Snap-on Incorporated — Form 10-Q Summary
Period discrepancy: The request specifies 2018 Q2, but the supplied filing is for the quarter ended June 29, 2019, with comparative results for the quarter ended June 30, 2018. The 2019 and 2018 second quarters each comprised 13 weeks. Amounts below are in millions of dollars except per-share data.
Business context and reporting period
Snap-on sells tools, diagnostics and repair-information systems, and equipment to professional customers; its Financial Services business provides financing that supports product sales and franchisees. The filing reports the second quarter and first six months of fiscal 2019.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $951.3 | $954.6 | $1,873.0 | $1,890.1 |
| Financial services revenue | $84.1 | $82.0 | $169.7 | $165.0 |
| Operating earnings | $250.5 | $250.9 | $500.0 | $485.5 |
| Net earnings attributable to Snap-on | $180.4 | $178.7 | $358.3 | $341.7 |
| Diluted EPS | $3.22 | $3.12 | $6.38 | $5.93 |
| Operating cash flow | Not presented quarterly | $346.8 | $418.8 |
Q2 gross margin was 49.8%, down from 51.0%; operating earnings were 24.2% of total revenues in both quarters. For the first half, gross margin was 50.5% versus 50.7%, while operating earnings were 24.5% versus 23.6% of total revenues. The six-month effective tax rate attributable to Snap-on was 23.9%, compared with 25.0%.
At June 29, 2019, cash was $164.0, working capital was $1,375.8, and total assets were $5,545.4. Notes payable were $168.2 and long-term debt was $947.9; the $700 million revolving credit facility had no borrowings. Total liabilities were $2,236.7. The company reported covenant ratios of 0.21 and 0.95, both within permitted limits.
Material changes versus comparable periods
- Q2 net sales decreased 0.3%; organic sales increased 1.6%, but unfavorable currency translation of $19.5 and lower sales in some businesses more than offset that growth. Six-month net sales fell 0.9%, with organic growth of 1.5% offset by $45.6 of unfavorable currency translation.
- Q2 net earnings attributable to Snap-on increased 1.0% and diluted EPS rose from $3.12 to $3.22. Six-month attributable earnings increased 4.9%; results included an $11.6 pre-tax benefit from settling patent litigation, equivalent to an $8.7 after-tax benefit or $0.15 per diluted share.
- Q2 Snap-on Tools Group operating earnings declined $7.7 to $71.3, with segment margin falling to 17.6% from 19.2%. Financial Services operating earnings increased 4.8% to $60.6. Repair Systems & Information sales grew 1.7% in Q2, but segment operating earnings were essentially unchanged.
- First-half operating cash flow declined $72.0, primarily because changes in operating assets and liabilities were $94.0 less favorable, partly offset by higher earnings. Cash increased $23.1 from year-end. Capital expenditures rose to $48.2 from $38.6.
- The company repurchased 660,000 shares for $107.5 and paid $105.3 in dividends during the first half. Inventory increased $52.0 from year-end, and inventory turns declined to 2.7 from 2.9.
Outlook, commentary, risks and unusual items
- Management expected continued progress in 2019 through growth in automotive repair, adjacent markets, additional geographies and critical industries. It forecast 2019 capital expenditures of $90–$100 and a full-year effective tax rate comparable to 2018’s 24.0%.
- Management said cash from operations, receivable collections, available cash and borrowing sources were expected to cover anticipated needs, including debt service, dividends, working capital, receivable originations, pension funding, capital expenditures and potential buybacks or acquisitions. It cautioned that future financing availability and terms, and debt ratings, are not assured.
- The patent-related litigation matter was settled in the first half, producing the $11.6 operating-expense benefit. Management said other ordinary-course legal matters were not expected to materially affect financial position, results or cash flows, while noting outcomes cannot be predicted.
- Principal risks cited include foreign-exchange movements, tariffs and trade disputes, economic weakness including uncertainty around the UK’s planned EU exit, competition, raw-material and energy costs, interest rates, pension funding, execution of cost and growth initiatives, acquisitions, data security, and litigation. The company reported no off-balance-sheet arrangements and no material change in internal controls.
- Financial Services credit exposure merits attention: the company held substantial extended-term receivables and recorded $24.4 of first-half provision for finance-receivable losses. Its expected-credit-loss accounting standard was still under assessment at the filing date.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2019, not Q2 2018.
- Assess whether organic growth can continue to outweigh currency impacts, and monitor margin pressure from material costs and business mix.
- Evaluate the sustainability of earnings growth excluding the one-time patent settlement benefit.
- Review operating cash-flow conversion, inventory growth and receivable credit quality, including delinquency trends and future loss provisions.
- Track progress against the 2019 capital-expenditure and tax-rate outlook, and the use of cash for dividends and share repurchases.