Snap-on Announces First Quarter 2020 Results

Snap-on Incorporated (NYSE: SNA), a leading global innovator, manufacturer and marketer of tools, equipment, diagnostics, repair information and systems solutions for professional users performing critical tasks, today announced operating results for the first quarter of 2020.

  • Net sales of $852.2 million in the first quarter of 2020 compared to $921.7 million in 2019, reflecting a $62.7 million, or 6.9%, organic sales decline and $10.3 million of unfavorable foreign currency translation, partially offset by $3.5 million of acquisition-related sales. The lower sales volume primarily reflects the impact of economic uncertainty associated with the COVID-19 pandemic.
  • Operating earnings before financial services for the quarter of $138.9 million, or 16.3% of sales, including $7.5 million of exit and disposal costs (“restructuring charges”), primarily related to actions in Europe, and $3.3 million of unfavorable foreign currency effects, compared to $187.4 million, or 20.3% of sales last year. In 2019, operating earnings before financial services included an $11.6 million benefit from a legal settlement (the “legal settlement”). Excluding the restructuring charges in the first quarter of 2020 and the legal settlement in 2019, operating earnings before financial services, as adjusted, of $146.4 million decreased $29.4 million, or 16.7%, from $175.8 million in 2019. As a percentages of sales, operating earnings before financial services, as adjusted, of 17.2% compared to 19.1% last year.
  • Financial services revenue in the quarter of $85.9 million increased $0.3 million from 2019 levels; financial services operating earnings of $56.9 million compared to $62.1 million last year. Under the recently adopted credit loss standard, financial services operating earnings in 2020 include $2.6 million of higher credit reserve requirements as a result of global economic uncertainty.
  • Consolidated operating earnings for the quarter of $195.8 million, including $7.5 million of restructuring charges, $2.6 million of higher credit reserve requirements and $3.5 million of unfavorable currency effects, compared to $249.5 million last year, which included an $11.6 million benefit from the legal settlement. As a percentage of revenues (net sales plus financial services revenue), consolidated operating earnings were 20.9% and 24.8% in the first quarters of 2020 and 2019, respectively. Excluding the restructuring charges in 2020 and the legal settlement in 2019, consolidated operating earnings, as adjusted, of $203.3 million decreased $34.6 million, or 14.5%, from $237.9 million in 2019. As a percentage of revenues, consolidated operating earnings, as adjusted, of 21.7% compared to 23.6% last year.
  • The first quarter effective income tax rate was 24.2% in 2020 and 24.3% in 2019. The effective income tax rates in both periods were increased by 10 basis points, from the restructuring charges in 2020 and the legal settlement in 2019.
  • Reported net earnings in the first quarter of 2020 of $137.2 million, or $2.49 per diluted share, compared to $177.9 million, or $3.16 per diluted share, a year ago. Excluding the restructuring charges in 2020 and the legal settlement in 2019, net earnings, as adjusted, were $143.2 million, or $2.60 per diluted share, in 2020, and $169.2 million, or $3.01 per diluted share, last year.

See “Non-GAAP Measures” below for a definition of, and further explanation about, organic sales and measures, as adjusted, excluding restructuring charges in 2020 and the legal settlement in 2019.

At the beginning of fiscal 2020, Snap-on adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which required the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The adoption did not have a significant impact on the company’s consolidated financial statements. Among the changes, the adoption resulted in an increase in the allowance for credit losses in the Condensed Consolidated Balance Sheets of $8.1 million, but did not have any impact on the Condensed Consolidated Statements of Earnings.

“As a result of the global impact of COVID-19, particularly near the end of the period, the worsening economic conditions impacted our sales and earnings during the first quarter,” said Nick Pinchuk, Snap-on chairman and chief executive officer. “During these challenging times, as we prioritize the health and safety of our associates, franchisees, customers, and communities, we continue to support essential activities and serve serious professionals engaged in performing the critical tasks that underpin and advance our society. Furthermore, we will continue to utilize our Snap-on Value Creation Processes, as we believe these principles will help guide us through an uncertain future in a rapidly changing environment, as they have in the past. Again this quarter, but especially in this time of turbulence, I want to extend my thanks to our franchisees and associates worldwide for their significant contributions, unfailing dedication, and extraordinary resilience.”

Impact of COVID-19

The challenges posed by the COVID-19 pandemic on the global economy increased significantly as the first quarter progressed, impacting Snap-on’s sales volumes in most geographies and across a variety of customers, including those in automotive repair. In addition, under the recently adopted ASU No. 2016-13, the impact of economic uncertainty caused by COVID-19 led to an increase of $2.6 million in the company’s credit reserve requirements for its financial services portfolio. COVID-19 has caused disruption and volatility in the global capital markets, and has authored an economic slowdown. In response to COVID-19, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. Although the company’s operations have been deemed essential and Snap-on is following the COVID-19 guidelines from the Centers for Disease Control (CDC) concerning the health and safety of the company’s personnel, these measures have resulted in attenuating activity, and in some cases, required temporary closures of certain facilities, among other impacts. The duration of these measures is unknown, may be extended and additional measures may be imposed.

Segment Results

Commercial & Industrial Group segment net sales of $299.9 million in the quarter compared to $322.5 million last year, reflecting an $18.0 million, or 5.7%, organic sales decline and $5.3 million of unfavorable foreign currency translation, partially offset by $0.7 million of acquisition-related sales. The organic decrease primarily reflects lower sales in the segment’s Asia Pacific operations and European-based hand tools business, partially offset by higher sales in the segment’s power tools operations.

Operating earnings of $31.5 million in the period, including $4.4 million of restructuring costs and $1.2 million of unfavorable foreign currency effects, compared to $46.5 million in 2019, while the operating margin (operating earnings as a percentage of segment net sales) of 10.5%, including 150 basis points (100 basis points “bps” equals 1.0 percent) of costs from restructuring actions and 20 bps of unfavorable foreign currency effects, compared to 14.4% a year ago.

Snap-on Tools Group segment net sales of $375.9 million in the quarter compared to $410.2 million last year, reflecting a $31.8 million, or 7.8%, organic sales decline and $2.5 million of unfavorable foreign currency translation. The organic sales decrease includes lower sales in both the U.S. and international franchise operations.

Operating earnings of $48.6 million in the period, including $1.4 million of unfavorable foreign currency effects, compared to $67.2 million in 2019, while the operating margin of 12.9%, including 30 bps of unfavorable foreign currency effects, compared to 16.4% a year ago.

Repair Systems & Information Group segment net sales of $314.6 million in the quarter compared to $327.9 million last year, reflecting a $12.9 million, or 4.0%, organic sales decrease and $3.2 million of unfavorable foreign currency translation, partially offset by $2.8 million of acquisition-related sales. The organic decline includes decreased sales to OEM dealerships and lower sales of undercar equipment, partially offset by increased sales of diagnostic and repair information products to independent repair shop owners and managers.

Operating earnings of $77.3 million in the period, including $3.1 million of restructuring costs and $0.7 million of unfavorable foreign currency effects, decreased $6.3 million from 2019 levels, and the operating margin of 24.6%, including 100 bps of costs from restructuring actions, compared to 25.5% last year.

Financial Services operating earnings of $56.9 million on revenue of $85.9 million in the quarter compared to operating earnings of $62.1 million on revenue of $85.6 million a year ago. In the first quarter of 2020, financial services operating earnings include $2.6 million of higher provisions for credit losses related to the impact of economic uncertainty associated with COVID-19. Originations of $255.6 million in the first quarter increased $3.1 million, or 1.2%, from 2019 levels.

Corporate expenses of $18.5 million in the quarter compared to $9.9 million last year, which included an $11.6 million benefit from the legal settlement.

Outlook

COVID-19 has spread across the globe during 2020 and is impacting economic activity worldwide. In the near term, Snap-on anticipates no improvement in the macroeconomic environment and, as a result, expects sales and credit originations in the second quarter of 2020 to be down year over year. Snap-on does not, as a general practice, furnish quarterly sales or earnings projections. However, in light of actions imposed by national and local governments to contain the spread of COVID-19, the company believes that its second quarter 2020 sales and earnings will be lower than reported second quarter 2019 amounts.

Snap-on is responding to the global macroeconomic challenges by deepening its Rapid Continuous Improvement (RCI), sourcing and other cost reduction initiatives. Snap-on recorded $7.5 million of costs related to restructuring actions, primarily in Europe, in the first quarter of 2020. Snap-on will continue to manage its cash flows and balance its capital allocation priorities, including investments and the need for further cost reduction actions; the current economic uncertainty makes it difficult to presently predict this balance as the company continually adjusts to the changing business environment. Snap-on expects that capital expenditures in 2020 will be in a range of $70 million to $80 million, of which $17.2 million was incurred in the first quarter.

Despite near term uncertainty, Snap-on expects to maintain focus on its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive repair arena and developing and expanding its professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including extending in critical industries, where the cost and penalties for failure can be high.

Snap-on currently anticipates that its full year 2020 effective income tax rate will be in the range of 23% to 25%.

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