Snap-on Incorporated — Form 10-Q Summary
Period clarification: The supplied filing is for the fiscal third quarter ended October 1, 2011, with comparisons to the quarter ended October 2, 2010. This does not match the request metadata of “2010 Q3.” Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Snap-on sells tools, diagnostics, equipment, software and related services through its Commercial & Industrial, Snap-on Tools and Repair Systems & Information groups. Financial Services provides financing to technicians, franchisees and other customers. The filing reports unaudited results for the three and nine months ended October 1, 2011.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $697.2 | $653.1 | $2,117.6 | $1,922.3 |
| Gross profit / margin | $329.3 / 47.2% | $301.2 / 46.1% | $1,002.1 / 47.3% | $892.6 / 46.4% |
| Operating earnings | $115.1 | $83.8 | $349.2 | $234.5 |
| Net earnings attributable to Snap-on | $67.8 | $46.5 | $202.0 | $128.6 |
| Diluted EPS | $1.16 | $0.80 | $3.44 | $2.20 |
- Q3 sales increased 6.8%; excluding $19.6 of favorable currency translation, organic sales grew 3.6%. Nine-month sales rose 10.2%; organic growth excluding $58.7 of favorable currency effects was 6.9%.
- Q3 gross margin improved 110 basis points; nine-month gross margin improved 90 basis points. Management cited sales growth, productivity and manufacturing utilization, and ongoing Rapid Continuous Improvement savings.
- Financial Services revenue was $32.7 in Q3 and $88.8 year to date. Its operating earnings were $20.8 and $68.8, respectively; the nine-month figure includes an $18.0 pretax CIT arbitration settlement gain. Excluding that gain, nine-month Financial Services operating earnings were $50.8.
- Nine-month interest expense was $47.7, up from $40.7. The effective tax rate attributable to Snap-on was 33.0% for the first nine months, versus 33.3% in 2010.
- Cash from operations was $56.2 for the first nine months, versus $76.1 in 2010. Investing activities used $170.2 and financing activities used $271.6. Capital expenditures were $46.6.
- Cash and cash equivalents were $185.7 at October 1, down $386.5 from fiscal year-end. Working capital was $953.9, up from $884.4 at year-end.
- Total debt was $981.9, including $13.9 of current maturities and $968.0 of long-term debt. Shareholders’ equity was $1,574.2. The company repaid $200.0 of notes at maturity during the period.
- Dividends declared were $0.32 per share in Q3 and $0.96 per share year to date. Snap-on repurchased 628,000 shares for $37.4 during the first nine months.
Material changes versus the prior comparable period
- Growth in sales and improved margins supported higher earnings. Each of the three operating groups reported higher nine-month sales and operating earnings; Q3 Commercial & Industrial operating earnings declined 3.3% to $29.6 despite higher sales.
- Financial Services revenue and earnings increased substantially as Snap-on retained and funded more loans originated by Snap-on Credit after ending its CIT joint venture in 2009. The nine-month comparison also includes the one-time $18.0 settlement gain.
- Cash fell primarily because of the $200.0 debt repayment, growth in newly originated finance receivables, the $89.8 cash payment to CIT under the settlement, and higher inventories. Inventories increased $70.3 from year-end to $399.7.
- Operating cash flow decreased $19.9 year over year. Management attributed this chiefly to returning $89.8 of cash previously withheld from CIT, partly offset by higher earnings.
- Pension liabilities increased to $275.3 from $246.1 at year-end; management cited higher pension expense, largely associated with amortization of prior investment losses.
Outlook, commentary and risks
- Management expected 2011 capital expenditures of approximately $65, higher year-over-year pension expense of approximately $13, and a full-year effective tax rate of approximately 33.0%. The filing provides no specific revenue or EPS forecast.
- Snap-on said available cash, operating cash flow and borrowing sources were expected to cover anticipated needs, including working capital, finance originations, capital spending, restructuring, pensions, dividends and potential repurchases or acquisitions.
- The $500 revolving credit facility, with no balance outstanding, was due to terminate August 10, 2012; discussions to renew it had begun. A separate receivables-backed facility was amended to provide commitments of up to $200, subject to borrowing-base limits, and no amount was outstanding at quarter-end. The company reported compliance with debt covenants.
- Risks identified include uncertain global economic conditions, particularly Southern Europe; currency and interest-rate movements; inflation and raw-material costs; credit losses and potential additional financing needs for Snap-on Credit; execution of cost-reduction and restructuring initiatives; franchisee and product execution; and litigation or other contingencies.
- The CIT dispute was settled May 5, 2011: Snap-on recognized the $18.0 pretax gain and paid CIT $89.8, the amount withheld less the settlement. Management said ordinary-course legal matters were not expected to materially affect financial position, results or cash flows.
- Q3 included $2.9 of exit and disposal costs; nine-month costs were $7.8. Actions included the Newmarket, Canada facility closure and European cost optimization. Management reported no goodwill or indefinite-lived intangible impairment in its 2011 annual test.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers Q3 2011, not Q3 2010.
- Assess earnings quality by separating the $18.0 pretax CIT settlement gain from recurring Financial Services and consolidated performance.
- Track cash conversion and working-capital demands, especially finance receivable growth, inventory levels and cash balances following debt repayment and the CIT payment.
- Monitor renewal of the $500 revolving credit facility before its August 2012 termination and continued covenant compliance.
- Review credit quality trends: nonperforming finance receivables were $10.4 at October 1, compared with $7.4 at year-end; nonperforming contract receivables were $0.8.
- Compare actual 2011 capital spending, pension expense and tax rate with management’s stated outlook.