The Daily Magic Formula Stock for 01/13/2009 is Snap-On Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 25-50%.
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Snap-on was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of tools, diagnostics, equipment, software and service solutions for professional users. Products and services include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as customers in industry, government, agriculture, aviation and natural resources. Snap-on also derives income from various financing programs to facilitate the sales of its products.
Snap-on markets its products and brands through multiple distribution sales channels in more than 130 countries. Snap-onâ€™s largest geographic markets include the United States, Australia, Canada, China, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom. Snap-on also reaches its customers through the companyâ€™s franchisee, company-direct, distributor and Internet channels. Snap-on originated the mobile van tool distribution channel in the automotive repair market.
Snap-onâ€™s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-onâ€™s reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on Credit LLC (â€śSOCâ€ť), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. (â€śCITâ€ť), and Snap-onâ€™s wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations. See Note 18 to the Consolidated Financial Statements for information on business segments and foreign operations.
Snap-on evaluates the performance of its reportable segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools, and Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segmentâ€™s operations. Intersegment amounts are eliminated to arrive at consolidated financial results.
On November 28, 2006, Snap-on acquired the ProQuest Business Solutions business and certain net assets (collectively, â€śSnap-on Business Solutionsâ€ť or â€śBusiness Solutionsâ€ť) from ProQuest Company for an initial purchase price of $516.0 million of cash and the assumption of approximately $19 million of debt. Subsequent to the November 28, 2006, closing, the cash purchase price increased by $5.7 million to $521.7 million, primarily reflecting a higher level of working capital received by Snap-on at closing. For segment reporting, Snap-on Business Solutions is included in the Diagnostics & Information Group.
Snap-on Business Solutions is a world leader in automotive parts and service information. Its products are aimed at assisting original equipment manufacturers (â€śOEMsâ€ť) and their dealers to enhance their service operations. Business Solutionsâ€™ products include integrated software, services and systems that transform complex technical data for parts catalogs into easily accessed electronic information (electronic parts catalogs). Other products and services include warranty management systems and analytics to help dealerships manage and track the complex process of warranty claims management. Over 35,000 automotive dealerships around the world use Business Solutionsâ€™ electronic parts catalogs, which are available in 26 different languages and support 15 automotive manufacturers and 31 brands. Business Solutionsâ€™ products are also sold to over 85,000 dealers in the power equipment and power sports markets. See Note 2 to the Consolidated Financial Statements for further information on the Snap-on Business Solutions acquisition.
Information Available on the Companyâ€™s Web Site
Additional information regarding Snap-on and its products is available on the companyâ€™s Web site at www.snapon.com. Snap-on is not including the information contained on its Web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Snap-onâ€™s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements on Schedule 14A, Current Reports on Form 8-K, and any amendments to those reports, are made available to the public at no charge, other than an investorâ€™s own Internet access charges, through the Investor Information section of the companyâ€™s Web site at www.snapon.com/investor. Snap-on makes such material available on its Web site as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (â€śSECâ€ť). Copies of any materials the company files with the SEC can also be obtained free of charge through the SECâ€™s Web site at www.sec.gov. The SECâ€™s Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549, or by calling 1-800-732-0330. In addition, the companyâ€™s (i) charters for the Audit, Corporate Governance and Nominating, and Organization and Executive Compensation committees of the companyâ€™s Board of Directors; (ii) Corporate Governance Guidelines; and (iii) Code of Business Conduct and Ethics are available on Snap-onâ€™s Web site. Snap-on will also post any amendments to these documents, or information about any waivers granted to directors or executive officers with respect to the Code of Business Conduct and Ethics, on the companyâ€™s Web site at www.snapon.com. These documents are also available in print upon written request directed to the Corporate Secretary, 2801 80 th Street, Kenosha, Wisconsin 53143.
Products and Services
Snap-on offers a broad line of products and complementary services that are grouped into three product categories: (i) tools; (ii) diagnostics and repair information; and (iii) equipment. Further product line information is not presented as it is not practicable to do so.
The tools product category includes hand tools, power tools and tool storage products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets, saws and cutting tools, pruning tools, torque measuring instruments and other similar products. Power tools include pneumatic (air), cordless (battery) and corded (electric) tools such as impact wrenches, ratchets, chisels, drills, sanders, polishers and similar products. Tool storage includes tool chests, roll cabinets and other similar products. The majority of products are manufactured by Snap-on and, in completing the product line, other items are purchased from external manufacturers.
The diagnostics and repair information product category includes handheld and PC-based diagnostics products, service and repair information products, diagnostic software solutions, electronic parts catalogs, business management systems, point-of-sale systems, integrated systems for vehicle service shops, equipment repair services, OEM purchasing facilitation services, and warranty management systems and analytics to help dealerships manage and track performance.
Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs as well as after sales support for its customers, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on.
The equipment product category includes solutions for the diagnosis and service of automotive and industrial equipment. Products include wheel alignment equipment, wheel balancers, tire changers, vehicle lifts, test lane systems, collision repair equipment, air conditioning service equipment, brake service equipment, fluid exchange equipment, transmission troubleshooting equipment, safety testing equipment, battery chargers and hoists.
Sales and Distribution
Snap-on markets and distributes its products and related services principally to professional tool and equipment users around the world. The two largest 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: (i) professional technicians who purchase tools and equipment for themselves; (ii) vehicle service and repair shop owners and managers - including independent shops, national chains and automotive dealerships - who purchase tools, equipment and diagnostics products for use by multiple technicians within a service or repair facility; and (iii) OEMs.
Snap-on provides innovative tool, equipment and business solutions, as well as technical sales support and training, to meet techniciansâ€™ evolving needs. Snap-onâ€™s franchise van distribution system offers technicians the convenience of purchasing quality tools with minimal disruption of their work routine. Snap-on also provides owners and managers of shops, where technicians work, with tools, diagnostics equipment, repair and service information, including electronic parts catalogs, and shop management products. Through its Equipment Solutions (â€śOEM facilitationâ€ť) business, Snap-on provides OEMs with products and services including tools, consulting services and facilitation services. Snap-onâ€™s facilitation services include product procurement, distribution and administrative support to customers for their dealership equipment programs.
Major challenges for Snap-on and the vehicle service and repair sector include the increasing rate of technological change within motor vehicles, vehicle population growth, vehicle life and the resulting impact on the businesses of both our suppliers and customers that is necessitated by such change. Snap-on believes it is a meaningful participant in the market sector for vehicle service and repair.
Snap-on markets its products globally to a broad cross-section of industrial and commercial customers including maintenance and repair operations; manufacturing and assembly facilities; various government agencies, facilities and operations, including military operations; vocational and technical schools; aerospace and aviation; OEM and repair customers; oil and gas developers; mining operations; energy and power generation equipment fabricators; agriculture; infrastructure construction companies; and other customers that require instrumentation, service tools and/or equipment for their products.
The industrial sector for Snap-on has achieved growth in recent years by providing value-added products and services to an increasingly expanding global base of customers, particularly those in the market segments of natural resources, aerospace, government and education. Through its experienced and dispersed sales organization, industrial â€śsolutioneersâ€ť strive to develop unique and highly valued productivity solutions for customers worldwide that leverage Snap-onâ€™s product, service and development capabilities.
Major challenges in the industrial sector include a highly competitive, cost-conscious environment, and a trend toward customers making many of their tool and equipment purchases through one integrated supplier. Snap-on believes it is a meaningful participant in the market sector for industrial tools and equipment.
Snap-on serves customers primarily through the following channels of distribution: the mobile franchise van channel, company-direct sales, distributors and e-commerce. The following discussion summarizes Snap-onâ€™s general approach for each channel, and is not intended to be all-inclusive.
In the United States, the majority of sales to the vehicle service and repair sector are conducted through Snap-onâ€™s franchise van distribution system. Snap-onâ€™s franchisees primarily serve vehicle service technicians and vehicle service shop owners, generally providing weekly contact at the customerâ€™s place of business. Franchiseesâ€™ sales are concentrated in hand and power tools, tool storage units, small diagnostic and shop equipment, and diagnostics and repair information products, which can easily be transported in a van and demonstrated during a brief sales call. Franchisees purchase Snap-onâ€™s products at a discount from suggested list prices and resell them at prices established by the franchisee. Most U.S. franchisees are provided a list of places of business that serves as the basis of the franchiseeâ€™s sales route, although some franchisees have sales areas defined by other methods.
Snap-on also offers a trial franchise option â€“ termed the â€śGateway Programâ€ť â€“ to potential U.S. franchisees that do not meet the franchise qualification requirements. Gateway Program participants have less upfront investment and are provided an initial base level of consigned inventory from Snap-on to assist them in gaining experience and building equity toward the future purchase of a standard franchise. Snap-on also provides certain franchisees the opportunity to add vans to their franchise or to add a limited number of franchises. Snap-on charges nominal initial and ongoing monthly license fees. Since 1991, new U.S. franchisees, and a majority of the pre-1991 U.S. franchisees, have been enrolled as franchisees of Snap-on. At 2007 year end, 3,269 U.S. franchisees (approximately 96%) were enrolled as franchisees, or employed by franchisees, as compared with 3,308 U.S. franchisees (approximately 95%) at year-end 2006.
Snap-on has replicated its U.S. franchise van distribution model in certain other countries including Australia, Canada, Japan, the Netherlands, South Africa and the United Kingdom. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians and shop owners. Snap-on markets products in certain other countries through its subsidiary, Snap-on Tools International LLC, which sells to foreign distributors under license or contract with Snap-on.
Through SOC, financing is available to U.S. franchisees, including financing for van and truck leases, working capital loans, and loans to enable new franchisees to fund the purchase of the franchise. Internationally, Snap-on offers financing to its franchisees and customer networks through its wholly owned finance subsidiaries. While Snap-on offers financing to qualified franchisees and their customers through SOC and its wholly owned international finance subsidiaries, the decision to finance through Snap-on or another financing entity is solely at the election of the customer.
Snap-on supports its franchisees with a field organization of regional offices, franchise performance teams, Diagnostic Sales Developers (â€śDSDsâ€ť), service centers and distribution centers. Snap-on also provides sales and business training, and marketing and product promotion programs, as well as customer and franchisee financing programs through SOC and its wholly owned international finance subsidiaries, all of which are designed to strengthen franchisee sales. In the United States and Canada, the National Franchise Advisory Council and the Snap-on Tools Canadian Franchise Advisory Council, both of which are composed of franchisees that are elected by franchisees, assist Snap-on in identifying and implementing enhancements to the franchise program.
In the United States, franchisees work closely with the DSDs. The DSD specialists demonstrate and sell higher-price-point diagnostics and vehicle service shop management information systems. DSDs work independently and with franchisees to identify and generate sales leads among vehicle service shop owners and managers. DSDs are Snap-on employees who, beginning in 2008, are compensated through a combination of base salary and commission; a franchisee receives a brokerage fee from certain sales made by the DSDs to the franchiseeâ€™s customers. Most products sold through franchisees and the DSDs are sold under the Snap-on , Blue-Point and Sun brand names.
Company Direct Sales
In the United States, a significant proportion of shop equipment sales under the Sun, John Bean and Blackhawk brands and information products under the Mitchell1 brand are made by a direct sales force that has responsibility for national accounts. As the vehicle service and repair sector consolidates (with more business conducted by national chains, automotive dealerships and franchised service centers), the company believes these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of equipment and diagnostic products and services. Snap-on also sells these products and services directly to OEMs.
Snap-on brand tools and equipment are marketed to industrial and governmental customers in the United States through both industrial sales representatives, who are employees, and independent industrial distributors. In most markets outside the United States, industrial sales are conducted through independent distributors. The sales representatives focus on industrial customers whose main purchase criteria are quality and service. At the end of 2007, Snap-on had industrial sales representatives in the United States, Australia, Canada, Japan, Mexico, Puerto Rico and some European, Asian, Latin American and Middle Eastern countries, with the United States representing the majority of Snap-onâ€™s total industrial sales.
Business Solutions sells automotive, power equipment and power sports software solutions, both domestically and internationally, through an internal sales force. Products and services are marketed to two targeted groups: OEMs and individual dealerships. To effectively reach the large OEMs in the automotive segment, such as General Motors Corporation, Daimler AG, Ford Motor Company, Chrysler LLC, and Toyota Motor Corporation, Business Solutions has deployed a team of business development professionals in the worldâ€™s principal automotive centers in the United States, the United Kingdom, Germany, Italy, France, Spain and Japan. In the United States and Canada, automotive products and services are sold directly to individual dealerships using an experienced sales force. In reaching customers such as John Deere (Deere & Company), JC Bamford Excavators Ltd. (JCB) and Yamaha Corporation of America (Yamaha) in the power equipment and power sports segments, teams are also positioned to support the 90+ brands that Business Solutions distributes to globally. Business management solutions are sold directly to the automotive OEMs in the United States and throughout Europe, including the United Kingdom.
Sales of certain tools and equipment are made through independent vehicle service and industrial distributors who purchase the items from Snap-on and resell them to end users. Hand tools under the Bahco, Fish and Hook, Pradines and Lindstrom brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Wheel service and other vehicle service equipment are sold through distributors primarily under brands including Hofmann, Kansas Jack , John Bean and Blackhawk . Sun -branded equipment is marketed through distributors in South America and Asia , and through both a direct sales force and distributors in Europe.
The following is information about the nominees and Snap-on's other directors as of February 25, 2008. Pursuant to the Company's Restated Certificate of Incorporation and Bylaws, the Board must be comprised of three approximately equal classes. At the Annual Meeting each year, one class is nominated for election to a three-year term.
When Mr. Pinchuk was elected to the Board in April 2007 between meetings of shareholders, it was determined that he would stand for re-election in 2008 in the class of directors whose terms would, upon re-election, then expire in 2011. When Mr. Holden was so elected in July 2007, in order to keep classes of directors even at that time, it was determined that he would be in the class whose terms expire in 2010; however, the Bylaws require that the person be submitted to the shareholders at the Annual Meeting in any event for the balance of the term.
Lars Nyberg, a director of Snap-on since 2002, resigned from the Board in November 2007 due to increasing business commitments. We have greatly appreciated his years of service to Snap-on. The Board of Directors would like to acknowledge and thank Mr. Nyberg for that dedicated service.
Nominees for Election for Terms Expiring at the 2011 Annual Meeting
Roxanne J. Decyk
Director since 1993
Ms. Decyk, age 55, has been Corporate Affairs Director of Royal Dutch Shell plc, an oil, gas, chemical and refined petroleum products company, since July 2005. From March 2005 to July 2005, Ms. Decyk was Director International of Shell International B.V., from 2002 to 2005 was Senior Vice Presidentâ€”Corporate Affairs and Human Resources of Shell Oil Company, and from 1999 through 2002, was the Vice President of Corporate Strategy of Shell International Limited, based in London, England.
Nicholas T. Pinchuk
Director since 2007
Mr. Pinchuk, age 61, has been Snap-on's President and Chief Executive Officer since December 2007. Prior to his appointment as President and CEO, Mr. Pinchuk served as Snap-on's President and Chief Operating Officer since April 2007, and as Snap-on's Senior Vice President and Presidentâ€”Worldwide Commercial & Industrial Group since 2002. Prior to joining Snap-on, Mr. Pinchuk served in several executive operational and financial management positions at United Technologies Corporation and held various financial and engineering positions at Ford Motor Company. Mr. Pinchuk serves on the board of directors of Columbus McKinnon Corporation.
Richard F. Teerlink
Director since 1997
Mr. Teerlink, age 71, retired as Chairman of the Board of Harley-Davidson, Inc., a manufacturer of motorcycles, in 1998. He served as its Chairman from 1996 to 1998, Chief Executive Officer from 1989 to 1997, and President from 1988 to 1997. Mr. Teerlink serves as a Director of Johnson Controls, Inc.
Nominee for Ratification and Election for a Term Expiring at the 2010 Annual Meeting
James P. Holden
Director since 2007
Mr. Holden, age 56, served 27 years in the automotive industry, including 19 years with DaimlerChrysler and its predecessor, Chrysler Corporation. He was most recently President and Chief Executive Officer until 2000 of DaimlerChrysler Corporation, a US subsidiary of DaimlerChrysler AG. Since March 2007, he has served as non-executive Chairman of Meridian Automotive Systems. Mr. Holden is also a director of SMobile Systems, Speedway Motorsports, Inc. and SIRIUS Satellite Radio, Inc.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE FOUR NOMINEES.
Shares represented by proxies will be voted according to instructions on the Proxy Card. Only cards clearly indicating a vote against will be considered as a vote against the nominee. If the Board learns prior to the Annual Meeting that a nominee is unable to serve, then the Board may name a replacement, in which case the shares represented by proxies will be voted for the substitute nominee.
Directors Not Standing for Election at this Meeting:
Directors Continuing to Serve Until the 2010 Annual Meeting
John F. Fiedler
Director since 2004
Mr. Fiedler, age 69, was the Chairman of the Board of BorgWarner Inc., a supplier of engineered systems and components primarily for automotive powertrain applications, from 1996 until 2003. He was also the Chief Executive Officer of BorgWarner from 1995 until 2003. Mr. Fiedler serves as a Director of AirTran Holdings, Inc., Mohawk Industries, Inc. and WABCO Holdings Inc.
W. Dudley Lehman
Director since 2003
Mr. Lehman, age 56, retired in 2006 as Group President for Kimberly-Clark Corporation, a manufacturer and marketer of a wide range of consumer and business-to-business products from natural fibers, which position he held since 2005. From 2004 to 2005 he served as Group Presidentâ€”Business to Business for Kimberly-Clark and from 1995 to 2004 he served as Group Presidentâ€”Infant and Child Care Sectors for Kimberly-Clark.
Edward H. Rensi
Director since 1992
Mr. Rensi, age 63, has been an owner and Chief Executive Officer of Team Rensi Motorsports, which sponsors two cars in the NASCAR Nationwide Series, since 1998. From 1997 to 1998, he was a consultant to McDonald's U.S.A., a food service organization. He was President and Chief Executive Officer of McDonald's U.S.A. from 1991 to 1997. Mr. Rensi also serves as a Director of Great Wolf Resorts, Inc. and of International Speedway Corporation.
Directors Continuing to Serve Until the 2009 Annual Meeting
Bruce S. Chelberg
Director since 1993
Mr. Chelberg, age 73, retired as Chairman of the Board and Chief Executive Officer of Whitman Corporation, a consumer goods company, in 2000. He had served as its Chairman and Chief Executive Officer since 1992 and had served on Whitman's Board since 1988. Mr. Chelberg serves as a Director of First Midwest Bancorp, Inc. and Northfield Laboratories, Inc.
Karen L. Daniel
Director since 2005
Ms. Daniel, age 50, has served as Executive Vice President and the Chief Financial Officer for Black & Veatch Corporation, a leading global engineering, construction and consulting company specializing in infrastructure development in the areas of energy, water and information, since 2000.
Arthur L. Kelly
Director since 1978
Mr. Kelly, age 70, has been the Managing Partner of KEL Enterprises L.P., a holding and investment company, since 1982. Mr. Kelly is a Director of BASF Aktiengesellschaft, Bayerische Motoren Werke (BMW) A.G., Deere & Company and Northern Trust Corporation.
Jack D. Michaels
Director since 1998
Mr. Michaels, age 70, has been Snap-on's Chairman since November 2004. Mr. Michaels was also our Chief Executive Officer from November 2004 until his retirement in December 2007, and our President from November 2004 until April 2007. Prior to joining Snap-on, Mr. Michaels was the Chairman of the Board of HNI Corporation, a manufacturer and marketer of office furniture and hearth products, from 1996 to 2005. In addition, from 1991 to 2004 he served as HNI's Chief Executive Officer, and from 1991 to 2003, he served as HNI's President.
MANAGEMENT DISCUSSION FROM LATEST 10K
In 2007 Snap-on continued to implement strategic initiatives intended to create long-term value for company shareholders, associates, franchisees and other distributor partners across all of its business segments and channels. During the year, Snap-on believes it made measurable progress on many fronts.
Net sales grew 15.7% year over year, with sales increases in each segment. Operating earnings of $324.8 million in 2007 nearly doubled from $162.8 million in 2006. Higher sales, increased income from financial services, and improved operating expense margins from ongoing efficiency, productivity and cost reduction (collectively â€śRapid Continuous Improvementâ€ť or â€śRCIâ€ť) initiatives, along with the absence of the 2006 franchisee litigation settlement cost, all contributed to the significant year-over-year earnings improvement.
Our strategic priorities and plans for 2008 will continue to build on the improvement initiatives underway to achieve sustainable, profitable growth through increased sales and lower costs.
In the Commercial & Industrial Group , higher sales, including growth in emerging markets, combined with expense control and savings from restructuring initiatives to deliver continued improvements in operating performance. Segment net sales in 2007 were up 13.3% and operating earnings were up 23.8%.
Benefits from ongoing cost reduction and RCI initiatives, including increased production and sourcing of materials from lower-cost regions and facilities, were major contributors to the year-over-year earnings improvement. As a result of continued sales growth, improved levels of customer service, and savings from RCI and restructuring activities, operating earnings increased to $131.5 million in 2007.
In the Snap-on Tools Group , considerable progress on fundamental, strategic initiatives strengthened company operating and financial performance, as well as franchisee performance and satisfaction.
Higher sales of a mid-tier brand of tools and equipment (Blue Point), a re-launch of the companyâ€™s warehouse distribution program, and a more focused promotional program all contributed to the 8.1% sales growth in 2007. Supply chain improvements and an ongoing transition to a market-demand-based replenishment system continued to improve complete and on-time delivery of a broad assortment of products. Operating earnings of $125.1 million in 2007 improved significantly from prior-year levels, primarily due to contributions from the higher sales and benefits from ongoing cost reduction and RCI initiatives, as well as the absence of the $38.0 million franchisee litigation settlement charge in 2006.
The Snap-on Tools Group expects to continue to build on the progress made in enhancing the franchise proposition and delivering customer productivity solutions, with specific initiatives in 2008 focused on the following:
â€˘ Continue to improve franchisee profitability and satisfaction;
â€˘ Improve service to existing customers;
â€˘ Introduce programs to capture un-served customers;
â€˘ Continued new product innovation and development;
â€˘ Continually improve the supply chain through investments in manufacturing and use of RCI; and
â€˘ Integrate customer driven, pull-marketing initiatives.
By executing in these areas, Snap-on believes the company and its franchisees will continue to serve more customers better and more profitably.
In the Diagnostics & Information Group , significant progress was realized across many facets of the business in 2007. Segment sales increased 28.5% to over $650 million, despite lower original equipment manufacturers (â€śOEMâ€ť) facilitation sales, due primarily to the wind down of a major facilitation program in Europe, and the outsourcing of certain non-strategic, low-margin products previously manufactured for the Snap-on Tools Group.
The integration of the Snap-on Business Solutions (â€śBusiness Solutionsâ€ť) acquisition, which was acquired November 28, 2006, provided an opportunity to successfully build closer relationships with key OEM customers and strengthen Snap-onâ€™s position as a provider of productivity solutions. New product and program offerings, coupled with a renewed focus and dedication to customer delivery, were rewarded with solid sales growth. Integrating Snap-onâ€™s RCI initiatives also drove improved operating cost leverage.
The diagnostics equipment and software business, as well as the shop management business, grew through the development and launch of new hardware and software products targeted at a broader and growing customer base. Focus on RCI initiatives also achieved strong cost reduction and improved inventory turns.
The Diagnostics & Information Group expects to build on the following strategic priorities in 2008:
â€˘ Continued growth in the base business and emerging markets;
â€˘ Further leveraging of customer relationships and product and service offerings; and
â€˘ Continued innovation in new products and services.
Financial Services revenue increased 28.6% to $63.0 million, and operating income of $22.4 million increased 72.3% from the prior year. Originations in 2007 were flat with prior-year levels.
Snap-on delivered continued increased cash flow from operations of $231.1 million in 2007, up from $203.4 million in the prior year. Snap-on used available cash in 2007 to repurchase over 1.8 million shares of Snap-on common stock for $94.4 million, pay dividends totaling $64.8 million, and pay down debt of $36.6 million. Capital expenditures in 2007 of $61.9 million reflect higher levels of efficiency and cost-reduction capital investments and higher levels of spending to support strategic supply chain and other growth initiatives, including the expansion of the companyâ€™s manufacturing capabilities in lower-cost regions and emerging markets. Cash at year-end 2007 of $93.0 million was up from $63.4 million at year-end 2006. In 2006, the company used available cash to fund, in part, the purchase of the Business Solutions acquisition, pay dividends totaling $63.6 million, repurchase over 2.6 million shares of Snap-on common stock for $109.8 million, and invest $50.5 million in capital expenditures.
Results of Operations
Operating expenses in 2007 were $964.2 million, as compared to $930.0 million in 2006. The $34.2 million increase in operating expenses includes $62.1 million of higher year-over-year operating expenses for Business Solutions (twelve months of operating expense in 2007 versus approximately five weeks of post-acquisition operating expense in 2006), $22.2 million of unfavorable currency translation, higher volume-related expenses, and increased spending for expansion in emerging markets. These increases in year-over-year operating expenses were largely offset by the absence, in 2007, of a $38.0 million franchisee litigation settlement charge recorded in 2006, higher benefits of $11.5 million from ongoing RCI initiatives, $6.4 million of gains on the sale of facilities and $2.0 million of lower restructuring costs. As a percentage of net sales, operating expenses of 33.9% were significantly improved from 2006 levels. See Note 15 to the Consolidated Financial Statements for further information on the franchisee litigation settlement.
Interest expense of $46.1 million in 2007 was up from $20.6 million in 2006 primarily due to higher debt levels to finance the Business Solutions acquisition.
Other income (expense) â€“ net was income of $5.5 million in 2007 as compared to income of $5.3 million in 2006. This line item includes the impact of all non-operating items such as interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for further information on other income (expense) â€“ net.
Snap-onâ€™s effective income tax rate on earnings before minority interests and equity earnings (loss) was 32.5% in 2007, as compared with 31.1% in the prior year. See Note 8 to the Consolidated Financial Statements for further information on income taxes.
On June 29, 2007, Snap-on sold its Sun Electric Systems (â€śSESâ€ť) business based in the Netherlands for a nominal cash purchase price. SESâ€™s primary business was the research, development and manufacture of test equipment in Europe for aircraft hydraulics. SES reported full-year sales of $18.3 million in 2006 and was not a significant subsidiary of Snap-on. Snap-on divested of SES as it deemed SES to be non-core to the companyâ€™s ongoing strategies. The anticipated future capital and other resources necessary to be expended in connection with the SES business were not consistent with Snap-onâ€™s growth plans. Snap-on recorded an $8.0 million net loss ($9.2 million net loss on sale partially offset by $1.2 million of net earnings from operations) from the sale of SES in 2007. Certain prior year amounts were reclassified on the accompanying Consolidated Statements of Earnings to reflect the sale of SES as â€śDiscontinued operations, net of tax.â€ť For segment reporting purposes, the results of operations of SES were previously included in the Diagnostics & Information Group. See Note 16 to the Consolidated Financial Statements for information on SES.
Net earnings from continuing operations in 2007 were $189.2 million, or $3.23 per diluted share. Net earnings from continuing operations in 2006 were $97.9 million, or $1.65 per diluted share, including a $23.4 million after-tax charge ($0.40 per diluted share) related to the resolution of the franchisee litigation settlement. Net earnings in 2007 were $181.2 million, or $3.09 per diluted share, as compared to net earnings of $100.1 million, or $1.69 per diluted share, in 2006. Results of operations for 2007 include a full year of operating results for Business Solutions; results of operations for 2006 include approximately five weeks of post-acquisition operating results for Business Solutions. See Note 2 to the Consolidated Financial Statements for information on the Business Solutions acquisition.
Snap-onâ€™s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-onâ€™s reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on Credit LLC (â€śSOCâ€ť), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. (â€śCITâ€ť), and Snap-onâ€™s wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations.
Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools, and Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segmentâ€™s operations. Intersegment amounts are eliminated to arrive at consolidated financial results.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Caution Regarding Forward-Looking Statements:
Statements in this document that are not historical facts, including statements that (i) are in the future tense; (ii) include the words â€śexpects,â€ť â€śplans,â€ť â€śtargets,â€ť â€śestimates,â€ť â€śbelieves,â€ť â€śanticipates,â€ť or similar words that reference Snap-on Incorporated (â€śSnap-onâ€ť or â€śthe companyâ€ť) or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-onâ€™s or managementâ€™s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in its Annual Report on Form 10-K for the fiscal year ended December 29, 2007, which are incorporated herein by reference, could affect the companyâ€™s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.
These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain efficiencies and savings from its Rapid Continuous Improvement (â€śRCIâ€ť) and other cost reduction initiatives, including its ability to implement reductions in workforce, achieve improvements in the companyâ€™s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and lost revenues. These risks also include uncertainties related to Snap-onâ€™s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby enhance their sales and profitability, introduce successful new products, successfully integrate acquisitions, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, litigation challenges and external negative factors including significant changes in the current competitive environment, inflation, disruptions and instability in the credit and financial markets, changes in interest rates and other monetary and market fluctuations; and the impact of legal proceedings, energy and raw material supply and pricing, including steel and gasoline, the amount, rate and growth of Snap-onâ€™s general and administrative expenses, including health care and postretirement costs, the impacts of non-strategic business and/or product line rationalizations, and terrorist disruptions on business. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law.
In addition, investors should be aware that generally accepted accounting principles in the United States of America (â€śU.S. GAAPâ€ť) prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.
RESULTS OF OPERATIONS
Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue.
Net sales in the third quarter of 2008 of $697.8 million increased $17.1 million, or 2.5%, from 2007 levels, including $12.1 million from currency translation.
Sales in the Commercial & Industrial Group of $338.1 million increased $10.2 million, or 3.1%. Excluding $12.4 million of currency translation, Commercial & Industrial Group sales declined $2.2 million year over year as continued growth in emerging markets, higher sales of power tools, increased sales to industrial customers, and continued strong sales of imaging aligner units, were more than offset by lower sales of professional tools in Europe and by sales declines in other wheel service equipement worldwide. Sales in the Snap-on Tools Group of $269.5 million increased $7.5 million, or 2.9%, primarily due to higher sales in the companyâ€™s international franchise operations; currency translation contributed $0.4 million of the sales increase. In the Diagnostics & Information Group, sales of $155.1 million were up $3.1 million from 2007 levels as higher Original Equipment Manufacturer (â€śOEMâ€ť) program sales, increased sales of diagnostics products in Europe, and higher sales of Mitchell1â„˘ information products were partially offset by lower sales of diagnostics products in North America and by lower sales at Snap-on Business Solutions, including expected lower sales from the planne d exit of certain non-core product lines.
Gross profit in the third quarter of 2008 was $312.2 million, as compared to $300.9 million in 2007. The $11.3 million increase in gross profit primarily includes contributions from higher pricing, $5.2 million of savings from ongoing efficiency, productivity and cost reduction (â€śRapid Continuous Improvementâ€ť or â€śRCIâ€ť) initiatives, $4.0 million of currency translation, and $2.2 million of lower restructuring costs. These improvements were partially offset by a shift in product mix that included lower sales of higher-margin products in the U.S. franchise operations and increased production, material and freight costs. Gross profit margin of 44.7% in 2008 was up 50 basis points (100 basis points equals 1.0 percent) from 44.2% in 2007.
Operating expenses in the third quarter of 2008 were $230.6 million, as compared to $234.1 million in 2007. The $3.5 million reduction in operating expenses includes $6.4 million of benefits from RCI initiatives and $2.6 million of lower franchisee termination costs, primarily as a result of continued favorable trend rates. These improvements were partially offset by $3.6 million of unfavorable currency translation and $1.8 million of higher restructuring costs. As a percentage of net sales, operating expenses improved 140 basis points to 33.0% in the third quarter of 2008, as compared to 34.4% in 2007.
Operating income from Financial Services was $4.8 million on revenue of $18.0 million in the third quarter of 2008, as compared with $5.6 million of operating income on revenue of $15.8 million in 2007. Contributions from higher revenues in 2008, primarily as a result of lower market discount rates, were more than offset by higher year-over-year operating expenses, including $1.4 million of one-time, project-related costs.
Consolidated operating earnings in the third quarter of 2008 were $86.4 million, an increase of $14.0 million, or 19.3%, from the $72.4 million achieved in the third quarter of 2007. Currency translation contributed $0.3 million of the $14.0 million increase in year-over-year operating earnings.
Interest expense of $6.8 million in the third quarter of 2008 was down $4.8 million from the prior year primarily due to declining interest rates and lower average debt levels in the quarter.
Other income (expense) â€“ net was income of $1.0 million in the third quarter of 2008 as compared to income of $2.6 million in 2007. Other income (expense) â€“ net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Condensed Consolidated Financial Statements for further information.
Snap-onâ€™s effective income tax rate on earnings before equity earnings and minority interests was 33.3% in the third quarter of 2008 and 34.1% in the third quarter of 2007. Snap-on anticipates that its full year effective income tax rate on earnings before equity earnings and minority interests will approximate 33.3% in 2008. See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes.
On March 5, 2008, Snap-on acquired a 60% interest in Zhejiang Wanda Tools Co., Ltd. (â€śWanda Snap-onâ€ť), a tool manufacturer in China, for a preliminary cash purchase price of $14.7 million, including an estimated $1.1 million of transaction costs. The preliminary purchase price, which is subject to the finalization of working capital and certain other adjustments that are expected to be finalized in the fourth quarter of 2008, increased from $14.7 million to $15.1 million (or $13.8 million, net of cash acquired) in the second quarter of 2008; no purchase price adjustments were recorded in the third quarter of 2008.
The acquisition of Wanda Snap-on is part of the companyâ€™s ongoing strategic initiatives to further expand its manufacturing presence in emerging growth markets and lower-cost regions. For segment reporting purposes, the results of operations and assets of Wanda Snap-on, which have been included in Snap-onâ€™s condensed consolidated financial statements since the date of acquisition, are included in the Commercial & Industrial Group. As of September 27, 2008, the net sales and operating earnings impact of the acquisition were not material to Snap-onâ€™s third quarter or year-to-date 2008 condensed consolidated financial statements.
Net earnings in the third quarter of 2008 were $54.6 million, or $0.94 per diluted share. This compares with net earnings of $41.1 million, or $0.70 per diluted share, in the third quarter of 2007.
Exit and Disposal Activities
Snap-on recorded costs of $1.4 million and $8.0 million for exit and disposal activities in the three and nine month periods ended September 27, 2008, respectively, as compared to $1.8 million and $16.5 million of such costs in the three and nine month periods ended September 29, 2007, respectively. Snap-on anticipates full-year 2008 restructuring costs to be in a range of $12 million to $14 million, as compared to the $26.3 million incurred in full-year 2007.
Snap-on is continually evaluating the long-term strategic fit of its various businesses and/or product lines. Additional exit and/or disposal charges may be incurred in the event the company decides to exit certain non-strategic businesses and/or product lines that no longer fit with the companyâ€™s core strategies. See Note 6 to the Condensed Consolidated Financial Statements for further information on Snap-onâ€™s exit and disposal activities.
Thank you Sean, and good morning everyone. Thank you for joining us today to review Snap-onâ€™s third quarter 2008 results.
By now you should have seen our press release issued this morning. Despite increased challenges in the economy, we believe that our third quarter results demonstrate our continued progress in our core strategic and operating initiatives. Weâ€™ll discuss these with you today.
Joining me is Nick Pinchuk, Snap-onâ€™s President and CEO. Nick will kick off our call this morning with his perspective on our business and results. I will then provide a more detailed review of our financial results and afterwards, weâ€™ll take your questions.
Consistent with past practice, we will use slides to help illustrate our discussion. You can find a copy of these slides on our website next to the audio icon for this call. These slides will be archived on our website, along with a transcript of todayâ€™s call.
Any statements made during this call relative to managementâ€™s expectations, estimates or beliefs, or otherwise state managementâ€™s or the companyâ€™s outlook, plans or projections, are forward-looking statements and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings.
This call is copyrighted material by Snap-on Incorporated. It is intended solely for the purpose of this audience. Therefore it cannot be recorded, transcribed or rebroadcast by any means without Snap-onâ€™s expressed permission. With that said, I will now turn the call over to Nick.
Thanks, Marty. It appears we live in interesting times. Uncertainty seems to be the order of the day, and of course, Snap-on is not immune. What you can still depend on is that enabling solutions, real products for critical jobs, continue to be in demand, even now, and thatâ€™s what Snap-on is all about.
Whatâ€™s also reliable, even in these times, is the strength of our corporationâ€™s business model; the breadth of our customers; the power of our value creating processes, and most importantly, the capability and commitment of our team.
In this past quarter, those extraordinary characteristics were on display again. Sales growth was a lot tougher but the strength of our brands and the pull of our new innovative products provided what I think was significant buoyancy. All of that combined to create record earnings for the quarter.
Operating margins expanded 170 points to over 12%. The EPS of $0.94 is a record for any third quarter, any time in the history of our corporation, and for the nine months completed so far this year, operating margins reached 13%.
Those of you who have been listening to us for some time might recall that this was the very goal we set for ourselves a couple of years ago. It was a goal we thought would be achieved, but we thought it would be achieved in 2010. Weâ€™re ahead of our own targets, despite the macroeconomic difficulties.
Now Iâ€™ll be giving you some more specifics as we go forward, but before I do, I want to note that we could not have accomplished this past quarterâ€™s performance without the extraordinary efforts of all our associates and franchisees.
I know many of you are listening in today to what is your call. My congratulations and my thanks to each and every one of you. Itâ€™s clear that these are turbulent times. There is significant uncertainty for both businesses and individuals. As Iâ€™ve said many times, Snap-on is not immune.
Weâ€™re fully aware of the difficulties and weâ€™re vigilant regarding the potential impact and the need to act against the eventualities. But having said that, we believe our strategies and business models do create resiliency.
We have a growing global position with an expanding presence in emerging markets. We benefit from a diverse set of professional users in critical industries from vehicle repair to aerospace to natural resources to alternate energy.
Those are fairly favorable places to be in difficult times, places where Snap-on products fill crucial needs, enhance productivity, and in the end make money for our customers.
Beyond that we hold some of the strongest brand positions anywhere. Underpinning all of this, is our value creation approach with differentiating processes like Rapid Continuous Improvement, enabling innovation and passionate customer care.
So having said that as an overview, let me give you some highlights of our results. This year for the nine months, almost 45% of our sales were outside the U.S. That compares to about 42% for the same period just a year ago.
About 8% of our global sales, are now in the emerging markets of Asia Pacific and Eastern Europe. If you look at international in a broad sense, the slowdown of Western European economies and the generally tighter credit conditions did make it even more challenging this quarter for both our SNA Europe tools business and for our European based equipment operations, but the rest of our international businesses remained strong contributors throughout the period.
Even a casual attention to the media I think today would lead you to question the global economy. We still see opportunity and runway. Weâ€™re continuing to invest in emerging markets.
Progress continues on our third plant expansion in Kunshan, China. Weâ€™re already producing power tools and under-car equipment and hacksaws in that location.
Now weâ€™re adding a third facility, supporting new products for Asia like band saws and tool storage. Weâ€™re continuing on schedule with that project and we expect to be up and running in about six months for both of those product lines.
The first quarter acquisition of our 60% interest in Wanda Snap-on is also proceeding well. That new venture is providing what I consider to be high-quality hot-forged hand tool capacity for our markets throughout the world.
Letâ€™s talk for a moment about Eastern Europe. I donâ€™t know that weâ€™ve highlighted that region as much as we might have, but we continue to see growth opportunities in those unclaimed markets, and weâ€™re moving forward successfully with the relocation of our plant in Belarus.
I think I mentioned in the last quarter that that facility makes important cutting tools and they are low-cost and very high quality. So weâ€™re looking forward to expanding those capabilities as we go forward.
Eastern Europe is a strategic growth region for us. Sales there are starting to be significant and they grew in the quarter by almost double digits and thatâ€™s excluding currency. Weâ€™re excited about the growth prospects in Eastern Europe and weâ€™re going to keep investing.
Overall about emerging markets thereâ€™s still an awful lot for us to achieve; weâ€™re only scratching the surface. So weâ€™re going to keep investing, keep pursuing opportunities aggressively.
Now turning to slide 6, letâ€™s talk about our markets and our customer base. We feel weâ€™re in an encouraging position. For vehicle repair technicians: remember, they are served by our Snap-on tools distribution channel, the van.
With those customers we remain the leader, the aspirational brand of choice; this is clear. Thatâ€™s a relatively long wave segment. At this point we see a mixture of both headwinds and tailwinds.
For example, fuel prices have begun to decline. Thatâ€™s probably the one bright spot in the macroeconomic situation. But that will lower cost for our franchisees and will possibly dampen what weâ€™ve seen to be the downward trend in miles driven.
But in addition for that segment, government data through August continues to report an increase in household spending on vehicle repair. I guess thatâ€™s not surprising given the dramatic decline in new car sales.
Think of it this way: as I believe Iâ€™ve said before, almost 40% of the car park in the United States is now older than 10 years and itâ€™s getting older. So increased spending on repair seems logical, it seems right.
Beyond the vehicle age, I also think we must consider that much of U.S. driving is not discretionary. With the non-discretionary nature of the driving weâ€™d expect repair to remain somewhat resilient, even in the face of economic slowdown and thatâ€™s what weâ€™re seeing.
With all of that said however, technicians are certainly exposed to the uncertain atmosphere. We expected both technicians and garage owners to be more cautious in their spending and itâ€™s played out, it appears to be so.
Itâ€™s not a surprise that the sales of higher priced tool storage products were again soft and the volume of our larger diagnostics products in the United States was down in the third quarter.
But overall, technicians are still spending on the innovative tools that make them money. Weâ€™ll speak in that context later when we talk about power tools and some of the innovations weâ€™ve brought to the market in that product line.
As I said, the U.S. auto market, some headwinds, some tailwinds, but all in all, one of the more reliable segments of the day.
Letâ€™s talk about the tools group. Weâ€™re pleased this quarter that we did have a slight uptick in U.S. van count, both versus 2007 and on a sequential basis versus last quarter. Significantly this is the first year-over-year improvement in some time, so weâ€™re encouraged.
But while weâ€™d like to fill the open territories even faster, weâ€™re being selective in recruiting. We believe thatâ€™s been the right thing to do. Itâ€™s lowered new franchiseesâ€™ terminations and reduced termination costs. Thatâ€™s been a help. Selectivity notwithstanding though, we continue to recruit actively and we expect further increases in van count in the fourth quarter.
Letâ€™s talk about our franchisees for a minute. We believe the outlook does remain positive. In early August, we had a U.S. franchisee conference in Las Vegas. I spent three days with many of the almost 2000 franchisees attending. Their attitudes were positive and they were quite excited about our new product lineup. In fact future orders from that get together vastly exceeded our expectations.
Even in August though, we recognized the need to help the franchisees offset cost pressures. A significant portion of that colloquium was dedicated to raise van efficiencies, dedicated to improving items like fuel costs, selling methods and communications charges.
The training was as enthusiastic as weâ€™ve seen and we think itâ€™s working and weâ€™re confident it will serve us well going forward. Despite the convention success however, we need to be mindful that more economic uncertainty has arisen since early August. So we are cautious, at least for the fourth quarter for our U.S. franchisee business.
While the U.S. business saw a decline in the quarter, the results were very different for the franchisees in Canada, U.K. and other international franchise operations.
In those jurisdictions, we achieved growth of almost 10%, driven largely by innovation, a number of new product launches in areas like diagnostics and power tools; all of them had significant success in moving the technicians to purchase.
Letâ€™s talk about our industrial business. Our focus remains on critical customer segments like the military, aerospace, natural resources, alternate energy and automotive vocational training.
Weâ€™re rolling the Snap-on brand out of the garage and itâ€™s working. Growth did slow from 21% last quarter to about 3% the past period, but year-to-date itâ€™s 14% and we believe the variation over the last two quarters was influenced strongly by customer order timing and a strike at one of our large customers.
Order activity for industrial is now very strong, so we expect a return to double-digit growth in the fourth quarter. Weâ€™re positioning to serve the tool storage and control needs of great opportunities like the expanding natural resources sector and the new major airframes being introduced around the world.
We continue to invest in industrial product and resources to support that business and we see abundant runway going forward in that area and weâ€™re going to take full advantage; weâ€™re determined to do it.
Two of the more challenged businesses in the quarter were our European tools business and our worldwide equipment business. At SNA Europe, while the market coverage is fairly broad based across Europe, the operation has some concentration in Southern Europe, particularly in Spain where sales declined in the quarter by 20%.
While the economic conditions have slowed throughout the region, Spain has been weaker than most and thatâ€™s resulted in a challenge for SNA Europe.
In the global equipment business, which sells larger priced capital goods, sales were down 5% without currency. Thatâ€™s not unexpected in this tight credit environment.
But even though the sales environment has become more challenging, weâ€™re continuing to advance our technologies. Over the last few years product innovation has been the key to significant improvements weâ€™ve see in equipment and thatâ€™s continuing.
In this past quarter we introduced our Prism imaging alignment system, which won Motor Magazineâ€™s Top 20 Tools award. Sales by Prism are exceeding expectations despite the overall downturn and volume in the bellwether imaging aligner category for equipment was up significantly.
In equipment, we are continuing to innovate and as a result weâ€™re advancing penetration of our targeted key accounts and despite the softness, we believe weâ€™re gaining market share although it is in a weak market.
Also in the C&I segment, let me talk for a moment about automotive power tools. They had a terrific quarter and it aided the franchise business significantly. Sales improved almost 34% and this is just another innovation story.
Our new NG725 pneumatic impact wrench and our CT4410 cordless impact, both are power to weight leaders and have and continue to be enormous successes. As with our equipment business, power tools has had a string of successful new product launches and we have a solid pipeline of new products coming to us over the next few quarters.
Weâ€™ve consistently said for technicians, power tools are an essential purchase. They translate into immediate productivity and therefore will do well even in a softer environment; so far this appears to be the case.
The diagnostics and information group also had an encouraging quarter, considering the market for bigger ticket items. The European diagnostics business expanded in the period and our OEM facilitation won an essential tool deployment in North America that significantly aided its third quarter.
Now while business solutions sales did decline, much of that was expected as a result of exiting small peripheral lines of business. Activity in the SBS, the Snap-on business solutions core, however was favorable in the quarter.
In total, for the diagnostics and information group from a profitability perspective, that organization achieved an operating margin of 17.5% and the profits represented a growth of over 20% for the quarter.
Now letâ€™s turn to slide 7. I think this is important because itâ€™s authored our success for many quarters: we continue to drive improvement across our business. We drive it with a suite of strong and critical processes; we call those activities Snap-on value creations. That helped author our third quarter and it will drive further improvement going forward; we are confident.
Iâ€™ve already mentioned a few of the innovations; there are many more across all the businesses. But weâ€™re going to keep investing in innovation. In fact next month weâ€™ll be opening another Snap-on Innovation Center, right here in Kenosha. We call it the Snap-on Innovation Works.
It will include areas to observe customers interacting with products; a modern auto repair garage; space for both two and three-dimensional prototyping; and an area specifically devoted to the critical industries I talked about before.
I look forward to many of you visiting and when you do, youâ€™re going to get a first hand view of Snap-on innovation taking shape.
Another process thatâ€™s important to us and crucial to us is rapid continuous improvement or RCI. Itâ€™s played a major role in our progress. We see its results almost everywhere, from manufacturing to administration to product design.
For example, our COT in our U.S. distribution business continues to perform in the mid-90s range, and while thatâ€™s good and much improved over just a short time ago, we need to make it better and we will.
From a productivity viewpoint, RCI has enabled us to raise sales for associates by over 8%. In the past quarter, we did see more than $10 million of commodity cost inflation. Those increases were substantial, but they were more than offset by our RCI activities.
While the commodity price increases are softening going forward, we still feel, I believe, that fourth quarter costs for steel freight packaging and other items will increase by about $12 million. But weâ€™re confident that we can achieve offsets through RCI just as weâ€™ve done so far.
While economic difficulties clearly increased in the third quarter, I think you can say that the Snap-on team met those challenges and prevailed. Sales were tougher to come by, but we continue to seize opportunities in those places where growth was made available by our diversification.
We continue to innovate, stimulating demand, even in the face of economic weakness. We continue to aggressively deploy RCI, further improving processes and reducing costs.
While inventories have risen somewhat, there were clear purposes for that positioning. We believe that some of that paid off in capturing additional businesses in emerging markets and with selective customers. That drove up our return on capital.
Having said that though, some was aimed at sales that didnâ€™t materialize and weâ€™ll begin correcting for that in the fourth quarter. As I said, the fourth quarter was a strong quarter. Our business models, our brand, our innovation, prevailed in economic difficulties.
Now I have Marty here to give you some of the details.
Thanks, Nick. Turning to slide 9, net sales of $698 million in the quarter were up 2.5% from last year; without currency, sales were up just under 1%. Clearly, this was a much tougher quarter in terms of sales growth.
In the U.S., sales were up 1.3%. Our U.S. franchisee business, comprising 26% of this quarterâ€™s sales, was down three tenths of 1%. Our U.S. industrial business grew 2.8% in the quarter, substantially less than the 21% growth last quarter.
We believe a substantial amount of this variation over the last two quarters resulted from timing of customer order activity. We believe this business will return to double-digit growth in the fourth quarter.
In Asia-Pacific and the developing economies of Eastern Europe, which comprised about 8% of sales, reported growth was relatively robust at 15.3%, and it was 9.1% without currency.
However, in Western Europe, which comprised about 27% of this quarterâ€™s sales, our commercial and industrial tools and under-car equipment businesses faced increased head winds due to the slowing economies.
Spain and Italy have experienced some of the more severe slowdowns and our SNA Europe tools business does have some concentration of its business in these countries.
As many of you already know our equipment business, which sells more expensive capital equipment and has a reasonable presence in Europe, faced the challenges of not only economic slowdown, but tighter credit conditions.
A continuing bright spot in Europe is our U.K. franchisee business, which had another solid quarter reporting 13.5% growth without currency.
Consolidated gross profit of $312 million represented 44.7% of sales and improved 50 basis points over last year. Higher price realization along with $5.2 million of benefits from RCI initiatives more than covered steel, freight and other product cost inflation.
Partially offsetting these improvements in gross margin was less favorable U.S. sales mix in the Snap-on tools group. Lower restructuring costs this year of $2.2 million also benefited the gross margin rate.
Operating expenses of $230.6 million in the quarter declined to 33% of sales compared to 34.4% last year. Major cost improvements were achieved through $6.4 million of benefits from ongoing RCI initiatives and $2.6 million of lower franchisee termination costs.
Financial services contributed $4.8 million of operating income, compared to $5.6 million last year. I will cover financial services in more detail in a moment.
Operating earnings of $86.4 million for the quarter were up 19.3% over last year. As a percent of total revenues, operating earnings improved to 12.1%, up 170 basis points from the 10.4% earned a year ago.
For the nine months this year, we achieved an operating margin of 13% and believe we have opportunities for further margin expansion.
Interest expense in the quarter is down $4.8 million from 2007, primarily as a result of lower interest rates on our floating rate debt and lower average debt levels. With the recent rise in short-term interest rates, we expect interest expense will be about $8.5 million in the fourth quarter.
Our effective income tax rate on earnings before equity earnings and minority interests is 33.3% in the third quarter and we anticipate that for the full-year we will remain at this rate. Diluted earnings per share of $0.94 in the quarter were up 34.3% from the $0.70 earned last year.
With that as a consolidated summary, I will now turn to our segment results starting with the commercial and industrial group on slide 10. Segment sales of $338.1 million in the quarter were up $10.2 million or 3.1% over 2007.
As I just mentioned, our European tools and worldwide equipment businesses experienced sales declines. Those larger businesses on a combined basis had relatively flat reported sales, but growth was down 5.6% on a constant currency basis.
However higher sales of tools, kits and tool storage products to U.S. industrial customers, increased sales of power tools and continued growth in Asia and in Eastern Europe resulted in an overall reported segment sales increase of 3.1% and a less than 1% decline without currency.
Notwithstanding the challenging sales environment, third quarter operating earnings of $40.7 million for the segment were up 24.5% from prior year levels, including $4.9 million of savings from RCI and cost reduction initiatives, along with contributions from higher pricing.
Restructuring costs were lower by $1 million. As a percentage of sales, operating earnings in the C&I segment improved 200 basis points in the quarter to 12% from 10% last year.
Turning now to slide 11, the Snap-on tools group reported third quarter sales of $269.5 million, which was up $7.5 million, or 2.9% from last year. The groupâ€™s international operations again reported double-digit growth, and despite the continued economic headwinds in the U.S., sales in our U.S. franchise operations [audio gap] relatively relatively flat; as I said, down three-tenths of 1%, while van count actually improved slightly both on a sequential and year-over-year basis.
Third quarter operating earnings for the Snap-on tools group grew 14.6% from last year. Operating earnings benefited from the higher international sales volumes, but this was tempered by a less favorable U.S. product sales mix.
Pricing improvements, net of commodity cost increases were about neutral for the quarter. Operating earnings improved as a result of $2.6 million of RCI savings and $2.6 million of lower franchisee termination costs, consistent with the lower level of franchisee terminations.
As a result of these factors, operating earnings in the quarter improved to 10.5% of sales, compared to 9.4% last year.
For the diagnostics and information group, which is shown on slide 12, third quarter sales of $155.1 million were up $3.1 million from prior year. Our OEM facilitation business in North America fulfilled an essential tool program in the quarter.
We also achieved increased sales of diagnostics products in Europe, and higher sales of Mitchell 1 information products. These increases were partially offset by lower U.S. sales of diagnostics and lower activity of Snap-on business solutions resulting from the planned exit of certain non-core business product lines.
Operating earnings of $27.2 million for the segment improved $5 million or 22.5% from 2007, primarily due to $4.1 million of savings from RCI initiatives. As a percentage of sales, operating earnings in the quarter improved 290 basis points year-over-year from 14.6% last year to 17.5% this year.
Turning to slide 13, financial services revenues increased nearly 14% year-over-year on higher originations and, in our U.S. Snap-on credit business, revenue growth was aided by an approximate 180 basis point reduction in the year-over-year discount rate on extended credit contracts sold.
Many of you have recently asked about the credit quality of the portfolio of Snap-on credit loans to technicians. Let me give you some additional data and trends. Accounts 60 plus days delinquent, at the end of September were about 1.9%. At the end of 2007 and 2006 they were about 2%.
The high water mark was about 3% at the end of 2005: not reflective of credit deterioration, but of higher franchisee turnover and consolidation of Snap-on Creditâ€™s field organization.
For years prior to 2005 and going all the way back to 2001, the highest level experienced was about 2.2%. We believe this demonstrates the discipline, strength, and tight integration of our Snap-on Credit and franchisee distribution businesses.
While operating earnings in financial services were down year-over-year for the quarter, this had nothing to do with their core credit operations. We incurred $1.4 million of one-time expenses primarily related to an information systems project.
Let me turn to a brief discussion of our balance sheet and cash flow. As seen on slide 14, our accounts receivable increased $19.3 million from year-end levels, primarily due to higher levels of sales and receivables outside of the United States.
Notwithstanding generally longer payment terms outside the U.S., days sales outstanding of 73 days was equal to last year. All of our businesses are being extra vigilant in managing customer credit in this environment.
Inventory performance has been somewhat disappointing with inventory turns declining from 4.9 times at last year-end, to 4.5 times currently. Of the nearly $66 million inventory increase over the nine-month period, we believe about $20 million or so is the result of lower than expected sales.
The remainder includes higher material and other cost increases, planned builds ahead of certain production line relocations, and some seasonal build for school programs and other specific fourth-quarter sales initiatives.
As Nick said, weâ€™ve already begun addressing this inventory position and even with the added level of working investment, pre-tax return on invested capital continues to improve.
For the trailing 12-month period ended September, it was 22%, and for all of calendar year 2007, it was about 20%. For the comparable September 2007 period it was 18.4%. Our net debt position at the end of the quarter is $397.6 million. Our net debt to total capital of 22.4% is down from 24.9% at year-end 2007.
Our liquidity position remains strong. Besides the cash flow generated from operations, we currently maintain a $500 million revolving credit facility provided by a strong diversified group of international banks and another $20 million of committed bank lines.
All $520 million of this borrowing capacity is not presently used and our revolver does not expire until August 2012. Our current A2/[P-1] short-term credit rating also allows us to access the commercial paper market should we need to do so. We presently have no commercial paper outstanding.
Turning to slide 15, cash provided by operating activities was $20.4 million, or $39 million lower than the third quarter last year. The primary reason for this decline relates to the inventory build I just mentioned, which amounted to about $23 million for the quarter, as well as other timing differences primarily related to accounts payable and accrued liabilities.
This concludes my remarks on our third-quarter performance. Iâ€™d like to briefly review with you some financial considerations for the balance of 2008, which are shown on slide 16.
Regarding full-year 2008, we expect to continue to invest on our growth initiatives, including further investments in Asia and other global emerging markets, while aggressively managing cost.
We also expect to continue implementing our other strategic and RCI initiatives intended to enable higher levels of growth and profitability. We anticipate full-year 2008 restructuring costs to be in a range of $12 to $14 million and we expect capital expenditures to be in a range of $60 to $65 million.
As I said, we also expect our 2008 effective income tax rate to approximate 33.3%. Finally, we expect earnings will improve over 2007 levels for the balance of the year.
Before opening the call for questions, Nick would like to provide some final thoughts.
Thanks Marty. Iâ€™d just like to end by once again noting that the third quarter represented a significant increase in earnings and it was a record despite the difficult environment.
I want to once again thank our associates and franchisees for making that happen. Congratulations. Iâ€™d also like to end by saying that weâ€™re confident of our business models, of our runway and of our people.
Having said that, itâ€™s clear that the current economic volatility has rendered projection I think less certain and so as befits such situations weâ€™re taking action now to reduce costs, to restructure and to accelerate productivity.
As Iâ€™ve said on practically every call, the opportunities for such improvement on Snap-on are abundant and weâ€™re increasing our emphasis on cost. Itâ€™s helped us so far; it will continue to help us in the future.
But at the same time, we also continue to see opportunity. Opportunity in emerging markets, in innovative products, and in critical industries; places where working people need real solutions to crucial tasks. So weâ€™re continuing to pursue those opportunities even in these difficult times.
As we move into the fourth quarter, we know no one has great visibility in this environment. But for Snap-on, weâ€™ll maintain our core strategic initiatives but at the same time, weâ€™re confident we have the flexibility and the options to balance among the areas of sales growth, cost reduction, working capital utilization, and capital investment.
Weâ€™re confident our operations can create a focus appropriate to the economic and business environment as it unfolds. As a result, we believe that Snap-on can continue its trend of encouraging progress as we go forward to the days and the years ahead.
Now Iâ€™ll turn the call over to the operator.