Snap-on reports sales up in second quarter over first quarter

Jan. 1, 2020
Snap-on Inc. reports sales were up during the second quarter of 2009 from the first quarter, as the company last week reported operating results for that quarter. Sales of $590 million were up 3.0 percent sequentially from first quarter levels, but d

Snap-on Inc. reports sales were up during the second quarter of 2009 from the first quarter, as the company last week reported operating results for that quarter.

Sales of $590 million were up 3.0 percent sequentially from first quarter levels, but down 23.0 percent compared to last year. Without the effects of currency, sales were up 0.8 percent sequentially, but down 16.4 percent year over year.

Operating earnings of $70.3 million increased $6.0 million, or 9.3 percent, over first quarter 2009 on essentially flat sales levels as improved operating performance and higher financial services income were partially offset by $6.6 million of higher restructuring costs. As a percentage of revenues, operating earnings improved to 11.4 percent from 10.9 percent in the first quarter. Restructuring costs in the second quarter of $8.6 million reduced the operating margin by approximately 140 basis points. Operating earnings in the second quarter of 2008 were $111.7 million on significantly higher sales volumes.

Cash flow from operations of $155.6 million increased significantly from $14.7 million in the first quarter of 2009 and $80.5 million in the second quarter of 2008 primarily due to working capital improvements principally as a result of increased emphasis on inventory reduction, the company reports.

Net earnings attributable to Snap-on of $37.4 million, or $0.65 per diluted share, increased $2.6 million, or $0.05 per diluted share, over first quarter 2009 levels. Net earnings attributable to Snap-on in the second quarter of 2008 were $66.9 million, or $1.15 per diluted share.

“There were a number of encouraging signs in the second quarter, particularly the sequential improvements for our Snap-on Tools and Diagnostics & Information businesses,” says Nick Pinchuk, Snap-on chairman, president and CEO. “The deepening of the recession across most European economies and the spreading of economic weakness to other industries had a more severe impact on us in the second quarter, particularly for the Commercial & Industrial Group. Nevertheless, sales and operating income for the overall corporation did improve sequentially from the first quarter.

"As we said previously, we continue to drive cost reduction initiatives, and in the second quarter took a number of actions resulting in $8.6 million of restructuring costs, with $6.7 million related to the Commercial & Industrial Group," he adds. "In addition, we continue our investment in the selected strategic growth areas that we believe will be decisive in our future. As a result, we believe Snap-on is making significant quarter-by-quarter strategic progress and will emerge from this downturn in a stronger position. Going forward, we will continue to aggressively manage the balance between investing in growth opportunities and acting on rapid continuous improvement and our other value creation initiatives. Finally, again this quarter, I want to extend my thanks to our franchisees and associates worldwide for their ongoing dedication and contributions.”

Commercial & Industrial Group segment sales of $256.4 million in the quarter declined $131.3 million, or 33.9 percent, from 2008 levels. Excluding $33.2 million of unfavorable currency translation, organic sales declined 25.3 percent due to the continued economic downturn.

Operating earnings of $0.1 million in the quarter declined $49.2 million from 2008 levels and declined sequentially from $18.0 million in the first quarter. Operating earnings include $6.7 million of restructuring costs, as compared to $0.4 million last year and $1.3 million in the first quarter of 2009. In addition, foreign currency effects lowered second quarter 2009 operating earnings by $2.1 million from prior-year levels; foreign currency effects compared to first quarter levels were minimal.

Operating earnings in the second quarter of 2009 were significantly impacted by the company’s European-based tools business where lower sales levels, continued distributor inventory de-stocking, and further reduction of production levels to draw down inventories had an adverse effect on manufacturing performance. As a result of these factors, and combined with $4.4 million of restructuring spending in the quarter, the company’s European-based tools business accounted for the majority of the decline in operating earnings as compared to both last year and the first quarter of 2009. The remainder of the declines in segment operating earnings was principally due to lower sales and higher restructuring costs across the other businesses.

Snap-on Tools Group segment sales of $258.3 million in the quarter declined $34.5 million, or 11.8 percent, from 2008 levels. Excluding $12.4 million of unfavorable currency translation, organic sales declined 7.5 percent. Organic sales in the second quarter were up 4.5 percent over first quarter 2009 levels.

Operating earnings of $28.0 million in the quarter declined $7.3 million from 2008 levels primarily due to the lower sales volumes, the effects of excess manufacturing costs associated with lower demand and inventory reduction, and unfavorable currency movements. The stronger U.S. dollar decreased international margins on U.S. sourced product by $4.3 million and currency translation further reduced operating earnings by $2.2 million. These declines were partially offset by $9.6 million of savings from ongoing efficiency and productivity (collectively, “Rapid Continuous Improvement” or “RCI”) initiatives and other cost reduction activities. As compared to first quarter levels, operating earnings in the second quarter of 2009 increased $6.9 million.

Diagnostics & Information Group segment sales of $137.0 million in the quarter decreased $27.8 million, or 16.9 percent, from 2008 levels. Excluding $7.2 million of unfavorable currency translation, organic sales declined 12.5 percent primarily due to lower essential tool and facilitation program sales to Original Equipment Manufacturer (OEM) dealerships. Compared to first quarter 2009, organic sales increased sequentially 2.3 percent primarily due to higher sales of diagnostics products worldwide.

Operating earnings of $34.0 million in the quarter increased $3.0 million, or 9.7 percent, over 2008 levels despite the lower sales primarily as a result of a more favorable sales mix of higher-margin diagnostics and software products and contributions from RCI and other cost reduction initiatives. As compared to first quarter levels, operating earnings in the second quarter of 2009 increased $8.3 million.

Financial Services operating income of $16.6 million in the quarter increased $5.8 million from prior-year levels as a result of contributions from lower market discount rates and higher levels of originations.

Corporate expenses of $8.4 million in the quarter declined $6.3 million from prior-year levels primarily due to lower performance-based incentive compensation and other expenses, partially offset by $3.0 million of higher expected pension expense.

Outlook
The difficulties posed by the global economy continued in the second quarter of 2009, further challenging Snap-on’s sales. In the near term, Snap-on anticipates no significant change in the economic climate.

Snap-on is continuously responding to the global macroeconomic challenges by furthering its RCI and cost reduction initiatives. In the first six months of 2009, Snap-on incurred $10.6 million of restructuring costs, including $8.6 million in the second quarter, and presently anticipates that full-year 2009 restructuring costs will be in a range of $20 million to $24 million, up from the previously communicated range of $14 million to $18 million. Snap-on is also proceeding with several of its planned growth investments, including further expansion of its manufacturing capacity in China and in Eastern Europe, both of which are proceeding on schedule. Snap-on continues to expect that full-year capital expenditures will be in a range of $60 million to $70 million.

On July 16, 2009, Snap-on terminated the financial services operating agreement that it had with The CIT Group, Inc. (CIT) relating to the parties’ Snap-on Credit LLC (SOC) joint venture. SOC will continue to service the portfolio of contracts owned by CIT and Snap-on will provide financing for new contract originations to franchisees and their customers on a prospective basis. Snap-on will incur additional interest cost associated with the funding of the new finance receivables.

The new finance receivables will be included on the company’s balance sheet, and Snap-on will record the interest yield on these receivables over the life of the contracts as financial services revenue. Previously, the company recorded gains on contracts sold to CIT as financial services revenue. As a result of this change in reporting financial services revenue, Snap-on anticipates that reported financial services revenue and operating income will decline during the transition period as the company builds its portfolio of receivables. The company presently expects that operating income from financial services, which is before interest expense and which totaled $16.6 million in the second quarter of 2009, will be a loss in a range of $8 million to $10 million in each of the third and fourth quarters of 2009.

Snap-on estimates that its incremental financing needs for SOC will approximate $450 million over the next 12 months. Snap-on believes that it has sufficient available cash on hand, cash flow from operating activities and available credit facilities, including access to public debt markets, to fund the financing needs of SOC.

Snap-on continues to expect approximately $3.0 million per quarter of higher year-over-year pension expense in 2009 due to declines in pension asset values. For the first six months of 2009, foreign currency effects reduced year-over-year operating earnings by $21.3 million, of which $10.3 million occurred in the second quarter. At current exchange rates, Snap-on expects a continued, but somewhat lessened, impact on its third quarter earnings comparisons.

As a result of the above, Snap-on continues to expect that third quarter sales and earnings will be down year over year. The company anticipates that its second-half 2009 effective income tax rate on earnings attributable to Snap-on will approximate year-to-date 2009 levels.

For more information, visit www.snapon.com.

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