Snap-on has announced promising operating results for the first quarter of 2010.
The repair and diagnostic tool supplier posted sales for the quarter of $621.6 million, up $49.0 million, or 8.6%, from 2009 levels; excluding $24.4 million of foreign currency translation, organic sales increased 4.1%. All figures in U.S. dollars.
The company generated a gross profit of $287.6 million, an improvement to 46.3% of sales compared with 45.2% a year ago.
Operating earnings before financial services of $71.7 million increased $17.4 million, or 32.0%, from prior-year levels and, as a percentage of sales, improved to 11.6% compared with 9.5% a year ago.
Net earnings of $36.8 million, or $0.63 per diluted share, increased from $34.8 million, or $0.60 per diluted share, a year ago, despite $8.6 million, or $0.15 per diluted share, of lower year-over-year financial services net earnings due to the July 2009 termination of the joint venture with CIT Group Inc.
“We are encouraged by Snap-on’s first quarter results and by some of the performance trends achieved during the quarter,” said Nick Pinchuk, Snap-on chairman and chief executive officer. “The higher sales combined with a 210 basis point improvement in operating earnings margin before financial services are evidence of the benefits being realized through our steadfast commitment to the Snap-on Value Creation Processes. We believe that this commitment, coupled with continuing progress on our strategic initiatives to enhance the franchisee network, to expand in the auto repair garage, to extend in critical industries and to build in emerging markets, will put Snap-on in a strong position as the global economy begins to recover. Overall, the first quarter reflects significant effort and achievement across the company. In that regard, I thank our franchisees and our associates worldwide for their continued contributions and commitment.”
Business Unit Results
Commercial & Industrial Group segment sales of $297.5 million in the first quarter increased $37.7 million, or 14.5%, from 2009 levels. Excluding $12.1 million of foreign currency translation, organic sales increased $25.6 million, or 9.4%, reflecting continued growth in emerging markets, higher volumes of equipment and increased sales to industrial customers.
Operating earnings of $30.4 million in the quarter increased $12.9 million from 2009 levels primarily due to the higher sales, savings from ongoing efficiency and productivity (collectively, “Rapid Continuous Improvement” or “RCI”) initiatives, and benefits from prior restructuring programs. As a percentage of sales, operating earnings of 10.2% in the first quarter of 2010 compared favourably with 6.7% a year ago.
Snap-on Tools Group segment sales of $264.0 million in the quarter increased $21.6 million, or 8.9%, from 2009 levels; excluding $10.7 million of foreign currency translation, organic sales increased 4.3%.
Operating earnings of $28.2 million in the quarter increased $7.5 million from 2009 levels primarily due to higher sales and favorauble currency effects, partially offset by increased inventory-related and other expenses. As a percentage of sales, operating earnings of 10.7% in the first quarter of 2010 compared favourably with 8.5% a year ago.
Diagnostics & Information Group segment sales of $135.1 million in the quarter increased $2.6 million, or 2.0%, from 2009 levels; excluding $2.0 million of foreign currency translation, organic sales increased slightly. The year-over-year sales increase is primarily due to higher sales of diagnostics and information products and increased facilitation program sales, partially offset by anticipated lower electronic parts catalogue sales to original equipment manufacturer (OEM) dealerships.
Operating earnings of $30.8 million in the quarter increased $5.6 million from 2009 levels primarily due to contributions from a more favourable sales mix of higher-margin diagnostics and software products, and savings from ongoing RCI and restructuring initiatives. As a percentage of sales, operating earnings in the quarter improved to 22.8% as compared to 19.0% last year.
Financial Services revenue of $9.7 million in the quarter declined $10.3 million from first quarter 2009 levels, but improved sequentially from $6.7 million in the fourth quarter of 2009. The first quarter 2010 operating loss of $1.7 million was down from operating income of $10.0 million last year but improved sequentially from an operating loss of $3.8 million in the fourth quarter of 2009.
As previously communicated, on July 16, 2009, Snap-on terminated the financial services operating agreement that it had with CIT Group Inc. (CIT) relating to the parties’ Snap-on Credit LLC (SOC) joint venture. The change from recognizing gains on contracts sold to CIT, to recognizing the interest yield on the on-book finance portfolio, was a primary factor in the year-over-year decline in both financial services revenues and operating income. Snap-on expects that operating income from financial services, which is before interest expense, will improve as the on-book finance portfolio grows. Snap-on continues to expect that the full year incremental cash requirements for SOC in 2010 will approximate $300 million.
Corporate expenses of $17.7 m
illion in the first quarter increased $8.6 million from prior-year levels primarily due to $5.0 million of expected higher pension expense, largely due to lower than projected asset returns in previous years related to the U.S. pension plan, and $3.5 million of higher stock-based (mark to market) incentive and other compensation expense.
Snap-on recorded $3.2 million in restructuring costs during the first quarter of 2010 and continues to expect that it will incur full-year 2010 restructuring costs of approximately $18 million to $22 million. The company believes that it will continue to realize further benefits in 2010 from its RCI, sourcing and other cost reduction initiatives. Snap-on also anticipates continuing with its planned strategic investments, including expansion in emerging growth markets. The company continues to anticipate capital expenditures in 2010 to be in a range of $55 million to $60 million, of which $5.7 million was incurred in the first quarter. The company continues to expect to incur $5 million per quarter of higher year-over year pension expense in 2010. For full year 2010, the anticipated effective income tax rate will approximate 34.5%. Snap-on is encouraged by its first quarter 2010 results and with trends in certain markets and businesses; however, challenges remain due to ongoing difficulties in the current global economy. As a result, the company intends to continue its efforts of striking a balance between investing in and capturing growth opportunities with the need for cost reduction actions beyond those already implemented.