KENOSHA, WI — Snap-on’s net earnings for the first quarter of 2006 increased 23.5 percent to $22.1 million from $17.9 million a year ago. Diluted earnings per share were 37 cents this year compared with 31 cents a year ago. Operating earnings increased 14.9 percent to $39.4 million from $34.3 million in the prior year. The operating margin on total revenues improved to 6.5 percent from 5.6 percent a year ago. Net sales were $593.5 million in the first quarter of 2006 compared to $598.7 million in the prior year. Sales increased by $9.8 million, or 1.6 percent, due to higher volume and pricing, which was more than offset by $15 million of currency translation.
“Our first-quarter performance demonstrates that Snap-on associates are executing on the initiatives announced earlier this year to improve customer satisfaction, strengthen our brands and operations, push savings to the bottom line and grow financial returns,” said Jack Michaels, Snap-on chairman, president and chief executive officer. “We are making progress against our strategic priorities and see substantial long-term opportunity for profitable growth.”
Snap-on Tools Group (formerly the Snap-on Dealer Group) operating earnings were $18.2 million on segment sales of $248.7 million in the first quarter of 2006, compared with $18.1 million of operating earnings on $255.8 million of segment sales in the first quarter of 2005.
Operating earnings, as a percentage of sales, increased to 7.3 percent in the first quarter of 2006 compared with 7.1 percent in 2005. Savings and enhanced productivity from rapid continuous improvement actions, higher selling prices and a favorable product mix more than offset the lower sales volume and higher planned costs associated with efforts to improve U.S. manufacturing flexibility. Operating earnings in 2006 were also impacted by $4.5 million of higher year-over-year production and material costs, including steel, and $2.3 million of higher promotional costs, including an extensive update of the Snap-on catalog. Operating earnings in the first quarter of 2005 included $3 million of costs related to the termination of a supplier relationship.
Sales in the first quarter of 2006 decreased by $7.1 million year over year, including $2.9 million from unfavorable currency translation.
Sales in North America were down 1.8 percent year over year. A 1.5 percent increase in Snap-on’s U.S. sales per franchisee was more than offset by a 2.5 percent reduction in the number of U.S. franchisees during the quarter. This decrease in franchisees was anticipated as a consequence of the strategic initiatives being implemented in 2006 to improve the franchise system.
Commercial and Industrial Group operating earnings were $23.1 million on segment sales of $287.2 million in the first quarter of 2006 compared with operating earnings of $11 million on $293.8 million of segment sales in the first quarter of 2005.
Operating earnings as a percentage of sales increased to 8 percent in the first quarter of 2006 compared with 3.7 percent in 2005. The significant increase in year-over-year operating earnings reflects the impact of substantial cost reductions, including $8.4 million from on-going rapid continuous improvement initiatives, and consolidation and other strategic efforts to increase production and sourced materials from lower-cost regions and facilities. Improved product sales mix, as well as benefits from higher year-over-year selling prices, more than offset planned spending to expand our sales presence in emerging growth markets. The profitability of the worldwide equipment business demonstrated substantial year-over-year earnings growth, reflecting its continuing cost improvement efforts and technology-driven sales gains in its wheel service product lines.
First-quarter 2006 sales growth in emerging markets and higher sales of hand tools for industrial applications were more than offset by $10.8 million of unfavorable currency translation. Sales volume of worldwide vehicle-service equipment was up slightly year over year.
Diagnostics and Information Group operating earnings were $10.3 million on segment sales of $119.2 million for the first quarter of 2006 compared with $9.3 million of operating earnings on $114.4 million of segment sales in the first quarter of 2005.
Operating earnings as a percentage of sales increased to 8.6 percent in the first quarter of 2006 compared with 8.1 percent in 2005. The benefit of higher sales and improved productivity from rapid continuous improvement initiatives led to the increased earnings and a higher operating margin year over year.
Sales increases of $6.6 million year over year, largely due to higher OEM facilitation actions and increased sales of Mitchell1(TM) information products, were partially offset by $1.8 million of unfavorable currency translation.
Financial Services operating earnings were $2 million on $11.2 million of revenue in the first quarter of 2006 compared with $4.3 million of operating earnings on $14.1 million of revenue in the first quarter of 2005. The decrease in operating earnings primarily reflects the impact of lower net interest spreads, partially offset by higher originations.
Corporate general expenses were $14.2 million in the first quarter of 2006 compared with $8.4 million a year ago. Increased expenses in 2006 include $5.3 million of higher insurance, health care and other costs. Higher expenses were also incurred in 2006 related to performance compensation and adjustments on liability-based awards, including $2 million from the adoption of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 123(R) “Share-Based Payment.”
Cash flow from operating activities improved to $27.5 million in the 2006 first quarter compared with $19.3 million for the year-ago period. This cash flow was used to fund $10.7 million of capital expenditures, as well as $26 million for share repurchases and $15.8 million for shareholder dividends. At quarter end, cash and cash equivalents increased to $182.9 million compared with $170.4 million at year-end 2005. Total debt was $228.2 million at quarter end compared with $226.5 million at year-end 2005.
Snap-on will continue to emphasize the implementation of its 2006 strategic priorities, including focused innovation on product and process improvements, its growth initiatives in emerging markets, and its actions to further enhance value and service to Snap-on’s franchisees and customers. While Snap-on is encouraged by the progress in its key initiatives and with the improvement in first-quarter earnings performance, the Company is still early in the implementation phase of its 2006 strategic initiatives and certain key transformational changes are planned for the second and third quarters of 2006.
First-quarter 2006 earnings exceeded expectations provided at the beginning of 2006. Snap-on continues to believe that operating earnings for the Commercial and Industrial and the Diagnostics and Information Groups will improve for the year, even as the businesses continue to invest and progress on their key initiatives to support sustainable profitable growth: expansion in Asia and other emerging markets, and focused innovation on new technology and information-based products.
The Snap-on Tools Group said it plans to continue to invest in its initiatives to improve service and value to its franchisees and customers, enhance sales and profitability of its franchisees, improve and transform its manufacturing supply chain to a lower cost, market demand replenishment system, and extend Snap-on brands and product lines into targeted underdeveloped market segments. The expected costs to enhance field support and for other franchise system initiatives, previously believed to cost up to $15 million, are now expected to cost $5 million to $7 million, of which approximately $1 million was incurred in the first quarter. This lower level of spending contributed to the higher-than-expected earnings in the first quarter. The company believes that customer service and supply chain initiatives, along with new marketing programs, will require spending of $8 million to $10 million in 2006, as originally anticipated, with a significant portion of this spending expected to occur in the third quarter. Progress is on track and is expected to continue to show positive momentum through the remainder of 2006, although the company continues to believe the Snap-on Tools segment will experience a year-over-year decline in 2006 operating earnings.
The Financial Services segment is expected to continue to be challenged by higher interest rates, and therefore its operating results for the full year are estimated to be lower than the results achieved a year ago.
For more information about Snap-on, go to: www.snapon.com .
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