Snap-On (NYSE: SNA) reported Q1 EPS of $2.60, $0.10 worse than the analyst estimate of $2.70. Revenue for the quarter came in at $852.2 million versus the consensus estimate of $877.69 million.

• 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.

“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.”

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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