Snap-on Incorporated — 2011 Form 10-K
Period clarification: The supplied filing is the annual report for the fiscal year ended December 31, 2011, not a 2010 Q4 filing. It also reports fourth-quarter 2011 results, compared with Q4 2010. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Snap-on designs, manufactures and sells tools, diagnostics, repair information and equipment to professional customers worldwide. Its reportable businesses are Commercial & Industrial, Snap-on Tools, Repair Systems & Information, and Financial Services. Fiscal 2011 and fiscal 2010 each comprised 52 weeks.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $2,854.2 | $2,619.2 |
| Financial services revenue | $124.3 | $62.3 |
| Gross profit / margin | $1,337.9 / 46.9% | $1,211.1 / 46.2% |
| Operating earnings | $475.1 | $331.4 |
| Net earnings attributable to Snap-on | $276.3 | $186.5 |
| Diluted EPS | $4.71 | $3.19 |
| Operating cash flow | $128.5 | $140.4 |
| Capital expenditures | $61.2 | $51.1 |
| Cash and cash equivalents at year end | $185.6 | $572.2 |
| Total debt at year end | $984.1 | $1,170.8 |
| Working capital at year end | $946.9 | $884.4 |
Net sales rose 9.0% (6.6% excluding favorable currency translation); gross margin improved 70 basis points. Operating margin on total revenues was 16.0%, versus 12.4%. Interest expense increased to $61.2 from $54.8. Cash declined mainly because of debt repayment, finance-portfolio growth, the CIT settlement payment, pension funding and higher inventory. Net cash used in investing activities was $219.6 and net cash used in financing activities was $293.7.
At year end, current liabilities were $583.8 and current assets $1,530.7. Long-term debt was $967.9. Snap-on had a $500 million revolving credit facility with no year-end borrowings and a separate receivables-backed facility of up to $200 million, also undrawn. The company reported covenant compliance.
Material changes versus the prior comparable period
- Snap-on’s net earnings attributable to the company increased 48.2%; diluted EPS rose from $3.19 to $4.71.
- Operating earnings increased 43.4%. The improvement included $76.5 of higher Financial Services earnings, of which $18.0 was a one-time pretax arbitration settlement gain from CIT.
- All three operating groups grew sales: Commercial & Industrial +7.4%, Snap-on Tools +10.9%, and Repair Systems & Information +8.7%. Snap-on Tools operating earnings grew 39.0%, supported by sales growth, improved utilization and cost initiatives.
- Financial Services revenue nearly doubled as Snap-on expanded its on-book lending portfolio after ending its CIT operating arrangement in 2009. The company originated $606.1 of financing in 2011, up 12.6%.
- Operating cash flow fell to $128.5 from $140.4 despite higher earnings, reflecting working-capital investment and the $89.8 cash payment to CIT. Finance and contract receivables increased as the company retained more originated loans.
- Total debt decreased, primarily following repayment of $200.0 of 6.25% notes at maturity; cash also fell substantially.
Fourth-quarter 2011 results
Q4 net sales were $736.6, up 5.7% year over year; organic sales increased 5.9%. Gross margin was 45.6%, versus 45.7%. Operating earnings were $125.9, up 29.9%, and net earnings attributable to Snap-on were $74.3, or $1.27 diluted EPS, versus $57.9, or $0.99, in Q4 2010. The filing attributes much of the operating-earnings increase to higher Financial Services earnings and operating leverage.
Outlook, management commentary, risks and unusual items
- Management identified vehicle repair, critical industries and emerging markets as 2012 growth opportunities, alongside continued franchisee support, product development and rapid continuous improvement. The filing provides no specific 2012 revenue or EPS guidance.
- Expected 2012 capital expenditures: $60–$70. The company estimated a 2012 effective tax rate of approximately 33.5%, and pension expense broadly comparable with 2011, excluding a planned $6–$8 pension-settlement charge associated with the Newmarket facility closure.
- Snap-on expected required 2012 pension contributions of $18.3 domestic and $12.6 foreign; additional discretionary domestic contributions remained possible.
- Key risks include weak or volatile economic conditions, particularly in Europe; currency movements; steel, energy and other input costs; customer and franchisee credit quality; financing-market access and leverage; pension funding and discount-rate changes; franchisee relationships; competition and product innovation; restructuring and supply-chain execution; and legal, regulatory, environmental and information-security matters.
- Unusual item: the CIT dispute was settled in May 2011. Snap-on recorded an $18.0 pretax gain and paid CIT $89.8 of the $107.8 previously withheld. Management said other ordinary-course legal matters were not expected to have a material consolidated impact. Goodwill and indefinite-lived intangible impairment testing resulted in no impairment in 2011.
Important facts for investors to verify
- Separate recurring Financial Services portfolio earnings from the $18.0 CIT settlement gain when assessing earnings growth.
- Review the cash-flow and funding implications of continued growth in on-book receivables, including credit losses, originations and collections.
- Confirm liquidity, debt maturities, covenant headroom and access to committed facilities; year-end cash was materially lower than in 2010.
- Assess pension-liability sensitivity to discount rates and asset returns, planned contributions, and the Newmarket-related settlement charge.
- Track segment margins and regional conditions, especially Commercial & Industrial weakness in southern Europe and the Q4 margin decline there.
- Compare actual 2012 results with the stated capital-spending, tax-rate and restructuring expectations; the filing gives no quantified sales or EPS forecast.