Snap-on Incorporated — Form 10-Q Summary
Period clarification: The supplied filing is for the fiscal quarter ended October 2, 2010, and the nine months then ended—not 2009 Q3 as stated in the request metadata. Comparative periods ended October 3, 2009. Amounts are in millions except per-share data.
Business context and reporting period
Snap-on sells tools, diagnostics, equipment, software and related services through commercial and industrial, mobile tool distribution, and repair-shop channels. Its Financial Services segment finances product purchases and franchisees. The company realigned reportable segments in 2010 and restated prior-period segment data. The statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $653.1 | $581.8 | $1,922.3 | $1,744.4 |
| Gross profit / margin | $301.2 / 46.1% | $260.5 / 44.8% | $892.6 / 46.4% | $773.2 / 44.3% |
| Operating earnings | $83.8 | $48.7 | $234.5 | $183.3 |
| Net earnings attributable to Snap-on | $46.5 | $25.4 | $128.6 | $97.6 |
| Diluted EPS | $0.80 | $0.44 | $2.20 | $1.69 |
- Q3 sales rose 12.3%; excluding unfavorable currency translation, organic sales grew 13.4%. Nine-month sales increased 10.2%, or 9.0% organically.
- Q3 operating margin on total revenues was 12.5%, versus 8.3%; nine-month margin was 11.9%, versus 10.2%. Gross-margin improvement reflected higher sales, better manufacturing utilization and cost-reduction initiatives, partly offset by higher LIFO expense.
- For the first nine months, operating cash flow was $76.1, compared with $250.4 in 2009. Investing cash outflow was $226.1, including $374.5 of finance-receivable additions and $171.1 of collections. Financing cash outflow was $189.8. Cash fell to $359.9 from $699.4 at year-end 2009.
- At October 2, current assets were $1,531.9 and current liabilities $847.4; reported working capital was $684.5. Total debt was $930.6, comprising $218.3 current and $712.3 long-term, versus $1,066.8 at year-end. The $500 revolving facility was undrawn; the company reported covenant compliance.
- Net current and long-term contract and finance receivables increased $258.1 from year-end, largely as Snap-on retained more newly originated loans on its balance sheet. The finance-receivable loss provision was $11.5 for the nine months, versus $3.1.
Material changes versus the prior comparable period
- Q3 growth and margin gains lifted attributable earnings 83.1% year over year. For the nine months, attributable earnings rose 31.8%.
- Commercial & Industrial and Repair Systems & Information improved materially. Snap-on Tools Q3 operating earnings declined to $28.2 from $29.5, and margin fell to 10.9% from 12.6%, despite higher sales.
- Financial Services recorded Q3 operating earnings of $5.0 versus a $5.3 loss; for the nine months, earnings declined to $5.0 from $21.3. The year-over-year comparison reflects the shift after July 2009 from selling most new loans to CIT to retaining loans and recognizing interest over time.
- Nine-month operating cash flow weakened substantially amid increased receivables and inventory. Interest expense rose to $40.7 from $33.0, while cash dividends remained $0.90 per share for the nine-month period.
Outlook, commentary, risks and unusual items
- Management expected full-year 2010 restructuring costs of approximately $15, capital expenditures of about $45, higher year-over-year pension expense of approximately $16, and an effective tax rate near 33.6%. It planned continued strategic investment, including expansion in emerging markets.
- Management estimated approximately $300 of incremental 2010 cash requirements for SOC and said available cash, operating cash flow and credit facilities were adequate to meet anticipated needs. A $200 note maturity was due in August 2011.
- A major unresolved arbitration with CIT concerns alleged joint-venture underpayments: Snap-on alleged damages of approximately $115; CIT denied the claim and asserted claims exceeding $110, mostly relating to amounts withheld by Snap-on. The company had withheld $107.8 from CIT payments, recorded in other accrued liabilities. Management said the outcome could not be determined.
- Other risks cited include global economic and automotive-market weakness, credit-market conditions, financing needs and credit losses, foreign-exchange and interest-rate movements, pension costs, commodity prices, execution of cost reductions and franchise strategies, and litigation. Management reported no material impairment in its annual goodwill and indefinite-lived intangible testing.
- Snap-on reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the intended reporting period: this filing reports Q3 2010, not Q3 2009.
- Track the CIT arbitration, the withheld $107.8, and potential settlement or payment exposure.
- Assess SOC loan growth, funding requirements, receivable quality and loss allowances as the on-balance-sheet portfolio expands.
- Monitor cash conversion, working-capital needs, the August 2011 $200 debt maturity, and progress against stated 2010 outlook estimates.
- Evaluate whether operating-margin improvement persists, particularly given weaker Q3 Snap-on Tools margins and higher pension, incentive-compensation and stock-based costs.