Snap-on Incorporated — Form 10-Q Summary
Period clarification: The request identifies 2010 Q2, but the supplied filing is for the quarter ended July 2, 2011, with comparisons to the quarter ended July 3, 2010. This summary reflects the filing supplied.
Business context and reporting period
Snap-on sells tools, diagnostics, equipment and related products through its Commercial & Industrial, Snap-on Tools, and Repair Systems & Information groups, and also provides customer and franchisee financing through Financial Services. The filing reports the three- and six-month periods ended July 2, 2011; financial statements are unaudited.
Financial performance and position
- Second-quarter revenue: Net sales were $726.7 million, up 12.2% year over year; organic growth was 7.2% excluding favorable currency translation. Financial services revenue was $30.3 million, bringing total revenue to $757.0 million.
- Second-quarter earnings: Gross profit was $342.2 million, with a 47.1% gross margin versus 46.9%. Operating earnings were $134.3 million versus $80.7 million; this includes an $18.0 million pretax CIT arbitration settlement gain. Net earnings attributable to Snap-on were $78.0 million, or $1.33 diluted EPS, versus $45.3 million, or $0.78.
- First-half results: Net sales were $1,420.4 million, up 11.9% (8.6% organic). Gross margin improved to 47.4% from 46.6%. Operating earnings were $234.1 million versus $150.7 million, including the $18.0 million settlement gain. Net earnings attributable to Snap-on were $134.2 million, or $2.29 diluted EPS, versus $82.1 million, or $1.41.
- Cash flow: First-half operating cash flow was $14.2 million, down from $65.9 million. Investing cash outflow was $121.3 million, including $261.6 million of finance-receivable additions and $33.3 million of capital expenditures. Financing cash outflow was $48.7 million. Cash declined $154.0 million to $418.2 million.
- Liquidity and debt: Working capital was $964.9 million, up from $884.4 million at fiscal year-end. Total debt was $1,170.5 million, including $215.0 million current and $955.5 million long-term. The $500 million revolving facility was undrawn, and the company reported covenant compliance. Snap-on planned to repay $200 million of notes maturing August 15, 2011, using cash on hand.
- Other metrics: Total assets were $3,826.5 million and shareholders’ equity was $1,582.9 million. Inventories rose to $392.2 million from $329.4 million at year-end; inventory turns were 4.3 versus 4.7. Dividends declared were $0.32 per share for the quarter.
Changes versus comparable periods
- All three product groups reported higher second-quarter sales. Snap-on Tools had the strongest reported growth, with sales up 13.0% and segment operating earnings up 40.0%; Repair Systems & Information sales rose 13.9%, and Commercial & Industrial sales rose 8.1%.
- Core operating performance improved alongside higher sales, productivity and restructuring savings. Company gross and operating expense ratios improved year over year.
- Financial Services benefited from the expanding on-balance-sheet lending portfolio after Snap-on assumed most new originations following the 2009 end of its CIT joint venture. The $18.0 million CIT settlement materially boosted reported earnings.
- Operating cash flow declined despite higher earnings, largely reflecting the $89.8 million cash payment to CIT and investment in inventories and the financing portfolio. First-half capital expenditures also rose from $12.3 million to $33.3 million.
Outlook, commentary, risks and unusual items
- Management anticipated approximately $65 million of full-year 2011 capital expenditures, approximately $13 million of higher year-over-year pension expense, and a full-year effective tax rate of approximately 33.6%.
- The company settled its dispute with CIT on May 5, 2011: it recorded an $18.0 million pretax gain and paid CIT $89.8 million from amounts previously withheld. The settlement contributed $0.19 to second-quarter and first-half diluted EPS after tax.
- Snap-on expected to repay the August 2011 note maturity from cash on hand. It had begun discussions to renew a separate $100 million loan and servicing agreement due to terminate September 30, 2011.
- Management cited risks including weak conditions in parts of Southern Europe, foreign-exchange movements, inflation and raw-material pricing, interest-rate and credit risks, pension costs, execution of cost-reduction initiatives and facility changes, franchisee performance, loan-credit quality, and litigation or other contingencies. The Newmarket, Canada, tool-storage facility ceased production at the end of April; related restructuring actions continued.
- Management stated that ordinary-course legal matters were not expected to materially affect the company’s financial position, results or cash flows. Annual goodwill and indefinite-lived intangible impairment testing in the second quarter found no impairment.
Important facts for investors to verify
- Confirm the intended filing period: the supplied document is 2011 Q2, not 2010 Q2.
- Separate recurring operating and Financial Services performance from the $18.0 million one-time CIT settlement gain.
- Track operating cash conversion, inventory growth and cash needs from expanding finance receivables and scheduled debt repayments.
- Verify repayment of the $200 million August 2011 notes and renewal or replacement of the $100 million facility expiring September 30, 2011.
- Monitor credit quality, pension expense and contributions, and whether management’s 2011 capital expenditure and tax-rate outlooks were achieved.