Snap-on Incorporated — fiscal second quarter 2017
Period clarification: The supplied filing is a Form 10-Q for the quarter ended July 1, 2017, compared with July 2, 2016; it is not a 2016 Q2 filing as indicated in the request metadata. Each quarter contained 13 weeks. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $921.4 | $872.3 | $1,808.5 | $1,706.5 |
| Financial services revenue | $77.7 | $69.3 | $154.5 | $135.6 |
| Operating earnings | $238.3 | $215.9 | $460.3 | $418.3 |
| Net earnings attributable to Snap-on | $153.2 | $140.1 | $294.8 | $268.4 |
| Diluted EPS | $2.60 | $2.36 | $4.98 | $4.52 |
| Gross margin | 50.2% | 49.4% | 50.4% | 49.6% |
| Operating margin before financial services | 19.9% | 19.1% | 19.5% | 18.9% |
| Operating margin on total revenue | 23.9% | 22.9% | 23.4% | 22.7% |
| Cash from operating activities | Not separately stated for quarter | $319.5 | $303.7 |
- Q2 net sales rose 5.6%; management attributed the change to $23.2 of organic growth and $38.4 of acquisition sales, partly offset by $12.5 of unfavorable currency translation. Six-month sales rose 6.0%, including 3.4% organic growth.
- Q2 operating earnings increased 10.4% and diluted EPS increased 10.2%. Management cited higher sales and Rapid Continuous Improvement savings as contributors to gross-margin expansion; acquisition costs and foreign exchange were offsets.
- Financial services revenue and operating earnings increased 12.1% and 10.3%, respectively, in Q2, mainly reflecting portfolio growth. Credit-loss provisions contributed to higher financial services expenses.
Segments and material changes
- Commercial & Industrial: Q2 segment sales rose 8.5% to $310.0; operating earnings rose 8.7% to $42.7. Six-month operating margin declined to 13.8% from 14.0%, with increased research and engineering costs and acquisition expenses among the pressures.
- Snap-on Tools: Q2 segment sales declined 0.7% to $413.8, while operating earnings rose 5.6% to $80.6 and margin improved to 19.5% from 18.3%. U.S. franchise sales decreased at a low-single-digit rate; international franchise sales increased at a double-digit rate.
- Repair Systems & Information: Q2 segment sales rose 14.5% to $338.1 and operating earnings rose 9.9% to $81.9. Margin fell to 24.2% from 25.2%, primarily reflecting acquisition-related expenses and sales mix. Acquisitions contributed materially to reported growth.
- Q2 operating earnings included $4.9 of unfavorable foreign currency effects. Other income/expense was a $1.9 expense versus $1.2 income a year earlier, including a Q2 net foreign-exchange loss of $2.0.
Cash, liquidity and debt
- At July 1, 2017, cash was $89.0, working capital was $960.3, total assets were $5,067.1 and total equity was $2,873.0. Working capital increased $65.8 from year-end 2016.
- Six-month operating cash flow was $319.5. Investing used $220.3, including $80.2 for acquisitions and $34.4 of capital expenditures; financing used $90.0. Cash increased $11.4 from year-end to $89.0.
- Total debt, including current maturities and notes payable, was $1,105.8; long-term debt was $755.6. Snap-on issued $300 of 3.25% notes due 2027 and repaid $150 of notes at maturity during the first half. The $250 of 4.25% notes due January 2018 was classified as current.
- No borrowings were outstanding under the $700 revolving credit facility. The company reported covenant ratios of 0.25 and 1.07 against respective limits of 0.60 and 3.50, and stated that it was in compliance with debt covenants. Management expected available cash, operating cash flow and borrowing capacity to fund anticipated needs, including repayment of the 2018 notes.
- Share repurchases totaled $122.5 for 745,000 shares in the first six months; dividends paid were $82.3. Remaining repurchase authorization was $142.4 at July 1.
Outlook, risks and unusual items
- Management expected continued progress in 2017 through growth in automotive repair and adjacent markets, additional geographies and critical industries. It forecast 2017 capital expenditures of $80–$90 and an effective tax rate comparable to the 2016 full-year rate. No specific revenue or earnings guidance was provided.
- Risks identified include foreign-exchange and interest-rate movements; economic weakness, including uncertainty related to the U.K.’s pending EU exit; competition, inflation and raw-material costs; execution of productivity initiatives; franchisee recruitment and performance; product innovation; acquisition integration; pension funding; cybersecurity; and potential operational disruption.
- Norbar was acquired in May 2017 for a preliminary cash purchase price of $72.4; purchase accounting remained preliminary. BTC was acquired in January for $9.2. The filing also discusses the 2016 Car-O-Liner acquisition and Sturtevant Richmont acquisition. Management said the acquisitions’ combined pro forma effects were not material.
- A $14.9 gain from settling a treasury lock was included in operating cash flow and was being amortized against interest expense over the 2027 notes’ term. Annual goodwill and indefinite-lived intangible-asset impairment testing found no impairment. Ordinary-course litigation was not expected by management to materially affect financial position, results or cash flows.
- Management reported effective disclosure controls. New controls were implemented as part of preparing to adopt revenue recognition Topic 606; adoption was expected at the start of fiscal 2018 using the modified retrospective approach, with no significant financial-statement impact anticipated.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request: the filing covers Q2 2017, not Q2 2016.
- Assess how much reported sales and earnings growth is organic versus acquisition-related, and whether acquired businesses sustain margins as purchase accounting is finalized.
- Monitor portfolio credit quality, provisions for finance-receivable losses, and the growth in finance receivables and inventories.
- Track the January 2018 $250 note maturity, refinancing or repayment plans, and covenant headroom.
- Compare actual capital spending, tax rate, cash generation, dividends and repurchases with management’s stated outlook and liquidity priorities.