Snap-on Announces Next Phase of Strategic Plan
29 June 1998
Snap-on Announces Next Phase of Strategic Plan, Stressing Global Simplicity, Flexibility, Efficiency
KENOSHA, Wisc.--June 29, 1998--Company plans $175 million charge, sees $60 million
annual cost savings; Computer system issues to
impact second-quarter earnings; $100 million
added to share repurchase program
Snap-on Incorporated today announced that the next stage of its strategic business plan will contain a broad program of internal rationalizations, consolidations and reorganizations that will dramatically improve the simplicity, speed and flexibility of Snap-on's business operations and its economic profit.
Through its simplification initiative, Snap-on plans to:
-- Flatten the organizational structure, and push responsibility and functionality closer to the customer;
-- Combine or eliminate redundant business units, achieving necessary efficiencies and economies of scale;
-- Implement shared services programs within manufacturing, engineering, order fulfillment, research and administration to serve multiple business units; and
-- Create greater customer and franchisee access to Snap-on, together with a new, more responsive customer service approach.
Overall, these actions will lead to: the closing of approximately 5 manufacturing plants, 5 warehouses, and 40 to 45 small offices in North America and Europe, representing about 10% of the Corporation's total square footage; the elimination of approximately 1,000 positions out of a total workforce of nearly 12,000; the discontinuance of certain product lines representing a minimum of 5,000 product SKUs; and the consolidation of certain business units.
Cost attendant to the project will require a restructuring charge of approximately $175 million, which is expected to be recorded in the third quarter of 1998. These costs include integration of business units and systems; discontinuation of certain business units; and write-offs of goodwill and asset impairments. Approximately 45% of the total restructuring charge is expected to represent actual cash costs, including severance and facilities' lease terminations; the remainder represents non-cash write-offs of fixed assets and goodwill related to operations affected by the simplification initiative, which is known internally as Project Simplify. The final restructuring plan will be presented to Snap-on's board of directors for approval in August.
As a result of these initiatives, Snap-on expects to realize annual cost savings of approximately $60 million. On an annual run-rate basis, half of these savings will be achieved in 1999, with the full amount achieved in the year 2000.
Earnings Outlook
The strategic initiative supports Snap-on's publicly stated financial goals: annual revenue growth of 10%, including acquisitions; average annual earnings per share growth of 15%; and return on common equity of 20% by the year 2000. Snap-on reaffirms these goals, but notes that the earnings per share goal will not be met in calendar 1998, due primarily to the slow pace of implementation and the related disruptive effect of the company's new enterprise-wide client/server computer system.
Earnings per share in the second quarter of 1998 will be approximately 40% below the $0.63 per share (diluted) reported in the second quarter of 1997. This shortfall results from system delays and the learning curve for the required new computer processes, which have had a significant adverse effect on service levels, with a negative impact on sales, expenses and productivity. In addition, the economic and political crises in Asia are having a greater impact on results than previously expected, and will reduce second quarter earnings by approximately $.05 per share.
The outlook for third quarter earnings is clouded by the same factors as those affecting the second quarter. At this point, the company believes third quarter earnings per share might be below last year's third quarter earnings per share of $0.57 by as much as 10%. Snap-on anticipates returning to more typical earnings performance in the fourth quarter of 1998 and thereafter. As has been previously stated, Snap-on expects 1998 revenues to be well ahead of 1997's $1.7 billion. The goal of Project Simplify is to increase the profitability of this revenue. Prior to the second quarter of 1998, Snap-on had generated 20 consecutive quarters of earnings per share growth.
Share repurchase
Snap-on's board of directors has authorized an additional share-repurchase program aggregating $100 million of Snap-on common shares. This additional authorization, and the currently outstanding authorizations, together represent about $150 million available for share repurchases. Since 1995, the company has repurchased over $225 million of its common stock. Also, as announced on June 26, the board approved a 4.8% increase in the common stock dividend to an annual rate of $.88 per share.
"Our industry is rapidly consolidating into a small number of broadly-based global competitors, surrounded by a large number of niche participants. Snap-on will be one of the major global players," said Robert A. Cornog, chairman, president and chief executive officer of Snap-on Incorporated. "The marketplace has seen us dramatically expand our global reach and the range of our product and service offerings, with 17 acquisitions and hundreds of new products in the last six years. These actions have added substantially to our revenue growth.
"It is because we are well along in the implementation of our enterprise-wide client/server computer format that Snap-on is now able to embark on Project Simplify. The computer technology will enable us to use more accurate, timely, integrated information in operational planning and decision-making, and to conduct our transaction processing in a fast, cost-effective manner. The computer system, which is Year 2000 compliant, demonstrably meets our needs; its functionality has been proven; and it will give us the information and operating systems we require for flexible, integrated operations as a global company. The short-term implementation issues we now face are manageable.
"These initiatives will continue. In particular, we will seek opportunities to extend our global presence and to fill in gaps in our product and service lineup," said Mr. Cornog. "We have made substantial progress toward our vision of becoming the total solutions provider to the transportation service industry. But it is now time to rationalize the larger organization that we have built. We intend to create a more agile, scale-advantaged and operationally excellent company that can not only compete globally, but can also deliver consistently attractive returns to shareholders. The companies we have acquired came to us with their own operating systems and administrative structures. We intend now to remove these embedded costs and to unite and align these systems. We are migrating toward a more integrated business model, bringing together our tool and equipment capabilities and utilizing shared services on a regional basis. In the process, we expect to reduce the capital tied up in our business. This next phase of our growth strategy will take us a long way toward our business and financial goals.
"Asia apart, our industry is in robust health. Our near-term earnings issues are self-inflicted and temporary," said Mr. Cornog. "We're confident we will return to our normal patterns of growth and profitability as the changes we are making take hold."
Snap-on's customer-focused approach will segment sales and marketing by customer, channel and product with shared services supporting these activities. Customers will benefit from a clearly defined single point of interface with Snap-on, more rapid decision making, and stronger systems to support customer service.
Business units will be combined where common products or platforms exist to leverage the organization's knowledge and competencies fully and to eliminate redundancies. Snap-on expects that the plants, warehouses and offices in the United States and overseas to be closed will reduce redundancies, achieve scale economies, and eliminate activities that cannot achieve returns in excess of risk-adjusted capital costs.
The company's management is sensitive to the concerns of employees whose positions will be affected by Project Simplify. The majority of the workforce reduction is expected to be achieved through a combination of attrition and voluntary separation.
Snap-on Incorporated is a $1.7 billion leading global developer, manufacturer, and distributor of tool and equipment solutions for professional technicians, motor service shop owners, specialty repair centers, original equipment manufacturers, and industrial tool users worldwide. Product lines include hand and power tools, diagnostics and shop equipment, tool storage products, diagnostics software, and other solutions for the automotive service industry.
Statements in this press release that are not historical facts, including statements (i) that include the words "believes," "expects," "anticipates," or "estimates" or words of similar importance with reference to the Corporation or management; (ii) specifically identified as forward-looking; or (iii) describing the Corporation's or management's future plans, objectives or goals, are forward-looking statements. The Corporation or its representatives may also make similar forward-looking statements from time to time orally or in writing. The Corporation cautions the reader that these statements are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Those important factors include the Corporation's ability to manufacture, distribute, and/or record the sale of products during the implementation of a new computer system involving the replacement of hardware and software components and the enterprise-wide linking of all functions; the Corporation's ability to withstand external negative factors including changes in trade, monetary and fiscal policies, laws and regulations, or other activities of governments or their agencies; significant changes in the current competitive environment; inflation; currency fluctuations or the material worsening of the economic and political situation in Asia; and the achievement of productivity improvements and cost reductions. These factors may not constitute all factors that could cause actual results to differ materially from those discussed in any forward-looking statement. The Corporation operates in a continually changing business environment and new factors emerge from time to time. The Corporation cannot predict such factors nor can it assess the impact, if any, of such factors on the Corporation or its results. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Corporation disclaims any responsibility to update any forward-looking statement provided in this press release.