Snap-on Incorporated — Form 10-Q Summary
Business context and reporting period
The filing covers Snap-on’s fiscal second quarter and first six months of 2010, ended July 3, 2010, compared with periods ended July 4, 2009. The request metadata says “2009 Q2,” but the filing itself is for 2010 Q2. Snap-on reports Commercial & Industrial, Snap-on Tools, Repair Systems & Information, and Financial Services segments. Segment reporting was realigned in Q2 2010; prior-year segment figures were restated.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $647.6 million | $590.0 million | $1,269.2 million | $1,162.6 million |
| Gross profit / margin | $303.8 million / 46.9% | $254.0 million / 43.1% | $591.4 million / 46.6% | $512.7 million / 44.1% |
| Operating earnings | $80.7 million | $70.3 million | $150.7 million | $134.6 million |
| Net earnings attributable to Snap-on | $45.3 million | $37.4 million | $82.1 million | $72.2 million |
| Diluted EPS | $0.78 | $0.65 | $1.41 | $1.25 |
| Financial services revenue | $13.9 million | $25.6 million | $23.6 million | $45.6 million |
| Operating earnings from Financial Services | $1.7 million | $16.6 million | $0 | $26.6 million |
Q2 net sales increased 9.8% year over year; management reported organic growth of 9.6%, excluding currency translation. Six-month net sales rose 9.2%, with organic growth of 6.8%. Q2 operating earnings increased 14.8%, despite lower Financial Services earnings. Gross margin improved as higher sales, productivity and manufacturing utilization, cost reductions, and favorable currency effects more than offset higher expenses. Operating expenses rose, notably from increased incentive compensation and pension costs.
For the first six months, operating cash flow was $65.9 million, down from $170.3 million. Investing cash flow was a use of $156.2 million, including $246.3 million of finance-receivable additions and $108.3 million of collections; financing cash flow was a use of $176.7 million. Cash declined $268.6 million to $430.8 million, primarily reflecting repayment of $150 million of debt and funding of new SOC loans. Capital expenditures were $12.3 million.
At July 3, 2010, total assets were $3.313 billion, working capital was $839.7 million, and total current liabilities were $646.4 million. Debt, including current maturities, was $923.4 million ($909.8 million long term), compared with $1.067 billion at year-end 2009. The $500 million revolving facility had no borrowings outstanding; the company reported covenant compliance and $20 million of unused capacity under separate committed bank lines. The filing reports covenant ratios of 0.43 and 2.66, within limits of 0.60 and 3.50, respectively.
Material changes versus comparable periods
- Q2 net earnings attributable to Snap-on rose 21.1%; six-month earnings rose 13.7%. Diluted EPS increased from $0.65 to $0.78 for Q2 and from $1.25 to $1.41 for the six months.
- All three operating groups recorded higher Q2 sales. Commercial & Industrial had the strongest reported growth, with segment sales up 22.0%; Snap-on Tools rose 9.0%, and Repair Systems & Information rose 4.0%.
- Financial Services comparisons are affected by Snap-on’s July 2009 acquisition of CIT’s interest in SOC. Snap-on now retains and finances most new loans, recognizing interest over the loan term rather than the prior gains from selling substantially all new originations to CIT. The change materially reduces comparability of revenue and operating earnings.
- Net finance receivables increased by $170.7 million from year-end 2009, reflecting growth in the on-balance-sheet portfolio. Foreign currency translation reduced six-month comprehensive income: Snap-on-attributable comprehensive loss was $20.0 million, including a $102.1 million foreign-currency translation loss.
Outlook, risks, contingencies and unusual items
- Management said it was encouraged by Q2 and first-half results and trends in some markets, while noting continuing global economic challenges. It plans to balance growth investments with further cost reductions; interim results are not necessarily indicative of full-year results.
- 2010 expectations included approximately $15 million of restructuring costs, $50 million of capital expenditures, approximately $16 million of higher year-over-year pension expense, and an effective tax rate of approximately 33.7%. Snap-on estimated SOC’s incremental 2010 cash requirements at approximately $300 million.
- Snap-on alleges approximately $115 million in damages in an arbitration with former joint-venture partner CIT. CIT denies the claim and alleges damages exceeding $110 million, mostly related to amounts Snap-on withheld. Snap-on had withheld $107.8 million as of July 3, 2010, recorded in other accrued liabilities; management said the outcome could not yet be determined.
- Other risks discussed include credit and collection losses, the need to fund SOC loans, currency and interest-rate movements, pension costs, global economic and automotive-market weakness, raw-material and energy costs, litigation, and execution of cost-saving and growth initiatives. No off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: it is the quarter ended July 3, 2010, not 2009 Q2.
- Assess operating cash generation against earnings and the increased cash required to originate and hold finance receivables.
- Review SOC loan growth, credit-loss provisions and allowance trends; the six-month provision for finance-receivable losses was $8.0 million.
- Track the CIT arbitration, the withheld balance, and the potential effect of either party’s claims on liabilities and cash flows.
- Separate underlying segment performance from currency effects, restructuring savings, incentive compensation, pension expense, and the accounting change in Financial Services.
- Check whether stated 2010 outlook assumptions and liquidity capacity remain supportable as financing needs, pension funding, and market conditions evolve.