UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to

 

Commission File Number 1-7724

(Exact name of registrant as specified in its charter)

 

(262) 656-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  o     No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Class		Outstanding at July 20, 2007
Common Stock, $1.00 par value		57,972,816 shares

 

TABLE OF CONTENTS

 

Part I: Financial Information
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
			Condensed Consolidated Statements of Earnings — Three and Six Months Ended June 30, 2007, and July 1, 2006
			Condensed Consolidated Balance Sheets — June 30, 2007, and December 30, 2006
			Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2007, and July 1, 2006
			Notes to Condensed Consolidated Financial Statements
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3		Quantitative and Qualitative Disclosures About Market Risk
	Item 4.		Controls and Procedures
Part II: Other Information
	Item 1.		Legal Proceedings
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits
			Signatures
			Exhibit Index

 

2

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions, except per share data)

(Unaudited)

		Three Months Ended						Six Months Ended
		June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Net sales		$	711.9		$	621.7		$	1,417.6		$	1,209.0
Cost of goods sold		(389.5		)	(341.8		)	(785.3		)	(670.5		)
Gross profit		322.4			279.9			632.3			538.5
Financial services revenue		14.8			11.7			28.2			22.9
Financial services expenses		(9.7		)	(8.7		)	(19.4		)	(17.9		)
Operating income from financial services		5.1			3.0			8.8			5.0
Operating expenses:
Selling, general and administrative		(240.1		)	(224.9		)	(485.0		)	(446.9		)
Litigation settlement		—			(38.0		)	—			(38.0		)
Total operating expenses		(240.1		)	(262.9		)	(485.0		)	(484.9		)
Operating earnings		87.4			20.0			156.1			58.6
Interest expense		(11.7		)	(4.7		)	(23.0		)	(9.1		)
Other income (expense) — net		2.5			0.3			2.7			(0.9		)
Earnings from continuing operations		78.2			15.6			135.8			48.6
Income tax expense		(25.4		)	(3.9		)	(45.0		)	(15.6		)
Net earnings from continuing operations		52.8			11.7			90.8			33.0
Discontinued operations, net of tax		(9.0		)	0.1			(8.0		)	0.9
Net earnings		$	43.8		$	11.8		$	82.8		$	33.9
Basic earnings per common share:
Earnings per share, continuing operations		$	0.91		$	0.20		$	1.56		$	0.56
Earnings (loss) per share, discontinued operations		(0.16		)	—			(0.14		)	0.02
Net earnings per share		$	0.75		$	0.20		$	1.42		$	0.58
Diluted earnings per common share:
Earnings per share, continuing operations		$	0.90		$	0.20		$	1.54		$	0.56
Earnings (loss) per share, discontinued operations		(0.16		)	—			(0.14		)	0.02
Net earnings per share		$	0.74		$	0.20		$	1.40		$	0.58
Weighted-average shares outstanding:
Basic		58.1			58.2			58.2			58.2
Effect of dilutive options		0.7			0.7			0.7			0.7
Diluted		58.8			58.9			58.9			58.9
Dividends declared per common share		$	0.27		$	0.27		$	0.54		$	0.54

 

See notes to Condensed Consolidated Financial Statements

3

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SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

		June 30, 2007			December 30, 2006
Assets
Current assets
Cash and cash equivalents		$	72.0		$	63.4
Accounts receivable — net of allowances		561.2			559.2
Inventories		323.9			323.0
Deferred income tax benefits		67.5			76.0
Prepaid expenses and other assets		78.8			91.6
Total current assets		1,103.4			1,113.2
Property and equipment
Land		23.9			24.3
Buildings and improvements		231.6			236.7
Machinery and equipment		539.8			540.9
		795.3			801.9
Accumulated depreciation and amortization		(501.7		)	(504.8		)
Property and equipment — net		293.6			297.1
Deferred income tax benefits		58.8			55.3
Goodwill		786.0			776.1
Other intangibles — net		242.8			257.8
Pension assets		14.4			14.0
Other assets		161.3			141.0
Total assets		$	2,660.3		$	2,654.5

 

See notes to Condensed Consolidated Financial Statements

4

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

		June 30, 2007			December 30, 2006
Liabilities and shareholders’ equity
Current liabilities
Accounts payable		$	185.3		$	178.8
Notes payable and current maturities of long-term debt		19.7			43.6
Accrued benefits		40.5			41.4
Accrued compensation		73.7			90.4
Franchisee deposits		46.4			48.5
Deferred subscription revenue		25.1			25.3
Income taxes		23.6			37.8
Other accrued liabilities		209.4			216.2
Total current liabilities		623.7			682.0
Long-term debt		501.4			505.6
Deferred income taxes		83.7			88.9
Retiree health care benefits		67.9			69.6
Pension liabilities		120.1			113.9
Other long-term liabilities		126.5			118.2
Total liabilities		1,523.3			1,578.2
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 67,095,354 and 67,081,801 shares)		67.1			67.1
Additional paid-in capital		129.7			121.9
Retained earnings		1,231.4			1,180.3
Accumulated other comprehensive income (loss)		46.9			21.2
Grantor Stock Trust at fair market value (zero and 407,485 shares)		—			(19.4		)
Treasury stock at cost (9,168,225 and 8,503,482 shares)		(338.1		)	(294.8		)
Total shareholders’ equity		1,137.0			1,076.3
Total liabilities and shareholders’ equity		$	2,660.3		$	2,654.5

 

See notes to Condensed Consolidated Financial Statements

5

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SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

		Six Months Ended
		June 30, 2007			July 1, 2006
Operating activities:
Net earnings		$	82.8		$	33.9
Adjustments to reconcile net earnings to net cash provided (used) by operating activities:
Depreciation		25.1			24.4
Amortization of other intangibles		8.7			0.8
Stock-based compensation expense		9.3			6.9
Excess tax benefits from stock-based compensation		(5.3		)	(6.1		)
Deferred income tax provision (benefit)		4.8			(2.4		)
Gain on sale of assets		—			(0.4		)
Loss (gain) on mark to market for cash flow hedges		0.1			(0.2		)
Changes in operating assets and liabilities, net of effects of acquisition:
(Increase) decrease in receivables		7.4			(12.1		)
(Increase) decrease in inventories		3.7			(19.6		)
(Increase) decrease in prepaid and other assets		5.8			(16.0		)
Increase (decrease) in accounts payable		3.4			14.0
Increase (decrease) in accruals and other liabilities		(28.3		)	49.8
Net cash provided by operating activities		117.5			73.0
Investing activities:
Capital expenditures		(27.6		)	(19.9		)
Acquisition of business		(4.1		)	—
Proceeds from disposal of property and equipment		8.6			11.0
Other		(1.9		)	1.0
Net cash used in investing activities		(25.0		)	(7.9		)
Financing activities:
Proceeds from issuance of long-term debt		298.5			—
Net decrease in short-term borrowings		(328.2		)	(8.5		)
Purchase of treasury stock		(64.3		)	(58.3		)
Proceeds from stock purchase and option plans		35.4			46.0
Excess tax benefits from stock-based compensation		5.3			6.1
Cash dividends paid		(31.6		)	(31.8		)
Net cash used in financing activities		(84.9		)	(46.5		)
Effect of exchange rate changes on cash and cash equivalents		1.0			1.1
Increase in cash and cash equivalents		8.6			19.7
Cash and cash equivalents at beginning of year		63.4			170.4
Cash and cash equivalents at end of period		$	72.0		$	190.1
Supplemental cash flow disclosures:
Cash paid for interest		$	(15.9	)	$	(7.8	)
Net cash paid for income taxes		(10.7		)	(16.0		)

 

See notes to Condensed Consolidated Financial Statements

6

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)

 

1.  Condensed Consolidated Financial Statements

These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Snap-on Incorporated’s (“Snap-on” or “the company”) 2006 Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

The condensed consolidated financial statements include the accounts of Snap-on, its majority-owned subsidiaries and Snap-on Credit LLC (“SOC”), a 50%-owned joint venture with The CIT Group, Inc. (“CIT”).  The condensed consolidated financial statements do not include the accounts of the company’s independent franchisees.  All intercompany accounts and transactions have been eliminated.  Certain prior year amounts have been reclassified on the Condensed Consolidated Statements of Cash Flows to conform to the current year presentation, and the Condensed Consolidated Statements of Earnings have been restated to reflect the company’s June 29, 2007, sale of its Sun Electric Systems (“SES”) business as “Discontinued Operations.”  See Note 17 for information on the sale of SES.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the statement of financial condition and results of operations for the three and six month periods ended June 30, 2007, and July 1, 2006, have been made.  The interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

2.  New Accounting Standards

Effective December 30, 2006, the last day of the 2006 fiscal year, Snap-on adopted the recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  SFAS No. 158 requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, and also requires an employer to initially apply the requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position for fiscal years ending after December 15, 2008.  As the company uses the last day of its fiscal year end as the measurement date for its plans, the adoption of the measurement provisions of SFAS No. 158 will not have a material impact on the company’s consolidated financial position and results of operations.  Retrospective application of the recognition and fiscal year-end measurement date provisions of SFAS No. 158 is not permitted.  See Notes 11 and 12 for information on pension and postretirement plans.

Effective December 31, 2006, the first day of fiscal 2007, Snap-on adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109.”  See Note 8 for information regarding income taxes.

Effective December 31, 2006, Snap-on adopted SFAS No. 156, “Accounting for Servicing of Financial Assets,” to simplify accounting for separately recognized servicing assets and servicing liabilities.  The adoption of SFAS No. 156 did not have a material impact on the company’s consolidated financial position and results of operations.

The FASB released SFAS No. 157, “Fair Value Measurements,” to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements.  SFAS No. 157 will be effective for Snap-on as of December 30, 2007, the beginning of the company’s fiscal-2008 year.  The company is currently evaluating the impact of adopting SFAS No. 157.

In February 2007, the FASB released SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows companies to choose to elect, at specified dates, to measure eligible financial instruments at fair value. Companies shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in

7

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SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

earnings as incurred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for companies that have also elected to apply the provisions of SFAS No. 157, “Fair Value Measurements.” Companies are prohibited from retrospectively applying SFAS No. 159 unless they choose to early adopt both SFAS No. 157 and SFAS No. 159.  SFAS No. 159 also applies to eligible items existing at November 15, 2007, (or early adoption date). Snap-on is currently evaluating the impact of adopting SFAS No. 159.

In June 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.”  EITF 06-11 specifies how companies should recognize the income tax benefit received on dividends that are (i) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options; and (ii) charged to retained earnings under SFAS No. 123 (R), “Share-Based Payment.” EITF 06-11 is effective for Snap-on beginning in fiscal 2008.  The company does not believe the adoption of EITF 06-11 will have a material impact on the company’s consolidated financial statements.

3.  Acquisitions

On November 28, 2006, Snap-on acquired the ProQuest Business Solutions business and certain net assets (collectively, “Snap-on Business Solutions” or “Business Solutions,” and formerly ProQuest Business Solutions) from ProQuest Company for an initial purchase price of $516 million of cash and the assumption of approximately $19 million of debt.  The initial purchase price, which remains subject to the completion of a working capital adjustment, increased by $4.1 million to $520.1 million in the second quarter of 2007, primarily reflecting the higher level of working capital received by Snap-on at closing.  The preliminary purchase price allocation is based upon the preliminary estimated fair values of the assets and liabilities acquired, and are subject to change upon the finalization of income tax matters and the working capital adjustment that is expected to be finalized in the third quarter of 2007.

The intangible assets consist of $163.6 million of customer-related assets with a 16 year average life and $20.7 million of developed technology with a five year average life, based on exchange rates at the date of acquisition.

4.  Accounts Receivable

Accounts receivable include trade accounts, installment and other receivables, including the current portion of franchisee-financing receivables.  The components of Snap-on’s current accounts receivable were as follows:

(Amounts in millions)		June 30, 2007			December 30, 2006
Trade accounts receivable		$	486.1		$	477.6
Installment receivables, net of unearned finance charges of $7.6 million and $7.3 million		66.2			62.4
Other accounts receivable		42.8			52.1
Total		595.1			592.1
Allowance for doubtful accounts		(33.9		)	(32.9		)
Total accounts receivable — net		$	561.2		$	559.2

8

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SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The long-term portion of accounts receivable is classified in “Other assets” on the accompanying Condensed Consolidated Balance Sheets and is comprised of installment and other receivables, including franchisee-financing receivables, with payment terms that are due beyond one year.  The components of Snap-on’s long-term accounts receivable were as follows:

(Amounts in millions)		June 30, 2007			December 30, 2006
Installment receivables, net of unearned finance charges of $9.8 million and $9.2 million		$	45.7		$	42.6
Other long-term accounts receivable		29.3			28.3
Total		$	75.0		$	70.9

 

5.  Inventories

Inventories by major classification were as follows:

(Amounts in millions)		June 30, 2007			December 30, 2006
Finished goods		$	310.3		$	310.4
Work in progress		35.4			35.2
Raw materials		62.8			64.1
Total FIFO value		408.5			409.7
Excess of current cost over LIFO cost		(84.6		)	(86.7		)
Total inventories		$	323.9		$	323.0

 

Inventories accounted for using the first-in, first-out (“FIFO”) method as of June 30, 2007, and December 30, 2006, approximated 64% and 62% of total inventories.  The company accounts for its non-U.S. inventory on the FIFO method.  As of June 30, 2007, approximately 32% of the company’s U.S. inventory was accounted for using the FIFO method and 68% was accounted for using the last-in, first-out (“LIFO”) method.  LIFO inventory liquidations resulted in a reduction of “Cost of goods sold” on the accompanying Condensed Consolidated Statements of Earnings of $0.4 and $1.4 million for the six month periods ended June 30, 2007, and July 1, 2006.  There were no LIFO inventory liquidations for the three month periods ended June 30, 2007, and July 1, 2006.

9

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SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6.  Acquired Intangible Assets

Disclosures related to other intangible assets are as follows:

		June 30, 2007						December 30, 2006
(Amounts in millions)		Gross  Carrying Value			Accumulated  Amortization			Gross  Carrying  Value			Accumulated  Amortization
Amortized other intangible assets:
Customer relationships		$	165.1		$	(5.9	)	$	164.6		$	(0.9	)
Developed technology		21.1			(2.9		)	28.3			(0.4		)
Patents		33.0			(16.8		)	32.5			(15.8		)
Trademarks		2.8			(1.0		)	2.8			(0.9		)
Other		0.7			(0.4		)	0.7			(0.3		)
Total		222.7			(27.0		)	228.9			(18.3		)
Non-amortized trademarks		47.1			—			47.2			—
Total		$	269.8		$	(27.0	)	$	276.1		$	(18.3	)

 

The weighted-average amortization periods related to other intangible assets are as follows:

(In years)		Weighted- average Amortization
Customer relationships		16
Developed technology		5
Patents		16
Trademarks		39
Other		2

 

The weighted-average amortization period for all amortizable intangibles on a combined basis is 16 years.

Amortization expense was $4.3 million and $8.7 million for the three and six month periods ended June 30, 2007, and $0.3 million and $0.8 million for the three and six month periods ended July 1, 2006.  Total estimated annual amortization expense is expected to be $17.5 million in 2007, and $17.0 million for each of the next five fiscal years, based on current levels of amortized intangible assets.

Goodwill was $786.0 million and $776.1 million at June 30, 2007, and December 30, 2006.  The increase in goodwill from December 31, 2006, primarily resulted from $5.8 million of currency translation and $4.1 million of purchase accounting adjustments related to the Business Solutions acquisition.

 

10

SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7.  Exit or Disposal Activities

Snap-on recorded costs associated with exit and disposal activities of $6.5 million and $14.7 million for the three and six month periods ended June 30, 2007, and $5.8 million and $10.9 million for the three and six month periods ended July 1, 2006.

		Three Months Ended						Six Months Ended
(Amounts in millions)		June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Exit and disposal costs:
Cost of goods sold		$	5.6		$	1.8		$	11.3		$	3.7
Operating expenses		0.9			4.0			3.4			7.1
Financial services expenses		—			—			—			0.1
Total exit and disposal costs		$	6.5		$	5.8		$	14.7		$	10.9

 

Of the $6.5 million and $14.7 million of costs incurred during the three and six month periods ended June 30, 2007, $1.8 million and $6.2 million qualified for accrual treatment.  Costs associated with exit and disposal activities in 2007 primarily related to headcount reductions from (i) the transfer of certain production activities from Sweden to lower-cost regions and emerging markets; (ii) the third quarter 2007 closure of the Johnson City, Tennessee, hand tool facility; (iii) the consolidation of multiple customer call centers in the United States; and (iv) various management realignment actions at other Snap-on facilities.

Snap-on’s exit and disposal accrual activity for the quarter ended June 30, 2007, was as follows:

		Balance at			First Quarter						Balance at			Second Quarter						Balance at
(Amounts in millions)		December 30, 2007			Additions			Usage			March 31, 2007			Additions			Usage			June 30, 2007
Severance costs:
Snap-on Tools		$	2.3		$	1.4		$	(0.3	)	$	3.4		$	0.3		$	(1.1	)	$	2.6
Commercial & Industrial		2.4			2.1			(1.4		)	3.1			0.9			(2.0		)	2.0
Diagnostics & Information		0.3			0.3			(0.3		)	0.3			0.6			(0.5		)	0.4
Corporate		0.3			0.5			(0.2		)	0.6			—			(0.4		)	0.2
Facility-related costs:
Snap-on Tools		0.2			—			(0.1		)	0.1			—			—			0.1
Diagnostics & Information		0.3			0.1			—			0.4			—			—			0.4
Corporate		0.2			—			—			0.2			—			—			0.2
Total		$	6.0		$	4.4		$	(2.3	)	$	8.1		$	1.8		$	(4.0	)	$	5.9

 

Exit and disposal accrual usage of $4.0 million and $6.3 million during the three and six month periods ended June 30, 2007, consisted primarily of severance and facility-related payments.  Since year-end 2006, Snap-on has reduced headcount by approximately 185 employees as part of its restructuring actions.  While the majority of the exit and disposal accrual will be utilized in 2007, certain severance and facility-related costs will extend beyond 2007 primarily due to longer-term severance and lease obligations.

Snap-on expects to fund the remaining cash requirements of its exit and disposal activities with cash flows from operations and borrowings under the company’s existing credit facilities.  The estimated costs for the exit and disposal activities were based on management’s judgment under prevailing circumstances.

11

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SNAP-ON INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. Income Taxes

The company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes,” on December 31, 2006, the beginning of the company’s 2007 fiscal year.  As of December 31, 2006, the company had unrecognized tax benefits of $23.5 million.  Snap-on did not record any cumulative effect adjustment to retained earnings as a result of adopting FIN No. 48.

Of the $23.5 million of unrecognized tax benefits, $21.0 million would impact the effective income tax rate if recognized. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.  As of December 31, 2006, the company had $2.2 million of accrued interest included in the $23.5 million of unrecognized tax benefits.

Snap-on believes it is reasonably possible that, within the next 12 months, $0.6 million of previously unrecognized tax benefits will be recorded as a result of the resolution of various tax positions.

With few exceptions, Snap-on is no longer subject to U.S. federal, state/local, or non-U.S. income tax examinations by tax authorities for years prior to 2003, 2002 and 1998, respectively.

Snap-on’s effective tax rate on income from continuing operations was 32.5% in the second quarter of 2007 as compared with 25.0% in the second quarter of 2006.  The company’s effective tax rate in 2007 was favorably impacted by the resolution of previously unrecognized tax benefits in certain non-U.S. jurisdictions.  Snap-on’s effective tax rate of 25.0% in the second quarter of 2006 primarily reflects both the mix of U.S. and non-U.S. earnings, and the impact of the $38.0 million pretax litigation settlement charge, which was tax effected at a higher U.S. tax rate.  Snap-on expects that its effective tax rate for the second-half of 2007 will approximate 34.5%, as the company does not believe any additional material adjustments will be made related to unrecognized tax benefits for the remainder of 2007.

9.  Short-term and Long-term Debt

Notes payable and long-term debt at June 30, 2007, was $521.1 million; no commercial paper was outstanding at June 30, 2007.  As of December 30, 2006, notes payable and long-term debt was $549.2 million, including $314.9 million of commercial paper. On January 12, 2007, Snap-on sold $300 million in floating and fixed rate notes consisting of $150 million of floating rate notes that mature in their entirety on January 12, 2010, and $150 million of fixed rate notes that mature in their entirety on January 15, 2017.  Interest on the floating rate notes accrue at a floating rate equal to the three-month London Interbank offer rate plus 0.13% per year; interest is payable quarterly.  Interest on the fixed rate notes accrue at a rate of 5.50% per year; interest is payable semi-annually beginning July 15, 2007.  Snap-on used the proceeds from the sale of the notes, net of $1.5 million of transaction costs, to repay commercial paper obligations issued to finance the acquisition of Business Solutions.  On January 12, 2007, the company also terminated the $250 million bridge credit agreement that Snap-on established prior to its acquisition of Business Solutions.

Long-term debt of $501.4 million as of June 30, 2007, includes $200 million of unsecured 6.25% notes, $150 million of unsecured 5.50% notes, $150 million of unsecured floating rate notes, and $1.4 million of other long-term debt.  Notes payable to banks under uncommitted lines of credit were $18.7 million at June 30, 2007, and $28.6 million at December 30, 2006.  CIT and Snap-on have agreed to lend funds to support SOC’s working capital requirements on a 50/50 basis.  As of June 30, 2007, and December 30, 2006, SOC owed both Snap-on and CIT $1.0 million and $0.1 million each pursuant to this agreement.

At June 30, 2007, Snap-on had a $400 million multi-currency revolving credit facility that terminates on July 27, 2009.  The $400 million credit facility’s financial covenant requires that Snap-on maintain a ratio of short-term and long-term debt (“total debt”) to the sum of total debt plus shareholders’ equity of not greater than 0.60 to 1.00.  As of June 30, 2007, Snap-on was in compliance with all covenants of its revolving credit facility.

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(Unaudited)

At June 30, 2007, Snap-on also had $20 million of unused committed bank lines of credit, of which $10 million expires on July 29, 2007, and $10 million expires on August 31, 2007; Snap-on intends to renew both of these lines of credit during the third quarter of 2007.  At June 30, 2007, Snap-on had approximately $420 million of unused available debt capacity under the terms of its revolving credit facility and its committed bank lines of credit.

10.  Financial Instruments

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.  On the date a derivative contract is entered into, Snap-on designates the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a natural hedging instrument whose change in fair value is recognized as an economic hedge against changes in the values of the hedged item.

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.  Snap-on also has 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.  Forward exchange contracts are used to hedge the net exposures.  Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.

At June 30, 2007, Snap-on had $136.3 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $53.1 million in Swedish kronor, $31.8 million in British pounds, $24.4 million in euros, $15.5 million in Australian dollars, $4.3 million in Canadian dollars, $3.8 million in Japanese yen, $3.2 million in Singapore dollars and $4.3 million in other currencies, and sell contracts of $2.2 million in Hungarian forint and $1.9 million in other currencies.  At December 30, 2006, Snap-on had $80.1 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $31.4 million in Swedish kronor, $23.1 million in euros, $17.8 million in British pounds, $10.9 million in Australian dollars, $2.3 million in Japanese yen, $2.1 million in Norwegian kroner, and $3.4 million in other currencies, and sell contracts of $7.0 million in Canadian dollars and $3.9 million in other currencies.

The majority of Snap-on’s forward exchange contracts are not designated as hedges under SFAS No. 133.  The fair value changes of these contracts are reported in earnings as foreign exchange gain or loss, which is included in “Other income (expense) — net” on the accompanying Condensed Consolidated Statements of Earnings.

Interest Rate Swap Agreements:  Snap-on enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates. Interest rate swap agreements are accounted for as either cash flow hedges or fair value hedges. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense.  For fair value hedges, the effective portion of the change in fair value of the derivative is recorded in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to “Interest Expense” on the accompanying Condensed Consolidated Statements of Earnings.  For cash flow hedges, the effective portion of the change in fair value of the derivative is recorded in “Accumulated other comprehensive income (loss),” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to interest expense.  The notional amount of interest rate swaps outstanding and designated as fair value hedges was $50 million at June 30, 2007, and at December 30, 2006.

Changes in the fair value of derivative financial instruments qualifying for hedge accounting are reflected as derivative assets or liabilities with the corresponding gains or losses reflected in earnings in the period of change.  An offsetting

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(Unaudited)

gain or loss is also reflected in earnings based upon the changes of the fair value of the debt instrument being hedged.  For all fair value hedges qualifying for hedge accounting, the net accumulated derivative loss at June 30, 2007, was $2.5 million.  At June 30, 2007, the maximum maturity date of any fair value hedge was four years.  During the second quarter of 2007, cash flow hedge and fair value hedge ineffectiveness was not material.

11.  Pension Plans

Snap-on’s net pension expense included the following components:

		Three Months Ended						Six Months Ended
(Amounts in millions)		June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Service cost		$	4.8		$	4.9		$	10.7		$	11.4
Interest cost		12.3			11.7			24.7			23.5
Expected return on assets		(16.0		)	(15.3		)	(32.1		)	(30.4		)
Actuarial loss		1.7			2.7			3.5			5.8
Prior service cost		0.3			0.3			0.6			0.6
Net transition asset		—			—			(0.1		)	(0.1		)
Net pension expense		$	3.1		$	4.3		$	7.3		$	10.8

 

Snap-on expects to make contributions to its foreign pension plans throughout 2007 of approximately $7.5 million. Snap-on is not required to make a contribution to its domestic pension plans in 2007.  Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its domestic pension plans.

12.  Retiree Health Care

Snap-on’s net postretirement health care benefits expense included the following components:

		Three Months Ended						Six Months Ended
(Amounts in millions)		June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Service cost		$	0.1		$	0.1		$	0.2		$	0.3
Interest cost		1.1			0.9			2.1			2.1
Unrecognized net gain		(0.4		)	(0.5		)	(0.5		)	(0.6		)
Prior service credit		0.1			(0.2		)	(0.2		)	(0.2		)
Net postretirement expense		$	0.9		$	0.3		$	1.6		$	1.6

 

13.  Stock-Based Compensation

The 2001 Incentive Stock and Awards Plan, as Amended (“2001 Plan”), which was approved by shareholders in 2001 and amended and approved by shareholders in 2006, provides for the grant of stock options, performance share awards and restricted stock awards.  As of June 30, 2007, the 2001 Plan has 3,406,363 shares available for future grants.

Snap-on recognized $5.4 million and $9.3 million of compensation cost for the three and six month periods ended June 30, 2007, and $3.6 million and $6.9 million for the three and six month periods ended July 1, 2006.  Cash received from option exercises during the three and six month periods ended June 30, 2007, totaled $21.6 million and $35.4 million.  Cash received from option exercises during the three and six month periods end July 1, 2006, totaled $20.6 million and $46.0 million.  The tax benefit realized from the exercise of share-based payment arrangements was $3.8 million and $6.3 million

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

for the three and six month periods ended June 30, 2007, and $2.8 million and $6.3 million for the three and six month periods ended July 1, 2006.

Stock Options

Stock options are granted with an exercise price equal to the market value of a share of common stock on the date of grant and have a contractual term of ten years.  Grants made prior to 2007 vest in two annual increments beginning on the first anniversary following the grant date of the award.  Beginning in 2007, all stock option grants vest over a three-year period, beginning on the first anniversary following the grant date of the award, with the exception of the 2007 grant to the company’s Chief Executive Officer, which vests in its entirety within one year of grant.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model.  The company uses historical data regarding stock option exercise behaviors for different participating groups to estimate the expected term of options granted (based on the period of time that options granted are expected to be outstanding). Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option.  The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield on the grant date for the expected term of the option.  The following weighted-average assumptions were used in calculating the fair value of stock options granted during the three and six month periods ended June 30, 2007, and July 1, 2006, using the Black-Scholes valuation model:

		Three Months Ended				Six Months Ended
		June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
Expected term of option (in years)		6.44		7.74		6.31		7.20
Expected volatility factor		25.08	%	28.55	%	25.75	%	29.19	%
Expected dividend yield		3.08	%	3.21	%	3.05	%	3.23	%
Risk-free interest rate		4.55	%	5.00	%	4.68	%	4.59	%

 

A summary of stock option activity as of and for the six month period ended June 30, 2007, is presented below:

		Shares (in millions)		Exercise  Price Per  Share (*)			Remaining Contractual  Term (*) (in years)		Aggregate  Intrinsic  Value  (in millions)
Outstanding at December 30, 2006		2.8		$	33.39
Granted		0.7		50.40
Exercised		(0.9	)	33.50
Forfeited or expired		(0.1	)	44.78
Outstanding at June 30, 2007		2.5		37.74			7.15		$	31.7
Exercisable at June 30, 2007		1.6		32.30			5.90		28.8

     (*) Weighted-average

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The weighted-average grant-date fair value of options granted during the six month periods ended June 30, 2007, and July 1, 2006, was $12.17 and $10.57.  The intrinsic value of options exercised during the six month periods ended June 30, 2007, and July 1, 2006, was $17.1 million and $14.6 million.  The fair value of stock options vested during the six month periods ended June 30, 2007, and July 1, 2006, was $4.2 million and $3.8 million.

As of June 30, 2007, there was $8.7 million of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the 2001 Plan.  That cost is expected to be recognized as a charge to earnings over a weighted-average period of 1.5 years.

Performance Awards

Performance awards granted in 2007 under the 2001 Plan are earned and expensed using the fair value of the performance award, determined by using the Black-Scholes valuation model, over a contractual term of three years based on the company’s performance.  Vesting of the performance awards will be dependent upon performance relative to pre-defined goals for revenue growth and return on assets for the years 2007 through 2009.  Based on Snap-on’s performance relative to these goals, the recipient can earn up to 100% of the performance awards.  For performance achieved above a certain level, the recipient may earn additional cash units, not to exceed 50% of the number of performance awards initially awarded.  Each additional cash unit also represents the right to receive cash of $50.22, which was the fair market value of a share of common stock on the date of grant.

Performance awards granted in 2006 are earned and expensed using the fair value of the performance award, determined by using the Black-Scholes valuation model, over a contractual term of three years based on the company’s performance.  Vesting of the performance awards will be dependent upon performance relative to pre-defined goals for revenue growth and return on assets for the years 2006 through 2008.  Based on Snap-on’s performance relative to these goals, the recipient can earn up to 100% of the performance awards.  For performance achieved above a certain level, the recipient may earn additional cash units, not to exceed 50% of the number of performance awards initially awarded.  Each additional cash unit also represents the right to receive cash of $39.35, which was the fair market value of a share of common stock on the date of grant.

Performance awards granted in 2005 are earned and expensed using the fair value of the performance award, determined by using the Black-Scholes valuation model over a contractual term of three years based on the company’s performance.  Vesting of the performance awards will be dependent upon performance relative to pre-defined goals for revenue growth and return on assets for the years 2005 through 2007.  Based on Snap-on’s performance relative to these goals, the recipient can earn up to 100% of the performance awards with an equal number of cash units that represent the right to receive cash of $31.73 per unit.  For performance achieved above a certain level, the recipient may earn additional cash units, not to exceed 100% of the number of performance awards initially awarded.  Each additional cash unit also represents the right to receive cash of $31.73, which was the fair market value of a share of common stock on the date of grant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of each performance award is estimated on the date of grant using the Black-Scholes valuation model.  The company uses the vesting period of the performance awards as the expected term of options granted.  Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the performance award.  The expected dividend yield is based on the company’s historical dividend payments.  The risk-free interest rate is based on the U.S. treasury yield on the grant date for the length of time corresponding to the expected term of the performance award.  The following weighted-average assumptions were used in calculating the fair value of performance awards granted during the six month periods ended June 30, 2007, and July 1, 2006, using the Black-Scholes valuation model.  No performance awards were granted in the three month periods ended June 30, 2007, and July 1, 2006.

 

		Six Months Ended
		June 30, 2007		July 1, 2006
Expected term of performance award (in years)		3.0		3.0
Expected volatility factor		20.52	%	20.54	%
Expected dividend yield		3.05	%	3.23	%
Risk-free interest rate		4.73	%	4.67	%

 

The weighted-average grant-date fair value of performance awards granted during the six month periods ended June 30, 2007, and July 1, 2006, was $45.86 and $35.74.  As performance share awards generally vest only at the end of the performance-award period, no shares vested or were paid out during the three and six month periods ended June 30, 2007, and the three month period ended July 1, 2006.  During the first quarter of 2006, 0.1 million shares were paid out for the vesting of performance awards granted in 2004.

A summary of the status of the company’s non-vested performance share awards as of June 30, 2007, and changes during the six month period ended June 30, 2007, are as follows:

		Shares (in millions)		Grant-Date Fair Value (*)
Non-vested performance awards at December 30, 2006		0.4		$	33.52
Granted		0.2		45.86
Vested		—		—
Forfeited or expired		(0.1	)	35.83
Non-vested performance awards at June 30, 2007		0.5		38.25

    (*) Weighted-average

As of June 30, 2007, there was $10.7 million of unrecognized compensation cost related to non-vested performance share awards granted.  That cost is expected to be recognized as a charge to earnings over a weighted-average period of 2.1 years.

Stock Appreciation Rights (“SARs”)

The company also issues SARs to certain key non-U.S. employees.  SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant and have a contractual term of ten years and, for SARs granted prior to 2007, vest in two annual increments beginning on the first anniversary following the grant date of the award.  SARs granted in 2007 vest over a three-year period beginning on the first anniversary following the grant date of the award.  SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price.  SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock value over the grant price is paid in cash and not in common stock.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of SARs is remeasured each reporting period using the Black-Scholes valuation model.  The company uses historical data regarding SARs exercise behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding.  Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs.  The expected dividend yield is based on the company’s historical dividend payments.  The risk-free interest rate is based on the U.S. treasury yield in effect on the grant date for the length of time corresponding to the expected term of the SARs.  The following weighted-average assumptions were used in calculating the fair value of SARs granted during the six month periods ended June 30, 2007, and July 1, 2006, using the Black-Scholes valuation model.  No SARs were granted in the three month periods ended June 30, 2007, and July 1, 2006.

		Six Months Ended
		June 30, 2007		July 1, 2006
Expected term of SARs (in years)		5.81		6.79
Expected volatility factor		24.44	%	27.55	%
Expected dividend yield		3.05	%	3.21	%
Risk-free interest rate		4.92	%	5.11	%

 

The total intrinsic value of SARs exercised during the three and six month periods ended June 30, 2007, was $1.0 million and $1.5 million, and $0.9 million and $1.4 million during the three and six month periods ended July 1, 2006.  The total fair value of SARs vested during the six month period ended June 30, 2007, and July 1, 2006, was $1.6 million and $0.9 million.  No SARs vested during the three month periods ended June 30, 2007, and July 1, 2006.

A summary of the status of the company’s non-vested SARs as of June 30, 2007, and changes during 2007, are as follows:

		Shares (in millions)		Fair Value (*)
Non-vested SARs at December 30, 2006		0.1		$	13.85
Granted		0.1		11.71
Vested		—		—
Forfeited or expired		—		—
Non-vested SARs at June 30, 2007		0.2		12.82

    (*) Weighted-average

As of June 30, 2007, there was $1.7 million of unrecognized compensation cost related to non-vested SARs.  That cost is expected to be recognized as a charge to earnings over a weighted-average period of 2.0 years.

Restricted Stock Awards

The company granted 16,443 shares of restricted stock to members of the board of directors during the second quarter ended June 30, 2007.  All restrictions will lapse upon the recipient’s retirement from the Board, death or a change in control.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14.  Earnings Per Share

The shares used in the computation of the company’s basic and diluted earnings per common share are as follows:

		Three Months Ended				Six Months Ended
		June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
Weighted-average common shares outstanding		58,122,407		58,208,826		58,162,270		58,204,512
Dilutive effect of stock-based instruments		664,451		680,645		738,138		719,346
Weighted-average common shares outstanding, assuming dilution		58,786,858		58,889,471		58,900,408		58,923,858

 

The dilutive effect of the potential exercise of outstanding stock-based instruments to purchase common shares is calculated using the treasury stock method.  Options to purchase 29,700 shares and 312,407 shares of Snap-on common stock were not included in the computation of diluted earnings per share for the three month periods ended June 30, 2007, and July 1, 2006, as the exercise price of the options was greater than the average market price of the common stock for the respective periods and the effect on earnings per share would be anti-dilutive.  Options to purchase 29,700 shares and 851,877 shares of Snap-on common stock were not included in the computation of diluted earnings per share for the six month periods ended June 30, 2007, and July 1, 2006, as the exercise price of the options was greater than the average market price of the common stock for the respective periods and the effect on earnings per share would be anti-dilutive.

15.  Comprehensive Income

Total comprehensive income for the three and six month periods ended June 30, 2007, and July 1, 2006, was as follows:

		Three Months Ended						Six Months Ended
(Amounts in millions)		June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Net earnings		$	43.8		$	11.8		$	82.8		$	33.9
Foreign currency translation		19.8			34.7			25.6			38.1
Change in fair value of derivative instruments, net of tax		—			(0.3		)	0.1			(0.2		)
Total comprehensive income		$	63.6		$	46.2		$	108.5		$	71.8

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

16.  Commitments and Contingencies

Snap-on provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the sale is recorded.  Snap-on calculates its reserve requirements based on historic warranty loss experience that is periodically adjusted for recent actual experience.  The following summarizes Snap-on’s product warranty accrual activity for the three and six month periods ended June 30, 2007, and July 1, 2006:

		Three Months Ended						Six Months Ended
(Amounts in millions)		June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
Warranty reserve:
Beginning of period		$	16.9		$	17.9		$	17.3		$	16.8
Additions		5.5			4.0			9.3			9.2
Usage		(3.4		)	(3.2		)	(7.6		)	(7.3		)
End of period		$	19.0		$	18.7		$	19.0		$	18.7

 

Snap-­on has credit risk exposure for certain SOC-originated contracts for franchisee van loans with recourse provisions to Snap-­on. At June 30, 2007, and December 30, 2006, $16.3 million and $16.2 million of loans, with terms ranging from eighteen months to ten years, have a primary recourse provision to Snap­-on if the loans become more than 90 days past due. The asset value of the collateral underlying these recourse loans would serve to mitigate Snap­-on’s loss in the event of default. The estimated fair value of the guarantees for franchisee van loans with recourse as of June 30, 2007, was not material.

On May 16, 2006, Snap-on reached an agreement to settle certain legal matters related to certain then current and former franchisees on a class basis.  The court gave its final approval to the class settlement on October 27, 2006.  Under the terms of the settlement, Snap-on agreed to make payments to claimants and class counsel, plus incur certain other costs and expenses.  Snap-on recorded a $38.0 million pretax charge in the second quarter of 2006 representing its best estimate to settle these legal matters.  As of June 30, 2007, the majority of the settlement funds, including payments to the class participants made in the first quarter of 2007, have been disbursed.  Snap-on has not admitted any wrongdoing by way of this settlement.

Snap-on is also involved in various other legal matters that are being litigated and/or settled in the ordinary course of business. Although it is not possible to predict the outcome of these other legal matters, management believes that the results will not have a material impact on Snap-on’s consolidated financial position or results of operations.

17. Discontinued Operations

On June 29, 2007, Snap-on sold its Sun Electric Systems (“SES”) business based in the Netherlands to DUINMAAIJER B.V., a limited liability company represented by an employee of SES, for a nominal cash purchase price.   SES’s primary business is the research, development and manufacture of test equipment in Europe for aircraft hydraulics.  Snap-on divested of SES as it deemed SES to be non-core to Snap-on’s ongoing business strategies.  The anticipated future capital and other resources necessary to be expended in connection with the SES business were not consistent with Snap-on’s growth plans.  Certain prior year amounts have been reclassified on the accompanying Condensed Consolidated Statements of Earnings to reflect the company’s sale of its SES business as “Discontinued Operations.”

The company recorded an after-tax loss of $9.0 million, or $0.16 per diluted share, in the second quarter of 2007 related to the sale and results of operations of SES.  For segment reporting purposes, the results of operations of SES were previously included in the Diagnostics & Information Group.

 

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