Snap-on Profits Plummet

Snap-on Incorporated (SNA - Analyst Report) reported dismal second quarter 2009 results due to the turbulent European economy and spreading impact of the global recession.

EPS for the reported quarter plunged 43.5% year over year to 65 cents, weaker than the Zacks Consensus Estimate of 73 cents. Net sales (excluding financial services revenue) declined 23% to $590 million; excluding foreign currency translation, it plummeted 16.4%.  Total revenue fell 21.5% to $615.6 million.

However, on a sequential basis, EPS increased 8.3%, whereas net sales were up marginally by 0.8% (excluding foreign currency translation), showing some signs of improvement. Operating earnings fell 37.1% year over year to $70.3 million, whereas on a sequential basis operating earnings increased 9.3% driven by cost reduction initiatives.

Snap-on expects third quarter 2009 sales and earnings to decline year over year.

Commercial & Industrial Group segment sales fell 33.9% to $256.4 million; excluding foreign currency translation, sales plummeted 25.3%. Operating earnings decreased $49.2 million from the prior year quarter to $0.1 million. The decrease was due to lower sales of professional tools in Europe and worldwide, and decline in production to reduce inventories, which negatively impacted manufacturing activities.

Snap-on Tools Group segment sales declined 11.8% to $258.3 million in the quarter; excluding foreign currency translation, sales fell 7.5%. Operating earnings fell 20.7% to $28 million due to a decline in sales, a rise in manufacturing costs and adverse foreign currency fluctuations.

Diagnostics & Information Group segment sales dropped 16.9% to $137 million; excluding foreign currency translation, sales fell 12.5% due to fall in sales to Original Equipment Manufacturer (OEM) dealerships. Despite lower sales, operating earnings increased 9.7% to $34 million driven by sales of higher-margin diagnostics and software products, as well as cost reduction initiatives.

Financial Services revenue increased 40% to $25.6 million, whereas operating income rose 53.7% to $16.6 million. However, management expects operating losses of $8 million to $10 million in the third and fourth quarters of 2009 due to termination of a joint venture with commercial lender CIT Group, which has been facing a liquidity crunch and debt retirement.

Despite the global recession, Snap-on is continuing with its investment opportunities, including the expansion of its manufacturing capacity in China and Eastern Europe. Capital expenditures for full-year 2009 are expected to be between $60 million and $70 million.

We maintain a neutral Hold rating on the stock.