to Exhibit 10(o) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724)) (r) Agreement between Branko M. Beronja and the Corporation regarding various subsidiary director assignments and special project fees for 2000 and 2001 (incorporated by reference to Exhibit 10(q) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* (s) Retention and Recognition Agreement between Robert A. Cornog and the Corporation (incorporated by reference to Exhibit 10(r) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* 20 (t) Form of Severance Agreement between Donald S. Huml and the Corporation (incorporated by reference to Exhibit 10(s) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* (u) Form of Severance Agreements between the Corporation and each of Alan T. Biland, Sharon M. Brady, Dale F. Elliott, Frederick D. Hay, Nicholas L. Loffredo, Susan F. Marrinan and Michael F. Montemurro dated October 27, 2000 (incorporated by reference to Exhibit 10(t) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* (v) Form of Amendment to Deferred Compensation Waiver and Insurance Benefit Agreement between the Corporation and each of Robert A. Cornog, Branko M. Beronja and Fredrick D. Hay (incorporated by reference to Exhibit 10(u) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* (w) Form of Split-Dollar Insurance Plan Agreement between the Corporation and each of Robert A. Cornog, Branko M. Beronja, Dale F. Elliot, Fredrick D. Hay, Donald S. Huml, Susan F. Marrinan and Michael F. Montemurro (incorporated by reference to Exhibit 10(v) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* (x) Form of Amendment to Split-Dollar Insurance Plan Agreement between the Corporation and each of Robert A. Cornog, Branko M. Beronja, Dale F. Elliot, Fredrick D. Hay, Donald S. Huml, Susan F. Marrinan and Michael F. Montemurro (incorporated by reference to Exhibit 10(w) to Snap-on's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (Commission File No. 1-7724))* (y) Employment Agreement between the Corporation and Dale F. Elliott, effective as of April 27, 2001 (incorporated by reference to Exhibit 10.2 to Snap-on's report on Form 10-Q for the quarterly period ended June 30, 2001 (Commission File No. 1-7724))* (z) Executive Employment Agreement between Frederick D. Hay and the Corporation (incorporated by reference to Exhibit 10.2 to Snap-on's report on Form 10-Q for the quarterly period ended September 29, 2001 (Commission File No. 1-7724))* (12) Computation of Ratio of Earnings to Fixed Charges# (13) The following portions of Snap-on's Annual Report to Shareholders, which are incorporated by reference in this Form 10-K, are filed as Exhibit 13: Management's Discussion and Analysis, Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Shareholders' Equity and Comprehensive Income, Consolidated Statements of Cash Flows, Notes to Consolidated Financial Statements, Quarterly Financial Information, Six-year Data, Management's Responsibility for Financial Reporting and Report of Independent Public Accountants.# (21) Subsidiaries of the Corporation# (23) Consent of Independent Public Accountants# # Filed herewith. * Denotes management contract or compensatory plan or arrangement. 21 Item 14(d): Schedules SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (Amounts in millions) Balance at Balance at Beginning End of Description of Year Expenses Deductions(1) Other - Net Year - ------------------- ---------- -------- ------------- ----------- ---------- Allowance for doubtful accounts: Year ended December 29, 2001 $40.9 $31.4 $(32.7)* $ - $39.6 Year ended December 30, 2000 $27.8 $27.9 $(14.8) $ - $40.9 Year ended January 1, 2000 $29.2 $21.1 $(15.0) $(7.5)** $27.8 (1) This amount represents write-offs of bad debts. * The increase in bad debt write-offs in 2001 was primarily due to write-offs resulting from the exiting of a segment of the emissions-testing business and the termination of a European supplier relationship. ** Includes a $9.5 million reduction due to the sale of receivables to The CIT Group, Inc. 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in Snap-on Incorporated's ("Snap-on") Annual Report to Shareholders, incorporated by reference in this Form 10-K, and have issued our report thereon dated January 29, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed on page 22 is the responsibility of Snap-on's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois January 29, 2002 23 EX-10.(J) 3 pdm280c.txt DEFERRED COMPENSATION PLAN Exhibit (10)(j) SNAP-ON INCORPORATED DEFERRED COMPENSATION PLAN (as amended through March 12, 2002) Section 1. Establishment and Purposes 1.1 Establishment. Snap-on Incorporated established effective as of April 1, 1986, a deferred compensation plan for executives as described herein, known as the "SNAP-ON INCORPORATED DEFERRED COMPENSATION PLAN" (hereinafter called the "Plan"). Snap-on Incorporated hereby amends the Plan effective March 12, 2002. 1.2 Purposes. The purposes of this Plan are to (i) enable the Corporation to attract and retain persons of outstanding competence, (ii) provide a means whereby certain amounts payable by the Corporation to selected executives may be deferred to some future period and to provide such executives with a means to have deferred amounts treated as if invested in the Corporation's stock, thereby aligning their interests more closely with the interests of shareholders and (iii) effective July 1, 2001, provide a matching credit by the Corporation to certain elected officers of the Corporation and to provide such elected officers with alternatives as to the manner in which annual adjustments are made to their credited matching accounts. The Plan is intended to constitute an unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Section 2. Definitions 2.1 Definitions. Whenever used herein, the following terms shall have the meanings set forth below: (a) "Board" means the Board of Directors of the Corporation. (b) "Cause" means that prior to a Participant's termination of employment, he shall have (i) engaged in any act of fraud, embezzlement or theft in connection with his duties as an executive or in the course of employment with the Corporation or its subsidiaries; (ii) wrongfully disclosed any secret process or confidential information of the Corporation or its subsidiaries; or (iii) engaged in any Competitive Activity; and in any such case the act shall have been determined to have been materially harmful to the Corporation. A Participant's employment may not be terminated for Cause prior to the receipt by the Participant of a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for the purpose of considering such termination (after reasonable notice to the Participant and an opportunity for the Participant, together with the Participant's counsel, to be heard before the Board) finding that the Participant was guilty of conduct set forth in the definition of Cause, and specifying the particulars thereof in detail. In the event of a dispute regarding whether the Participant's employment has been terminated for Cause, no claim by the Corporation that Cause exists shall be given effect unless the Corporation establishes by clear and convincing evidence that Cause exists. (c) "Committee" means the Organization and Executive Compensation Committee of the Board or, as to compensation matters in respect of which it has authority, any other committee of the Board or director or officer of the Corporation that has authority of the Organization and Executive Compensation Committee of the Board relating to compensation matters. (d) "Common Stock" means the common stock, par value $1.00 per share, of the Corporation. (e) "Compensation" means the gross Salary and Incentive Compensation payable to a Participant during a Year and Other Compensation payable to a Participant. (i) Salary. "Salary" means all regular, basic compensation, before reduction for amounts deferred pursuant to this Plan or any other plan of the Corporation, payable in cash to a Participant for services during the Year, exclusive of any bonuses or incentive compensation, special fees or awards, allowances, or amounts designated by the Corporation as payments toward or reimbursement of expenses. (ii) Incentive Compensation. "Incentive Compensation" means the annual Incentive Compensation Plan payable in cash by the Corporation to a Participant in a Year. (iii) Other Compensation. "Other Compensation" means other compensation payable in cash and/or Common Stock or other property by the Corporation to a Participant in a Year, including without limitation compensation payable under the Amended and Restated Snap-on Incorporated 1986 Incentive Stock Program, as amended (the "Stock Program"), if the award of such compensation provides that the Participant may defer the compensation. (f) "Competitive Activity" shall mean the Participant's participation without the written consent of the Board in the management of any business enterprise which manufactures or sells any product or service competitive with any product or service of the Corporation or its subsidiaries. Competitive Activity shall not include the ownership of less than five (5) percent of the securities in any enterprise and exercise of any ownership rights related thereto. (g) "Corporation" means Snap-on Incorporated, a Delaware corporation. (h) "Fair Market Value" means the closing price of the Common Stock on the New York Stock Exchange on any particular date; provided, however, that for purposes of Section 17, Fair Market Value shall mean the closing price of the Common Stock on 2 the New York Stock Exchange on the date of the Change of Control (as defined therein) or, if higher, the highest price per share of Common Stock paid in the transaction giving rise to the Change of Control. (i) "Growth Increment" means the amount of interest earned on a Participant's deferred amounts. (j) "Participant" means an individual selected by the Committee for participation in the Plan. (k) "Snap-on 401(k) Plan" means the Snap-on Incorporated 401(k) Personal Savings Plan, as amended from time to time. (l) "Year" means a calendar year. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology used herein also shall include the feminine gender, and the definition of any term herein in the singular also shall include the plural. Section 3. Eligibility and Participation 3.1 Eligibility. The following persons shall be eligible to participate in the Plan: (a) the elected officers and appointed officers of the Corporation; (b) the elected officers and appointed officers of Snap-on Tools Company LLC; (c) the elected officers and appointed officers of any other direct or indirect subsidiary of the Corporation designated by the Committee from time to time; and (d) any other employee of the Corporation or any direct or indirect subsidiary of the Corporation designated by the Committee from time to time. 3.2 Ceasing Eligibility. In the event a Participant no longer meets the requirements for participation in this Plan, he shall become an inactive Participant. An inactive Participant shall retain all rights described under this Plan, except the right to make any further deferrals and the right to receive any further matching credits, until the time that he again meets the eligibility requirements of Section 3.1 (and, if applicable, Section 5.1). Section 4. Election to Defer 4.1 Deferral Election. (a) Subject to the following provisions, prior to the beginning of the Year, a Participant irrevocably may elect, by written notice to the Corporation, to defer all or a percentage of annual Salary, Incentive Compensation, or both Salary and Incentive Compensation. The amount to be deferred each Year must equal or exceed Five Thousand and No/100 Dollars ($5,000.00). 3 (i) With respect to Salary deferrals, the deferral percentage elected shall be applied to the Participant's Salary for each pay period of the Year to which the deferral election applies and must be made before November 30 of the year immediately preceding the Year for which such deferral election applies. (ii) With respect to Incentive Compensation deferrals, the deferral percentage elected shall apply only to the Participant's Incentive Compensation payable with respect to service to be performed in the Year and must be made before December 31 of such Year. (b) An individual who becomes a Participant at or after the beginning of the Year may irrevocably elect, by written notice to the Corporation, to defer all or a percentage of (i) the annual Salary earned by such Participant for such Year after such election, if such election is made within thirty (30) days after becoming a Participant, and (ii) the pro rata share of the Participant's Incentive Compensation, if any, payable with respect to service performed during such Year, if such election is made before December 31 of such Year. (c) If so provided in an award of Other Compensation, and subject to such restrictions and conditions as may be set forth in the award or imposed by the Corporation, a Participant irrevocably may elect, by written notice to the Corporation, to defer all or a percentage of such Other Compensation. 4.2 Deferral Period. (a) The Participant irrevocably shall select the deferral period for each separate deferral. The deferral period shall be for a specified number of Years or until a specified date. The deferral period shall not be less than five (5) Years. (b) However, notwithstanding the deferral period specified, payments of deferred amounts shall begin following the earliest to occur of: (i) Death, (ii) Total and permanent disability, (iii) Subject to subsection (c), retirement, or (iv) Subject to subsection (d), termination of employment. (c) A Participant may elect to have the deferral period for some or all amounts deferred continue beyond termination of employment due to retirement by so indicating when the Participant selects, or modifies pursuant to Section 4.4, the Participant's deferral period for a deferral. At such time the Participant may elect one or more successive post retirement deferral periods of up to five (5) Years each. (d) Effective January 1, 2001, a Participant may elect to have the deferral period for some or all amounts deferred continue beyond termination of employment with the 4 Corporation, but only if such employment was terminated at the initiative of the Corporation for reasons other than for Cause. A Participant may exercise this one-time election by so indicating when the Participant selects, or modifies pursuant to Section 4.4, the Participant's deferral period for a deferral. At such time, the Participant may elect one or more post-termination deferral periods of up to five (5) Years each. 4.3 Manner of Payment Election. At the same time as an election is made pursuant to Section 4.1, or is modified pursuant to Section 4.4, the Participant also may elect to have a deferred amount paid either in a lump sum or in up to twenty (20) substantially equal annual installments; provided, however, at such time a Participant that elects to receive payments in substantially equal annual installments may also specify a date within the installment period to receive all then remaining deferred amounts in a lump sum. 4.4 Modification. A Participant may change the manner in which a deferred amount will be paid and/or the date such payments are to commence by written election made prior to the Year in which such payments are to commence. Section 5. Matching Credits 5.1 Effective Date and Eligibility. Effective July 1, 2001, the Corporation shall credit matching credits under this Plan only to Participants described in this Section at such time and in such amounts as provided in Section 5.2. Notwithstanding anything to the contrary in the Plan, only elected officers of the Corporation who are also actively participating under the cash balance formula in the Snap-on Incorporated Supplemental Retirement Plan for Officers, as amended from time to time, and are making deferrals for the Year shall be eligible for a matching credit by the Corporation for a Year for their benefit under this Plan. 5.2 Time and Amount of Matching Contributions. The Corporation shall credit matching credits under this Plan during each calendar quarter for the benefit of each eligible Participant. The amount of the matching credit for each calendar quarter for the benefit of an eligible Participant will be an amount equal to the excess of: (a) the lesser of (i) the product of the Participant's total deferrals to this Plan, excluding deferrals of Other Compensation under the Amended and Restated Snap-on Incorporated 1986 Incentive Stock Program or the Snap-on Incorporated 2001 Incentive Stock and Awards Plan, for the calendar quarter multiplied by fifty percent (50%), or (ii) three percent (3%) of the Participant's Compensation (other than Other Compensation under the Amended and Restated Snap-on Incorporated 1986 Incentive Stock Program or the Snap-on Incorporated 2001 Incentive Stock and Awards Plan) for such calendar quarter, over (b) the actual matching contribution made by the Corporation for the benefit of such Participant for such calendar quarter under the Snap-on 401(k) Plan. 5 5.3 Deferral Period. (a) The deferral period selected for a Year's deferrals by a Participant under Section 4.2 shall also apply to the matching credits credited under Section 5 with respect to those deferrals. (b) However, notwithstanding the deferral period specified, payments of matching credits shall begin following the earliest to occur of: (i) Death, (ii) Total and permanent disability, (iii) Subject to Section 4.2(c), retirement, or (iv) Subject to section 4.2(d), termination of employment. 5.4 Manner of Payment Election. A Participant's elected manner of payment for deferred payments under Section 4.3 shall also apply to the matching credits credited under Section 5 with respect to those deferrals. 5.5 Modification. A Participant's change in the manner in which the deferred amounts will be paid and/or the date such payments are to commence under Section 4.4 will apply to the associated matching credits. Section 6. Deferred Compensation and Matching Credits Accounts 6.1 Participant Accounts. (a) Deferred Compensation Accounts. The Corporation shall establish and maintain individual bookkeeping accounts in respect of deferrals made by a Participant consisting of a "Cash Account" and a "Share Account." A Participant shall have separate Cash Accounts and Share Accounts for deferred amounts with different deferral periods under Section 4.2 and/or manners of payment under Section 4.3. A Participant's Cash Account shall be credited with the dollar amount of any amount deferred as of the date the amount deferred otherwise would have become due and payable unless prior to such date the Participant notifies the Corporation in writing that all or any portion of the dollar amount deferred shall be converted into deferred shares of Common Stock to be credited to the Participant's Share Account. In such event (i) there shall be credited to the Participant's Share Account as of such date a number of units ("Share Units") equal to the dollar amount of any amount deferred or if less the dollar amount specified in such notice divided by the Fair Market Value on the last trading business day immediately preceding the date the amount deferred otherwise would have become due and payable and (ii) the Participant's Cash Account shall be credited as of such date with the balance of the dollar amount deferred, if any. 6 (b) Matching Credits Accounts. The Corporation shall establish and maintain an individual bookkeeping account in respect of matching credits by the Corporation for the benefit of an eligible Participant to be known as a "Matching Account". A Participant's Matching Account shall be credited with a number of units ("Share Units") equal to the dollar amount of matching credits under Section 5 for the Participant's benefit divided by the Fair Market Value on the last trading business day immediately preceding the date the Corporation credits the matching credits. 6.2 Growth Increments on Cash Accounts. The Corporation will provide the opportunity for Growth Increments to be earned on the balance of a Participant's Cash Accounts. The Committee will have the authority to select, from time to time, the appropriate interest rate to apply to such amounts. Each Cash Account shall be credited on the first day of each month with a Growth Increment computed on the daily balance in the Cash Account during the immediately preceding month. The Growth Increment shall be the sum of the daily interest earned, compounded monthly by the interest rate selected by the Committee. 6.3 Share Accounts. (a) Subject to applicable corporate policies, from time to time a Participant may convert all or a portion of any Cash Account balance of the Participant into deferred shares of Common Stock credited to the Participant's corresponding Share Account by written notice to the Corporation. In such event, and effective as of the date the Corporation receives such a notice, (i) there shall be credited to the Participant's Share Account a number of Share Units equal to the number of Share Units specified in the notice or, if such notice specifies a dollar amount, a number of Share Units equal to such dollar amount divided by the Fair Market Value on the last trading business day immediately preceding the date the Corporation receives such notice and (ii) the Participant's Cash Account shall be debited in an amount equal to the number of Share Units credited to the Share Account multiplied by the Fair Market Value on the same trading business day. (b) Subject to the authority of the Committee, the Corporation's Chief Executive Officer may approve the terms of any agreements between the Corporation and any Participant relating to the deferral of Other Compensation where, but for the Participant's deferral, the Participant would have received shares of Common Stock if such officer determines that such terms are appropriate to carry out the purposes of this Plan and the award of Other Compensation. Without limitation, the Corporation may enter into an agreement with a Participant relating to such a deferral under which (i)(A) there shall be credited to the Participant's Share Account a number of Share Units equal to the number of shares of Common Stock the receipt of which the Participant has deferred which credit shall be made as of the date the Other Compensation deferred otherwise would have become due and payable or (B) Share Units shall be credited to the Participant's Share Account only at a future date, such as the date that one or more conditions to vesting have been satisfied; (ii) a credit of Share Units may be made subject to such restrictions as are imposed under the terms of the award of Other Compensation (or restrictions substantially equivalent to those to which shares of Common Stock would have been 7 subject but for the deferral), including without limitation forfeiture under certain circumstances and restrictions on the Participant's rights to convert such Share Units pursuant to this Section 6.5; and (iii) if the terms of the award of Other Compensation require a Participant to deliver cash and/or shares of Common Stock to the Corporation to exercise or otherwise receive the benefit of such Other Compensation, then in lieu of delivering such cash and/or Common Stock, there may be a debit to the Participant's Cash Account in an amount equal to the amount of cash that the Participant otherwise would have delivered and/or a debit to the Participant's Share Account in an amount equal to the number of shares of Common Stock that the Participant otherwise would have delivered, in each case to the extent of any credit balance in such account. 6.4 Cash Dividends. Whenever cash dividends are paid by the Corporation on outstanding Common Stock, as of the payment date for the dividend, at the election of a Participant (i) there shall be credited to a Participant's Cash Account, as appropriate, an amount equal to the amount per share of the cash dividend on the Common Stock multiplied by the number of Share Units credited to the Participant's Share Account, if any, as of the close of business on the record date for the dividend or (ii) there shall be credited between a Participant's Share Account and Matching Account (if any, and then only to the extent then maintained in Share Units), as appropriate, additional Share Units equal to the cash amount described in clause (i) divided by the Fair Market Value of the Common Stock on the last trading business day immediately preceding the date of payment of the dividend. Absent an express election by a Participant, clause (i) shall apply. A Participant shall be entitled to elect treatment under clause (i) as to some Share Units reflected in the Participant's Share Account and treatment under clause (ii) as to other Share Units reflected in the Participant's Share Account. Clause (ii) shall apply to Share Units reflected in the Participant's Matching Account. 6.5 Conversion of Share Account. Subject to applicable corporate policies, from time to time a Participant with a credit balance in a Share Account may convert all or a portion of such balance into an amount to be credited to the Participant's corresponding Cash Account by giving written notice to the Corporation. In such event, and effective as of the date the Corporation receives such a notice, (i) there shall be credited to the Participant's Cash Account an amount equal to the number of Share Units specified in the notice multiplied by the Fair Market Value on the last trading business day immediately preceding the date the Corporation receives such notice and (ii) the Participant's Share Account shall be debited by the number of Share Units specified in the notice. 6.6 Earnings Adjustments to Matching Accounts. (a) Except as provided in Section 6.6(b), a Participant's Matching Account will be adjusted (in the manner provided in Section 6.6(c)) at the end of each Year in an amount which is equal to the net increase (or net decrease as appropriate) in Fair Market Value for the same Year. 8 (b) Diversification Election. Notwithstanding anything in Section 6.6(a) to the contrary, a Participant may elect, subject to the limits in this Section 6.6(b), that annual earnings adjustments to his Matching Account be determined with reference to a measure other than Fair Market Value. For purposes of this Section 6.6(b), a change to the measure used to determine adjustments to a Matching Account of a Participant shall be made at the election of the Participant, but only at the same times, under the same conditions and subject to the same limitations as are allowed or imposed under the Snap-on 401(k) Plan for diversifying the Corporation's matching contribution under such plan out of shares of Common Stock to other permissible investments available under the Snap-on 401(k) Plan. The election provided in this Section 6.6(b) shall be made in writing as directed by the Committee. Earnings adjustments to Matching Accounts after the effective date of an election under this Section 6.6(b) shall be calculated for the Participant's Matching Account with reference to the Participant's duly elected alternative earnings measure. Once an election is made under this Section 6.6(b), the Participant's Matching Account balance shall be converted out of Share Units (using Fair Market Value on the last trading business day immediately preceding the date the election is effective) and shall not be maintained in Share Units again. (c) An eligible Participant's Matching Account shall be credited, or debited, as appropriate, at the end of each Year with (i) a number of Share Units equal to the dollar amount of adjustments determined under Section 6.6(a) divided by the Fair Market Value on the last trading business day immediately preceding the date the Corporation credits such adjustments to the Participant's Matching Account, or (ii) an earnings adjustment calculated as provided in Section 6.6(b) if a qualified election has been made under Section 6.6(b). 6.7 Charges Against Accounts. There shall be charged against a Participant's Cash Account any cash payments (excluding payments for fractional shares) made to the Participant or to his beneficiary in accordance with Section 7. There shall be charged against a Participant's Share Account any distributions made to the Participant or to his beneficiary in respect of the Participant's Share Account in accordance with Section 7. There shall be charged against a Participant's Matching Account any distributions made to the Participant or to his beneficiary in respect of the Participant's Matching Account in accordance with Section 7. Section 7. Payment of Deferred and Matching Amounts 7.1 Payment of Deferred and Matching Amounts. (a) Payment of a Participant's Cash Account balance, including accumulated Growth Increments attributable thereto and dividend credits under Section 6.4, shall be paid in cash commencing within thirty (30) calendar days after the commencement date referred to in Section 4.2. The payments shall be made in the manner selected by the Participant under Section 4.3 or, in the absence thereof, in a lump sum. The amount of each payment shall be equal to a Participant's then distributable Cash Account balance multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installment payments remaining. 9 (b) Payment of a Participant's Share Account balance shall be paid commencing within thirty (30) calendar days after the commencement date referred to in Section 4.2. Payments in respect of a Share Account balance shall be made by converting Share Units into Common Stock on a one-for-one basis, with payment of fractional shares to be made in cash based upon the Fair Market Value on the last trading business day immediately preceding the date of payment; provided, however, that at the election of a Participant, made by written notice to the Corporation delivered not less than five business days before a payment due date, payments in respect of a Share Account may be made solely in cash in an amount equal to the number of Share Units then payable multiplied by the Fair Market Value on the last trading business day immediately preceding the date of payment. The payments shall be made in the manner selected by the Participant under Section 4.3 or, in the absence thereof, in a lump sum. The number of Share Units payable at the time of a payment shall be equal to a Participant's then distributable Share Account balance multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installment payments remaining. (c) Payment of a Participant's Matching Account balance shall be paid commencing within thirty (30) calendar days after the commencement date referred to in Section 5.3. Payments in respect of a Matching Account balance maintained in Share Units at the time shall be made by converting Share Units into Common Stock on a one-for-one basis, with payment of fractional shares to be made in cash based upon the Fair Market Value on the last trading business day immediately preceding the date of payment; provided, however, that at the election of a Participant, made by written notice to the Corporation delivered not less than five (5) business days before a payment due date, payments in respect of a Matching Account maintained in Share Units at the time may be made solely in cash in an amount equal to the number of Share Units then payable multiplied by the Fair Market Value on the last trading business day immediately preceding the date of payment. Payments of a Participant's Matching Account balance that is no longer maintained in Share Units shall be in cash in an amount equal to the Matching Account balance plus accumulated adjustments under Sections 6.6(b) and 6.6(c) and dividend credits under Section 6.4. The payments shall be made in the manner selected by the Participant under Section 5.4 or, in the absence thereof, in a lump sum. The number of Share Units payable at the time of a payment shall be equal to a Participant's then distributable Matching Account balance maintained in Share Units multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installment payments remaining. 7.2 Acceleration of Payments. If a Participant dies prior to the payment of all or a portion of his Cash Account, Share Account and/or Matching Account balances, the balance of any amounts payable shall be paid in a lump sum to the beneficiaries designated under Section 8. If a Participant's Cash Account balance is less than Five Thousand and No/100 Dollars ($5,000.00) at the time for the payment specified, such amount shall be paid to the Participant in a lump sum. If either a Participant's Share Account or Matching Account balance is less than three hundred (300) Share Units at the time for the payment specified, such amount shall be paid to the Participant in a lump sum. 10 7.3 Financial Emergency. The Committee, in its sole discretion, may alter the timing or manner of payment of deferred amounts and/or matching amounts in the event that the Participant establishes, to the satisfaction of the Committee, severe financial hardship. In such event, the Committee may: (a) provide that all, or a portion of, the amount previously deferred by the Participant immediately shall be paid in a lump sum payment, (b) provide that all, or a portion of, the installments payable over a period of time immediately shall be paid in a lump sum, or (c) provide for such other installment payment schedules as it deems appropriate under the circumstances, as long as the amount distributed shall not be in excess of that amount which is necessary for the Participant to meet the financial hardship. Severe financial hardship will be deemed to have occurred in the event of the Participant's impending bankruptcy, a dependent's long and serious illness, or other events of similar magnitude. The Committee's decision in passing on the severe financial hardship of the Participant and the manner in which, if at all, the payment of deferred amounts or matching credits shall be altered or modified shall be final, conclusive, and not subject to appeal. Section 8. Beneficiary Designation 8.1 Designation of Beneficiary. A Participant shall designate a beneficiary or beneficiaries who, upon the Participant's death, are to receive the amounts that otherwise would have been paid to the Participant. All designations shall be in writing to the Corporation in such form as it requires or accepts and signed by the Participant. The designation shall be effective only if and when delivered to the Corporation during the lifetime of the Participant. The Participant also may change his beneficiary or beneficiaries by a signed, written instrument delivered to the Corporation. However, if a married Participant maintains his primary residence in a state that has community property laws, the Participant's spouse shall join in any designation of a beneficiary or beneficiaries other than the spouse. The payment of amounts shall be in accordance with the last unrevoked written designation of beneficiary that has been signed and delivered to the Corporation. 8.2 Death of Beneficiary. In the event that all of the beneficiaries named in Section 8.1 predecease the Participant, the amounts that otherwise would have been paid to the Participant shall be paid to the Participant's estate, and in such event, the term "beneficiary" shall include his estate. 8.3 Ineffective Designation. In the event the Participant does not designate a beneficiary, or if for any reason such designation is ineffective, in whole or in part, the amounts that otherwise would have been paid to the Participant shall be paid to the Participant's estate, and in such event, the term "beneficiary" shall include his estate. 11 Section 9. Rights of Participants 9.1 Contractual Obligation. It is intended that the Corporation is under a contractual obligation to make payments from a Participant's account when due. Payment of account balances payable in cash shall be made out of the general funds of the Corporation as determined by the Board. 9.2 Unsecured Interest. No Participant or beneficiary shall have any interest whatsoever in any specific asset of the Corporation. To the extent that any person acquires a right to receive payments under this Plan, such receipt shall be no greater than the right of any unsecured general creditor of the Corporation. 9.3 Employment. Nothing in the Plan shall interfere with or limit in any way the rights of the Corporation to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Corporation. 9.4 Participation. No employee shall have a right to be selected as a Participant or, having been so selected, to be selected again as a Participant. Section 10. Nontransferability 10.1 Nontransferability. In no event shall the Corporation make any payment under this Plan to any assignee or creditor of a Participant or a beneficiary. Prior to the time of a payment hereunder, a Participant or a beneficiary shall have no rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan nor shall such rights be assigned or transferred by operation of law. Section 11. Administration 11.1 Administration. This Plan shall be administered by the Committee. The Committee may from time to time establish rules for the administration of this Plan that are not inconsistent with the provisions of this Plan. 11.2 Finality of Determination. The Committee has sole discretion in interpreting the provisions of the Plan. The determination of the Committee as to any disputed questions arising under this Plan, including questions of construction and interpretation, shall be final, binding, and conclusive upon all persons. 11.3 Expenses. The cost of payments from this Plan and the expenses of administering the Plan shall be borne by the Corporation. 11.4 Action by the Corporation. Any action required or permitted to be taken under this Plan by the Corporation shall be by resolution of the Board, by the duly 12 authorized Committee of the Board, or by a person or persons authorized by resolution of the Board or the Committee. Section 12. Amendment and Termination 12.1 Amendment and Termination. The Corporation expects the Plan to be permanent but, since future conditions affecting the Corporation cannot be anticipated or foreseen, the Corporation necessarily must and does hereby reserve the right to amend, modify, or terminate the Plan at any time by action of the Board. Notwithstanding the foregoing, upon the occurrence of a Potential Change of Control (as hereinafter defined) and for a period of six (6) months thereafter, the Plan may not be terminated or amended in a manner adverse to Participants. For purposes of this Section, a "Potential Change of Control" shall be deemed to have occurred if an event set forth in any one of the following shall have occurred: (i) The Corporation enters into an agreement, the consummation of which would result in the occurrence of a Change of Control; (ii) The Corporation or any other Person publicly announces an intention to take or consider taking actions that, if consummated, would constitute a Change of Control; (iii) Any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation representing fifteen percent (15%) or more of either the then outstanding shares of Common Stock or the combined voting power of the Corporation's then outstanding voting securities; or (iv) The Board adopts a resolution to the effect that, for purposes of this Plan, a Potential Change of Control has occurred. Each of "Change of Control," "Person" and "Beneficial Owner" shall have the meaning set forth in Section 17.1. Section 13. Applicable Law 13.1 Applicable Law. This Plan shall be governed and construed in accordance with the laws of the State of Wisconsin. Section 14. Withholding of Taxes 14.1 Tax Withholding. The Corporation shall have the right to deduct from all contributions made to, or payments made from, the Plan any federal, state, or local taxes required by law to be withheld with respect to such contributions or payments. The Corporation may defer making payments in the form of Common Stock under the Plan until satisfactory arrangements have been made for the payment of any federal, state or local taxes required to be withheld with respect to such payment or delivery. Each Participant shall be entitled to irrevocably elect, prior to the date shares of Common Stock would otherwise be delivered 13 hereunder, to have the Corporation withhold shares of Common Stock having an aggregate value equal to the amount required to be withheld. The value of fractional shares remaining after payment of the withholding taxes shall be paid to the Participant in cash. Shares so withheld shall be valued at Fair Market Value on the last trading business day immediately preceding the date such shares would have otherwise been transferred hereunder. Section 15. Notice 15.1 Notice. Any notice required or permitted to be given under the Plan shall be sufficient if in writing and hand-delivered, or sent by a registered or certified mail, and if given to the Corporation, delivered to the principal office of the Corporation. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. Section 16. Common Stock Matters 16.1 Stock Reserved for the Plan. The Corporation shall make available as and when required a sufficient number of shares of Common Stock to meet the needs of the Plan. Shares of Common Stock issued hereunder shall be previously issued shares reacquired and held by the Corporation. 16.2 General Restrictions. (a) Investment Representations. The Corporation may require any Participant, as a condition of receiving Common Stock under this Plan, to give written assurances in substance and form satisfactory to the Corporation and its counsel to the effect that such person is acquiring the Common Stock for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Corporation deems necessary or appropriate in order to comply with federal and applicable state securities laws. (b) Compliance with Securities Laws. Delivery of Common Stock under the Plan shall be subject to the requirement that, if at any time counsel to the Corporation shall determine that the listing, registration or qualification of the shares of Common Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance of shares thereunder, such shares may not be delivered in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require the Corporation to apply for or to obtain such listing, registration or qualification. 16.3 Effect of Certain Changes in Capitalization. In the event of any Change in Capitalization, a proportionate substitution or adjustment may be made in (a) the aggregate number and/or kind of shares or other property reserved for issuance under the Plan, (b) the number and kind of shares or other property to be delivered 14 under the Plan and (c) the number and kind of shares or other property held in each Participant's Share Account and Matching Account (if any), in each case as may be determined by the Committee in its sole discretion. Such other proportionate substitutions or adjustments may be made as shall be determined by the Committee in its sole discretion. "Change in Capitalization" means any increase, reduction, change or exchange of shares of Common Stock for a different number or kind of shares or other securities or property by reason of a reclassification, recapitalization, merger, consolidation, reorganization, issuance of warrants or rights, stock dividend, stock split or reverse stock split, combination or exchange of shares, repurchase of shares, change in corporate structure or otherwise; or any other corporate action, such as declaration of a special dividend, that affects the capitalization of the Corporation. Section 17. Change of Control 17.1 Change of Control. For purposes of this Plan, a "Change of Control" shall be deemed to have occurred on the first to occur of any one of the events set forth in the following paragraphs: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Corporation or its Affiliates) representing 25% or more of either the then outstanding shares of Common Stock or the combined voting power of the Corporation's then outstanding voting securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (c) below; or (b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on January 25, 2002, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation as such terms are used in Rule 14a-11 of Regulation 14A under the Exchange Act) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on January 25, 2002 or whose appointment, election or nomination for election was previously so approved or recommended; or (c) there is consummated a merger or consolidation of the Corporation or any direct or indirect subsidiary of the Corporation with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar 15 transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Corporation (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Corporation or its Affiliates) representing 25% or more of either the then outstanding shares of Common Stock or the combined voting power of the Corporation's then outstanding voting securities; or (d) the stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets (in one transaction or a series of related transactions within any period of 24 consecutive months), other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale. Notwithstanding the foregoing, no "Change of Control" shall be deemed to have occurred if there is consummated any transaction or series of integrated transactions immediately following which the record holders of the Common Stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Corporation immediately following such transaction or series of transactions. For purposes of the definitions of Change of Control and Potential Change of Control, "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act; "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act; "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended; and "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the shareholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation or (v) any individual, entity or group which is permitted to, and actually does, report its Beneficial Ownership on Schedule 13G (or any successor schedule); provided that if any such individual, entity or group subsequently becomes required to or does report its Beneficial Ownership on Schedule 13D (or any successor schedule), such individual, entity or group shall be deemed to be a Person for purposes hereof on the first date on which such individual, entity or group becomes required to or does so report Beneficial Ownership of all of the voting securities of the Corporation Beneficially Owned by it on such date. 17.2 Payments. Upon the occurrence of a Change of Control, and notwithstanding Section 7, 16 (a) payment of a Participant's Cash Account balance and Matching Account balance (if any, and then only to the extent not then maintained in Share Units) shall be made immediately in cash in a lump sum; (b) all Share Units credited to a Participant's Share Account and Matching Account (if any) shall be converted into an amount equal to the number of Share Units multiplied by the Fair Market Value, which amount shall be (i) paid as soon as possible to such Participant and (ii) denominated in (A) such form of consideration as the Participant would have received had the Participant been the owner of record of such shares of Common Stock at the time of such Change of Control, in the case of a "Change of Control With Consideration" or (B) cash, in the case of a "Change of Control Without Consideration". For purposes of this Section 17.2(b), (I) "Change of Control With Consideration" shall mean a Change of Control in which shares of Common Stock are exchanged or surrendered for shares, cash or other property and (II) "Change of Control Without Consideration" shall mean a Change of Control pursuant to which shares of Common Stock are not exchanged or surrendered for shares, cash or other property. Section 18. Rating Event 18.1 Rating Event. The term "Rating Event" means the date on which the Corporation's debt rating drops below an Investment Grade Rating. "Investment Grade Rating" means a rating at or above Baa3 by Moody's Investors Services, Inc. (or its successors) or a rating at or above BBB by Standard & Poor's Corporation (or its successors). Only one such rating at the required level is necessary for the Corporation to have an Investment Grade Rating for purposes of this Section. If either or both of these ratings cease to be available then an equivalent rating from a nationally prominent rating agency shall be substituted by the Corporation. 18.2 Payment. Upon the occurrence of a Rating Event, and notwithstanding Section 7: (a) a Participant's Cash Account balance and Matching Account balance (if any, and then only to the extent not then maintained in Share Units) shall be paid immediately in cash in a lump sum; and (b) payments in respect of a Share Account balance shall be made immediately by converting Share Units into Common Stock on a one-for-one basis, with payment of fractional shares to be made in cash based upon the Fair Market Value on the last trading business day immediately preceding the date of payment; provided, however, that at the election of a Participant, made by written notice to the Corporation prior to delivery of such Common Stock, payments in respect of a Share Account may be made solely in cash in an amount equal to the number of Share Units then payable multiplied by the Fair Market Value on the last trading business day immediately preceding the date of payment; and (c) payments in respect of a Matching Account balance (if any, and then only to the extent then maintained in Share Units) shall be made immediately by converting 17 Share Units into Common Stock on a one-for-one basis, with payment of fractional shares to be made in cash based upon the Fair Market Value on the last trading business day immediately preceding the date of payment; provided, however, that at the election of the Participant, made by written notice to the Corporation prior to delivery of such Common Stock, payments in respect of a Matching Account may be made solely in cash in an amount equal to the number of Share Units then payable multiplied by the Fair Market Value on the last trading business day immediately preceding the date of payment. (d) In addition to payment of the Participant's Cash Account balance as described above, the Corporation shall pay the Participant an amount equal to the interest that would have been earned on the Accelerated Tax Amount from the date of the Rating Event to the date payment of the deferred amounts was then scheduled to commence, calculated at the interest rate determined under Section 6.2, compounded monthly, which interest amount shall then be discounted to the date of payment at a discount rate equal to the rate determined under Section 6.2. The "Accelerated Tax Amount" means the Participant's Cash Account balance multiplied by the Assumed Tax Rate. The "Assumed Tax Rate" means a percentage which reflects the highest stated federal and state income tax rates imposed on residents of Wisconsin after giving effect to the deductibility of state income taxes. 18.3 Revocation of Election. Upon the occurrence of a Rating Event all deferral elections made prior thereto are revoked. 18 EX-12 4 pdm280d.txt COMPUTATION Exhibit (12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Amounts in millions) 2001 2000 1999 --------- --------- --------- Net Earnings $19.0 $148.5 $127.2 Add (Deduct): Income taxes 26.1 69.5 70.7 Minority interest in earnings of consolidated subsidiaries 2.7 3.0 .2 Cumulative effect 2.5 (25.4) - --------- --------- --------- Net Earnings as Defined 50.3 195.6 198.1 Fixed Charges: Interest on debt 35.5 40.7 27.4 Interest element of rentals 5.4 5.3 5.0 --------- --------- --------- Total Fixed Charges 40.9 46.0 32.4 --------- --------- --------- Total Adjusted Earnings Available for Payment of Fixed Charges $91.2 $241.6 $230.5 ========= ========= ========== Ratio of Earnings to Fixed Charges 2.2 5.3 7.1 ========= ========= ========= For purpose of computing this ratio, "Net Earnings" consist of (a) income from continuing operations before income taxes and adjusted for minority interest, and (b) "Fixed Charges," consists of interest on debt and the estimated interest portion of rents. EX-13 5 pdm280b.txt PORTION OF ANNUAL REPORT Management's Discussion and Analysis Snap-on Incorporated ("Snap-on") is a leading global innovator, manufacturer and marketer of high-quality tool, diagnostic and equipment solutions for professional tool and equipment users. Snap-on's mission is to delight its customers - professional tool and equipment users worldwide - by providing innovative, productivity-enhancing products, services and solutions. Product lines include hand and power tools, tool storage, shop equipment, saws and cutting tools, pruning tools, under-hood diagnostics equipment, under-car equipment, safety-testing equipment, collision repair equipment, vehicle service information, business management systems, repair services, and other solutions for vehicle service, industrial, government and agricultural customers, and commercial applications, including construction and electrical. Snap-on's customers include professional automotive technicians, shop owners, franchised and chain vehicle service centers, vehicle and equipment manufacturers and other industrial, agricultural, and commercial tool and equipment users worldwide. Snap-on has two business segments: the Snap-on Dealer Group, which serves the worldwide dealer van channel, and the Commercial and Industrial Group, which serves the non-dealer tool and equipment products businesses. In addition to its manufacturing, marketing and distribution operations, Snap-on also offers extended-credit financing for the purchase of its products through its wholly owned credit facilities and through a 50%-owned financial services joint venture. Snap-on markets its products through multiple distribution channels and under various brands worldwide. Products are primarily sold through Snap-on's dealer van, company-direct and distributor sales channels and the Internet. Snap-on began selling product via the Internet in 2000 as part of its "Store Without Walls" vision, which offers both current and prospective customers online, around-the-clock access to purchase Snap-on(R) products. Snap-on: Driven to Deliver(TM) In 2001, Dale F. Elliott succeeded Robert A. Cornog as president and chief executive officer of Snap-on and introduced a new message of Driven to Deliver(TM) as a catalyst to respond to marketplace changes - including economic factors, market consolidation, the impact of technology and changing customer expectations. The Driven to Deliver(TM) process, which builds on the strong foundation already created through the partnering efforts of Snap-on employees and dealers worldwide, provides a business management framework for all employees to take action, produce improvements and contribute to building a stronger Snap-on. Through the balance of three strategic principles - Quality People, Operational Fitness and Profitable Growth - Snap-on has set a course of action that it believes will better position the company by further strengthening the foundation for value and by setting the stage for continued expansion and growth. The Driven to Deliver(TM) principle of "Quality People" means employees throughout the company are encouraged to anticipate and take appropriate action to achieve Snap-on's goals. The "Operational Fitness" principle means that the businesses and functions of Snap-on are striving toward a high level of operating effectiveness and that a planning and process-driven approach is used. Operational Fitness is not a short-term objective - it does not translate into simply cutting costs - it means building continuous improvement as a mindset among all employees and applying it to every aspect of the business. The "Profitable Growth" principle means growing the company while delivering a measurable increase in financial performance. At Snap-on, this will be accomplished through the rationalization of businesses not earning acceptable financial returns and through a continuous stream of innovative, productivity-enhancing new products. The Driven to Deliver(TM) business process prompted Snap-on to take significant action during 2001 to reduce costs companywide in response to the slower sales environment and improve operating performance in businesses not earning acceptable financial returns. These initiatives, including the consolidation or closure of 35 facilities, coupled with a planned reduction in worldwide headcount of 796, or 6%, are expected to enhance financial returns and support investment initiatives that will deliver future profitable growth. Snap-on expects to achieve $40 million in pretax savings in 2002 from its restructuring and cost control activities, with approximately one-half of the savings targeted to support growth initiatives. Consolidated Results of Operations Snap-on's Global Presence: In recent years, Snap-on had product sales in the following geographic regions: - ------------------------------------------------------------------------------- (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- United States $1,360.0 $1,367.1 $1,306.7 Europe 537.5 587.5 434.3 All other 198.2 221.1 204.6 - ------------------------------------------------------------------------------- Total net sales $2,095.7 $2,175.7 $1,945.6 - ------------------------------------------------------------------------------- NET SALES: Net sales in 2001 were $2.096 billion, down 3.7% from the $2.176 billion posted in 2000. In the Snap-on Dealer Group, worldwide net sales declined 1.9% from 2000 levels as a decrease in sales of big-ticket equipment and diagnostics products was partially offset by the success of new product introductions and continued demand for tools and tool storage. In the Commercial and Industrial Group, worldwide net sales declined 5.4% for the year. The slowing economy in 2001 depressed demand for big-ticket capital goods equipment throughout the year, while the demand for professional tools in the manufacturing and industrial marketplace weakened in the second half. Despite adverse economic conditions in 2001, Snap-on strengthened its business through successful new product introductions and further investment in the expansion of the U.S. dealer base under its "More Feet on the Street" initiative. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 17 Management's Discussion and Analysis (continued) Overall, the year-over-year decline in net sales of 3.7% reflects a 2% deterioration from unfavorable currency translation and a 1.7% decline in organic sales. Organic sales exclude the impact of acquisitions, divestitures and currency translation. The combined net impact on 2001 sales from acquisitions and divestitures, including the impact of Snap-on's decision in December 2000 to exit an unprofitable segment of the emissions-testing business, was minimal. Net sales in 2000 were a record $2.176 billion, up 12% over the $1.946 billion posted in 1999 and the ninth consecutive year of higher sales for Snap-on. Acquisition sales growth contributed 11%, primarily attributable to the full-year contribution of Bahco Group AB ("Bahco"). Acquired by Snap-on on September 30, 1999, Bahco is a leading manufacturer and supplier of professional hand tools, including saws and other cutting implements, files, wrenches, pliers, screwdrivers and pruning tools. Sales of BAHCO(R) products in 2000 totaled $283 million, as compared to $75 million for the three-month period in 1999. Organic sales growth contributed 5% over 1999 levels led by solid dealer sales growth in North America and Europe and incremental sales of equipment to new-car dealerships under facilitation contracts, in which Snap-on provides product procurement, distribution and administrative support to customers for their dealerships' equipment programs ("the facilitation business"). These increases in net sales were partially offset by a 3% deterioration from unfavorable currency translation and a 1% decline from discontinued activities. Net sales in 1999 increased 10% to $1.946 billion over the $1.773 billion posted in 1998. Organic sales grew 5%, driven primarily by increased unit volumes in the Snap-on Dealer Group and in the North American region of the Commercial and Industrial Group. Acquisitions contributed an additional 7%, partially offset by a 1% decline from lower sales of emissions-testing equipment and a 1% decline from unfavorable currency translation. - ------------------------------------------------------------------------------- (Amounts in millions except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------- Net sales $2,095.7 $2,175.7 $1,945.6 Net earnings 19.0 148.5 127.2 Net earnings per share: Basic .33 2.54 2.18 Diluted .33 2.53 2.16 - ------------------------------------------------------------------------------- Snap-on recognizes revenues at the time that products are shipped or services are performed, and accrues for estimated future returns in the period in which the sale is recorded. Franchise fee revenue is recognized as the fees are earned and was not material in any year. Subscription revenue is deferred and recognized over the life of the subscription. EARNINGS: Snap-on reported net earnings of $19.0 million in 2001, as compared to net earnings of $148.5 million in 2000. Diluted earnings per share were $.33 in 2001, as compared to $2.53 in 2000. In the second quarter of 2001, Snap-on announced that it was taking significant action to (i) reduce costs companywide to adjust to the slower sales environment and (ii) improve operational performance in businesses not earning acceptable financial returns. Snap-on incurred pretax charges of $120.4 million ($85.2 million after tax or $1.47 per diluted share) in implementing these and other actions in 2001, including $62.0 million for restructuring and non-recurring charges and $58.4 million for other non-comparable items, including $47.0 million for the resolution of an arbitration matter and related legal costs. In addition to these charges, the decline in 2001 net earnings also reflects the impact of lower sales of higher-margin products, increased operating expenses for new product development and higher training and recruiting costs associated with the More Feet on the Street initiative. Net earnings in 2001 included a one-time net charge of $2.5 million, or $.04 per diluted share, for the cumulative effect of adopting Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Snap-on's net earnings were $148.5 million in 2000, as compared to net earnings of $127.2 million in 1999. Diluted earnings per share were $2.53 in 2000, as compared to $2.16 in 1999. The year-over-year increase in earnings was primarily driven by organic sales growth, the full-year impact of Bahco and benefits from ongoing streamlining initiatives, partially offset by lower finance income, reduced gross profit margins, higher interest expense and adverse currency impacts. In 2000, net earnings included pretax charges totaling $21.8 million ($14.2 million after tax or $.24 per diluted share) for restructuring and other non-recurring items, and pretax charges of $16.8 million ($10.5 million after tax or $.18 per diluted share) for certain legal and other costs. Net earnings in 2000 also included a one-time gain of $41.3 million ($25.4 million after tax or $.43 per diluted share) resulting from the cumulative effect of a change in accounting for pensions. This change, recommended by Snap-on's outside actuarial firm, did not result in any MARGIN ANALYSIS 1997 - $1,672 Net Sales in millions - 50.5% Gross Profit Margin - 11.6% Segment Operating Margin 1998 - $1,773 Net Sales in millions - 43.1% Gross Profit Margin - 6.7% Segment Operating Margin 1999 - $1,946 Net Sales in millions - 46.1% Gross Profit Margin - 9.7% Segment Operating Margin 2000 - $2,176 Net Sales in millions - 45.8% Gross Profit Margin - 9.8% Segment Operating Margin 2001 - $2,096 Net Sales in millions - 45.3% Gross Profit Margin - 7.5% Segment Operating Margin 18 SNAP-ON INCORPORATED 2001 ANNUAL REPORT cash flow into or out of the plan, and better reflects the market-related value of benefit plan assets for financial reporting purposes. The impact of this change on 2000 operating results was to reduce pension expense by $9.7 million. In 1999, Snap-on reported net earnings of $127.2 million, or $2.16 per diluted share, including non-recurring charges totaling $37.2 million ($23.3 million after tax or $.40 per diluted share) for restructuring and other non-recurring items associated with Snap-on's Project Simplify restructuring initiative. Project Simplify, a broad program of internal rationalizations, consolidations and reorganizations intended to make the Snap-on business operations simpler and more effective, began in the third quarter of 1998 and was essentially completed at the end of 1999. COSTS AND PROFIT MARGINS: Gross profit margin was $949.0 million in 2001, down 4.8% from $996.8 million in 2000. As a percent of net sales, gross profit margin was 45.3% in 2001 versus 45.8% in 2000. Effective price discipline, improved productivity and the success of new product introductions in 2001 partially offset the underabsorption of manufacturing costs from the lower-than-planned sales. In addition, Snap-on recorded charges of $12.6 million and $9.5 million in 2001 and 2000 for non-recurring inventory write-downs and warranty costs associated with its restructuring activities. These charges are included in "Cost of goods sold - non-recurring charges" on the accompanying Consolidated Statements of Earnings. Gross profit margin increased to $996.8 million in 2000, up 11.2% from $896.2 million in 1999, largely driven by increased sales volumes, including the full-year impact of Bahco. As a percent of net sales, gross profit margin was 45.8% in 2000, down from 46.1% in 1999, reflecting the impact of a planned shift in product mix to include higher volumes of lower margin sales associated with the facilitation and Bahco businesses. Bahco primarily sells its products through distributors, resulting in lower gross margins when compared to Snap-on's historical business mix. Unfavorable currency translation also adversely affected gross profit margin. The decline in gross profit margin was somewhat offset by operating improvements and streamlining benefits. Operating expenses were $848.7 million, or 40.5% of net sales, in 2001, as compared to $792.6 million, or 36.4%, in 2000. The year-over-year increase primarily reflects the impact of incremental costs incurred in 2001 for certain non-comparable legal and other costs, increased costs for new product development and higher spending for dealer expansion, training and recruitment under the More Feet on the Street initiative, and increased bad debt provisions. In 2001, Snap-on incurred charges totaling $56.9 million for certain legal and other costs, including $44.0 million for the resolution of a long-standing arbitration matter with SPX Corporation ("SPX") that includes patents and $3.0 million for related legal costs; $5.9 million for costs related to the termination of a European supplier relationship; and $4.0 million for emissions-related bad debts. These cost increases were partially offset by savings generated from the company's focus on Operational Fitness, including benefits realized from its cost-reduction and restructuring initiatives. OPERATING EXPENSES AS A PERCENT OF NET SALES - -------------------------------------------- 1997 - 38.9 1998 - 39.8 1999 - 37.2 2000 - 36.4 2001 - 40.5 RESEARCH & ENGINEERING (in $ millions) - ---------------------- 1997 - 47 1998 - 49 1999 - 50 2000 - 51 2001 - 55 Operating expenses were $792.6 million in 2000, compared to $723.7 million in 1999. The increase in year-over-year operating expenses primarily reflects the impact of higher sales volumes and the full-year addition of Bahco, as well as the inclusion of $16.8 million for certain non-comparable legal and other costs. Operating expenses improved from 37.2% of net sales in 1999 to 36.4% in 2000, primarily due to the planned shift in business mix associated with Bahco and higher sales in the facilitation business, as well as lower pension expense and benefits from Project Simplify activities. These improvements were partially offset by higher costs for recruiting and training for the dealer expansion initiative and by increased bad debt provisions and higher energy-driven freight costs. Research and engineering costs for the development of new and improved products and process improvements are included in operating expenses. In 2001, Snap-on filed 132 new patent applications in conjunction with its development activities, resulting in a total of 1,343 active or pending patents at year end. Research and engineering expenses totaled $54.6 million, $50.6 million and $50.2 million in 2001, 2000 and 1999. In 2001, Snap-on introduced such new and improved products as the handheld, Color Graphing Scanner,(TM) the air-powered Crud Thug(TM) material-removing tool, productivity-enhancing wheel balancers and aligners, and new BAHCO(R) hand tools. These new product introductions contributed incremental sales in 2001 and enhanced Snap-on's leadership position in the marketplace. SEGMENT RESULTS: Snap-on's business segments include the Snap-on Dealer Group and the Commercial and Industrial Group. Snap-on defines operating earnings for segment reporting purposes as net sales, less cost of goods sold and operating expenses, excluding restructuring and non-recurring charges. Had it been Snap-on's policy to allocate restructuring and other non-recurring charges to its reportable segments, such charges of $62.0 million, $21.8 million and $37.2 million for 2001, 2000 and 1999 would have been allocated to the segments as follows: Snap-on Dealer Group - $14.3 million, $11.5 million and $8.9 million for 2001, 2000 and 1999; Commercial and Industrial Group - $47.7 million, $10.3 million and $28.3 million for 2001, 2000 and 1999. In 2001, the $44.0 million cost for the resolution of patent arbitration was not allocated to the reportable segments. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 19 Management's Discussion and Analysis (continued) Snap-on reported segment net sales and operating earnings of $2.096 billion and $156.9 million in 2001, as compared to net sales and operating earnings of $2.176 billion and $213.7 million in 2000. The following discussion focuses on Snap-on's reported net sales and operating earnings by segment. For supplemental segment information, refer to Note 17. (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Net sales Snap-on Dealer Group $1,048.8 $1,068.7 $1,050.9 Commercial and Industrial Group 1,046.9 1,107.0 894.7 - ------------------------------------------------------------------------------- Total net sales $2,095.7 $2,175.7 $1,945.6 - ------------------------------------------------------------------------------- Operating earnings Snap-on Dealer Group $ 116.8 $ 127.3 $ 120.0 Commercial and Industrial Group 40.1 86.4 69.1 - ------------------------------------------------------------------------------- Total operating earnings $ 156.9 $ 213.7 $ 189.1 - ------------------------------------------------------------------------------- Snap-on Dealer Group Worldwide net sales in the Snap-on Dealer Group were $1.049 billion in 2001, down 1.9% from $1.069 billion in 2000, reflecting lower sales of big-ticket equipment and diagnostic products and adverse currency impacts, partially offset by the success of new products and the continued demand for tools and tool storage. During 2001, Snap-on continued to focus resources on expanding its U.S. dealer network through its More Feet on the Street program of second vans and second franchises. This initiative, introduced in 2000, provides new expansion opportunities for successful existing franchised Snap-on dealers. The addition of second vans and second franchises under this program also facilitates better market penetration and service to Snap-on customers. In 2001, a net addition of 203 dealers in the United States was achieved, and in 2000, Snap-on added 137 net new dealers as part of this expansion initiative. Based on the success of its dealer expansion efforts to date, Snap-on will continue to invest in adding more second vans and new franchise dealers in 2002 under this program. Organic sales in the Snap-on Dealer Group were flat year over year. Sales to U.S. dealers, which account for approximately 78% of Snap-on Dealer Group sales, were flat with 2000 levels. Despite the difficult economies, however, 2001 sales in the U.S. dealer business, excluding sales of big-ticket equipment and diagnostics products sold through the company's tech rep organization, were up 3% over the prior year and international dealer sales were up 4% in local currencies. Organic sales in the Snap-on Dealer Group grew 4% in 2000 from 1999 levels. Sales to U.S. dealers grew 4% and, in local currencies, international dealer sales were up 2% over the prior year. Operating earnings decreased 8.2% to $116.8 million in 2001, as compared to $127.3 million in 2000. The decrease reflects the negative operating leverage experienced during the first half of the year on the lower-than-planned sales, higher training and recruiting costs related to expanding the dealer base and increased bad debt provisions. Operating earnings increased 6.1% to $127.3 million in 2000, as compared to $120.0 million in 1999. This increase primarily resulted from enhanced dealer sales, improved customer service and market penetration as a result of the net increase in dealers. The year-over-year growth in organic sales and continued cost savings from ongoing streamlining initiatives, as well as the elimination of discontinued business activities, all had a positive impact on segment operating earnings. Higher costs for recruiting and training as part of the More Feet on the Street initiative, as well as increased bad debt provisions and higher energy-driven freight costs, partially offset the year-over-year improvement in operating earnings. Commercial and Industrial Group Worldwide net sales in the Commercial and Industrial Group decreased 5.4% to $1.047 billion in 2001 from $1.107 billion in 2000, largely due to a decline in industrial tool sales, continued softness in the diagnostics and equipment markets and unfavorable currency translation. Organic sales decreased 3%, reflecting a decline in industrial sales, as well as declines in equipment and diagnostic sales in both North America and Europe. An erosion in consumer confidence and weaker economic conditions affected many industrial sectors, such as automotive, electronics and aerospace. The slowing economy also depressed demand for diagnostics and equipment throughout the year, while the demand for tools in many industrial sectors, such as manufacturing, weakened in the second half. Sales in Europe declined 9%, with approximately one-half due to unfavorable currency translation. In conjunction with the Driven to Deliver(TM) business process, equipment operations are being consolidated in North America with a clear focus toward achieving an improved operating profit. And in Europe, the diagnostics business is progressing toward a pan-European "build-to-order" supply process. New product introductions - such as productivity-enhancing wheel balancers and aligners, and ergonomic BAHCO(R) hand tools - improved Snap-on's marketplace position. Net sales in the Commercial and Industrial Group were $1.107 billion in 2000, up 23.7% as compared to 1999 sales of $894.7 million. The year-over-year increase in net sales was primarily due to the full-year contribution of Bahco, incremental growth in the facilitation business, increased commercial tool sales in Europe and higher sales to industrial customers worldwide. These increases were partially offset by soft market conditions for equipment and diagnostics and by negative currency impacts. 20 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Operating earnings were $40.1 million in 2001 compared with $86.4 million in 2000. The decline in operating earnings reflects the lower sales in 2001, as well as the impact of non-comparable charges incurred during the year. These charges include additional asset write-downs related to the December 2000 announced exiting of an unprofitable segment of the emissions-testing business and charges related to the second-quarter 2001 termination of a European supplier agreement. Operating earnings increased 25.0% to $86.4 million in 2000, as compared to $69.1 million in 1999. The increase primarily resulted from the full-year contribution of Bahco and incremental growth in the facilitation business, partially offset by the decline in equipment sales. Margin enhancements and improved profitability in Europe, along with savings generated from actions taken under Project Simplify, also added to the year-over-year improvement in operating earnings. Snap-on's Commercial and Industrial Group includes a Bahco hand-tool manufacturing facility in Argentina with net assets of approximately $11.7 million as of December 29, 2001, including reserves for restructuring charges incurred in 2001. Due to the economic instability in Argentina, Snap-on resized its operations there, shifting a portion of its manufacturing to other existing Snap-on facilities. The Bahco Argentina facility will continue to operate with about one-half of its previous workforce, manufacturing product at a level to support its local market. Snap-on will continue to assess Argentina's economic situation to determine if any future actions or impairment write-downs are warranted. NET FINANCE INCOME: Net finance income was $35.7 million in 2001, down from $38.1 million in 2000. The year-over-year decline in net finance income is a result of a 1% decline in loan originations related to the soft demand for capital-type equipment and diagnostics products, partially offset by the effects of a more favorable interest-rate environment. The decrease also reflects the impact of gains realized in 2000 on the sale of installment receivables associated with the formation of the financial services joint venture in 1999. Snap-on utilizes various financing programs to facilitate the sales of its products. To reduce asset intensity from financing activities, Snap-on established a joint venture in January 1999 with Newcourt Financial USA Inc. ("Newcourt"), now CIT Group, Inc., which was subsequently acquired by Tyco International Ltd. The joint venture, Snap-on Credit LLC ("the LLC"), is a 50%-owned joint venture that provides financial services to Snap-on's U.S. dealer and customer network and to its industrial and other customers. As a result of establishing the joint venture, Snap-on effectively outsourced to the LLC its domestic captive credit function that was previously managed by a wholly owned subsidiary. In conjunction with the establishment of the LLC, Snap-on repurchased $337.0 million of its previously securitized installment receivables and $68.3 million of its previously securitized dealer finance loan receivables. Upon repurchase, these receivables were sold to Newcourt. In a separate transaction, Snap-on also sold to Newcourt its remaining on-balance-sheet portfolio of U.S. installment receivables, including existing extended credit, equipment lease and dealer loan receivables, for an aggregate sale price of $141.1 million, resulting in a pretax gain of approximately $40 million. Since Newcourt had the right to put back to Snap-on the unpaid portion of the extended credit installment receivable portfolio based on the same pricing formula, this gain was recognized over a two-year period. For additional information on the LLC, refer to Note 7. Net finance income was $38.1 million in 2000, as compared to $60.5 million in 1999. The year-over-year decline was largely due to reduced gains on the sale of installment receivables and the adverse effect of higher interest rates in 2000, partially offset by an increase in loan originations. In 2000, originations grew 15% over prior-year levels, influenced by growth in extended credit, dealer finance and van leasing programs. RESTRUCTURING AND NON-RECURRING CHARGES: As a result of its Driven to Deliver(TM) business process, Snap-on announced in the second quarter of 2001 that it was taking significant action to (i) reduce costs companywide to adjust to the slower sales environment and (ii) improve operational performance in businesses not earning acceptable financial returns. As a result of selective rationalization and consolidation actions, Snap-on recorded $62.0 million in pretax restructuring and other non-recurring charges in 2001 for actions that include the consolidation or closure of 35 facilities, asset write-downs and severance costs to effect a 6% reduction in workforce. The $62.0 million charge includes restructuring charges of $40.3 million and non-recurring charges of $21.7 million. On the accompanying Consolidated Statements of Earnings, "Restructuring and other non-recurring charges" of $49.4 million includes restructuring charges of $40.3 million and other non-recurring charges of $9.1 million, and "Cost of goods sold - non-recurring charges" includes $12.6 million for certain inventory write-downs and warranty costs. Approximately 45% of the charges recorded in 2001 were non-cash, with the remaining costs requiring cash outflows from operations and borrowings under Snap-on's existing credit facilities. The 2001 restructuring charges are for the consolidation or closure of 35 facilities, comprised of nine manufacturing or distribution facilities and 26 sales or administrative offices. The $40.3 million charge includes $27.1 million for severance costs associated with the planned elimination of 796 salaried and hourly positions, $6.0 million for non-cancelable lease agreements, $5.9 million for facility asset write-downs, and $1.3 million for exit-related legal and professional services. Non-recurring charges of $9.1 million include $8.4 million for management transition costs associated with the April 2001 retirement of Snap-on's president and chief executive officer and the appointment of Dale F. Elliott as successor to this position and $.7 million for non-recurring transition costs related to equipment and employee relocation associated with the facility consolidations. The non-recurring charges of $12.6 million in "Cost of goods sold - non-recurring charges" are comprised of $2.3 million for restructuring-related inventory write-downs and $10.3 million for additional inventory write-downs and warranty costs associated with Snap-on's exiting of an unprofitable segment of the emissions-testing business. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 21 Management's Discussion and Analysis (continued) Snap-on recorded charges for expected losses on the disposition of discontinued inventory, extended warranty costs and other asset impairments related to this exit plan in December 2000. During 2001, Snap-on experienced higher than expected emissions-related warranty costs and, as a result, Snap-on revised its cost estimate relative to the emissions exit plan and recorded $10.3 million of additional non-recurring charges in 2001. The composition of Snap-on's restructuring reserve activity for the year ended December 29, 2001, was as follows: Restructuring Reserve as of (Amounts in millions) Provisions Usage Dec. 29, 2001 - ------------------------------------------------------------------------------- Severance costs $27.1 $ (6.0) $21.1 Facility consolidation or closure costs 7.3 (5.3) 2.0 Loss on asset write-downs 5.9 (5.9) - - ------------------------------------------------------------------------------- Total restructuring reserves $40.3 $(17.2) $23.1 - ------------------------------------------------------------------------------- As of December 29, 2001, restructuring reserve usage of $17.2 million represents $6.0 million for severance payments related to the separation of 272 of the 796 identified employees, $5.3 million for facility consolidation or closure costs and $5.9 million for the write-down of assets. Snap-on believes that the restructuring reserve balance of $23.1 million as of December 29, 2001, is adequate to complete all announced activities and anticipates that all actions will be completed by the end of 2002. Snap-on expects to fund the cash requirements of its 2001 restructuring activities with cash flows from operations and borrowings under the company's existing credit facilities. The specific restructuring measures and estimated costs were based on management's best business judgment under prevailing circumstances. Snap-on also expects to incur an estimated $7 million to $8 million in restructuring-related transition costs in the first half of 2002. Transition costs do not qualify for restructuring accrual treatment and are therefore expensed when incurred. In 2000, Snap-on recorded restructuring and non-recurring charges totaling $21.8 million pretax, primarily for various exit-related costs and impairment write-downs. These costs were comprised of a $4.2 million restructuring charge and $17.2 million in non-recurring charges. The restructuring charge relates to the closure of a small, underperforming vehicle-service business in the Asia/Pacific region and includes costs related to severance, lease terminations and write-offs of intangible assets. The non-recurring charges primarily relate to Snap-on's decision, prompted by continued changes in technology and emissions regulations at both the state and federal levels, to exit an unprofitable segment of the emissions-testing business. The non-recurring charges consist of $5.6 million for expected losses on the disposition of discontinued inventory, $3.9 million for extended warranty costs and $7.7 million for other asset impairments. Additionally, Snap-on incurred $.4 million in non-recurring charges for relocation, severance and facilities consolidation costs. On the accompanying Consolidated Statements of Earnings, the $9.5 million of non-recurring charges for emissions-related inventory write-downs and warranty costs in 2000 have been reported as "Cost of goods sold - non-recurring charges." The $12.3 million in "Restructuring and other non-recurring charges" includes non-recurring charges of $7.7 million for emissions-related asset impairments and $.4 million for other relocation, severance and facilities consolidation costs. Also included in "Restructuring and other non-recurring charges" was $4.2 million in restructuring costs for severance and exit costs related to the closure of a vehicle-service business. The restructuring actions initiated in 2000 were completed during the first half of 2001. In 1999, Snap-on recorded $37.2 million in restructuring and non-recurring charges related to its Project Simplify initiative. Project Simplify, a broad program of internal rationalizations, consolidations and reorganizations to make Snap-on's business operations simpler and more effective, was implemented in the third quarter of 1998. The 18-month program included the cost of closing facilities, employee severance associated with a reduction in staffing, impaired asset write-downs, costs to revalue discontinued stock keeping units ("SKUs"), legal matters and other non-recurring costs. Of the $37.2 million in charges recorded, $16.6 million was reflected in the Consolidated Statements of Earnings as "Cost of goods sold - non-recurring charges," and $20.6 million was included in "Restructuring and other non-recurring charges." The $16.6 million in non-recurring charges reflects the discontinuance of an emissions-testing equipment line as part of Snap-on's refocus on high-volume products. The $20.6 million of non-recurring charges represents employee incentives of $1.5 million, relocation costs of $10.9 million, professional services of $9.1 million and $4.8 million for the discontinuance of SKUs. These costs were partially offset by the reversal of $5.1 million of excess warranty reserves and the reversal of $.6 million of excess severance costs. Snap-on achieved its Project Simplify objectives of consolidating certain business units, closing 60 facilities, eliminating approximately 1,100 positions and discontinuing more than 12,000 SKUs. Total charges incurred for Project Simplify were $187.5 million, and were comprised of $67.1 million of restructuring charges and $120.4 million of other non-recurring charges. Project Simplify was essentially completed as of year-end 1999. INTEREST EXPENSE: Interest expense for 2001 was $35.5 million, compared with $40.7 million in 2000 and $27.4 million in 1999. The $5.2 million decrease in year-over-year interest expense reflects the impact of lower debt levels and lower average interest rates in 2001. In 2000, the $13.3 million increase in year-over-year interest expense was primarily due to higher average debt levels from the financing of the Bahco acquisition and higher interest rates. 22 SNAP-ON INCORPORATED 2001 ANNUAL REPORT OTHER INCOME (EXPENSE): "Other income (expense) - net" includes the impact of all non-operating items such as interest income, license fees, minority interests, disposals of fixed assets, hedging and exchange rate transaction gains and losses, and other miscellaneous items. In 2001, other expense was $3.5 million, as compared to income of $3.3 million in 2000, largely due to exchange losses and lower interest income in 2001. In 1999, other income totaled $12.9 million and primarily included a gain on the sale of an interest in a Snap-on subsidiary and a net gain on a currency hedge for the purchase of Bahco. INCOME TAXES: Snap-on's effective income tax rate, before cumulative effect, restructuring, non-recurring and other non-comparable items, was 36.5% in 2001. The effective tax rate on 2001 restructuring, non-recurring and other non-comparable items was 29.3%. Snap-on's reported effective income tax rate was 56.3% in 2001, 36.5% in 2000 and 35.7% in 1999. The 2001 tax rate was adversely impacted by the 2001 restructuring, non-recurring and other non-comparable items where certain expenses in various foreign jurisdictions were not tax benefited. For additional income tax information, refer to Note 9. FOURTH QUARTER: Net sales in the fourth quarter of 2001 were $534.6 million, a 3.9% decline from $556.3 million in the comparable prior-year period. Sales in the fourth quarter of 2001 were adversely impacted by continued difficult economic conditions. Sales declines in the worldwide industrial sector and in equipment for the vehicle repair market in North America and Europe offset increased U.S. dealer sales of tools and tool storage. The fourth quarter 2001 net loss was $17.4 million, compared with net earnings of $13.7 million in 2000. Loss per diluted share was $.30, compared with earnings of $.24 per share in the prior year. The decline in 2001 earnings is largely due to the recording of $48.3 million of charges ($31.2 million after tax or $.54 per diluted share), including $44.0 million for the resolution of an arbitration matter and $3.0 million in related legal costs, as well as $1.3 million for a revised estimate of costs related to the termination of a European supplier relationship. These charges have been reported in "Operating expenses" on the accompanying Consolidated Statements of Earnings. In the fourth quarter of 2001, Snap-on also incurred pretax restructuring and non-recurring charges totaling $17.2 million ($16.3 million after tax or $.28 per diluted share) for the consolidation or closure of nine facilities, including related severance costs and asset write-downs. Restructuring charges of $16.6 million include $13.6 million for severance costs associated with the elimination of 340 identified positions, $2.4 million for non-cancelable lease agreements and related facility asset write-downs, and $.6 million for exit-related legal and professional services. Non-recurring charges of $.6 million include $.2 million in "Cost of goods sold - - non-recurring charges" for inventory write-downs and $.4 million of other equipment and employee relocation costs related to the facility consolidations. The $16.6 million in restructuring costs, as well as the $.4 million in other non-recurring charges, have been reported in "Restructuring and other non-recurring charges" on the accompanying Consolidated Statements of Earnings. The year-over-year decline in fourth-quarter 2001 net earnings also reflects the impact of lower sales volumes, lower absorption of manufacturing costs as a result of inventory reduction efforts, increased spending for new product introductions and dealer expansion initiatives, and exchange losses from the decline of the euro and Swedish krona against the U.S. dollar. These declines were partially offset by the initial benefits of tighter cost controls under Operational Fitness, reduced interest expense and increased finance income. Fourth quarter net finance income was $8.0 million in 2001, up from $7.5 million in 2000, as the effects of a more favorable interest-rate environment offset lower loan originations caused by the soft demand for big-ticket equipment and diagnostics in 2001. In the fourth quarter of 2000, net earnings of $13.7 million included pretax charges of $21.4 million ($14.0 million after tax or $.24 per diluted share) for restructuring and non-recurring charges, including $9.5 million for inventory write-downs and warranty costs and $7.7 million for asset impairment write-downs related to the exit of a segment of the emissions-testing business, and $4.2 million in severance and exit costs for a vehicle-service business in the Asia/Pacific region. In 2000, Snap-on also reserved $16.8 million ($10.5 million after tax or $.18 per diluted share) for certain legal and other costs, including $13.6 million primarily for the aggressive defense and assertion of Snap-on's intellectual property rights and $3.2 million for emissions-related asset write-downs. Financial Condition Snap-on's financial condition continues to be strong, and Snap-on believes it has the resources necessary to meet future anticipated funding needs. Growth has historically been supported by a combination of cash provided by operating activities and debt financing. (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Net cash provided by operating activities $163.7 $190.2 $235.6 Net increase (decrease) in debt (68.7) (86.5) 290.1 - ------------------------------------------------------------------------------- SNAP-ON INCORPORATED 2001 ANNUAL REPORT 23 Management's Discussion and Analysis (continued) NET CASH PROVIDED BY OPERATING ACTIVITIES (in $ millions) - --------------------------------------------------------- 1997 - 195 1998 - 75 1999 - 236 2000 - 190 2001 - 164 AVERAGE WORKING CAPITAL AS A PERCENT OF NET SALES (in percent) - -------------------------------------------------------------- 1997 - 40.2 1998 - 36.4 1999 - 35.3 2000 - 32.2 2001 - 29.5 Net cash provided by operating activities was $163.7 million in 2001, $190.2 million in 2000 and $235.6 million in 1999. In 2001, the year-over-year decline in net cash provided by operating activities is primarily due to lower earnings, partially offset by working capital reductions. In 2001, Snap-on used its cash flow principally to fund cash requirements of its restructuring activities, internal growth opportunities, stock repurchases, dividend payments and debt repayments. Net debt levels decreased by $68.7 million to $474.6 million in 2001, as compared to $543.3 million in 2000, as a result of Snap-on's strong cash flow and reduced working capital. At year-end 2001, the ratio of total debt to total capital was 38.0%, as compared to 39.2% at the end of 2000. In 2000, Snap-on reduced its year-over-year net debt levels by $86.5 million. At year-end 2000, the ratio of total debt to total capital had improved to 39.2% from 43.3% at the prior year end. In 1999, net debt levels increased largely due to the financing of the Bahco acquisition in September 1999. LIQUIDITY: Snap-on's working capital at the end of 2001 was $590.0 million, down $58.4 million from $648.4 million in 2000. Snap-on's focus on improving working capital turns, particularly for inventory and receivables, contributed to the working capital reduction. In 2000, working capital was $648.4 million, down $105.2 million from year-end 1999 levels due to higher inventory turns and an increase in current liabilities. The ratio of current assets to current liabilities at year-end 2001 was 2.1 to 1, compared with 2.2 to 1 at year-end 2000 and 2.7 to 1 at year-end 1999. Cash and cash equivalents were $6.7 million at December 29, 2001, compared to $6.1 million and $17.6 million at year-end 2000 and 1999. (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Current assets $1,139.4 $1,186.4 $1,206.3 Current liabilities 549.4 538.0 452.7 - ------------------------------------------------------------------------------- Working capital $ 590.0 $ 648.4 $ 753.6 - ------------------------------------------------------------------------------- Accounts receivable at the end of 2001 were $615.2 million, down $29.3 million compared with year-end 2000, primarily due to lower sales volumes. In 2000, accounts receivable were up $26.8 million to $644.5 million, as compared with year-end 1999, largely due to higher sales and an increase in dealer financing receivables. In 1999, accounts receivable increased principally as a result of acquiring Bahco. Bad debt write-offs in 2001 represented 4.9% of average accounts receivable, compared with 2.2% in 2000 and 1.9% in 1999. The increase in bad debt write-offs in 2001 was primarily due to write-offs resulting from the exiting of a segment of the emissions-testing business and the termination of a European supplier relationship. Inventories at year-end 2001 were $375.2 million, down $43.7 million from year-end 2000. The decrease in year-over-year inventory levels reflects improved inventory turns, despite the slower sales environment, from the company's focus on working capital and the effect of currency translation. In 2000, inventories of $418.9 million were down $35.9 million from year-end 1999, reflecting increased inventory turns and currency translation impacts. In 1999, inventories increased by $79.4 million, primarily due to the Bahco acquisition. Notes payable and current maturities of long-term debt totaled $29.1 million at the end of 2001 compared with $70.3 million at year-end 2000. Current maturities of long-term debt were $2.6 million and $4.9 million at year-end 2001 and 2000. At the end of 2001 and 2000, Snap-on had $142.2 million and $365.5 million in outstanding short-term commercial notes that were classified as long term, as it is Snap-on's intent, and it has the ability (supported by its long-term revolving credit facilities), to refinance this debt on a long-term basis. At December 29, 2001, Snap-on had $458 million of multi-currency revolving credit facilities to support its commercial paper programs. Snap-on has a $208 million revolving credit facility that is effective for a five-year term and terminates on August 20, 2005, and a $250 million credit facility that is a 364-day facility with a one-year term-out option that terminates on August 19, 2002. The term-out option allows Snap-on to elect to borrow under the credit facility for an additional year after the termination date. At the end of 2001 and 2000, Snap-on was in compliance with all covenants of the revolving credit facilities and there were no borrowings under either revolving credit commitment. The most restrictive covenant requires Snap-on to maintain a total debt to total capital percentage of 60% or better. Average commercial paper and bank notes outstanding were $389.2 million in 2001 and $529.1 million in 2000. The weighted-average interest rate on these instruments was 4.3% in 2001 and 5.9% in 2000. As of December 29, 2001, and December 30, 2000, commercial paper and bank notes outstanding had a weighted-average interest rate of 2.1% and 6.1%. In August 2001, Snap-on issued $200 million of unsecured notes pursuant to a $300 million shelf registration statement filed with the Securities and Exchange Commission in 1994. In October 1995, Snap-on issued $100 million of unsecured notes to the public under this shelf registration. The August 2001 notes require semiannual interest payments at a rate of 6.25% and mature in their entirety on August 15, 2011. The October 1995 notes require semiannual interest payments at a rate 24 SNAP-ON INCORPORATED 2001 ANNUAL REPORT TOTAL DEBT AS A PERCENT OF TOTAL CAPITAL (in percent) - ----------------------------------------------------- 1997 - 16.4 1998 - 30.8 1999 - 43.3 2000 - 39.2 2001 - 38.0 TOTAL CAPITAL* (in $ millions) - ----------------------------- 1997 - 1,067 1998 - 1,102 1999 - 1,455 2000 - 1,387 2001 - 1,250 * Total debt plus shareholders' equity of 6.625% and mature in their entirety on October 1, 2005. The proceeds from these issuances were used to repay a portion of Snap-on's outstanding commercial paper and for working capital and general corporate purposes. Snap-on believes that its sources of borrowings, coupled with cash from operations, are sufficient to support its working capital requirements, finance capital expenditures and restructuring activities, make acquisitions, repurchase common stock and pay dividends. Due to Snap-on's credit rating over the years, external funds have been available at a reasonable cost. At the end of 2001, Snap-on's long-term debt and commercial paper was rated A1 and P-1 by Moody's Investors Service and A+ and A-1 by Standard & Poor's. Snap-on believes that the strength of its balance sheet affords the company the financial flexibility to respond to both internal growth opportunities and those available through acquisition. CAPITAL EXPENDITURES: Capital expenditures in 2001 were $53.6 million, as compared to $57.6 million in 2000 and $35.4 million in 1999. The year-over-year decrease in 2001 reflects greater spending discipline in light of the weaker economy. Investments for the year primarily included ongoing replacements and upgrades of manufacturing and distribution facilities and equipment, and restructuring-related capital investments. The impact of full-year capital expenditures at Bahco drove the year-over-year increase in 2000 capital spending over 1999 levels. Snap-on anticipates that 2002 capital expenditures will approximate $50 million to $55 million. CAPITAL EXPENDITURES (in $ millions) - ------------------------------------ 1997 - 55 1998 - 47 1999 - 35 2000 - 58 2001 - 54 DEPRECIATION AND AMORTIZATION (in $ millions) - --------------------------------------------- 1997 - 38 1998 - 45 1999 - 55 2000 - 66 2001 - 68 DEPRECIATION AND AMORTIZATION: Depreciation in 2001 was $50.4 million, compared with $48.4 million in 2000 and $41.3 million in 1999. Amortization expense for goodwill and intangibles was $17.6 million in 2001, $17.8 million in 2000 and $14.1 million in 1999. Acquisitions and the amortization of resulting goodwill and intangibles accounted for the higher expense in 2000 over 1999. Snap-on will adopt SFAS No. 142, "Goodwill and Other Intangible Assets," at the beginning of its 2002 fiscal year. Snap-on currently estimates that the annualized pretax impact of discontinuing goodwill amortization, as required under SFAS No. 142, will approximate $13.9 million ($11.9 million after tax or $.20 per diluted share). For additional information on Snap-on's adoption of SFAS No. 142, refer to the section entitled "Accounting Pronouncements." DIVIDENDS: During 2001, Snap-on paid dividends of $.96 per share. Snap-on has paid consecutive quarterly cash dividends since 1939. (Amounts in millions except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------- Cash dividends paid $55.6 $55.0 $52.6 Cash dividends paid per common share .96 .94 .90 Cash dividends paid as a percent of prior-year retained earnings 5.3% 5.7% 6.0% - ------------------------------------------------------------------------------- STOCK REPURCHASE PROGRAM: Snap-on has undertaken stock repurchases from time to time to prevent dilution created by shares issued for employee and dealer stock purchase plans, stock options, and other corporate purposes, as well as to repurchase shares when market conditions are favorable. Snap-on repurchased 400,000 shares in 2001, following the repurchase of 1,019,500 shares in 2000 and 492,800 shares in 1999. Since 1997, Snap-on's board of directors has authorized the repurchase of up to $250 million of Snap-on's common stock. As of the end of 2001, Snap-on has remaining availability to repurchase up to an additional $133 million in common stock pursuant to the board's authorizations. The purchase of Snap-on common stock is at the company's discretion, subject to prevailing financial and market conditions. Since 1995, Snap-on has repurchased 9,989,583 shares. Market, Credit and Economic Risks Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. Snap-on is exposed to market risk from changes in both foreign currency exchange rates and interest rates. Snap-on monitors its exposure to these risks and manages the underlying economic exposures through the use of financial instruments such as forward exchange contracts and interest rate swap agreements. Snap-on does not use derivative instruments for speculative or trading purposes. Snap-on's broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating earnings as a whole. Snap-on's management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 25 Management's Discussion and Analysis (continued) FOREIGN CURRENCY RISK MANAGEMENT: Snap-on has significant international operations. Foreign exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency. To manage these exposures, Snap-on identifies naturally offsetting positions and then purchases hedging instruments to protect the residual net anticipated exposures. For additional information, refer to Note 10. INTEREST RATE RISK MANAGEMENT: Snap-on's interest rate risk management policies are designed to reduce the potential volatility of earnings that could arise from changes in interest rates. Through the use of interest rate swaps, Snap-on aims to stabilize funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on's assets and liabilities. For additional information, refer to Note 10. Snap-on utilizes a Value-at-Risk ("VAR") model to determine the potential one-day loss in the fair value of its interest rate and foreign exchange-sensitive financial instruments from adverse changes in market factors. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. Snap-on's computations are based on the inter-relationships among movements in various currencies and interest rates (variance/co-variance technique). These inter-relationships were determined by observing interest rate and foreign currency market changes over the preceding quarter. The estimated maximum potential one-day loss in fair value, calculated using the VAR model, at December 29, 2001, was $1.9 million on interest rate-sensitive financial instruments and $2.4 million on foreign currency-sensitive financial instruments. The VAR model is a risk management tool and does not purport to represent actual losses in fair value that will be incurred by Snap-on, nor does it consider the potential effect of favorable changes in market factors. CREDIT RISK: Credit risk is the possibility of loss from a customer's failure to make payments according to contract terms. Prior to granting a loan, each customer is evaluated, taking into consideration the borrower's financial condition, collateral, debt-servicing capacity, past payment experience, credit bureau information and numerous other financial and qualitative factors that may affect the borrower's ability to repay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Loans that have been granted are typically monitored through an asset-quality-review process that closely monitors past due accounts and initiates collection actions when appropriate. In addition to credit risk exposure from its on-balance-sheet receivables, Snap-on also has credit risk exposure for certain loan originations with recourse provisions from the LLC. At December 29, 2001, $46.3 million of loans originated by the LLC have a recourse provision to Snap-on if the receivables become more than 90 days past due. In addition, there were $27.1 million of dealers' customer-originated loans that have a primary recourse provision directly to the dealer, with secondary recourse to Snap-on in the event of dealer default. For additional information, refer to Note 7. ECONOMIC RISK: Economic risk is the possibility of loss resulting from economic instability in certain areas of the world. Economic instability from time to time may cause Snap-on to react to such market conditions. The economic uncertainty in Argentina prompted Snap-on to resize its operations there in 2001, shifting a portion of its manufacturing to other existing Snap-on facilities. The Bahco Argentina facility will continue to operate with about one-half of its previous workforce, manufacturing product at a level to support its local market. Snap-on will continue to assess Argentina's economic situation to determine if any future actions or impairment write-downs are warranted. Other Matters ACQUISITIONS: During 2001, Snap-on incurred acquisition costs of $.9 million related to the finalization of its fiscal 2000 acquisitions. During 2000, Snap-on acquired full ownership of two business operations. The aggregate cash purchase price plus costs related to the finalization of 1999 acquisitions was $11.9 million. Each of the acquisitions provided Snap-on with a complementary product line, new customer relationships, access to additional distribution and/or an extended geographic reach. On September 30, 1999, Snap-on acquired Bahco Group AB for $391 million in a cash purchase transaction. Also during 1999, Snap-on acquired the remaining 40% of Mitchell Repair Information Company, LLC ("MRIC") and full ownership of three businesses for an aggregate cash purchase price of $73.9 million. DIVESTITURES: During 2000, Snap-on divested Windsor Forestry Tools Inc. ("Windsor"), which was acquired as part of the Bahco acquisition. As Windsor was accounted for as "held for sale" in accordance with Accounting Principles Board Opinion No. 16, it had no impact on Snap-on's Consolidated Statements of Earnings. The sale of Windsor resulted in cash proceeds of $15.5 million and an adjustment to goodwill. During the fourth quarter of 1999, Snap-on sold a 15% interest in MRIC to Genuine Parts Company ("GPC") in support of an alliance to enhance and expand the e-business efforts of both companies. The combined effort unites the replacement-parts catalog and online order interface and procurement capabilities of GPC's Automotive Parts Group with the online repair information, "voice and view" diagnostics help, labor rates and shop management capabilities of MRIC. ACCOUNTING PRONOUNCEMENTS: In 2001, Snap-on adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. The adoption of this standard resulted in the recording of a cumulative effect transition adjustment to decrease reported net income in the first quarter of 2001 by $2.5 million after tax related to a hedge strategy that did not qualify for hedge accounting under SFAS No. 133. Snap-on also recorded in the first quarter of 2001 a transition adjustment of $1.2 million after tax to recognize previously deferred net gains on derivatives designated as cash flow hedges that qualify for hedge accounting under SFAS No. 133. The $1.2 million transition adjustment was recorded in "Accumulated other comprehensive income (loss)" on the accompanying Consolidated Balance Sheets. 26 SNAP-ON INCORPORATED 2001 ANNUAL REPORT In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method, prohibiting the use of the pooling-of-interests approach, and includes criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 requires the periodic testing of goodwill and indefinite-lived intangible assets for impairment, as compared to the current method of amortizing such assets to expense over their estimated useful lives. Snap-on will adopt SFAS No. 142 at the beginning of its 2002 fiscal year and estimates that, on an annualized basis, the pretax impact of discontinuing goodwill amortization will approximate $13.9 million ($11.9 million after tax or $.20 per diluted share). Goodwill, net of accumulated amortization, was $331.2 million and $360.0 million at the end of 2001 and 2000. The FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations," in June 2001. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets. The statement requires that the fair value of a liability for an asset's retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. The statement will be effective for fiscal years beginning after June 15, 2002. Snap-on is currently evaluating the impact these new accounting standards may have on Snap-on's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement provides a single accounting model for long-lived assets to be disposed of. Snap-on will adopt SFAS No. 144 at the beginning of its 2002 fiscal year. The effect of this change in accounting is not material to Snap-on's financial position or results of operations. OUTLOOK: Snap-on believes that the long-term underlying fundamental trends that influence its business remain sound. In 2002, Snap-on will continue its efforts to incorporate the Driven to Deliver(TM) business process into its organizational culture. The strengths and potential of Snap-on's businesses will continue to be examined, and appropriate actions to drive improvement in operational metrics will be a focus. As these changes are implemented, Snap-on will ensure that its near-term efforts on enhancing profitability are balanced with a disciplined review of longer-term profitable growth investments. Snap-on also expects further progress on working capital to lead to improvements in cash flow. Snap-on expects that the current weak economic conditions will continue to challenge sales growth and profitability, particularly in the first half of 2002. With $40 million in pretax savings targeted in 2002 from its restructuring and cost-control activities. Snap-on plans to invest approximately one-half of those savings to support the further devel- opment of innovative products and other profitable growth initiatives, such as the continued expansion of the Snap-on dealer network. Continued emphasis on inventory reduction, coupled with the weak economic conditions, will limit Snap-on's ability to benefit from restructuring savings in the first quarter of 2002; however, beginning in the second quarter, Snap-on expects that improved seasonal volumes and benefits from Operational Fitness will lead to earnings per share growth over 2001 levels. The Snap-on(R) brand is the leading brand preferred by professional technicians. High quality, product performance, exacting standards, customer service, strong relationships and innovation remain the guiding principles throughout Snap-on. In 2002, emphasis will remain on supporting Snap-on's traditional growth drivers: developing new, innovative products and services, enhancing the delivery of value to its customers, and reinforcing its strong brands worldwide. SAFE HARBOR: Statements in this document that are not historical facts, including statements (i) that include the words "expects," "targets," "believes," "anticipates," "estimates," 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, objectives or goals, are forward-looking statements. Snap-on or its representatives may also make similar forward-looking statements from time to time orally or in writing. Snap-on cautions the reader that these statements 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. Some of these factors are discussed below, as a well as elsewhere in this document, and in Snap-on's Securities and Exchange Commission filings. These important factors include the validity of assumptions set forth above and the timing and progress with which Snap-on can continue to achieve further cost reductions and savings from its restructuring initiatives; Snap-on's ability to retain and attract dealers and to withstand external negative factors, including terrorist disruptions on business, changes in trade, monetary and fiscal policies, laws and regulations, or other activities of governments or their agencies; the timing, speed or ability with which Snap-on can realize the benefits of the Driven to Deliver(TM) initiatives; and the absence of significant changes in the current competitive environment, inflation, energy supply or pricing, legal proceedings, supplier disruptions, currency fluctuations, or the material worsening of economic and political situations around the world. These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. Snap-on operates in a continually changing business environment and new factors emerge from time to time. Snap-on cannot predict such factors, nor can it assess the impact, if any, of such factors on Snap-on's financial position or its results of operations. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 27 Consolidated Statements of Earnings
(Amounts in millions except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Net sales $ 2,095.7 $ 2,175.7 $ 1,945.6 Cost of goods sold (1,134.1) (1,169.4) (1,032.8) Cost of goods sold - non-recurring charges (12.6) (9.5) (16.6) Operating expenses (848.7) (792.6) (723.7) Net finance income 35.7 38.1 60.5 Restructuring and other non-recurring charges (49.4) (12.3) (20.6) Interest expense (35.5) (40.7) (27.4) Other income (expense) - net (3.5) 3.3 12.9 - ------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes 47.6 192.6 197.9 - ------------------------------------------------------------------------------------------------------------------- Income taxes on earnings from continuing operations 26.1 69.5 70.7 - ------------------------------------------------------------------------------------------------------------------- Earnings before cumulative effect of a change in accounting principle 21.5 123.1 127.2 Cumulative effect of a change in accounting principle for derivatives in 2001 (net of tax benefit of $1.6 million) and for pensions in 2000 (net of tax of $15.9 million) (2.5) 25.4 - - ------------------------------------------------------------------------------------------------------------------- Net earnings $ 19.0 $ 148.5 $ 127.2 - ------------------------------------------------------------------------------------------------------------------- Net earnings per share - basic: Earnings before cumulative effect of a change in accounting principle $ .37 $ 2.11 $ 2.18 Cumulative effect of a change in accounting principle, net of tax (.04) .43 - - ------------------------------------------------------------------------------------------------------------------- Net earnings per share - basic $ .33 $ 2.54 $ 2.18 - ------------------------------------------------------------------------------------------------------------------- Net earnings per share - diluted: Earnings before cumulative effect of a change in accounting principle $ .37 $ 2.10 $ 2.16 Cumulative effect of a change in accounting principle, net of tax (.04) .43 - - ------------------------------------------------------------------------------------------------------------------- Net earnings per share - diluted $ .33 $ 2.53 $ 2.16 - ------------------------------------------------------------------------------------------------------------------- Weighted-average shares outstanding: Basic 57.9 58.4 58.5 Effect of dilutive options .2 .2 .4 - ------------------------------------------------------------------------------------------------------------------- Diluted 58.1 58.6 58.9 - ------------------------------------------------------------------------------------------------------------------- Pro forma amounts of a change in accounting for pensions: Net earnings $ 19.0 $ 123.1 $ 133.3 Net earnings per share - basic .33 2.11 2.28 Net earnings per share - diluted .33 2.10 2.26 - -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 28 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Consolidated Balance Sheets
(Amounts in millions except share data) December 29, 2001 December 30, 2000 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 6.7 $ 6.1 Accounts receivable - net of allowances 615.2 644.5 Inventories 375.2 418.9 Prepaid expenses and other assets 142.3 116.9 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 1,139.4 1,186.4 Property and equipment - net 327.7 345.1 Deferred income tax benefits 27.7 33.0 Intangibles - net 60.7 64.6 Goodwill - net 331.2 360.0 Other assets 87.6 80.0 - -------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,974.3 $2,069.1 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 141.2 $ 161.0 Notes payable and current maturities of long-term debt 29.1 70.3 Accrued compensation 58.7 56.3 Dealer deposits 42.0 39.8 Deferred subscription revenue 45.0 44.9 Accrued restructuring reserves 23.1 - Other accrued liabilities 210.3 165.7 - -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 549.4 538.0 Long-term debt 445.5 473.0 Deferred income taxes 24.7 24.7 Retiree health care benefits 92.7 92.2 Pension liability 54.5 60.1 Other long-term liabilities 31.7 37.1 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,198.5 1,225.1 - -------------------------------------------------------------------------------------------------------------------------- Shareholders' equity Preferred stock - authorized 15,000,000 shares of $1 par value; none outstanding - - Common stock - authorized 250,000,000 shares of $1 par value; issued 66,847,107 and 66,789,090 shares 66.8 66.8 Additional paid-in capital 108.0 71.6 Retained earnings 1,014.7 1,051.3 Accumulated other comprehensive income (loss) (120.6) (87.2) Grantor stock trust at fair market value - 5,984,145 and 6,443,033 shares (203.0) (179.6) Treasury stock at cost - 2,923,435 and 2,523,435 shares (90.1) (78.9) - -------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 775.8 844.0 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,974.3 $2,069.1 - -------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 29
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated Additional Other Grantor Total Common Paid-in Retained Comprehensive Stock Treasury Shareholders' (Amounts in millions except share data) Stock Capital Earnings Income (Loss) Trust Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 2, 1999 $66.7 $117.4 $ 883.2 $ (30.2) $(241.0) $(33.7) $762.4 Comprehensive income: Net earnings for 1999 127.2 Foreign currency translation (5.4) Minimum pension liability (.2) Total comprehensive income 121.6 Cash dividends - $.90 per share (52.6) (52.6) Dividend reinvestment plan - 38,809 shares 1.2 1.2 Stock plans - 5,479 shares .4 .4 Grantor stock trust - 246,569 shares 6.9 6.9 Share repurchase, net of reissuance - 489,115 shares (14.6) (14.6) Adjustment of grantor stock trust to fair market value (56.7) 56.7 - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2000 66.7 62.3 957.8 (35.8) (177.4) (48.3) 825.3 Comprehensive income: Net earnings for 2000 148.5 Foreign currency translation (52.0) Minimum pension liability .6 Total comprehensive income 97.1 Cash dividends - $.94 per share (55.0) (55.0) Dividend reinvestment plan - 50,725 shares .1 1.3 1.4 Stock plans - 8,908 shares .3 .3 Grantor stock trust - 234,417 shares 5.5 5.5 Share repurchase, net of reissuance - 1,018,096 shares (30.6) (30.6) Adjustment of grantor stock trust to fair market value 7.7 (7.7) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 30, 2000 66.8 71.6 1,051.3 (87.2) (179.6) (78.9) 844.0 Comprehensive income: Net earnings for 2001 19.0 Foreign currency translation (29.9) Mark to market for cash flow hedges, net of tax of $.7 million (2.0) Minimum pension liability (1.5) Total comprehensive income (14.4) Cash dividends - $.96 per share (55.6) (55.6) Dividend reinvestment plan - 47,650 shares 1.3 1.3 Stock plans - 10,367 shares .3 .3 Grantor stock trust - 458,888 shares 10.4 10.4 Share repurchase - 400,000 shares (11.2) (11.2) Tax benefit from certain stock options 1.0 1.0 Adjustment of grantor stock trust to fair market value 33.8 (33.8) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 29, 2001 $66.8 $108.0 $1,014.7 $(120.6) $(203.0) $(90.1) $775.8 - ----------------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
30 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Consolidated Statements of Cash Flows
(Amounts in millions) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Operating activities Net earnings $ 19.0 $ 148.5 $ 127.2 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Cumulative effect of a change in accounting principle, net of tax 2.5 (25.4) - Depreciation 50.4 48.4 41.3 Amortization of intangibles 3.7 3.3 2.6 Amortization of goodwill 13.9 14.5 11.5 Deferred income tax provision 5.4 9.7 16.3 Gain on sale of assets (.1) (1.5) (1.3) Gain on dispositions of businesses - - (4.4) Gain on mark to market for cash flow hedges (2.0) - - Restructuring and other non-recurring charges, net of tax 46.1 14.2 23.3 Changes in operating assets and liabilities, net of effects of acquisitions: (Increase) decrease in receivables 18.2 (50.2) 21.6 (Increase) decrease in inventories 18.9 9.0 (5.7) (Increase) decrease in prepaid and other assets (19.8) (12.9) 42.0 Increase (decrease) in accounts payable (13.2) 17.9 7.4 Increase (decrease) in accruals and other liabilities 20.7 14.7 (46.2) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 163.7 190.2 235.6 Investing activities Capital expenditures (53.6) (57.6) (35.4) Acquisitions of businesses - net of cash acquired (.9) (11.9) (440.7) Dispositions of businesses - 15.5 21.3 Disposals of property and equipment 6.9 11.7 6.5 - -------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (47.6) (42.3) (448.3) Financing activities Payment of long-term debt (6.4) (8.0) (48.7) Increase in long-term debt 200.4 6.3 6.8 Increase (decrease) in short-term borrowings - net (255.1) (77.9) 316.2 Purchase of treasury stock (11.2) (30.6) (14.6) Proceeds from stock purchase and option plans 13.0 7.1 8.5 Cash dividends paid (55.6) (55.0) (52.6) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (114.9) (158.1) 215.6 Effect of exchange rate changes on cash (.6) (1.3) (.3) - -------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents .6 (11.5) 2.6 Cash and cash equivalents at beginning of year 6.1 17.6 15.0 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 6.7 $ 6.1 $ 17.6 - -------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash paid for interest $ 32.3 $ 40.8 $ 27.4 Cash paid for income taxes 27.4 54.0 26.4 - -------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 31
Notes to Consolidated Financial Statements > NOTE 1 Nature of Operations Snap-on Incorporated ("Snap-on"), a Delaware corporation, is a leading global innovator, manufacturer and marketer of tool, diagnostic and equipment solutions for professional tool and equipment users. Product lines include hand and power tools, diagnostics and shop equipment, tool storage, diagnostics software and other solutions for vehicle-service, industrial, government and agricultural customers, and commercial applications, including construction and electrical. Products are sold through its dealer van, company-direct and distributor sales channels and the Internet. > NOTE 2 Summary of Accounting Policies PRINCIPLES OF CONSOLIDATION AND PRESENTATION: The consolidated financial statements include the accounts of Snap-on and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Snap-on Credit LLC ("the LLC"), a 50%-owned joint venture with Tyco International Ltd., is recorded using the equity method. Certain prior-year amounts have been reclassified to conform with the current-year presentation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles 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. FISCAL YEAR ACCOUNTING PERIOD: Snap-on's fiscal year ends on the Saturday nearest December 31. The 2001, 2000 and 1999 fiscal years each contained 52 weeks and ended on December 29, 2001, December 30, 2000, and January 1, 2000. REVENUE RECOGNITION: Snap-on recognizes revenues at the time that products are shipped or services are performed, and accrues for estimated future returns in the period in which the sale is recorded. Franchise fee revenue is recognized as the fees are earned and was not material in any year. Subscription revenue is deferred and recognized over the life of the subscription. CASH EQUIVALENTS: Snap-on considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. INVENTORIES: Inventories consist of manufactured products and merchandise for resale and are stated at the lower of cost or market. Manufactured products include the costs of materials, labor and manufacturing overhead. Inventories accounted for using the first-in, first-out ("FIFO") method approximated 65% and 63% of total inventories as of year-end 2001 and 2000. All other inventories are accounted for using the last-in, first-out ("LIFO") cost method. For additional inventory information, refer to Note 4. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over estimated useful lives. Accelerated depreciation methods are used for income tax purposes. Major repairs that extend the useful life of an asset are capitalized, while routine maintenance and repairs are expensed as incurred. Capitalized software included in property and equipment reflects costs related to internally developed or purchased software for internal use that are capitalized and amortized on a straight-line basis over their estimated useful lives. Development costs for computer software to be sold, leased or otherwise marketed externally are capitalized once technological feasibility has been achieved and are amortized on a straight-line basis over their estimated useful lives. Capitalized software is subject to an ongoing assessment of recoverability based upon anticipated future revenues and identified changes in hardware and software technologies. For additional property and equipment information, refer to Note 5. GOODWILL AND INTANGIBLES: Goodwill and other intangibles are being amortized over 13 to 40 years on a straight-line basis. Goodwill, net of accumulated amortization, was $331.2 million and $360.0 million at the end of 2001 and 2000. Pretax goodwill amortization was $13.9 million, $14.5 million and $11.5 million for 2001, 2000 and 1999. Accumulated amortization of goodwill was $55.6 million and $41.7 million at the end of 2001 and 2000. Snap-on continually evaluates the existence of goodwill impairment on the basis of whether the goodwill is fully recoverable from projected, undiscounted net cash flows of the related business unit. Patents and trademarks totaling $60.7 million and $64.6 million at year-end 2001 and 2000 are being amortized over their estimated useful lives. Accumulated amortization of patents and trademarks was $12.2 million and $9.6 million at the end of 2001 and 2000. At the beginning of its 2002 fiscal year, Snap-on will adopt Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires the periodic testing of goodwill and indefinite-lived intangible assets for impairment, as compared to the current method of amortizing such assets to expense over their estimated useful lives. SHIPPING AND HANDLING: Snap-on adopted Emerging Issues Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires that amounts billed to customers for shipping and handling be included as a component of sales. The impact of implementing this statement was not significant to any periods presented. Shipping and handling costs are included as a component of both "Cost of goods sold" and "Operating expenses" on the accompanying Consolidated Statements of Earnings. In 2001, 2000 and 1999, costs of $11.2 million, $11.1 million and $12.6 million were recorded in "Cost of goods sold," while costs of $41.9 million, $41.9 million and $35.5 million were recorded in "Operating expenses." RESEARCH AND ENGINEERING: Research and engineering costs are charged to expense in the year incurred except for certain software development costs that qualify for capitalization. For 2001, 2000 and 1999, these costs were $54.6 million, $50.6 million and $50.2 million. 32 SNAP-ON INCORPORATED 2001 ANNUAL REPORT INCOME TAXES: Deferred income taxes are provided for temporary differences arising from differences in bases of assets and liabilities for tax and financial reporting purposes. Deferred income taxes are recorded on temporary differences at the tax rate expected to be in effect when the temporary differences reverse. For detailed tax information, refer to Note 9. FOREIGN CURRENCY TRANSLATION: The financial statements of Snap-on's foreign subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Assets and liabilities of foreign subsidiaries are translated at current rates of exchange, and income and expense items are translated at the average exchange rate for the year. The resulting translation adjustments are recorded directly into "Accumulated other comprehensive income (loss)" in the accompanying Consolidated Balance Sheets. Foreign exchange transactions resulted in pretax losses of $6.5 million in 2001, gains of $4.1 million in 2000 and gains of $2.5 million in 1999, and are reported in "Other income (expense) - net" on the accompanying Consolidated Statements of Earnings. NET FINANCE INCOME: Net finance income consists of royalty and management fees paid by the LLC based on the volume of receivables originated by the LLC and 50% of any residual profit or loss of the LLC after operating expenses, including royalty and management fees, interest costs and credit loss provisions. Net finance income also consists of installment contract income and dealer start-up loan receivable income, net of administrative expenses, derived from Snap-on's wholly owned international credit operations. Net finance income includes gains on the sale of receivables when applicable. ADVERTISING AND PROMOTION: Production costs of future media advertising are deferred until the advertising occurs. All other advertising and promotion costs are generally expensed when incurred. For 2001, 2000 and 1999, advertising and promotion expense totaled $47.6 million, $47.3 million and $36.2 million. WARRANTIES: Snap-on provides product warranties for specific product lines and accrues for estimated future warranty costs in the period in which the sale is recorded. DERIVATIVES: Snap-on utilizes derivative financial instruments, including interest rate swaps and foreign exchange contracts, to manage its exposure to interest rate and foreign currency exchange rate risks. Snap-on accounts for its derivatives in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. The adoption of this standard in 2001 resulted in a cumulative effect transition adjustment that decreased reported net income in 2001 by $2.5 million after tax related to a hedge strategy that did not qualify for hedge accounting under SFAS No. 133. Snap-on also recorded in 2001 a transition adjustment of $1.2 million after tax in "Accumulated other comprehensive income (loss)" to recognize previously deferred net gains on derivatives designated as cash flow hedges that qualify for hedge accounting under SFAS No. 133. Snap-on does not hold or issue financial instruments for speculative or trading purposes. For detailed financial instrument information, refer to Note 10. ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for under the purchase method, prohibiting the use of the pooling-of-interests approach, and includes criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 requires the periodic testing of goodwill and indefinite-lived intangible assets for impairment, as compared to the current method of amortizing such assets to expense over their estimated useful lives. Snap-on will adopt SFAS No. 142 at the beginning of its 2002 fiscal year, and estimates that the pretax impact of discontinuing goodwill amortization will approximate $13.9 million ($11.9 million after tax) on an annualized basis. Snap-on is currently evaluating what additional impact the adoption of SFAS No. 142 may have on Snap-on's financial position or results of operations. In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets. The statement requires that the fair value of a liability for an asset's retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. The statement will be effective for fiscal years beginning after June 15, 2002. Snap-on is currently evaluating the impact this new accounting standard may have on Snap-on's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement provides a single accounting model for long-lived assets to be disposed of. Snap-on will adopt SFAS No. 144 at the beginning of its 2002 fiscal year. The effect of this change in accounting is not material to Snap-on's financial position or results of operations. PER SHARE DATA: Basic earnings per share calculations were computed by dividing net earnings by the corresponding weighted-average number of common shares outstanding for the period. The dilutive effect of the potential exercise of outstanding options to purchase common shares is calculated using the treasury stock method. Snap-on had dilutive shares as of year-end 2001, 2000 and 1999 of 241,557 shares, 175,155 shares and 383,200 shares. > NOTE 3 Acquisitions and Divestitures During 2001, Snap-on incurred acquisition costs of $.9 million related to the finalization of its fiscal 2000 acquisitions. During 2000, Snap-on acquired full ownership of two business operations. The aggregate cash purchase price plus costs related to the finalization of 1999 acquisitions was $11.9 million. Pro forma financial information has not been presented, as the effects of these businesses, individually and in the aggregate, were not material. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 33 Notes to Consolidated Financial Statements (continued) On September 30, 1999, Snap-on acquired Bahco Group AB ("Bahco") for $391 million in a cash purchase transaction. Also during 1999, Snap-on acquired the remaining 40% of Mitchell Repair Information Company, LLC ("MRIC") and full ownership of three businesses for an aggregate cash purchase price of $73.9 million. During the fourth quarter of 1999, Snap-on sold a 15% interest in MRIC to Genuine Parts Company. During 2000, Snap-on divested Windsor Forestry Tools Inc. ("Windsor"), which was acquired as part of the Bahco acquisition. As Windsor was accounted for as "held for sale" in accordance with Accounting Principles Board ("APB") Opinion No. 16, it had no impact on Snap-on's Consolidated Statements of Earnings. The sale of Windsor resulted in cash proceeds of $15.5 million and an adjustment to goodwill. > NOTE 4 Inventories The components of Snap-on's inventories were as follows: (Amounts in millions) 2001 2000 - ------------------------------------------------------------------- Finished goods $351.4 $386.0 Work in process 41.5 45.1 Raw materials 77.2 79.7 Excess of current cost over LIFO cost (94.9) (91.9) - ------------------------------------------------------------------- Total inventories $375.2 $418.9 - ------------------------------------------------------------------- > NOTE 5 Property and Equipment Snap-on's property and equipment values, which are carried at cost, were as follows: (Amounts in millions) 2001 2000 - ------------------------------------------------------------------- Land $ 23.4 $ 24.3 Buildings and improvements 195.5 204.8 Machinery and equipment 501.3 477.2 - ------------------------------------------------------------------- 720.2 706.3 Less: accumulated depreciation (392.5) (361.2) - ------------------------------------------------------------------- Property and equipment - net $ 327.7 $ 345.1 - ------------------------------------------------------------------- The estimated service lives of property and equipment are principally as follows: - ------------------------------------------------------------------- Buildings and improvements 3 to 50 years Machinery and equipment 2 to 15 years Computer software 2 to 7 years Vehicles 2 to 6 years - ------------------------------------------------------------------- > NOTE 6 Accounts Receivable Accounts receivable include trade and installment receivables. At the end of 2001 and 2000, the allowance for doubtful accounts was $39.6 million and $40.9 million. Trade accounts receivable of $26.0 million with extended credit terms are due beyond one year from the end of 2001. There were no trade accounts receivable due beyond one year as of year-end 2000. Gross installment receivables amounted to $85.0 million and $89.7 million at the end of 2001 and 2000, and include $13.4 million and $15.0 million of unearned finance charges at the end of 2001 and 2000. Gross installment receivables of $42.4 million and $41.3 million are due beyond one year from the end of 2001 and 2000. > NOTE 7 Snap-on Credit LLC Joint Venture Snap-on Credit LLC ("the LLC") was established on January 3, 1999, as a 50/50 joint venture between Snap-on and Newcourt Financial USA Inc. ("Newcourt"). The LLC provides a broad range of financial services to Snap-on's U.S. dealer and customer network and to Snap-on's industrial and other customers. As a result of establishing the LLC, Snap-on effectively outsourced to the LLC its domestic captive credit function, which was previously managed by Snap-on's wholly owned subsidiary, Snap-on Credit Corporation. On November 15, 1999, Newcourt was acquired by The CIT Group, Inc. ("CIT") and was subsequently acquired by Tyco International Ltd. on June 1, 2001. Snap-on also provides extended-term financing internationally through its wholly owned credit subsidiaries. Snap-on receives royalty and management fee income from the LLC based on the volume of receivables originated by the LLC and also shares with CIT ratably in any residual net profit or loss of the joint venture after operating expenses, including royalty and management fees, interest costs and credit loss provisions. These amounts are included in net finance income. At December 29, 2001, Snap-on's equity investment in the LLC was $.3 million. The LLC originates extended-term receivables on sales of Snap-on product sold through the U.S. dealer and customer network and to Snap-on's industrial and other customers. The LLC then sells substantially all of these receivables (through asset-securitization transactions) to CIT and pays securitization-related fees to CIT in conjunction with its purchase of the receivables. The LLC originates loans primarily in three ways. Extended-term contracts are offered to technicians to enable them to purchase tools and equipment on an extended-term payment plan, generally with an average term of 32 months. Lease financing is offered to shop owners, both independents and national chains, who purchase equipment items. The duration of lease contracts is often two to five years. Financing options are also made available to dealers to meet a number of financing needs, including van and truck leases, working capital loans, and loans to enable new dealers to fund the purchase of the franchise. The duration of these contracts can be up to 10 years. The above receivables are secured by the underlying tools or equipment financed and other dealer assets. 34 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Financial information regarding LLC loan originations and reserves was as follows: 2001 2000 1999 - ------------------------------------------------------------------------------- Originations (Amounts in millions) Extended-credit receivables $ 343.6 $ 328.9 $ 301.7 Equipment leases 47.7 81.0 65.9 Dealer financing 73.4 61.4 44.1 - ------------------------------------------------------------------------------- Total originations $ 464.7 $ 471.3 $ 411.7 - ------------------------------------------------------------------------------- Number of accounts outstanding Extended-credit receivables 177,484 178,461 176,056 Equipment leases 16,765 19,051 18,377 Dealer financing 2,781 2,430 1,917 - ------------------------------------------------------------------------------- Total 197,030 199,942 196,350 - ------------------------------------------------------------------------------- Average account balance (Amounts in dollars) Extended-credit receivables $ 1,936 $ 1,843 $ 1,714 Equipment leases 2,845 4,252 3,586 Dealer financing 26,393 25,267 23,005 - ------------------------------------------------------------------------------- Reserves Net reserves (Amounts in millions) $ 8.1 $ 8.6 $ 12.1 Net reserves as % of originations 1.7% 1.8% 2.9% - ------------------------------------------------------------------------------- The LLC establishes a credit reserve for all receivables sold to CIT, and the LLC's credit losses on the sold receivables are limited to the extent of the reserve. In addition, certain loans originated by the LLC have a recourse provision to Snap-on. At December 29, 2001, $46.3 million of loans originated by the LLC have a recourse provision to Snap-on if the receivables become more than 90 days past due. In 2001, $6.2 million of such receivables were purchased by Snap-on under the recourse provision. In addition, at December 29, 2001, there were $27.1 million of dealers' customer-originated loans that have a primary recourse provision directly to the dealer, with secondary recourse to Snap-on in the event of dealer default. In 2001, the amount of such receivables purchased by Snap-on under the recourse provision was not material. The LLC also establishes a prepayment reserve to cover amounts due to CIT as a result of early prepayment by customers on loans sold. The LLC maintains a $25 million bank line of credit for working capital purposes, of which Snap-on is a 60% guarantor and CIT is a 40% guarantor. Borrowings under this facility totaled $22.0 million at both December 29, 2001, and December 30, 2000. The average amount outstanding under this facility was $11.9 million in 2001 and $14.3 million in 2000. The weighted-average interest rate for 2001 and 2000 was 4.2% and 6.9%. As of December 29, 2001, and December 30, 2000, the weighted-average interest rate was 2.5% and 7.8%. In conjunction with the establishment of the LLC, Snap-on repurchased $337.0 million of its previously securitized installment receivables and $68.3 million of its previously securitized dealer-finance loan receivables. Upon repurchase, these receivables were sold to Newcourt. In a separate transaction, Snap-on Credit Corporation also sold to Newcourt its remaining on-balance-sheet portfolio of U.S. installment receivables, including existing extended term, equipment lease and dealer loan receivables, for an aggregate sale price of $141.1 million, resulting in a pretax gain of approximately $40 million. Since Newcourt had the right to put back to Snap-on the unpaid portion of the extended-term installment receivable portfolio based on the same pricing formula, this gain was recognized by Snap-on over a two-year period. These transactions were recorded as sales of accounts receivable with the gains on these sales included in "Net finance income" on the accompanying Consolidated Statements of Earnings. > NOTE 8 Short-term and Long-term Debt Notes payable to banks under bank lines of credit totaled $26.5 million and $65.4 million at the end of 2001 and 2000. Commercial paper totaled $142.2 million at the end of 2001 and $365.5 million at the end of 2000. At the end of 2001, Snap-on had commercial paper outstanding in U.S. dollars of $135.0 million and Japanese yen of $7.2 million. At the end of 2000, Snap-on had commercial paper outstanding in U.S. dollars of $316.6 million, Swedish kronor of $28.8 million, euros of $14.0 million and Japanese yen of $6.1 million. These amounts have been classified as long term, as it is Snap-on's intent, and it has the ability (supported by its long-term revolving credit facilities), to refinance this debt on a long-term basis. At December 29, 2001, Snap-on had $458 million of multi-currency revolving credit facilities to support its commercial paper programs. Snap-on has a $208 million revolving credit facility that is effective for a five-year term and terminates on August 20, 2005, and a $250 million credit facility that is a 364-day facility with a one-year term-out option that terminates on August 19, 2002. The term-out option allows Snap-on to elect to borrow under the credit facility for an additional year after the termination date. At the end of 2001 and 2000, Snap-on was in compliance with all covenants of the revolving credit facilities and there were no borrowings under either revolving credit commitment. The most restrictive covenant requires Snap-on to maintain a total debt to total capital percentage of 60% or better. Average commercial paper and bank notes outstanding were $389.2 million in 2001 and $529.1 million in 2000. The weighted-average interest rate on these instruments was 4.3% in 2001 and 5.9% in 2000. As of December 29, 2001, and December 30, 2000, commercial paper and bank notes outstanding had a weighted-average interest rate of 2.1% and 6.1%. In August 2001, Snap-on issued $200 million of unsecured notes pursuant to a $300 million shelf registration statement filed with the Securities and Exchange Commission in 1994. In October 1995, Snap-on issued $100 million of unsecured notes to the public under this shelf registration. The August 2001 notes require semiannual interest payments at a rate of 6.25% and mature in their entirety on August 15, 2011. The October 1995 notes require semiannual interest payments at a rate of 6.625% and mature in their entirety on October 1, 2005. The proceeds from these issuances were used to repay a portion of Snap-on's outstanding commercial paper and for working capital and general corporate purposes. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 35 Notes to Consolidated Financial Statements (continued) Snap-on's long-term debt consisted of the following: (Amounts in millions) 2001 2000 - ------------------------------------------------------------------------------- Senior unsecured indebtedness $300.0 $100.0 Borrowings under commercial paper programs 142.2 365.5 Other long-term debt 5.9 12.4 - ------------------------------------------------------------------------------- 448.1 477.9 Less: current maturities (2.6) (4.9) - ------------------------------------------------------------------------------- Total long-term debt $445.5 $473.0 - ------------------------------------------------------------------------------- The annual maturities of Snap-on's long-term debt due in the next five years are $2.6 million in 2002, $2.7 million in 2003, $.2 million in 2004 and $242.5 million in 2005, with no maturities of long-term debt in 2006. > NOTE 9 Income Taxes Earnings before income taxes consisted of the following: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- United States $20.7 $175.2 $171.5 Foreign 22.8 58.7 26.4 - ------------------------------------------------------------------------------- Total earnings before income taxes $43.5 $233.9 $197.9 - ------------------------------------------------------------------------------- The provision (benefit) for income taxes consisted of the following: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Current: Federal $ 21.8 $42.9 $38.2 Foreign 13.3 19.7 13.9 State 3.7 4.6 5.4 - ------------------------------------------------------------------------------- Total current 38.8 67.2 57.5 - ------------------------------------------------------------------------------- Deferred: Federal (8.1) 11.8 9.8 Foreign (1.3) 4.0 1.4 State (4.9) 2.4 2.0 - ------------------------------------------------------------------------------- Total deferred (14.3) 18.2 13.2 - ------------------------------------------------------------------------------- Total income tax provision $ 24.5 $85.4 $70.7 - ------------------------------------------------------------------------------- A reconciliation of Snap-on's effective income tax rate to the statutory federal tax rate follows: 2001 2000 1999 - ------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) in tax rate resulting from: State income taxes, net of federal benefit 3.2 2.0 2.4 Foreign sales corporation tax benefit (1.6) (1.4) (1.2) Restructuring and other non-recurring charges 19.8 - (.3) Change in valuation allowance (.1) 1.0 .2 Non-deductible goodwill amortization 1.8 1.4 .1 Foreign rate difference (.8) (1.0) (.5) Other (1.0) (.5) - - ------------------------------------------------------------------------------- Effective tax rate 56.3% 36.5% 35.7% - ------------------------------------------------------------------------------- Snap-on's reported effective income tax rate was 56.3% for 2001, 36.5% for 2000 and 35.7% for 1999. The 2001 tax rate was adversely impacted by the 2001 restructuring, non-recurring and other non-comparable charges where certain expenses in various foreign jurisdictions were not tax benefited. Temporary differences that give rise to the net deferred tax benefit were as follows: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Current deferred income tax benefits: Inventories $ 26.4 $ 20.6 $ 18.4 Accruals and reserves not currently deductible 19.0 17.2 32.8 Restructuring and other non-recurring accruals 31.5 19.3 3.4 Other 3.3 3.5 5.0 - ------------------------------------------------------------------------------- Total current (included in prepaid expenses) 80.2 60.6 59.6 - ------------------------------------------------------------------------------- Long-term deferred income tax benefits (liabilities): Employee benefits 46.8 45.1 66.7 Net operating losses 26.3 27.9 27.6 Depreciation (37.5) (39.0) (41.6) Restructuring and other non-recurring accruals - - (3.0) Snap-on Credit LLC securitizations (10.2) (1.8) - Other 3.9 3.3 2.2 Valuation allowance (26.3) (27.2) (24.2) - ------------------------------------------------------------------------------- Total long-term 3.0 8.3 27.7 - ------------------------------------------------------------------------------- Net deferred income tax benefit $ 83.2 $ 68.9 $ 87.3 - ------------------------------------------------------------------------------- At December 29, 2001, Snap-on had tax net operating loss carryforwards totaling $87.6 million as follows: (Amounts in millions) United States Foreign Total - ------------------------------------------------------------------------------- Year of expiration: 2002 - 2004 $ - $ 8.0 $ 8.0 2005 - 2008 10.5 12.2 22.7 2009 - 2013 - 1.6 1.6 Indefinite - 55.3 55.3 - ------------------------------------------------------------------------------- $10.5 $77.1 $87.6 - ------------------------------------------------------------------------------- A valuation allowance totaling $26.3 million, $27.2 million and $24.2 million in 2001, 2000 and 1999 has been established for deferred income tax benefits related to certain subsidiary loss carryforwards that may not be realized. Included in this valuation allowance is $2.4 million that relates to the deferred tax assets recorded from acquisitions. Any tax benefits subsequently recognized for these deferred tax assets will be allocated to goodwill. Realization of the net deferred tax assets is dependent on generating sufficient taxable income prior to their expiration. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. 36 SNAP-ON INCORPORATED 2001 ANNUAL REPORT The undistributed earnings of all subsidiaries totaled $159.1 million, $146.7 million and $112.8 million at the end of 2001, 2000 and 1999. Snap-on does not expect that additional income taxes will be incurred on future distributions of such earnings, and no deferred income taxes have been provided for the distribution of these earnings to the parent company. > NOTE 10 Financial Instruments Snap-on accounts for its hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. These standards require that all derivative instruments be reported in the consolidated financial statements at fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or "Accumulated other comprehensive income (loss)," depending on the type of hedged transaction and whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments reported in "Accumulated other comprehensive income (loss)" must be reclassified as 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 current period. In accordance with the provisions of SFAS No. 133, Snap-on recorded a transition adjustment on December 31, 2000, the beginning of Snap-on's 2001 fiscal year, to recognize its derivative instruments at fair value and to recognize the difference between the carrying values and fair values of related hedged assets and liabilities upon adoption of these standards. The cumulative effect of this transition adjustment was to decrease reported net income in the first quarter of 2001 by $2.5 million after tax related to a hedge strategy that did not qualify for hedge accounting under SFAS No. 133. Snap-on also recorded in the first quarter of 2001 a transition adjustment of $1.2 million after tax in "Accumulated other comprehensive income (loss)" on the accompanying Consolidated Balance Sheets to recognize previously deferred net gains on derivatives designated as cash flow hedges that qualify for hedge accounting under SFAS No. 133. Snap-on uses derivative instruments to manage well-defined interest rate and foreign currency exposures. Snap-on does not use derivative instruments for speculative or trading purposes. The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure, (ii) whether or not overall risk is being reduced, and (iii) if there is a correlation between the value of the derivative instrument and the underlying obligation. Upon adoption of the new derivative accounting requirements, on the date a derivative contract is entered into, Snap-on designates the derivative as either 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. FOREIGN CURRENCY DERIVATIVE INSTRUMENTS: Snap-on has operations in a number of countries that have transactions outside their functional currencies and, as a result, is exposed to changes in foreign currency exchange rates. In addition, Snap-on hedges the anticipated repayment of intercompany loans to foreign subsidiaries denominated in foreign currencies. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets. To the extent the net exposures are hedged, forward exchange contracts are used. Gains and/or losses on these foreign currency hedges are intended to offset losses and/or gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. At December 29, 2001, Snap-on had net outstanding foreign exchange forward contracts totaling $191.3 million comprised of buy contracts of $55.1 million in Swedish kronor and sell contracts of $113.6 million in euros, $73.8 million in British pounds, $31.2 million in Canadian dollars, $8.8 million in Singapore dollars, $4.9 million in Danish kronor, $4.4 million in Australian dollars and $9.7 million in other currencies. At December 30, 2000, Snap-on had outstanding foreign exchange forward contracts totaling $168.9 million comprised of contracts to sell $65.4 million in euros, $61.1 million in British pounds, $26.4 million in Canadian dollars, $12.6 million in Swedish kronor and $3.4 million in other currencies. Snap-on's foreign exchange forward contracts generally do not qualify for hedge accounting treatment under SFAS No. 133 and are excluded from the assessment of effectiveness. 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 Consolidated Statements of Earnings. Those forward exchange contracts that qualify for hedge accounting treatment are accounted for as cash flow hedges where the effective portion of the changes in fair value of the derivative is recorded in "Accumulated other comprehensive income (loss)." When the hedged item is realized in income, the gain or loss included in "Accumulated other comprehensive income (loss)" is reclassified to income in the same financial statement caption as the hedged item. The ineffective portion of changes in fair value of the cash flow hedges are reported in earnings as foreign exchange gain or loss, which is included in "Other income (expense) - net" and which were not material. Forward points on forward exchange contracts are recognized as interest expense. NON-DERIVATIVE INSTRUMENTS USED IN HEDGING RELATIONSHIPS: Snap-on uses non-U.S. dollar financing transactions as net investment hedges of long-term investments in the corresponding foreign currency. Hedges that meet the effectiveness requirements are accounted for under net investment hedging rules. The effective portion of the net investment hedge of a foreign operation is recorded in "Accumulated other comprehensive income (loss)" as a cumulative translation adjustment. When applicable, the ineffective portion of the net investment hedge is recorded in earnings as foreign exchange gain or loss, which is included in "Other income (expense) - net" and which were not material. At December 29, 2001, net gains of $11.4 million arising from effective hedges of net investments have been reflected in the cumulative translation adjustment account as a component of "Accumulated other comprehensive income (loss)." INTEREST RATE SWAP AGREEMENTS: Snap-on enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates, specifically the future issuance of commercial paper. Snap-on has interest rate swap agreements that effectively exchange floating rate payments for fixed rate payments. Interest rate swap agreements are accounted for as cash flow hedges. The differentials paid or received SNAP-ON INCORPORATED 2001 ANNUAL REPORT 37 Notes to Consolidated Financial Statements (continued) on interest rate swap agreements are accrued and recognized as adjustments to interest expense. The effective portion of the change in fair value of the derivative is recorded in "Accumulated other comprehensive income (loss)," while any ineffective portion is recorded as an adjustment to interest expense. At December 29, 2001, and December 30, 2000, the notional principal amounts outstanding of these agreements were $25 million and $100 million, respectively. For all derivatives qualifying for hedge accounting under SFAS No. 133, the net accumulated derivative loss at December 29, 2001, was $2.0 million after tax and is reflected in "Accumulated other comprehensive income (loss)." At December 29, 2001, the maximum maturity date of any cash flow hedge was approximately 39 months. During the next 12 months, Snap-on expects to reclassify into earnings net losses from "Accumulated other comprehensive income (loss)" of approximately $1.1 million after tax at the time the underlying hedged transactions are realized. During 2001, cash flow hedge ineffectiveness was not material. However, there were pretax derivative losses totaling $.8 million in 2001 that were excluded from the assessment of effectiveness and, as a result, were recorded in "Interest expense" and "Other income (expense) - net." CREDIT CONCENTRATIONS: Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its interest rate swap and foreign exchange 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. Snap-on's accounts receivable do not represent significant concentrations of credit risk because of the diversified portfolio of individual customers and geographic areas. FAIR VALUE OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires Snap-on to disclose the fair value of financial instruments for both on- and off-balance-sheet assets and liabilities for which it is practicable to estimate that value. The following methods and assumptions were used in estimating the fair value of financial instruments: Installment contracts: A discounted cash flow analysis was performed over the average life of a contract using a discount rate currently available to Snap-on adjusted for credit quality, cost and profit factors. As of December 29, 2001, and December 30, 2000, the fair value was approximately $82 million and $85 million versus a book value of $71.6 million and $74.7 million. Long-term debt: The fair value of long-term debt including current maturities was estimated using a discounted cash flow analysis based on quoted market rates for similar instruments. As of December 29, 2001, and December 30, 2000, the fair value was approximately $452 million and $479 million versus a book value of $448.1 million and $477.9 million. Other financial instruments: The carrying amounts of all other financial instruments approximate fair value based on quoted market prices or discounted cash flow analysis for cash equivalents, interest rate swaps, forward exchange contracts and other financial instruments. > NOTE 11 Pension Plans Snap-on has several non-contributory pension plans covering most U.S. employees and certain employees in foreign countries. Snap-on also has foreign contributory plans covering certain foreign employees. Retirement benefits are generally provided based on employees' years of service and average earnings or stated amounts for years of service. Normal retirement age is 65, with provisions for earlier retirement. Snap-on recognizes retirement plan expenses in accordance with SFAS No. 87, "Employers' Accounting for Pensions," and contributes to the plans based on actuarial computations. In certain defined retirement benefit plans, these computations include the amortization of past service cost over a maximum of 30 years. Plan assets primarily consist of corporate equities and various debt securities. In 2001, Snap-on amended certain of its U.S. pension plans and began offering a non-contributory account-based pension plan with a 401(k) match to certain U.S. salaried employees ("the 401(k) Plan"). Eligible participants were allowed to elect the 401(k) Plan, while new hires as of January 1, 2001, are automatically enrolled under this plan. Under the 401(k) Plan, Snap-on matches 50% of the first 6% of the employee's annual pretax contributions in Snap-on common stock, which is funded through the Grantor Stock Trust. Employees have the opportunity to diversify this match as they approach retirement. For 2001, Snap-on contributed $.4 million of Snap-on common stock to the 401(k) Plan. Snap-on utilizes the market-related approach to value its plan assets. During the fourth quarter of 2000, Snap-on changed its method of valuing its plan assets from a five-year averaging method to a three-year averaging method. The impact of this change is reported as a change in accounting principle for pensions, with a cumulative, pretax effect of $41.3 million recorded as of January 2, 2000. The impact on 2000 operating results was to reduce pension expense by $9.7 million. Snap-on's net pension expense (income) included the following components: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 15.8 $ 15.8 $ 18.7 Interest cost on projected benefits 38.9 35.6 34.0 Less: actual loss (return) on plan assets 1.6 (33.1) (37.2) Curtailment gain - (.6) (3.3) Net amortization and deferral: Actual return on plan assets in excess of projected return (57.2) (20.2) (.6) Amortization of net assets at transition (1.3) (1.3) (1.2) Other (4.1) (3.7) 1.3 - ------------------------------------------------------------------------------- Net pension expense (income) $ (6.3) $ (7.5) $ 11.7 - ------------------------------------------------------------------------------- 38 SNAP-ON INCORPORATED 2001 ANNUAL REPORT The status of Snap-on's pension plans was as follows: (Amounts in millions) 2001 2000 - ------------------------------------------------------------------------------- Change in projected benefit obligation Benefit obligation at beginning of year $490.6 $ 491.4 Service cost 15.8 15.8 Interest cost 38.9 35.6 Plan participants' contributions .8 .6 Benefits paid (26.4) (24.1) Curtailment gain - (.6) Plan amendments 6.9 .7 Actuarial loss (gain) 31.2 (31.2) Foreign currency impact (2.8) (3.9) Effect of business acquisitions 7.0 7.9 Effect of settlements - (1.6) - ------------------------------------------------------------------------------- Benefit obligation at end of year $562.0 $ 490.6 - ------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $545.8 $ 526.7 Actual return (loss) on plan assets (1.6) 33.1 Plan participants' contributions .8 .6 Employer contributions 5.4 5.2 Benefits paid (26.4) (24.1) Foreign currency impact (1.8) (1.8) Effect of business acquisitions 7.5 8.0 Effect of settlements - (1.9) - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $529.7 $545.8 - ------------------------------------------------------------------------------- Funded status $ (32.3) $ 55.4 Unrecognized net assets at year-end (2.9) (4.0) Change in unrecognized net gain from revaluation of market-related value of assets - 41.3 Unrecognized net loss (gain) from experience different than assumed .1 (136.4) Unrecognized prior service cost 14.8 10.5 - ------------------------------------------------------------------------------- Net amount recognized $ (20.3) $ (33.2) - ------------------------------------------------------------------------------- Amounts recognized in the consolidated balance sheets consist of: Prepaid benefit cost $ 31.6 $ 27.5 Accrued benefit liability (56.2) (63.1) Other assets .7 .3 Accumulated other comprehensive income (loss) 3.6 2.1 - ------------------------------------------------------------------------------- Net amount recognized $(20.3) $ (33.2) - ------------------------------------------------------------------------------- The prepaid benefit cost is included in "Other assets" with the current portion in "Prepaid expenses and other assets" on the accompanying Consolidated Balance Sheets, while the accrued benefit liability is included in "Pension liability," with the current portion in "Other accrued liabilities." The weighted-average rate assumptions used in determining pension costs and the projected benefit obligation were as follows: 2001 2000 - ------------------------------------------------------------------------------- Discount rate used to determine present value of projected benefit obligation at end of year 7.4% 7.9% Expected long-term rate of return on plan assets for the year 9.6% 9.7% Expected rate of increase in future compensation levels 4.6% 4.9% - ------------------------------------------------------------------------------- Snap-on has pension plans in which the accumulated benefit obligation exceeds the fair value of plan assets. At the end of 2001 and 2000, Snap-on had three such plans, including certain non-U.S. plans, with an aggregate accumulated benefit obligation of $30.0 million and $25.3 million with no plan assets. > NOTE 12 Retiree Health Care Snap-on provides certain health care benefits for most retired U.S. employees. The majority of Snap-on's U.S. employees become eligible for those benefits if they reach early retirement age while working for Snap-on; however, the age and service requirements for eligibility under the plans have been increased for certain employees hired on and after specified dates since 1992. Generally, most plans pay stated percentages of covered expenses after a deductible is met. There are several plan designs, with more recent retirees being covered under a comprehensive major medical plan. In determining benefits, the plans take into consideration payments by Medicare and other coverages. For employees retiring under the comprehensive major medical plans, contributions are required, and these plans contain provisions allowing for benefit and coverage changes. The plans require retirees to contribute either the full cost of the coverage or amounts estimated to exceed a capped per-retiree annual cost commitment by Snap-on. Most employees hired since 1994 are required to pay the full cost. Snap-on does not fund the retiree health care plans. Snap-on recognizes postretirement health care expense in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." Snap-on's net postretirement health care benefits expense included the following components: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Service cost - benefits attributed to service during the year $ 1.1 $1.3 $2.0 Interest cost on accumulated postretirement benefit obligation 5.5 5.6 5.9 Curtailment gain - - (.2) Amortization of unrecognized net gain (1.4) (.9) (.1) - ------------------------------------------------------------------------------- Net postretirement health care benefit expense $ 5.2 $6.0 $7.6 - ------------------------------------------------------------------------------- SNAP-ON INCORPORATED 2001 ANNUAL REPORT 39 Notes to Consolidated Financial Statements (continued) The status of Snap-on's U.S. postretirement plans was as follows: (Amounts in millions) 2001 2000 - ------------------------------------------------------------------------------- Change in projected benefit obligation Benefit obligation at beginning of year $ 75.0 $ 83.2 Service cost 1.1 1.3 Interest cost 5.5 5.6 Plan participants' contributions 2.2 1.6 Benefits paid (6.8) (6.8) Actuarial gain (1.7) (9.9) - ------------------------------------------------------------------------------- Benefit obligation at end of year $ 75.3 $ 75.0 - ------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year $ - $ - Plan participants' contributions 2.2 1.6 Employer contributions 4.6 5.2 Benefits paid (6.8) (6.8) - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $ - $ - - ------------------------------------------------------------------------------- Unfunded status $(75.3) $(75.0) Unrecognized actuarial gain (22.2) (22.2) - ------------------------------------------------------------------------------- Postretirement liability $(97.5) $(97.2) - ------------------------------------------------------------------------------- The accumulated postretirement benefit obligation at the end of 2001 consists of a current liability of $4.8 million and a long-term liability of $92.7 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% at the end of 2001 and 8.0% at the end of 2000. The actuarial calculation assumes a health care trend rate of 6.2% in 2002, decreasing gradually to 4.5% in 2006 and thereafter. As of December 29, 2001, a one-percentage-point increase in the health care cost trend rate for future years would increase the accumulated postretirement benefit obligation by $1.0 million and the service cost and interest cost components by $.1 million. Conversely, a one-percentage-point decrease in the health care cost trend rate for future years would decrease the accumulated postretirement benefit obligation by $.9 million and the service cost and interest cost components by $.1 million. > NOTE 13 Stock Option and Purchase Plans Snap-on has stock option plans for directors, officers and key employees, with expiration dates on the options ranging from 2002 to 2011 and vesting periods ranging from immediate to three years. The plans provide that options be granted at exercise prices equal to market value on the date the option is granted. On April 27, 2001, Snap-on's shareholders approved the 2001 Incentive Stock and Awards Plan. The 2001 Plan reserves five million shares of common stock for issuance. Non-employee directors receive a mandatory minimum of 50% and an elective maximum of up to 100% of their fees and retainer in shares of Snap-on stock. Directors may elect to defer receipt of all or part of these shares. For 2001, 2000 and 1999, issuances under the Directors' Fee Plan totaled 10,367 shares, 8,908 shares and 5,479 shares. Additionally, receipt of 15,043 shares, 11,670 shares and 6,886 shares was deferred in 2001, 2000 and 1999. At December 29, 2001, shares reserved for issuance to directors under this plan totaled 200,328 shares. Employees of Snap-on are eligible to participate in an employee stock purchase plan. The employee purchase price of the common stock is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (May 14) of each plan year. For 2001, 2000 and 1999, issuances under the employee stock purchase plan totaled 57,231 shares, 55,322 shares and 53,082 shares. At December 29, 2001, shares reserved for issuance to employees under this plan totaled 543,856, and Snap-on held employee contributions of approximately $1.2 million for the purchase of common stock. Franchised dealers are eligible to participate in a dealer stock purchase plan. The dealer purchase price of the common stock is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (May 14) of each plan year. For 2001, 2000 and 1999, issuances under the dealer stock purchase plan totaled 78,440 shares, 78,165 shares and 65,630 shares. At December 29, 2001, shares reserved for issuance to franchised dealers under this plan totaled 290,924, and Snap-on held dealer contributions of approximately $1.3 million for the purchase of common stock. Under the dividend reinvestment and stock purchase plan, participating shareholders may invest the cash dividends from all or a portion of their common stock to buy additional shares. The program also permits new investors and current shareholders to make additional cash contributions. For 2001, 2000 and 1999, issuances under the dividend reinvestment and stock purchase plan totaled 47,650 shares, 50,725 shares and 38,809 shares. At December 29, 2001, shares available for purchase under this plan totaled 1,808,286 shares. Snap-on accounts for its stock-based compensation plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, as a result, no compensation expense for stock options was recognized. For disclosure purposes only under SFAS No. 123, "Accounting for Stock-Based Compensation," the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option pricing model. Pro forma net income and earnings per share, and the assumptions used therein, assuming the fair value of accounting for stock-based compensation as prescribed under SFAS No. 123, were as follows: (Amounts in millions except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------- Net earnings: As reported $19.0 $148.5 $127.2 Pro forma 13.0 141.3 122.8 Net earnings per share - diluted: As reported .33 2.53 2.16 Pro forma .22 2.41 2.09 Weighted-average assumptions under Black-Scholes: Risk-free interest rate 4.9% 6.7% 4.7% Dividend yield 2.8% 2.5% 2.5% Expected stock price volatility 38.7% 28.2% 32.1% Expected option life (in years) 5.6 5.6 5.6 - ------------------------------------------------------------------------------- 40 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Stock option activity was as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------- Options Exercise Price* Options Exercise Price* Options Exercise Price* - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 4,526,481 $29.44 2,977,467 $30.83 2,398,136 $29.21 Granted 1,227,707 28.95 1,735,600 26.37 785,800 34.41 Exercised (375,756) 21.83 (118,681) 20.42 (132,254) 22.27 Canceled (189,286) 30.14 (67,905) 28.16 (74,215) 31.86 - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 5,189,146 $29.83 4,526,481 $29.44 2,977,467 $30.83 - ------------------------------------------------------------------------------------------------------------------------------- Exercisable at end of year 3,447,146 $30.65 2,887,281 $30.21 1,982,416 $28.31 Available for grant at end of year 4,349,388 387,809 2,056,504 - ------------------------------------------------------------------------------------------------------------------------------- *Weighted-average
As calculated using the Black-Scholes option pricing model, the weighted-average fair value of options granted during the years ended 2001, 2000 and 1999 were $9.37, $7.55 and $9.64. The following table summarizes information about stock options outstanding as of December 29, 2001:
2001 Options Outstanding 2001 Options Exercisable --------------------------------------------------------------------------------------------- Remaining Contractual Range of Exercise Prices Options Life (Years)* Exercise Price* Options Exercise Price* - ------------------------------------------------------------------------------------------------------------------------------- $19 to $25 610,823 2.2 $21.39 610,823 $21.39 $25 to $31 2,889,377 8.6 27.60 1,147,377 26.68 $31 to $38 1,166,239 6.4 35.30 1,166,239 35.30 $38 to $46 522,707 6.1 39.96 522,707 39.96 - ----------------------------------------------------------------------------------------------------------------- Totals 5,189,146 7.1 $29.83 3,447,146 $30.65 - ----------------------------------------------------------------------------------------------------------------- *Weighted-average
As of December 29, 2001, Snap-on had 460,850 performance units granted to certain officers and key employees with an average grant price of $29.60 per unit. > NOTE 14 Capital Stock Snap-on has undertaken stock repurchases from time to time to prevent dilution created by shares issued for employee and dealer stock purchase plans, stock options, and other corporate purposes, as well as to repurchase shares when market conditions are favorable. Snap-on repurchased 400,000 shares in 2001, following the repurchase of 1,019,500 shares in 2000 and 492,800 shares in 1999. Since 1997, Snap-on's board of directors has authorized the repurchase of up to $250 million of Snap-on's common stock. As of the end of 2001, Snap-on has remaining availability to repurchase up to an additional $133 million in common stock pursuant to the board's authorizations. The purchase of Snap-on common stock is at the company's discretion, subject to prevailing financial and market conditions. Since 1995, Snap-on has repurchased 9,989,583 shares. The board of directors declared on August 22, 1997, a dividend distribution of one preferred stock purchase right for each share of Snap-on's outstanding common stock. The rights are exercisable only if a person or group acquires 15% or more of Snap-on's common stock ("Acquiring Person") or publicly announces a tender offer to become an Acquiring Person. Each right may then be exercised to purchase one one-hundred-and-fiftieth of a share of Series A Junior Preferred Stock for $190, but if a person or group becomes an Acquiring Person, then each right entitles the holder (other than an Acquiring Person) to acquire common stock of Snap-on having a market value equivalent to two times the current purchase price. If Snap-on is acquired in a merger or other business combination not approved by the board of directors, then each holder of a right will be entitled to purchase common stock of the surviving company having a market value equivalent to two times the current purchase price. The effect of the rights is to cause ownership dilution to a person or group attempting to acquire Snap-on without approval of Snap-on's board of directors. The rights expire on November 3, 2007, and may be redeemed by Snap-on at a price of $.01 per right under certain circumstances. Snap-on created a Grantor Stock Trust ("GST") in 1998 that was subsequently amended. In conjunction with the formation of the GST, Snap-on sold 7.1 million shares of treasury stock to the GST. The sale of these shares had no net impact on shareholders' equity or on Snap-on's Consolidated Statements of Earnings. The GST is a funding mechanism for certain benefit programs and compensation arrangements, including the incentive stock program and employee and dealer stock purchase plans. The Northern Trust Company, as trustee of the GST, votes the common stock held by the GST based on the terms set forth in the GST Agreement as amended. The GST is recorded as "Grantor stock trust at fair market value" on the accompanying Consolidated Balance Sheets. Shares owned by the GST are accounted for as a reduction to shareholders' equity until used in connection with employee benefits. Each period, the shares owned by the GST are valued at the closing market price, with corresponding changes in the GST balance reflected in additional paid-in capital. At December 29, 2001, the GST held 5,984,145 shares of common stock. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 41 Notes to Consolidated Financial Statements (continued) > NOTE 15 Commitments and Contingencies Snap-on leases facilities and office equipment under non-cancelable operating leases that extend for varying amounts of time. Snap-on's future minimum lease commitments under these leases, net of sub-leases, were as follows: Year Ending (Amounts in millions) - -------------------------------------------------------------------- 2002 $27.4 2003 19.9 2004 13.4 2005 10.3 2006 8.4 2007 and thereafter 22.5 - -------------------------------------------------------------------- Rent expense, net of sub-lease rental income, for worldwide facilities and office equipment was $32.1 million, $35.3 million and $26.7 million in 2001, 2000 and 1999. In 1996, Snap-on filed a complaint against SPX Corporation ("SPX") alleging infringement of Snap-on's patents and asserting claims relating to SPX's hiring of the former president of Sun Electric, a subsidiary of Snap-on acquired in 1992. SPX filed a counterclaim alleging infringement of certain SPX patents. These patents, which related to engine analyzer products first introduced in the 1980s, have expired. In 2001, both companies agreed to a binding arbitration process. The arbitrator ruled in favor of SPX, and Snap-on will pay $44.0 million in damages to SPX. This obligation, which will be paid in January 2002, has been recorded in "Other accrued liabilities" on the accompanying Consolidated Balance Sheets and in "Operating expenses" on the accompanying Consolidated Statements of Earnings. Snap-on is involved in various other legal matters that are being defended and handled in the ordinary course of business, and Snap-on maintains accruals for such costs that are expected to be incurred. Although it is not possible to predict the outcome of these matters, management believes that the results will not have a material impact on Snap-on's financial statements. > NOTE 16 Restructuring and Non-recurring Charges Snap-on announced in the second quarter of 2001 that it was taking significant action to (i) reduce costs companywide to adjust to the slower sales environment and (ii) improve operational performance in businesses not earning acceptable financial returns. As a result of selective rationalization and consolidation actions, Snap-on recorded $62.0 million in pretax restructuring and other non-recurring charges in 2001 for actions that include the consolidation or closure of 35 facilities, asset write-downs and severance costs to effect a 6% reduction in workforce. The $62.0 million charge includes restructuring charges of $40.3 million and non-recurring charges of $21.7 million. On the accompanying Consolidated Statements of Earnings, "Restructuring and other non-recurring charges" of $49.4 million includes restructuring charges of $40.3 million and other non-recurring charges of $9.1 million, and "Cost of goods sold - non-recurring charges" includes $12.6 million for certain inventory write-downs and warranty costs. Approximately 45% of the charges recorded in 2001 were non-cash, with the remaining costs requiring cash outflows from operations and borrowings under Snap-on's existing credit facilities. The 2001 restructuring charges are for the consolidation or closure of 35 facilities, comprised of nine manufacturing or distribution facilities and 26 sales or administrative offices. The $40.3 million charge includes $27.1 million for severance costs associated with the planned elimination of 796 salaried and hourly positions, $6.0 million for non-cancelable lease agreements, $5.9 million for facility asset write-downs, and $1.3 million for exit-related legal and professional services. Non-recurring charges of $9.1 million include $8.4 million for management transition costs associated with the April 2001 retirement of Snap-on's president and chief executive officer and the appointment of Dale F. Elliott as successor to this position and $.7 million for non-recurring transition costs related to equipment and employee relocation associated with the facility consolidations. The non-recurring charges of $12.6 million in "Cost of goods sold - non-recurring charges" are comprised of $2.3 million for restructuring-related inventory write-downs and $10.3 million for additional inventory write-downs and warranty costs associated with Snap-on's exiting of an unprofitable segment of the emissions-testing business. Snap-on recorded charges for expected losses on the disposition of discontinued inventory, extended warranty costs and other asset impairments related to this exit plan in December 2000. During 2001, Snap-on experienced higher than expected emissions-related warranty costs and, as a result, Snap-on revised its cost estimate relative to the emissions exit plan and recorded $10.3 million of additional non-recurring charges in 2001. The composition of Snap-on's restructuring reserve activity for the year ended December 29, 2001, was as follows: Restructuring Reserve as of (Amounts in millions) Provisions Usage Dec. 29, 2001 - ------------------------------------------------------------------------------ Severance costs $27.1 $ (6.0) $21.1 Facility consolidation or closure costs 7.3 (5.3) 2.0 Loss on asset write-downs 5.9 (5.9) - - ------------------------------------------------------------------------------ Total restructuring reserves $40.3 $(17.2) $23.1 - ------------------------------------------------------------------------------ 42 SNAP-ON INCORPORATED 2001 ANNUAL REPORT As of December 29, 2001, restructuring reserve usage of $17.2 million represents $6.0 million for severance payments related to the separation of 272 of the 796 identified employees, $5.3 million for facility consolidation or closure costs and $5.9 million for the write-down of assets. Snap-on believes that the restructuring reserve balance of $23.1 million as of December 29, 2001, is adequate to complete all announced activities and anticipates that all actions will be completed by the end of 2002. Snap-on expects to fund the cash requirements of its 2001 restructuring activities with cash flows from operations and borrowings under the company's existing credit facilities. The specific restructuring measures and estimated costs were based on management's best business judgment under prevailing circumstances. Snap-on also expects to incur an estimated $7 million to $8 million in restructuring-related transition costs in the first half of 2002. Transition costs do not qualify for restructuring accrual treatment and are therefore expensed when incurred. In 2000, Snap-on recorded restructuring and non-recurring charges totaling $21.8 million pretax, primarily for various exit-related costs and impairment write-downs. These costs were comprised of a $4.2 million restructuring charge and $17.2 million in non-recurring charges. The restructuring charge relates to the closure of a small, underperforming vehicle-service business in the Asia/Pacific region and includes costs related to severance, lease terminations and write-offs of intangible assets. The non-recurring charges primarily relate to Snap-on's decision, prompted by continued changes in technology and emissions regulations at both the state and federal levels, to exit an unprofitable segment of the emissions-testing business. The non-recurring charges consist of $5.6 million for expected losses on the disposition of discontinued inventory, $3.9 million for extended warranty costs and $7.7 million for other asset impairments. Additionally, Snap-on incurred $.4 million in non-recurring charges for relocation, severance and facilities consolidation costs. On the accompanying Consolidated Statements of Earnings, the $9.5 million of non-recurring charges for emissions-related inventory write-downs and warranty costs in 2000 have been reported as "Cost of goods sold - non-recurring charges." The $12.3 million in "Restructuring and other non-recurring charges" includes non-recurring charges of $7.7 million for emissions-related asset impairments and $.4 million for other relocation, severance and facilities consolidation costs. Also included in "Restructuring and other non-recurring charges" was $4.2 million in restructuring costs for severance and exit costs related to the closure of a vehicle-service business. The restructuring actions initiated in 2000 were completed during the first half of 2001. In 1999, Snap-on recorded $37.2 million in restructuring and non-recurring charges related to its Project Simplify initiative. Project Simplify, a broad program of internal rationalizations, consolidations and reorganizations to make Snap-on's business operations simpler and more effective, was implemented in the third quarter of 1998. The 18-month program included the cost of closing facilities, employee severance associated with a reduction in staffing, impaired asset write-downs, costs to revalue discontinued stock keeping units ("SKUs"), legal matters and other non- recurring costs. Of the $37.2 million in charges recorded, $16.6 million was reflected in the Consolidated Statements of Earnings as "Cost of goods sold - non-recurring charges," and $20.6 million was included in "Restructuring and other non-recurring charges." The $16.6 million in non-recurring charges reflects the discontinuance of an emissions-testing equipment line as part of Snap-on's refocus on high-volume products. The $20.6 million of non-recurring charges represents employee incentives of $1.5 million, relocation costs of $10.9 million, professional services of $9.1 million and $4.8 million for the discontinuance of SKUs. These costs were partially offset by the reversal of $5.1 million of excess warranty reserves and the reversal of $.6 million of excess severance costs. Snap-on achieved its Project Simplify objectives of consolidating certain business units, closing 60 facilities, eliminating approximately 1,100 positions and discontinuing more than 12,000 SKUs. Total charges incurred for Project Simplify were $187.5 million, and were comprised of $67.1 million of restructuring charges and $120.4 million of other non-recurring charges. Project Simplify was essentially completed as of year-end 1999. > NOTE 17 Segments Snap-on has two reportable segments: the Snap-on Dealer Group and the Commercial and Industrial Group. These segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. The Snap-on Dealer Group consists of Snap-on's business operations serving the worldwide dealer van channel. The Commercial and Industrial Group consists of the business operations serving the worldwide non-dealer tool and equipment products businesses. These two segments derive revenues primarily from the sale of tools and equipment. The accounting policies described in Note 2 are applicable to the reportable segments. Snap-on evaluates the performance of its operating segments based on segment net sales and operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs established between the segments. Snap-on allocates shared services expenses to those segments that utilize the services based on their percentage of revenues from external sources. Restructuring and other non-recurring charges are not allocated to the reportable segments. Had it been Snap-on's policy to allocate restructuring and other non-recurring charges to its reportable segments, such charges of $62.0 million, $21.8 million and $37.2 million for 2001, 2000 and 1999 would have been allocated to the segments as follows: Snap-on Dealer Group - $14.3 million, $11.5 million and $8.9 million for 2001, 2000 and 1999; Commercial and Industrial Group - $47.7 million, $10.3 million and $28.3 million for 2001, 2000 and 1999. In 2001, the $44.0 million cost for the resolution of patent arbitration as described in Note 15 was not allocated to the reportable segments. Neither Snap-on nor any of its segments depends on any single customer, small group of customers or government for more than 10% of its sales. SNAP-ON INCORPORATED 2001 ANNUAL REPORT 43 Notes to Consolidated Financial Statements (continued) Financial data by segment was as follows: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Net sales from external customers Snap-on Dealer Group $1,048.8 $1,068.7 $1,050.9 Commercial and Industrial Group 1,046.9 1,107.0 894.7 - ------------------------------------------------------------------------------- Total net sales $2,095.7 $2,175.7 $1,945.6 - ------------------------------------------------------------------------------- Intersegment sales Snap-on Dealer Group $ .1 $ .1 $ - Commercial and Industrial Group 381.4 361.5 414.8 - ------------------------------------------------------------------------------- Total intersegment sales 381.5 361.6 414.8 Elimination of intersegment sales (381.5) (361.6) (414.8) - ------------------------------------------------------------------------------- Total consolidated intersegment sales $ - $ - $ - - ------------------------------------------------------------------------------- Earnings Snap-on Dealer Group $ 116.8 $ 127.3 $ 120.0 Commercial and Industrial Group 40.1 86.4 69.1 - ------------------------------------------------------------------------------- Segment operating earnings 156.9 213.7 189.1 Net finance income 35.7 38.1 60.5 Restructuring and other non-recurring charges (62.0) (21.8) (37.2) Arbitration resolution (44.0) - - Interest expense (35.5) (40.7) (27.4) Other income (expense) - net (3.5) 3.3 12.9 - ------------------------------------------------------------------------------- Earnings from continuing operations before income taxes $ 47.6 $ 192.6 $ 197.9 - ------------------------------------------------------------------------------- Assets Snap-on Dealer Group $ 823.3 $ 805.3 $ 772.3 Commercial and Industrial Group 1,120.6 1,220.2 1,321.2 - ------------------------------------------------------------------------------- Total from reportable segments 1,943.9 2,025.5 2,093.5 Financial Services 82.0 96.2 97.2 Elimination of intersegment receivables (51.6) (52.6) (29.8) - ------------------------------------------------------------------------------- Total assets $1,974.3 $2,069.1 $2,160.9 - ------------------------------------------------------------------------------- (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Capital expenditures Snap-on Dealer Group $ 14.7 $ 13.0 $ 16.2 Commercial and Industrial Group 38.9 44.6 19.2 - ------------------------------------------------------------------------------- Total from reportable segments 53.6 57.6 35.4 Financial Services - - - - ------------------------------------------------------------------------------- Total capital expenditures $ 53.6 $ 57.6 $ 35.4 - ------------------------------------------------------------------------------- Depreciation and amortization Snap-on Dealer Group $ 21.4 $ 20.3 $ 20.5 Commercial and Industrial Group 46.6 45.9 34.9 - ------------------------------------------------------------------------------- Total from reportable segments 68.0 66.2 55.4 Financial Services - - - - ------------------------------------------------------------------------------- Total depreciation and amortization $ 68.0 $ 66.2 $ 55.4 - ------------------------------------------------------------------------------- Geographic data was as follows: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------ Net sales* United States $1,360.0 $1,367.1 $1,306.7 Europe 537.5 587.5 434.3 All other 198.2 221.1 204.6 - ------------------------------------------------------------------------------ Total net sales $2,095.7 $2,175.7 $1,945.6 - ------------------------------------------------------------------------------ Long-lived assets United States $ 189.1 $ 199.0 $ 218.8 Europe 114.0 121.7 117.8 All other 24.6 24.4 26.0 - ------------------------------------------------------------------------------ Total long-lived assets $ 327.7 $ 345.1 $ 362.6 - ------------------------------------------------------------------------------ * Net sales are attributed to countries based on the origin of the sale. PRODUCTS AND SERVICES: Snap-on derives revenue from a broad line of products and complementary services that can be divided into two groups: tools and equipment. The following table shows the consolidated sales of these product groups in the last three years: (Amounts in millions) 2001 2000 1999 - ------------------------------------------------------------------------------ Tools $1,291.1 $1,343.5 $1,149.3 Equipment 804.6 832.2 796.3 - ------------------------------------------------------------------------------ Total $2,095.7 $2,175.7 $1,945.6 - ------------------------------------------------------------------------------ 44 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Quarterly Financial Information (Unaudited) (Amounts in millions except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------- Net sales First quarter $ 527.4 $ 544.3 $ 452.6 Second quarter 525.6 563.2 473.1 Third quarter 508.1 511.9 453.2 Fourth quarter 534.6 556.3 566.7 - ------------------------------------------------------------------------------- $2,095.7 $2,175.7 $1,945.6 - ------------------------------------------------------------------------------- Net earnings (loss) First quarter* $ 26.9 $ 60.7 $ 32.2 Second quarter 8.9 45.7 25.0 Third quarter .6 28.4 42.6 Fourth quarter (17.4) 13.7 27.4 - ------------------------------------------------------------------------------- $ 19.0 $ 148.5 $ 127.2 - ------------------------------------------------------------------------------- Earnings (loss) per share - basic First quarter* $ .47 $ 1.03 $ .55 Second quarter .15 .78 .43 Third quarter .01 .48 .73 Fourth quarter (.30) .25 .47 - ------------------------------------------------------------------------------- $ .33 $ 2.54 $ 2.18 - ------------------------------------------------------------------------------- Earnings (loss) per share - diluted First quarter* $ .47 $ 1.03 $ .55 Second quarter .15 .78 .42 Third quarter .01 .48 .72 Fourth quarter (.30) .24 .47 - ------------------------------------------------------------------------------- $ .33 $ 2.53 $ 2.16 - ------------------------------------------------------------------------------- Cash dividends paid per share First quarter $ .24 $ .23 $ .22 Second quarter .24 .23 .22 Third quarter .24 .24 .23 Fourth quarter .24 .24 .23 - ------------------------------------------------------------------------------- $ .96 $ .94 $ .90 - ------------------------------------------------------------------------------- * The first quarter of 2001 includes a pretax loss of $4.1 million ($2.5 million after tax or $.04 per basic and diluted share) for the cumulative effect of a change in accounting principle for derivatives. The first quarter of 2000 includes a pretax gain of $41.3 million ($25.4 million after tax or $.43 per basic and diluted share) for the cumulative effect of a change in accounting principle for pensions. NET SALES (in $ millions) - ------------------------- 1997 - 1,672 1998 - 1,773 1999 - 1,946 2000 - 2,176 2001 - 2,096 NET EARNINGS (LOSS) (in $ millions) - ----------------------------------- 1997 - 150 1998 - (5) 1999 - 127 2000 - 149 2001 - 19 SHAREHOLDERS' EQUITY PER SHARE (in dollars) - ------------------------------------------- 1997 - 14.74 1998 - 12.98 1999 - 14.10 2000 - 14.60 2001 - 13.40 CASH DIVIDENDS PAID PER SHARE (in dollars) - ------------------------------------------ 1997 - .82 1998 - .86 1999 - .90 2000 - .94 2001 - .96 SNAP-ON INCORPORATED 2001 ANNUAL REPORT 45 Six-year Data
(Amounts in millions except per share data) 2001 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Summary of operations Net sales $2,095.7 $2,175.7 $1,945.6 $1,772.6 $1,672.2 $1,485.3 Gross profit 949.0 996.8 896.2 763.2 843.8 750.8 Operating expenses 848.7 792.6 723.7 705.8 650.2 594.5 Net finance income 35.7 38.1 60.5 65.9 71.9 64.3 Interest expense 35.5 40.7 27.4 21.2 17.6 12.7 Earnings from continuing operations 47.6 192.6 197.9 10.8 238.7 208.7 Income taxes 26.1 69.5 70.7 15.6 88.3 77.2 Cumulative effect, net of taxes (2.5) 25.4 - - - - Net earnings (loss) 19.0 148.5 127.2 (4.8) 150.4 131.5 - ---------------------------------------------------------------------------------------------------------------------------------- Financial position Accounts receivable - net $ 615.2 $ 644.5 $ 617.7 $ 554.7 $ 539.6 $ 651.7 Inventories 375.2 418.9 454.8 375.4 373.2 269.8 Current assets 1,139.4 1,186.4 1,206.3 1,079.8 1,021.7 1,017.3 Accounts payable 141.2 161.0 146.4 89.4 91.6 89.3 Current liabilities 549.4 538.0 452.7 458.0 352.5 341.4 Working capital 590.0 648.4 753.6 621.8 669.2 675.9 Working investment 849.2 902.4 926.1 840.7 821.2 832.2 Total capital 1,250.4 1,387.3 1,455.1 1,102.0 1,067.2 1,001.2 Property and equipment - net 327.7 345.1 362.6 272.0 265.8 245.3 Total assets 1,974.3 2,069.1 2,160.9 1,674.9 1,641.4 1,520.8 Long-term debt 445.5 473.0 607.5 246.6 151.0 149.8 Total debt 474.6 543.3 629.8 339.7 175.1 173.0 Total shareholders' equity 775.8 844.0 825.3 762.4 892.1 828.2 - ---------------------------------------------------------------------------------------------------------------------------------- Common share summary Net earnings (loss) per share - diluted $ .33 $ 2.53 $ 2.16 $ (.08) $ 2.44 $ 2.13 Cash dividends paid per share .96 .94 .90 .86 .82 .76 Shareholders' equity per share 13.40 14.60 14.10 12.98 14.74 13.62 Common stock price range 34.21-21.65 32.44-20.88 37.81-26.44 46.44-25.50 46.31-34.25 38.25-27.33 Year-end share price 33.93 27.88 26.56 34.81 42.38 36.38 Average shares outstanding - diluted 58.1 58.6 58.9 59.2 61.7 61.6 - ---------------------------------------------------------------------------------------------------------------------------------- Other financial statistics Cash dividends paid $ 55.6 $ 55.0 $ 52.6 $ 51.0 $ 49.9 $ 46.3 Net cash provided by operating activities 163.7 190.2 235.6 75.0 194.9 136.4 Capital expenditures 53.6 57.6 35.4 46.8 55.4 52.3 Depreciation and amortization 68.0 66.2 55.4 45.0 38.4 31.9 Percent of total debt to total capital 38.0% 39.2% 43.3% 30.8% 16.4% 17.3% Return on average shareholders' equity 2.3% 17.8% 16.0% (.6)% 17.5% 16.7% - ----------------------------------------------------------------------------------------------------------------------------------
2001 results include $62.0 million of pretax restructuring and other non-recurring charges ($46.1 million after tax or $.80 per diluted share) and a $4.1 million pretax loss ($2.5 million after tax or $.04 per diluted share) for the cumulative effect of a change in accounting principle for derivatives. 2000 results include $21.8 million of pretax restructuring and other non-recurring charges ($14.2 million after tax or $.24 per diluted share) and a $41.3 million pretax gain ($25.4 million after tax or $.43 per diluted share) for the cumulative effect of a change in accounting principle for pensions. 1999 results include $37.2 million of pretax restructuring and other non-recurring charges ($23.3 million after tax or $.40 per diluted share). 1998 results include $149.9 million of pretax restructuring and other non-recurring charges ($107.6 million after tax or $1.82 per diluted share). For financial definitions see Glossary of Financial Terms on inside back cover. 46 SNAP-ON INCORPORATED 2001 ANNUAL REPORT Management's Responsibility for Financial Reporting The management of Snap-on Incorporated is responsible for the preparation and integrity of all financial statements and other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts based on judgments and estimates by management. Snap-on maintains internal control systems designed to provide reasonable assurance that Snap-on's financial records reflect the transactions of Snap-on and that its assets are protected from loss or unauthorized use. A staff of internal auditors conducts operational and financial audits to evaluate the adequacy of internal controls and accounting practices. Snap-on's consolidated financial statements have been audited by Arthur Andersen LLP, independent public accountants. As part of their audit of Snap-on's consolidated financial statements, Arthur Andersen LLP considered Snap-on's system of internal control to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. Management has made available to Arthur Andersen LLP Snap-on's financial records and related data. The audit committee of the board of directors is responsible for reviewing and evaluating the overall performance of Snap-on's financial reporting and accounting practices. The committee meets periodically and independently with management, internal auditors and the independent public accountants to discuss Snap-on's internal accounting controls, auditing and financial reporting matters. The internal auditors and independent public accountants have unrestricted access to the audit committee. /s/ Dale F. Elliott Dale F. Elliott President and Chief Executive Officer /s/ Donald S. Huml Donald S. Huml Senior Vice President - Finance and Chief Financial Officer Report of Independent Public Accountants To the Board of Directors and Shareholders of Snap-on Incorporated: We have audited the accompanying consolidated balance sheets of Snap-on Incorporated (a Delaware Corporation) and subsidiaries as of December 29, 2001, and December 30, 2000, and the related consolidated statements of earnings, shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 29, 2001. These consolidated financial statements are the responsibility of Snap-on's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Snap-on Incorporated and subsidiaries as of December 29, 2001, and December 30, 2000, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States. As explained in Note 10 to the financial statements, effective December 31, 2000, Snap-on Incorporated changed its method of accounting for derivatives. As explained in Note 11 to the financial statements, effective January 2, 2000, Snap-on Incorporated changed its method of accounting for pensions. /s/ Arthur Andersen LLP Arthur Andersen LLP Chicago, Illinois January 29, 2002 SNAP-ON INCORPORATED 2001 ANNUAL REPORT 47 EX-21 6 pdm280e.txt SUBSIDIARIES Exhibit (21) SUBSIDIARIES OF THE CORPORATION As of December 29, 2001 Name State or other jurisdiction of organization - ------------------------------ ------------------------------------------- IDSC Holdings, Inc. Wisconsin SB Tools S.a.r.l. Luxembourg Snap-on Global Holdings, Inc. Delaware Snap-on Holdings AB Sweden Snap-on Logistics Company Wisconsin Snap-on Technologies, Inc. Illinois Snap-on Tools Company LLC Wisconsin Snap-on Tools International, Ltd. Delaware EX-23 7 pdm280f.txt CONSENT Exhibit (23) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated January 29, 2002 incorporated by reference and included in this Form 10-K, into Snap-on Incorporated's previously filed Registration Statement File Nos. 2-53663, 2-53578, 33-7471, 33-22417, 33-37924, 33-39660, 33-57898, 33-55607, 33-58939, 33-58943, 333-14769, 333-21277, 333-21285, 333-41359 and 333-62098. It should be noted that we have not audited any financial statements of Snap-on Incorporated subsequent to December 29, 2001 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois March 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----