Tool and equipment maker Snap-on Inc. has terminated its operating agreement with CIT Group Inc., one of the nation's largest commercial lenders.
Snap-on and CIT have been joint venture partners since 1999 in Snap-on Credit L.L.C., which has provided a range of financial services to Snap-on's U.S. franchisees and customers. CIT has been the exclusive purchaser of the financing contracts originated by Snap-on Credit.
However, CIT has been on the verge of bankruptcy after the firm—which received a $2.33 billion taxpayer-financed bailout in December—was recently denied another bailout loan by the federal government.
Kenosha-based Snap-on said it and CIT have been in ongoing discussions concerning a new, longer term joint venture agreement, and both parties have agreed to continue those discussions. If a mutually acceptable agreement can be reached—and CIT can resolve its liquidity issues over a longer term—Snap-on said it is possible the companies could, at a later date, enter into a new joint venture agreement.
As a consequence of the termination of the joint venture, Snap-on will acquire CIT's interest in the joint venture for approximately $8.2 million; Snap-on Credit will become a wholly owned subsidiary of Snap-on Inc.; and Snap-on Credit will continue to service the existing portfolio of contracts that were owned by CIT.
The approximate outstanding balance of this portfolio is $834 million. Snap-on said it has no obligation to purchase the existing portfolio of contracts owned by CIT. The operations of Snap-on Credit are expected to be uninterrupted by the joint venture's termination, and all activities surrounding the financing of extended credit contracts to customers, leases of shop equipment and loans to franchisees will continue without change, the firm said.
Snap-on said it will provide financing for new contracts and it estimates that, over the next 12 months, these incremental financing needs will be approximately $450 million. The company said it “believes it has adequate financial resources to fully provide for the financing needs of Snap-on Credit,” including:
* Cash on hand as of July 4 of $525 million;
* A $500 million bank credit facility, which also serves as a back-up credit facility for Snap-on's issuance of commercial paper. There is presently no commercial paper outstanding nor any amounts outstanding under these credit facilities, the company said; and
* Snap-on said it believes it has further access to the public debt markets, should additional borrowings be necessary, and the company said it believes it could secure additional bank revolving credit capacity to fund Snap-on Credit should this be necessary.
Subject to regular determination by its board, the company also anticipates it will continue its regular quarterly cash dividend of 30 cents per share. Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939.
In its second-quarter earnings report, Snap-on said its new finance receivables will be included on its balance sheet, and the company will record the interest yield on these receivables over the life of the contracts as financial services revenue.
Previously, the company recorded gains on contracts sold to CIT as financial services revenue. As a result of this change in reporting financial services revenue, Snap-on anticipates that reported financial services revenue and operating income will decline during the transition period as the company builds its portfolio of receivables.
Snap-on said it “presently expects that operating income from financial services, which is before interest expense and which totaled $16.6 million in the second quarter of 2009, will be a loss in a range of $8 million to $10 million in each of the third and fourth quarters of 2009.”
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