Snap-on Incorporated (SNA) Q3 2011 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Snap-on Inc. 2011 Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. And now your host for today's conference, Ms. Leslie Kratcoski, Vice President of Investor Relations. Ms. Kratcoski, please go ahead, ma'am.

Thanks, Rufus, and good morning, everyone. Thanks for joining us today to review Snap-on's third quarter 2011 results, which are detailed in our press release issued earlier this morning. We have on the call today Nick Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we have provided slides to supplement 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 the transcript of today's call. Any statements made during this call, relative to management's expectations, estimates or beliefs, or otherwise state management's or the company's outlook, plans or projections are forward-looking statements and actual results may differ materially from those made in such statements. Additional information on the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. With that said, I’ll now like to turn the call over to Nick Pinchuk. Nick?

Thanks, Leslie. Good morning, everyone. Well, I would characterize our third quarter as an extension of the broad progress we’ve been making for quite some time. And I would say that the continuing trend is especially encouraging in light of the generally negative macroeconomic news we seem to be hearing almost every day. Overall, our sales in the quarter were up 6.8%. Excluding currency, organic volumes increased 3.6%. Now last year's third quarter did create some tough year-over-year optics, because we were in the midst of a fairly robust recovery, and there really wasn't any of the normal 5% seasonal sequential decline we usually see in the third quarter. From that perspective, this year's sequential downtick of 3.5% was a bit better then usual. So this period's volume is a positive indicator. Operating income for the quarter rose by over 37%, and our operating margin of 15.8% was up from 12.5% last year. Now those numbers include $15.8 million in higher earnings from Financial Services, and that's the result of the continuing ramp up of our on-book portfolio. Looking at the results before Financial Services. The third quarter operating margin of 13.5% was up 140 basis points, in part aided by that favorable mark-to-market adjustments highlighted in our release. But even excluding those adjustments, Opco operating income in the period represents a new record high for a Snap-on third quarter. We believe the advancements we're making are a great testimony to the effectiveness of the Snap-on Value Creation Processes, the principles and processes we apply every day in moving the company forward: safety, quality, customer connection, innovation, Rapid Continuous Improvement or RCI. It's that framework that enables our progress and it's driving our strong profitability. As usual, I'll now review some of the highlights for the quarter, provide my perspective on the market environment and offer a view on the strategic areas we've identified as being decisive for our future, extending to critical industries, building in emerging markets, enhancing the franchise network and expanding in the garage. Regarding the overall environment, I'll just comment that based on our various businesses, it can be characterized as generally unchanged from the past several quarters. I view that as a real positive, because if you pick up the paper or watch the news on any given day, you'll get the feeling that there's been a decided turn for the worst, but we're just not seen it. That said, I do think the well-documented troubles in Europe are creating a bit more uncertainty, and therefore, less visibility. But we’ve had a high level of European uncertainty as well as a headwind in Southern Europe for quite a while, and we've managed through it by taking advantage in other places where opportunities are expanding like in emerging markets and in critical industries and in automotive repair. So there is some uncertainty as there has been for some time. But we're not seeing any overriding downturn. Probably the best summary measure I can give you is this. In the third quarter, our volumes, excluding the effect of currency movements, were above the third quarter levels of both 2007 and 2008, the strongest period before the recession took hold. That same comparison for the first 2 quarters of this year showed 2011 slightly below those earlier year levels. So if recapture of pre-recession level is your measure of recovery momentum, our third quarter was another favorable data point, and it occurred despite the bad news all over the press. Moving to the highlights of the operating segments. The Commercial & Industrial Group sales increased 6.6%, that's 2.6% organic growth excluding currency. The operating margin was 10.6%, a 20 basis point improvement from the second quarter, but down from the 11.7% last year, reflecting the concentration of our major headwinds in this segment, the weakness in Southern Europe as well as contracted military spending. These challenges primarily impact the C&I Group where SNA Europe has a strong position in Spain and Portugal and where our Industrial division has felt the impact of the reduced military spending. In the balance of the C&I Group, outside of those specific areas, volumes were actually up much more robustly, about 8% organically. Those gains reflect the progress being made in our primary areas of C&I strategic focus, building our presence in emerging markets and extending into critical industries. Speaking of emerging markets, the gains continue to be far in excess of any related GDP growth rate, and the expansion isn't just limited to Asia. We’re posting significant gains in the emerging European regions. Places like Russia and Turkey are growing rapidly. So I guess, when you say emerging markets, the focus is most of on Asia; the discussion is Asia. And we did see exceptionally strong gains across that region as well, in places like India, in Indonesia, and, of course, in China. We're investing continuously in the region and it's paying off with growing position. In that regard, our Asian product offering is expanding. Our Undercar Equipment lineup, aligners in particular has been ramping up and rolling out over the past few quarters. And as you would expect this is a product that is specifically designed for Asia, and coupled with our new Asian Diagnostic Products, which I discussed last quarter, we're not only driving growth in the region but we're building a strong presence as the repair wave is just rising in China. We said all along that we'll continue to invest in those areas that are strategically important. And we're doing just that in China. We're in the process of building a new engineering and R&D center in that country. It will be state-of-the-art. It will support a wide range of Asianized product and it’ll help continue our rapid growth all over the region. In addition to emerging markets, we're also building our position in critical industries. Our Aviation & Aerospace sales, served through our Industrial division, grew strongly in the quarter. I've spoken about our ever-expanding offering for those customers, while we're highlighting that broadened array of products with what we call our Advanced Technology Labs. These are large trucks, loaded with aviation offering, trav -- with our aviation offering, traveling site to site to assembly plants, to hangars and to maintenance and repair and overhaul locations. We find it to be a great way to demonstrate the product right in the workplace and it's helping drive our growth. Every month, we're getting orders from new customers for tool control systems and toolkits, for flight lines, for assembly operations and for those MRO facilities. Importantly, as you would expect, our position is improving across the globe here. Aviation is an industry that is growing internationally. It's certainly critical and it's right in the Snap-on wheelhouse. On to the Tools Group where sales were up 8.1%, including about 2 points from currency. The operating margin of 12.7% was an increase of 180 basis points from last year. The Tools Group is where we serve professional automotive technicians and they value Snap-on. That fact was recently highlighted, once again, by -- as we came out on top in Frost & Sullivan’s survey of technicians’ brand preferences in hand tools, diagnostics, tools storage, power tools and pneumatic air tools. We always distance ourselves from the competition by wide margins in this survey, but this year's results showed Snap-on even further in the lead with record levels of professional technicians choosing Snap-on in several of those categories. For example, in hand tools, 75% of technicians surveyed preferred Snap-on. The next highest brand registered only 8%. Now with that sort of position, it's no wonder that our franchise network is strong. Volumes in the third quarter for our franchisees were very robust. And the franchisee-held metrics, which we closely monitored, continued their favorable trend. The Snap-on Franchisee Conference, which was held in August, provided more evidence of progress in strengthening our franchise system, another one of our primary strategic objectives, strengthening that system. This conference was quite a success, record participation and higher than ever product ordering activity. And aside from the metrics and the sales levels, the enthusiasm, the enthusiasm on display was considerable and contagious. All of this is testimony that our network is well positioned and moving in the right direction. Now for the Repair System Information segment or the RS&I Group. Sales were up 7.3% or 4.7% without the favorable effect of currency. The gains were somewhat muted by the return to a more typical seasonal decline in our Undercar Equipment business, which had been particularly strong in the third quarter of 2010. The RS&I operating margin of 19.6% remained very strong, but was down from last year's level of, I think, 20.1%, mainly due to growth in our Facilitation business that serves OEM dealerships. That lower margin activity was up strongly as OEMs continue to commit to additional essential tools in diagnostic programs throughout the U.S. and in Europe. One of the highlights in RS&I for the third quarter was the launch of our SOLUS Ultra, a new full-function handheld diagnostic unit. We introduced it at the August Franchisee Conference and it made a big splash. It offers some real advancements, ease-of-use, functionality, starting with the faster boot-up and a battery that charged directly from the vehicle so never any worries about power availability. It also had a keyless adapter that makes connections to the vehicle much easier. And it has high-resolution graphing on a touch screen that is 50% larger than the competition. This tool is always ready to be used with improved simplicity and productivity and it’s helping support the strong results in RS&I. I mentioned earlier that the Equipment division returned to its normal seasonality in the third quarter, and that counterization is driven by the fact that Snap-on has a strong position in the European equipment market where summers, they tend to be a bit slower. Our Undercar Equipment lineup in fact is where we're seeing some strong international expansion. I already mentioned the liners in my discussion of Asian growth, but we're seeing the same kind of thing in Brazil and in the emerging markets of Eastern Europe. We're posting solid gains in those areas. Our equipment lineup is instrumental in advancing us along 2 of our strategic runways, expanding in the garage and building in emerging markets with leading technologies that does provide a real advantage. An example of one recent new product in this area, just being launched in Europe, is our new RFV 2000 diagnostic wheel balancer. It’s already getting considerable attention and winning innovation awards right out of the blocks. We've taken our patented imaging technology to analyze the interaction between the wheel and the suspension system so this new unit predicts and will head off any vibrations, all in just a few spins of the wheel, achieving a balance quicker than ever before. The RFV 2000 also laser maps the side wall and the wheel and the tire tread providing a picture of the actual and predicted tire wear, heading off any future problems. That's a feature that's going to be valued by shop owners everywhere when they’re dealing with car owners. So that's some of the highlights in each of the operating units, and while I just mentioned some of the new products in the RS&I Group, let me expand that discussion a bit as it relates to the entire corporation and to the Snap-on value creation processes. Two of the tenets embedded in this framework are innovation and customer connection. We have a great legacy in both those areas. And we believe a huge advantage in the number of customer interactions that our people, whether they're franchisees or associates, have with professional users, those who actually benefit from our productivity enhancing tools, that customer connection gives us great insight for developing new products. So not only do professionals prefer Snap-on as evidenced by the survey data, but we're using that strong customer connection to make sure our product line just keeps getting better with new innovative offerings that customers greatly value. Just recently, we were honored to have won 2 MOTOR Magazine Top 20 Tool Award. These awards recognize products that will help make the jobs of technicians and shop owners easier, enabling them to perform vehicle repair more accurately and more quickly. One of the winning products was the RFV 2000 that I already mentioned. The other was the VERDICT diagnostic and information systems, a modular handheld unit that includes a touch screen and wirelessly connects to the vehicle. It also includes Wi-Fi access and Windows multitasking so that technicians can access more information, including our Mitchell 1 shop key repair information system, and they can do it from anywhere in the garage. I've spoken about this product in the past and I think at that time, I told you it was great innovation. Well, this award confirms that fact. As further testimony to the effectiveness of customer connection and our innovation processes, Snap-on was also named winner of 4 innovation awards by Professional Tool & Equipment News. Our products were voted the best in tool storage, the best in lifts, the best in shop equipment and the best in tool accessories. The importance of this recognition is that the judges are professionals, people that make their living using these very products, independent shop owners and skilled technicians. In that regard, these awards speak strongly not only to Snap-on product innovations, but to our strong connection to our customers. It's a unique Snap-on advantage, and it's paying dividends. So that's our third quarter: Encouraging financials, clear evidence of strategic progress and a strong pipeline full of new and exciting products. Now I'll turn the call over to Aldo for a more detailed -- more detail on the financials. Aldo?

Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales in the third quarter of $697.2 million increased $44.1 million or 6.8% year-over-year. Excluding favorable currency translation of $19.6 million, organic sales increased 3.6% as we realized year-over-year sales growth across the majority of our businesses. Continued sales increases in the Snap-on Tools Group, higher essential tool and facilitation program sales to OEM dealerships, expansion in emerging markets and growth to a wide range of customers in critical industries, more than offset anticipated lower sales for the military and across Southern Europe. As Nick also noted, these sales levels reflect a return to a more traditional seasonal pattern where we typically experience lower sequential sales moving from the second quarter to the third quarter. This seasonal pattern was largely absent in 2010 as the economy was rebounding from 2009 recession levels. Consolidated gross profit of $329.3 million in the quarter increased $28.1 million from 2010 levels, reflecting contributions from higher sales, $9.5 million of favorable foreign currency effects, savings from our ongoing cost-reduction and rapid continuous improvement or RCI initiatives and $1 million of lower restructuring cost. Consolidated gross margin of 47.2% in the quarter improved 110 basis points from 46.1% last year. Operating expenses in the quarter of $235 million increased $12.6 million from 2010 levels. The year-over-year operating expense increase includes volume-related and other costs as well as $5.2 million of unfavorable foreign currency effects, $3.1 million of expected higher pension expense, $2.6 million of increased performance-based compensation expense and $1.8 million of higher restructuring cost. As noted in our earnings release, mark-to-market adjustments on stock-based compensation, which are calculated on the quarter ending stock price, also benefited third quarter results. The change in Snap-on's period-end stock price resulted in a benefit of $7.8 million or $0.09 per diluted share in the quarter. And while we always have some impact from mark-to-market in our results, recent stock market declines resulted in the significant third quarter benefit. Similarly, should the price of Snap-on stock appreciate during a given quarter, we would incur mark-to-market expense. As a percentage of sales, operating expenses in the quarter of 33.7% improved 30 basis points from 34% last year from a restructuring cost of $2.9 million in the quarter compared to $2.1 million last year. Operating earnings from Financial Services of $20.8 million improved $15.8 million from third quarter 2010 levels. As expected, Financial Services operating earnings continues to grow as our on-book Finance portfolio grows. Consolidated operating earnings of $115.1 million or 15.8% of total revenues increased 330 basis points from 12.5% a year ago, with the mark-to-market contributing 110 basis points. Interest expense of $15.1 million in the quarter increased $1.6 million from 2010 levels primarily due to higher average debt levels to fund the growth in our contract portfolio of Snap-on credit, partially offset by lower average interest rates. Our third quarter effective income tax rate of 31.7% was lower than last year's 34.4% rate, primarily due to the favorable resolution of certain tax matters. Finally, third quarter net earnings of earnings per share of $67.8 million or $1.16 per diluted share increased $21.3 million or 45.8% from last year's levels. Even without the $0.09 of benefit from mark-to-market, these net earnings and earnings per share represent an all-time third quarter record. Now let's turn to our segment results. Starting with the Commercial & Industrial, or C&I Group, on Slide 7. Sales of $278.3 million for the third quarter improved 6.6% from 2010 levels. Excluding currency translation, sales rose 2.6%. C&I benefited from double-digit gains in both Asia and Eastern Europe. These higher year-over-year sales to a wide range of customers in emerging markets as well as critical industries were partially offset by expected lower sales to the military and ongoing weakness across Southern Europe. Gross profit of $102.8 million in the quarter increased $6.6 million or 6.9% from 2010 levels, primarily due to higher sales, $2.9 million of favorable foreign currency effects and $1.2 million of a lower restructuring cost. Gross margin of 36.9% in the quarter improved slightly from 36.8% last year. Operating expenses of $73.2 million in the quarter were up $7.6 million from 2010 levels, primarily due to the volume related and other expenses, $2.7 million of unfavorable foreign currency effects and $1.8 million of higher restructuring costs, largely for the ongoing optimization of our cost structure in Europe. As a percentage of sales, operating expenses of 26.3% in the quarter compared to 25.1% last year. Third quarter operating earnings of $29.6 million for this C&I segment declined $1 million from 2010 levels, largely due to overall higher restructuring costs. As a percentage of sales, operating margin of 10.6% in the C&I segment compared with 11.7% last year. Turning now to Slide 8. Third quarter sales of the Snap-on Tools Group improved $20.9 million or 8.1% year-over-year, largely due to continued higher sales in the U.S. And on an organic basis, sales were up 6%. Gross profit in the Snap-on Tools Group of $125.2 million in the quarter increased $17.5 million from last year's levels, primarily due to higher sales across several product categories, favorable manufacturing utilization and $4.8 million of favorable currency effects. As a percentage of sales, gross margin of 44.8% in the Snap-on Tools Group improved 320 basis points from 41.6% last year. Operating expenses of $89.6 million in the quarter increased $10.1 million from 2010 levels, primarily due to higher volume related and other expenses including higher cost as a result of increased participation at the Annual Snap-on Franchisee Conference and $1.1 million of unfavorable foreign currency effects. As a percentage of sales, operating expenses of 32.1% in the quarter compared with 30.7% last year. Operating earnings for the Snap-on Tools Group of $35.6 million in the quarter increased $7.4 million or 26.2% from the $28.2 million earned last year. As a percentage of sales, operating earnings of 12.7% in the quarter increased 180 basis points from 10.9% last year. Turning to the Repair Systems & Information or RS&I Group as shown on Slide 9. Third quarter sales of $222.6 million increased 7.3% year-over-year. Excluding currency translation, organic sales increased 4.7%, primarily due to higher sales in our Equipment Solutions business, which facilitates essential tool programs for OEMs. Gross profit of $101.3 million in the quarter increased $4 million from prior year levels, primarily due to higher sales and $1.8 million of favorable foreign currency effects. Gross margin of 45.5% in the quarter declined 140 basis points from 2010 levels, largely reflecting the growth in essential tool facilities and program sales to OEM dealerships which yield relatively lower gross margins. Operating expenses of $57.6 million in the quarter increased $2 million from 2010 levels, primarily due to $1.4 million of unfavorable foreign currency effects and higher volume-related expenses, partially offset by savings from ongoing RCI initiatives. As a percentage of sales, operating expenses of 25.9% improved 90 basis points from 26.8% last year. Operating earnings of $43.7 million for the RS&I Group increased $2 million or 4.8% from 2010 levels. As a percentage of sales, operating margin of 19.6% compared to 20.1% last year. Now turning to Slide 10. Third quarter operating earnings from Financial Services was $20.8 million on revenue of $32.7 million. This compares with operating earnings of $5 million or $17.2 million of revenue last year. We believe the $15.8 million year-over-year increase in operating earnings demonstrates the earnings potential of our growing on-book Finance portfolio. Originations of $153 million in the quarter rose 7.2% compared to last year's levels, reflecting both higher sales in our Snap-on tools segment and increased participation in our credit programs. Moving to Slide 11. As of third quarter end, our balance sheet includes $896 million of gross financing receivables, including $751 million from our U.S. Snap-on Credit operation. In the U.S., $609 million or 81% of the financing portfolio relates to extended credit loans to technicians. Since the beginning of 2011, our on-book financing portfolio has grown over $160 million. For the remainder of the year, we expect that our on-book finance portfolio will roughly increase by an additional $20 million to $25 million. The pace of the portfolios on balance sheet development continues as expected and naturally decelerates as the transition progresses. For 2012, we would expect any further expansion of the Snap-on credit portfolio to largely reflect activity in the Snap-on Tools Group. Regarding finance portfolio losses and delinquency trends, these continue to be in line with our expectations. Now turning to Slide 12. Net cash provided by operating activities was $42 million in the quarter. This compares to net cash provided of $10.2 million last year. Our quarter-end cash position of $186 million decreased $386 million from year-end levels, primarily due to the August repayment of $200 million of long-term notes, continued funding for new loans originated by Snap-on Credit and the previously disclosed second quarter repayment of amounts previously withheld from CIT. As expected, free cash flow from Financial Services in the quarter was a negative $42 million, reflecting the continued funding of new loan originations at Snap-on Credit. Free cash flow from the operating company was a positive $35 million. Capital expenditures totaled $13.3 million in the quarter. As seen on Slide 13, days sales outstanding for trade receivables of 58 days at quarter end improved from 61 days at 2010 year end. Inventories increased $70 million from year-end levels, primarily to support higher demand and seasonal inventory builds, mitigate potential supply chain disruption and to improve customer service levels. On a trailing 12-month basis, inventory turns of 4.1x compared to 4.7x at 2010 year-end, reflective of the higher inventory. Our net debt to capital ratio of 33.8% compares to 30.1% to 2010 year-end and 29.2% last year. The year-over-year increase results primarily from last December's $250 million bond issuance, net of this quarter's $200 million debt repayment and the second quarter repayment to CIT. In addition to our $186 million of cash and expected cash flow from operations, we have more than $700 million in available credit facilities, including $200 million under our recently amended loan and servicing agreement. In addition, our current short-term credit ratings allow us to access the commercial paper markets should we choose to do so. As of third quarter end, no amounts were outstanding under any of these facilities. During the quarter, Fitch initiated credit ratings on Snap-on of A- and F2, which is in addition to our existing ratings of A- and A2 from S&P and Baa1 and P2 for Moody's. This concludes my remarks on our third quarter performance, and I'll now turn the call back over to Nick for his closing thoughts.

Thanks, Aldo. Well, that's our quarter. Sales positive from a sequential perspective. And from the vantage point of capturing pre-recession levels, the volumes represent another step forward, better than either our 2007 or our 2008 third quarter activity. From a profit view, there were adjustments that helped, but even excluding those effects, both OpCo operating income and our EPS in the period represent record high profits for a Snap-on third quarter. Regarding the environment. It was a third quarter, and as I have said in the past, there is considerable variation on third quarters due to vacations. On balance, however, looking at our overall results, it appears that just the same headwinds are in place, but the positive trends are continuing despite the bad news we get every day in the press. While our results don't indicate deterioration, the difficult macros -- the difficult macroeconomic bulletins do create some limits to our forward visibility; I think that's fair to say. But having said that, I'm confident that the advantages and strengths we bring to any environment, the Snap-on value creation process generates improvement in good times and in challenging times. Our runways for growth enhancing the network, expanding in the repair garage, extending the critical industry and building in emerging markets, they remain attractive and they’ve generated returns on our investments and on our energy for multiple quarters now. And we're fully confident they'll provide the same strong opportunities as we go forward to the days and the quarters and the years ahead. Before I finish though, I want to once again speak directly to our associates and franchisees around the world. I know many of you are listening or will replay this call later. The Snap-on third quarter was another encouraging period. And we all know that our financial and strategic progress would not be possible without your effort. So for your extraordinary contributions, for the wins you have achieved, and for your commitment to your team, you have my congratulations and you have my thanks. Now I'll turn the call over to the operator for questions. Operator?

[Operator Instructions] And for our first question, we go to Jim Lucas with Janney Capital Markets.

I want to start first with 2 housekeeping questions. First, on the military comparisons. When do -- when does that anniversary? So that will be the first question.

Yes, I said the last quarter, and I think that this does certainly continue, it starts to abate going into the fourth quarter. We said last time it would be about another quarter of tough comparisons, starts to get a little bit better next quarter, and, of course, gets better as we go into the first quarter. So we start to get out of the worst of it as we move forward into the next quarter.

Okay. And the other housekeeping question. With the shift in the third quarter in RS&I to -- with some more facilitation sales, understanding the seasonal weakness on the under car side, as you look to the fourth quarter, would you expect the stronger facilitation sales to continue or shift back to more equipment?

Well, I think equipment comes back in the fourth quarter. It has a stronger fourth quarter so you’ll see that come back. Equipment historically has a weak third quarter. We'll see some snap back of that in the fourth quarter on a seasonal basis. I don't expect the facilitation business to back off in the fourth quarter though. So I think what you're going to see, looking forward is, as I've outlined I think, in our – as was outlined in our comments, you'll see a seasonal recovery of the Equipment business. And I think that will affect the mix in that way. OEM will stay -- the OEM facilitation business will stay about where it is.

Okay. And one of the things that you historically talked about, Nick, is demand for big-ticket items. And as we got out of the seasonally slow August, end of September, entering into the fourth quarter, I was wondering if you could just give us a update anecdotally what you're seeing out there in both the tools as well as the C&I side?

Yes. We look at big ticket -- as you say, big ticket is kind of our bellwether for storms coming. And we haven't seen any back-off in the aggregate big ticket. If you're looking at that category, you're talking about tool storage units, larger equipment items and larger diagnostics. And that business has, in aggregate, been fairly strong. Now of course, it can be effective from quarter-to-quarter by product launches and shows and so on, but we feel still that we don't see any indication of downturn in that -- out of that data. In fact, our aligner business is, which is really sort of our ultimate big-ticket event is up quite strongly in this quarter.

Okay. And with regards to Europe, did you see any changes as the quarter progressed? Just wondering, I mean, I understand exactly where you're coming from. I mean, you're echoing what we're hearing from a lot of other companies and that if you don't read the headlines, things still look okay but have you seen any changes either from moderation of growth rates or anything in any specific countries or industries?

I hear you. I don't think so. Now I'll point out though that the third quarter is kind of squirrelly in Europe so if you’re going to look week-by-week or month-by-month, it's very hard to interpret anything. I think I've said that kind of consistently. But as I'd step back at it and look from a macro point of view, we don't see this. In fact, just as you said, I've said this many times and I think in the last fortnight, a number of people have said the same thing to me. If we could unplug the TVs and then withdraw from the Internet, people wouldn't be talking about a downturn. I just think our businesses look okay.

Okay, very helpful. And then final question from me, very big picture, each quarter we tend to ask just updates on the capital allocation side. And given credit playing out as expected, the balance sheet kind of getting where you would expect it to be, the strong cash that you're generating, could you talk a little bit about how you think of the dividend policy, buybacks as well as opportunities on the acquisition side?

Sure. Our ranking for use of cash, one organic growth. We have lots of places we can put it. For example, some of the build in working capital in Asia and so on and then emerging markets and investing in capital expenditures support things like our R&D center and so on. Secondly would be acquisitions around that core coherent group, making us -- allowing us to expand in the garage, extend to critical industries or build in emerging market, any of those dimensions, we'd be looking at that. And then dividends, where we feel pretty strongly that our dividends for perpetuity, because we've never – we’ve paid a dividend every year since 1939 and never reduced it. So we look at moving our dividend up, but it's always in the context that we're never going to move, it's permanent for us. And then after that, we offset shares -- we offset dilution by buying back shares. So those are the orders in which we look at it.

Okay. And with regards to the dividend policy, I mean, I understand where you're coming from, but it's been some time since that’s been addressed, and just trying to get an idea how often that is addressed.

Yes. I can just tell you that we look at it every quarter with the Board. And so I think you guys can draw your own conclusions in looking at our history in this kind of things. I think we moved it last November, right? So you guys can look at that and draw your own conclusions. I can only say we look at it every quarter.

And for our next question, we go to David Leiker with Robert W. Baird. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: A couple things here. You’ve touched on some of this, Nick just kind of put it all together, but as we look at the organic growth here in the quarter, slower, multiple reasons and understandable, some are tightening issues and things like that. As we look forward, do you think like a 4% or 5% organic growth is achievable over time in an economic environment that we're in today? We continue to muddle along in U.S. and Europe like we are. With the 4% to 5% organic number...

Yes, sure. I think we've said 4% to 6%, and this is kind of in that range. I think we tried to make the point in the call that okay, this is a 3.5% percent or 3.6% growth, but actually if you look at it from the perspective of recapturing pre-recessionary levels, it's a fairly positive quarter. And so now we're back to pre-recession levels so I think you're talking about that 4% to 6% range going forward. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: But can you do that in an environment where in U.S. or Europe are growing 1% GDP or 0, negative 1?

Yes. I think we can. I mean, I think that we have share gain to add. We have places where we have not unleashed the Snap-on brand. I think that's what coherent growth is all about. We're not looking at necessarily -- we're not necessarily looking at riding economics upwards. We're looking at, if you think about what we're doing, we're talking about taking the Snap-on brand to critical industries where it's never been done -- never done before in a real serious way. We're talking about emerging markets, which are growing at faster than whatever it is, 1% or 2%. And we know there are technicians we do not call on in the Tools Group. And we could do that. So I think we feel pretty good about that. Now I want to emphasize that I've said 4% to 6% kind of an annual over time basis. I'm not saying you can do it every single quarter, but I think if you look at those numbers, capturing more technicians through the efficiency of the vans, extending out into critical industries which are places we haven't gone before, which is kind of like share capture, building in emerging markets, where the wave is still rising and getting into the garage a little bit more by offering more products. I think those places ride above the specific GDP numbers. Now if everything crashes, and we have a really terrible situation like people are talking about the banks all holding up and everybody's worrying about putting money in their mattress or something, then that's a different situation. If you just talk about slow growth, we feel okay. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And then I think -- just I want to confirm something I think I heard is that, if you look at the seasonality that you saw in the revenue line here in the quarter, this is probably a pretty normal quarter adjusting for distortions last year. Is that fair?

Yes, yes. That's right. If you look at the second quarter, this is actually a little bit better. I mean, the thing is if you look at the second quarter -- normally, we're down 5% to 6%. We're down 3.5%. And so I would say this is within windage. The third quarter there’s always a lot of windage so we kind of view it as a kind of normal consequence of where we were at the second quarter. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then as we look at Q4 and into 2012, are there any particular initiatives or costs or unusual items or things like that, that we should be aware of as we look forward?

No, I don't think so. I think we're going to be -- continue where we’re – well that’s what I said. We're controlled restructurers so we're going to be restructuring about the same; we might move a little bit more. I think -- I've said all along that because we think times are good, we're still unloosening our belt a little bit from where we restricted costs way back in 2009. So some of that flows through our P&L from time to time, but nothing huge, I don't think. And we're just doing the same things we've said we've been doing for a while. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. One other item here. On the Stanley call yesterday, they talked about some of the initiatives that they’re gaining some traction, particularly taken some of the professional tools, the DeWalt brand in particular and putting on Mac truck some things like that. Are you seeing that Mac is better run now as a distribution channel today than it was over the years? Just your thoughts on what you're seeing there.

I have a lot of respect for the Stanley management, and to the extent that they would focus on Mac, I suppose that would have a very positive effect on the running of that business. And maybe that’s some of what you're seeing, but when I look at our numbers, and I talk to our people -- I was just with the NFAC or National Franchisee Advisory Council for the U.S. on one weekend and a subsequent weekend with the Canadians. They all feel pretty strongly about their position. And they're not seeing -- they're not feeling threatened by anybody else. So to the extent people are doing better, I think, maybe they're getting share someplace else; that could be part of it. I don't know. But our business, we seem to not be seeing pressure from competitive activity; if anything, we seem stronger.

And we go next to Gary Prestopino with Barrington Research.

Could you maybe help me with this issue with your stock price and the stock comp expense? Is this that you plan internally for stock comp expense relative to a certain price of the stock? And I guess what I'm getting at is in that if the stock stays where it is, through Q4, are we going to see the same kind of positive impact to the expenses?

No. Look, it has to do with -- I'll try to explain it and then I'll turn it over to Aldo. I mean, I'll try to give you the people's interpretation of it, and then -- the whole idea is, it emanates from 2 big pieces. One is the fact that for outside the United States, we grant stock appreciation rights, not options. And we have deferred compensation in the United States where you have a stock certificate, not a real share, and so that gets mark-to-market based on a stock price. And so what happens is that if the stock stays at where it is today, which is up from the quarter close, we would see some kind of negative in the fourth quarter. And so any time the stock -- it's a quarter-to-quarter thing so if the stock moves up during the quarter, we will see a negative impact for this. If the stock moves down, we see a positive.

Okay and in doing your budgeting, you kind of roll it every quarter. I guess what I'm getting at is…

It’s beyond our control, Gary. It actually moves within the stock price itself, which obviously we can't control. So when we do our budgets and planning, you might assume a certain appreciation rate for the stock over time and that's how we would approach it. But when people have stock appreciation rights or can invest in deferred compensation programs, they have the equivalent of -- they have stock equivalents. So depending on what the price of the stock is, whether it be up or down, you get a favorable or unfavorable mark-to-market effect or impact.

But it's pegged as of the 30th of September price then is it?

Correct. At the end of each quarter, the accounting rules require that it's the price at the close of the quarter that day, and so really you have -- all you have to do is look at the Snap-on stock price at the end of each quarter and if it's up over the previous quarter, it’ll be mark-to-market expense. If it's down from the previous quarter, it will be mark-to-market benefit. Normally, we’d never had this discussion because it was quite a volatile quarter as you can recall. So if you look at the Snap-on stock price, it was up in the 60s and then it was in the mid-40s so that's what caused this variation in a single quarter.

I just wanted to understand how it works. And then could – Nick, maybe -- could we drill down on a little more on Europe? I mean, there's so much bad news coming out of there. It seems that you're doing very well over there, relative to what the perception is, but could you maybe talk about, which countries are really carrying the loads there for you? I mean, you mentioned Southern Europe as definitely having some negative issues, but maybe could you kind of go through Europe...

Yes, I mean, Spain and Portugal and I guess, Italy some. And to the extent we have business -- we've got big business. As you know, we have big business in Spain, pretty big business in Portugal, we've got little in Greece, but Greece, we have business. And it's not so good. And so you see sort of if you draw a line across the south, we're getting pretty big headwind there. And the problem was, just to reiterate, as maybe as you know, but I'll just say it, we have the biggest shares in Spain and Portugal, so our margins were kind of strongest in that situation. Now if you want to talk about the other regions of Europe, first and foremost, what's going very well for us is Eastern Europe. Russia and the sort of Orthodox countries, they are very strong for us. The Nordic countries and the low countries are doing very well for us. We're seeing -- and so those are the businesses, those are the countries that are standing out, I think. Eastern Europe and the Nordic countries are standing out for us. The rest of Europe is kind of doing okay, but it's not as strong as Scandinavia or Russia and then the low countries.

Okay. So when you're talking about Nordic countries, that’s not Germany.

I'm talking about Sweden, Norway, Denmark, Finland.

Okay. And then maybe could you – with your people that are on the ground there, I mean, walk with them, as I'm sure you do. Is there any kind of level of apprehension among the people there or your people as to what's going to be the end event here with Greece and the euro...

I have to tell you though, no. Actually the people at the ground level don't seem concerned about that; they seem confident. And this is just anecdotally, Gary, anecdotally. When you talk to customers, or you talk to our people, they see much more confident in the solution of the euro and everything that's involved in that I'd say, Americans are. That's just how I characterize it. They don't seem as alarmed to me. I think, surprisingly, actually, but they seem very confident, and I don't know what to do with that, but I think that obviously, they do have problems and there is a lot of discussion in the press. And there's questions about what's going to happen in Europe. And we already talked about the idea that it limits our visibility, but if you're talking about the people at the ground, our people, seem to be confident that a solution is going to be worked out. And things are going to move on in Europe. The one thing I can say about our European business is we're clear, that even in Spain and Portugal, we haven't lost share. It’s just that these businesses are that's our business is still intact. So we're just there on hold waiting for the idea that the market comes back.

And we go next to Jarrod Rapalje with Longbow Research.

So one last question on Europe and just -- I understand the Southern Europe's weak and to the extent that it does carry over to these other countries, can you just talk about your profitability over there compared to the U.S. and the downside risks to earnings power in some sort of quantifiable way?

No. We never quantify the probability in Europe. I think we haven't done that, but I'll just say that our profitability in Europe has never been as strong as the United States. So if you're going to compare those 2, it's just never been as strong for us in Europe as it has been in the United States.

Okay. And then secondly within the Snap-on Tools segment, can you break out that organic growth between price and volumes?

Well, yes. Price is about between 0.5% and 1%, just a small amount. We generally price for material inflation. We feel that -- if you've listened to prior calls, we say generally that we can always get visible inflation back in pricing. And that's what they've done over the past year and that turns out for us to be between 0.5% and 1%.

Okay. So safe to say that with that pricing, you guys are recovering all the raw material inflation you guys are seeing and is that a headwind right now?

Sure. No, no, no. We're able to price for it. I mean, it's not a headwind. First of all, Snap-on isn't that big a purchaser. Our biggest commodities are freight and steel. And we buy, I think, we said about 75 million of steel. So if you think about that, it's not a lot. Our biggest input to a hand tool is labor. And so the commodity headwinds are a factor, and I often say this on these calls, I say we can price for it. I’ll probably say -- I'd say we can deal with it, and I'm pretty confident we have and we will as long as it's visible. So if somebody decided -- we put titanium, say, in our steel; if somebody decided to increase of the price of titanium by 20x, probably we might not be able to price for that. And then -- because no one would know, but if steel goes up by 10%, we can price for that. Now on top of that, we have a very -- as part of our Snap-on value creation processes we have a -- something called RCI, Rapid Continuous Improvement and we're out every day in every site with dedicated people. We have a dedicated guy in every site, pushing cost reduction and productivity. So not only do we have a pricing, but we have this productivity flowing through our plans.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore Ms. Kratcoski, I will turn the conference back over to you for any closing remarks.

Thanks, Rufus. Just to let everyone know, we will have a replay available shortly on snapon.com. And as always, we'd like to thank you for joining us this quarter on our call. Thanks again. Bye.

And again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation.