Business context and reporting period
Snap-on Incorporated’s filing covers the fiscal third quarter ended October 1, 2016 (13 weeks), and the first nine months of fiscal 2016, compared with periods ended October 3, 2015. The supplied request metadata says “2015 Q3,” but the filing itself is for 2016 Q3.
Snap-on serves industrial and commercial customers, vehicle technicians and repair shops, and provides financing through its Financial Services business.
Financial performance
Amounts below are in millions of dollars, except per-share data. Revenue growth and margins are as reported in the filing.
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Net sales | $834.1 | $821.5 | $2,540.6 | $2,501.1 |
| Operating earnings | $208.2 | $187.1 | $626.5 | $557.5 |
| Net earnings attributable to Snap-on | $131.7 | $116.8 | $400.1 | $347.3 |
| Diluted EPS | $2.22 | $1.98 | $6.74 | $5.88 |
| Gross margin | 50.2% | 49.5% | 49.8% | 49.4% |
| Operating margin before Financial Services | 18.9% | 17.5% | 18.9% | 17.3% |
| Operating earnings as % of total revenue | 23.0% | 21.2% | 22.8% | 20.8% |
- Q3 net sales rose 1.5%; organic sales increased 2.6%, excluding $9.7 million of unfavorable currency translation and $1.1 million of acquisition-related sales. For the first nine months, net sales rose 1.6% and organic sales rose 2.7%, with $36.3 million of unfavorable currency translation and $9.6 million of acquisition-related sales.
- Financial Services revenue increased 17.2% in Q3 and 16.9% year to date; operating earnings increased 16.3% and 17.5%, respectively. Management attributed growth primarily to expansion of the finance portfolio.
- Net cash provided by operating activities was $415.6 for the first nine months, versus $352.1 in 2015. Investing activities used $244.1 and financing activities used $146.8. Cash at period end was $117.5, compared with $119.2 a year earlier.
- At October 1, 2016, total debt was $896.0, including $182.6 current and $713.4 long-term; cash was $117.5. Working capital was $1,030.1, down from $1,118.6 at fiscal year-end, largely because $150.0 of notes due in January 2017 became current. The $700 million revolving facility had no borrowings outstanding, and the company was in compliance with its debt covenants.
- Dividends declared were $0.61 per share for Q3 and $1.83 per share for the first nine months. The company repurchased 492,000 shares for $76.4 during the first nine months.
Material changes and management commentary
- Profitability grew faster than sales. Management cited higher sales, Rapid Continuous Improvement savings, operating leverage and lower pension expense; the nine-month operating results also benefited from lower stock-based and employee/franchisee stock-plan costs.
- Snap-on Tools Group was a notable growth driver: nine-month sales rose 5.1% and operating earnings rose 12.8%. Commercial & Industrial Group nine-month sales fell 2.2% and earnings fell 2.7%, including weakness in critical-industry markets. Repair Systems & Information Group nine-month sales increased 3.3% and earnings 7.0%.
- Foreign currency was a material headwind: management reported $19.0 million of unfavorable currency effects on nine-month operating earnings. The company recorded a $0.9 million net foreign-exchange loss for the period.
- Finance and contract receivables grew with the portfolio. The filing reported $30.4 million of provision for finance-receivable losses for the first nine months, compared with $22.4 million in 2015; investors should assess this alongside portfolio growth and credit performance.
Outlook, risks and unusual items
- Management expected continued progress in growth initiatives during the remainder of 2016 and forecast full-year capital expenditures of approximately $80 million; $56.6 million had been incurred through Q3. It expected the 2016 full-year effective tax rate to be slightly below the 2015 rate. The filing gives no specific full-year sales or EPS guidance.
- On October 17, 2016, Snap-on announced a definitive agreement to acquire Car-O-Liner for approximately $155 million in cash. Car-O-Liner had trailing 12-month sales of approximately $95 million. Snap-on expected to fund the transaction with cash and commercial paper and anticipated closing within 30 days, subject to conditions.
- Management identified risks from foreign exchange and interest rates, economic weakness including uncertainty following the UK vote to leave the EU, competition, raw-material costs, pension funding, execution of efficiency initiatives, acquisitions, cybersecurity and customer credit losses. Legal matters in the ordinary course were not expected by management to materially affect financial position, results or cash flows.
- The company recorded $0.9 million of exit and disposal costs in the first nine months of 2016 and had a $3.1 million related accrual at quarter-end. Annual goodwill and indefinite-lived intangible impairment testing in Q2 resulted in no impairment. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the period: the filing is for Q3 2016, not Q3 2015 as indicated in the request metadata.
- Track organic sales and segment trends, particularly the continued weakness in Commercial & Industrial critical-industry demand and growth in Snap-on Tools and Financial Services.
- Review finance-receivable growth, loss provisions, delinquencies and nonperforming balances to assess the quality and returns of the expanding lending portfolio.
- Assess liquidity around the January 2017 maturity of $150 million of notes and the proposed Car-O-Liner acquisition, including its commercial-paper funding and closing conditions.
- Compare realized capital expenditures and the full-year tax rate with management’s outlook, and monitor currency, pension contributions and the remaining restructuring accrual.