Snap-on Incorporated — Q1 2018 Form 10-Q
Period note: The supplied filing is for the three months ended March 31, 2018 (13 weeks), compared with the three months ended April 1, 2017—not 2017 Q1 as stated in the request metadata. Amounts are in millions except per-share data.
Business context and financial results
Snap-on sells tools, diagnostics and repair-information systems, and equipment, and provides financing to customers and franchisees. Its four reportable segments are Commercial & Industrial, Snap-on Tools, Repair Systems & Information, and Financial Services.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $935.5 | $887.1 | +5.5% |
| Total revenue, including financial services | $1,018.5 | $963.9 | +5.7% |
| Gross profit / margin | $471.6 / 50.4% | $448.3 / 50.5% | +5.2%; margin down 10 bps |
| Operating earnings / margin on total revenue | $234.6 / 23.0% | $222.7 / 23.1% | +5.3%; margin down 10 bps |
| Net earnings attributable to Snap-on | $163.0 | $141.6 | +15.1% |
| Diluted EPS | $2.82 | $2.39 | +$0.43 |
| Operating cash flow | $231.9 | $192.4 | +$39.5 |
Net sales growth comprised $7.2 of organic growth (0.8%), $14.3 of acquisition-related sales, and $26.9 from favorable currency translation. Gross margin faced unfavorable currency and acquisition effects and higher other costs, partly offset by continuous-improvement savings. The effective tax rate was 26.2%, versus 30.7%; the 2018 rate included a 120-basis-point Tax Act charge.
Segments and material changes
- Commercial & Industrial: Segment sales $331.6, up 11.0%; organic sales up 1.9%. Operating earnings $46.5, up 11.0%; margin was 14.0%, flat.
- Snap-on Tools: Sales $404.7, down 1.1%; organic sales down 2.7%, including a mid-single-digit decline in U.S. franchise operations. Operating earnings $68.9, down 2.0%; margin 17.0%, versus 17.2%.
- Repair Systems & Information: Segment sales $337.0, up 5.7%; organic sales up 2.6%. Operating earnings $85.8, up 8.5%; margin improved to 25.5% from 24.8%.
- Financial Services: Revenue $83.0, up 8.1%, and operating earnings $56.9, up 8.4%, primarily reflecting portfolio growth. Originations were $247.3, down 6.5%.
Cash, debt and liquidity
- Cash and equivalents were $97.5 at quarter-end, up $5.5 from year-end; $73.9 was held outside the United States. Working capital was $1,216.8, up from $926.0.
- Operating cash flow was $231.9; investing cash use was $37.1 and financing cash use was $190.5. Capital expenditures were $18.0. Cash dividends paid were $46.5 and share repurchases were $43.5.
- Total debt, including commercial paper and other notes, was $1,091.5; long-term debt was $946.3 and current debt/notes payable $145.2. The company issued $400 of 4.10% notes due 2048, repaid $250 of notes at maturity and redeemed $200 of 6.70% notes due 2019. The refinancing produced a $7.8 early-extinguishment loss.
- No borrowings were outstanding under the $700 revolving credit facility. The company reported covenant ratios of 0.24 and 1.04, within limits, and stated it was in compliance with debt covenants. Management said operating cash flow, receivable collections, cash and borrowing access should cover anticipated needs.
Outlook, commentary and risks
- Management expects continued progress in 2018 through growth in automotive repair, adjacent markets, geographies and critical industries. No full-year revenue or EPS target was provided.
- Expected 2018 capital expenditures: $90–$100. Expected full-year effective tax rate: 24%–25%, compared with 31.1% in 2017.
- Tax Act accounting remained provisional. The company recorded $2.6 of additional tax expense in Q1 after new IRS guidance and further analysis; the final impact could differ, possibly materially. The company had not selected an accounting policy for GILTI taxes.
- Other unusual items included a $13.3 treasury-lock settlement gain and the $7.8 debt-extinguishment loss. Management identified the net after-tax debt items as adding $0.07 to Q1 diluted EPS and the Tax Act charge as reducing EPS by $0.04.
- Risks cited include execution of efficiency and growth initiatives, franchisee retention and sales, acquisitions, tariffs and trade issues (including steel), economic weakness and Brexit uncertainty, currency and interest-rate movements, pension funding, cybersecurity, and litigation.
- Accrued judgments of $30.9 in patent litigation and $15.0 in an employment-related case were under appeal. Management said it did not expect legal matters to materially affect consolidated results or financial position. No off-balance-sheet arrangements were reported.
Most important facts to verify
- Confirm the intended reporting period: the filing is Q1 2018, not Q1 2017.
- Track organic sales and U.S. franchise trends, especially the Snap-on Tools Group decline, against reported growth that included acquisitions and favorable currency.
- Assess whether Financial Services portfolio growth, credit-loss provisions and receivable collections remain sustainable; finance-receivable loss provision was $15.8 versus $13.0 a year earlier.
- Monitor final Tax Act and GILTI accounting, including the potential effect on the stated 24%–25% full-year tax-rate outlook.
- Review debt refinancing costs, long-term leverage and cash deployment, including dividends and authorized share repurchases.
- Follow the appealed litigation judgments and any changes in management’s assessment of potential exposure.