Snap-on Incorporated — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended September 29, 2012, not 2011 Q3. Comparatives are the quarter ended October 1, 2011, and the nine months ended on those dates.
Business context and reporting period
Snap-on sells tools, diagnostics, equipment, software and related solutions through mobile franchise, direct and distributor channels, and provides customer and franchisee financing. Its reportable segments are Commercial & Industrial, Snap-on Tools, Repair Systems & Information, and Financial Services. The interim statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $711.6 million | $697.2 million | $2,184.7 million | $2,117.6 million |
| Gross profit / margin | $340.4 million / 47.8% | $329.3 million / 47.2% | $1,038.0 million / 47.5% | $1,002.1 million / 47.3% |
| Operating earnings | $124.1 million | $115.1 million | $375.7 million | $349.2 million |
| Net earnings attributable to Snap-on | $74.1 million | $67.8 million | $221.5 million | $202.0 million |
| Diluted EPS | $1.26 | $1.16 | $3.77 | $3.44 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $226.4 million | $56.2 million |
For the nine months, operating earnings were $375.7 million, or 16.3% of total revenues; excluding the prior-year $18.0 million CIT arbitration gain, 2011 operating earnings were $331.2 million, or 15.0%. Interest expense was $41.4 million versus $47.7 million. The effective tax rate attributable to Snap-on was 33.1% versus 33.0%.
Nine-month investing cash use was $153.6 million, including $59.5 million of capital expenditures and net finance-receivable investment. Financing cash use was $82.1 million. Cash declined $9.5 million from year-end to $176.1 million. Operating cash flow less capital expenditures was $166.9 million, a derived measure.
At September 29, 2012, working capital was $1,002.3 million, up from $946.9 million at year-end; current assets were $1,623.9 million and current liabilities $621.6 million. Long-term debt was $971.2 million, with $18.7 million in notes payable and current maturities. The $500 million revolver and $200 million receivables-backed facility had no borrowings outstanding. The company reported covenant compliance; leverage ratios were 0.36 and 1.61 against respective maximums of 0.60 and 3.50.
Material changes versus comparable periods
- Q3 net sales rose 2.1%; excluding $16.6 million of unfavorable currency translation, organic sales increased 4.6%. Nine-month net sales rose 3.2%; organic sales increased 5.4% excluding $44.1 million of unfavorable currency translation.
- Q3 gross margin improved 60 basis points, attributed mainly to continuous-improvement and cost-reduction savings. Nine-month gross margin improved 20 basis points, partly offset by higher restructuring costs.
- Snap-on Tools was the strongest sales-growth segment: sales rose 10.4% in both the quarter and nine-month period. Repair Systems & Information’s nine-month segment sales declined 1.3%, while operating earnings increased 10.9%. Commercial & Industrial’s nine-month sales rose 2.4% and operating earnings rose 5.5%.
- Financial Services revenue rose 23.9% in Q3 and 33.3% year to date, primarily reflecting growth in the on-book finance portfolio. Nine-month operating earnings before the arbitration item rose 52.4% to $77.4 million.
- Q3 corporate operating expenses were affected by an unfavorable $4.4 million stock-based mark-to-market expense versus a favorable $7.8 million benefit in Q3 2011. Year to date, the respective effects were an $11.8 million expense and a $2.3 million benefit.
- Operating cash flow increased from $56.2 million to $226.4 million, but the comparison reflects prior-year CIT settlement-related cash movements and working-capital changes. 2012 cash flow also included $42.7 million of discretionary domestic pension contributions.
Outlook, commentary, risks and unusual items
- Management expected 2012 capital expenditures of $75 million to $80 million, with $59.5 million spent in the first nine months, and a full-year effective tax rate of approximately 33.2%. The filing provides no full-year revenue or EPS guidance.
- Management said available cash, operating cash flow and credit facilities were sufficient for anticipated needs, including financing originations, working capital, capital expenditures, restructuring, pensions, dividends and possible repurchases or acquisitions.
- The company repurchased 967,000 shares for $61.8 million and paid $59.4 million in dividends during the first nine months. Remaining repurchase authorization was $174.1 million.
- Restructuring and exit costs were $16.5 million year to date, primarily tied to the Newmarket, Canada, facility closure, pension settlement and workforce reductions, including European cost actions. Approximately $4.6 million of the $9.4 million accrual was expected to be used in 2012 and the balance to extend into 2013.
- The $18.0 million pretax CIT arbitration gain occurred in Q2 2011, not in 2012. Management considered ordinary-course legal matters unlikely to materially affect consolidated results, financial position or cash flows.
- Risks include foreign-exchange and interest-rate exposure, economic weakness (including in Europe), competition, raw-material and energy costs, franchisee retention and performance, execution of cost-saving and manufacturing initiatives, pension funding, technology and litigation. Goodwill and indefinite-lived intangible impairment tests in Q2 2012 found no impairment.
Most important facts for investors to verify
- Confirm the intended filing period: the supplied 10-Q is Q3 2012, despite request metadata stating Q3 2011.
- Assess whether organic sales growth and margin gains persist, especially amid European weakness and currency headwinds.
- Monitor growth, credit quality and reserve adequacy in the expanding finance-receivable portfolio; nine-month provision for finance-receivable losses was $13.8 million versus $8.7 million.
- Review the sustainability of operating cash flow after pension contributions, financing-portfolio investment, capital spending, dividends and share repurchases.
- Track stock-based mark-to-market expense, restructuring accrual use, pension contributions and the stated capital-spending and tax outlook.