Snap-on Incorporated — Form 10-Q Summary
Period discrepancy: The request identifies 2017 Q2, but the supplied filing is for the quarter ended June 30, 2018, with comparisons to the quarter ended July 1, 2017. The fiscal quarters each contained 13 weeks.
Business context and reporting period
Snap-on sells tools, diagnostics and repair-information systems, and equipment, and provides financing to customers and franchisees. Its reportable businesses are Commercial & Industrial, Snap-on Tools, Repair Systems & Information, and Financial Services. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $954.6 | $921.4 | $1,890.1 | $1,808.5 |
| Financial services revenue | $82.0 | $77.7 | $165.0 | $154.5 |
| Operating earnings | $250.9 | $238.3 | $485.5 | $461.0 |
| Net earnings attributable to Snap-on | $178.7 | $153.2 | $341.7 | $294.8 |
| Diluted EPS | $3.12 | $2.60 | $5.93 | $4.98 |
- Q2 net sales rose 3.6%; management attributed the increase to $12.1 of organic growth, $8.1 of acquisition-related sales, and $13.0 of favorable currency translation. For the six months, sales increased 4.5%, including $19.3 organic growth, $22.4 acquisition-related sales, and $39.9 favorable currency translation.
- Gross margin was 51.0% in Q2, up 70 basis points year over year; six-month gross margin was 50.7%, up 30 basis points. Management cited higher sales and continuous-improvement savings, partly offset by higher material and other costs.
- Operating margin on total revenues was 24.2% in Q2 versus 23.9%; six-month margin was 23.6% versus 23.5%. Operating earnings increased 5.3% in both comparisons.
- Q2 effective tax rate was 23.8%, versus 30.6% a year earlier; the six-month rate was 25.0% versus 30.6%. Lower taxes materially supported earnings growth. Q2 included a $0.5 tax benefit related to new Tax Act guidance; the six-month period included a $2.1 tax charge.
- Six-month operating cash flow was $418.8, compared with $319.5. Investing cash outflow was $100.8, including $436.7 of finance-receivable additions and $379.9 of collections; capital expenditures were $38.6. Financing cash outflow was $295.8. Cash ended at $112.3, up from $92.0 at fiscal year-end.
- At June 30, current assets were $2,155.4 and current liabilities $927.0; working capital was $1,228.4. Debt, including short-term borrowings and current maturities, totaled $1,073.0, versus $1,186.8 at year-end. The $700 revolving credit facility had no borrowings outstanding; the company reported compliance with debt covenants.
Material changes and segment trends
- Commercial & Industrial Q2 segment sales rose 9.0% and operating earnings rose 14.0%; six-month sales rose 10.0% and earnings rose 12.5%, reflecting organic growth, acquisitions and currency benefits.
- Snap-on Tools Q2 segment sales declined 0.5% and operating earnings declined 2.1%; six-month sales declined 0.8% and earnings declined 2.1%. Management cited lower organic sales, including weakness in U.S. franchise operations, and higher operating costs, partly offset by improved gross margins.
- Repair Systems & Information Q2 segment sales rose 1.5% and operating earnings 7.9%; six-month sales rose 3.5% and earnings 8.2%, with margin gains from product mix and continuous-improvement initiatives.
- Financial Services Q2 revenue and operating earnings increased 5.5% and 5.9%, respectively; six-month increases were 6.8% and 7.1%, mainly from portfolio growth. Six-month originations declined 2.2% year over year.
- Debt actions included issuing $400 of 4.10% notes due 2048 and using proceeds in part to redeem $200 of 6.70% notes due 2019 and reduce commercial paper. The company also repaid $250 of 4.25% notes at maturity. A $7.8 early-extinguishment loss and a $13.3 treasury-lock settlement gain were recorded in the six-month period.
Outlook, risks and unusual items
- Management expected continued progress in 2018 in its growth initiatives, including expansion in automotive repair, adjacent markets, additional geographies and critical industries. It forecast capital expenditures of $90–$100 for 2018 and a full-year effective tax rate of 24%–25%. No specific sales or earnings guidance was provided.
- The Tax Act accounting remained incomplete; estimates for the transition tax, deferred-tax effects and GILTI treatment could change, potentially materially. The company had not selected an accounting policy for GILTI.
- Two litigation judgments were accrued from 2017: $30.9 related to patent litigation and $15.0 related to an employment matter. Both were under appeal. Management stated it did not expect legal matters to materially affect financial position, results or cash flows.
- Management identified risks including tariffs and trade disputes, material-cost inflation, currency and interest-rate movements, economic weakness, pension funding, acquisition integration, operational disruptions, data security and litigation. It noted the potential effects of the U.K.’s pending exit from the EU were uncertain.
- Foreign-currency translation reduced Q2 comprehensive income materially: Q2 foreign-currency translation loss was $97.6, and accumulated other comprehensive loss was $377.3 at June 30. Goodwill impairment testing in Q2 resulted in no impairment.
- Snap-on repurchased 646,000 shares for $98.7 in the first six months and paid $92.8 in dividends. Remaining repurchase authorization was $345.1 at June 30.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q2 2018, not Q2 2017.
- Assess the durability of organic growth, especially the decline in Snap-on Tools and the contribution of currency and acquisitions to reported sales growth.
- Review receivable quality and credit-loss trends: six-month provision for finance-receivable losses was $29.4, and the company’s financial-services portfolio continued to grow.
- Monitor final Tax Act accounting and effective-tax-rate assumptions, along with the outcomes of the two appealed judgments.
- Evaluate debt refinancing, pension contributions, share repurchases, and the company’s ability to fund these alongside receivable growth and planned capital spending.