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Snap-On 10-K 2010
Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 2, 2010, or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-7724

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

Delaware   39-0622040
(State of incorporation)   (I.R.S. Employer Identification No.)

 

2801 80th Street, Kenosha, Wisconsin   53143
(Address of principal executive offices)   (Zip code)

(262) 656-5200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

                 Title of each class                 

 

Name of each exchange on which registered

Common stock, $1.00 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x  No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨     Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of voting and non-voting common equity held by non-affiliates (excludes 249,276 shares held by directors and executive officers) computed by reference to the price ($27.88) at which common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (July 4, 2009) was: $1.6 billion.

The number of shares of Common Stock ($1.00 par value) of the registrant outstanding as of February 12, 2010, was 57,761,069 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates by reference certain information that will be set forth in Snap-on’s Proxy Statement, which is expected to first be mailed to shareholders on or around March 10, 2010, prepared for the Annual Meeting of Shareholders scheduled for April 22, 2010.

 

 

 


Table of Contents

 

 

 

TABLE OF CONTENTS

 

              Page

PART I

  
 

Item 1

  

Business

   4
 

Item 1A

  

Risk Factors

   11
 

Item 1B

  

Unresolved Staff Comments

   18
 

Item 2

  

Properties

   19
 

Item 3

  

Legal Proceedings

   20
 

Item 4

  

Submission of Matters to a Vote of Security Holders

   20

PART II

  
 

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   20
 

Item 6

  

Selected Financial Data

   23
 

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   25
 

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risk

   53
 

Item 8

  

Financial Statements and Supplementary Data

   54
 

Item 9

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

   54
 

Item 9A

  

Controls and Procedures

   54
 

Item 9B

  

Other Information

   57

PART III

  
 

Item 10

  

Directors, Executive Officers and Corporate Governance

   57
 

Item 11

  

Executive Compensation

   58
 

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   58
 

Item 13

  

Certain Relationships and Related Transactions, and Director Independence

   59
 

Item 14

  

Principal Accounting Fees and Services

   59

PART IV

  
 

Item 15

  

Exhibits, Financial Statement Schedules

   59

Signatures

   105

Exhibit Index

   107

Computation of Ratio of Earnings to Fixed Charges

   110

Consent of Independent Registered Public Accounting Firm

   113

Certifications

   114

 

 

 

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PART I

Safe Harbor

Statements in this document that are not historical facts, including statements that (i) are in the future tense; (ii) include the words “expects,” “plans,” “targets,” “estimates,” “believes,” “anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”) or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-on’s or management’s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in this Annual Report on Form 10-K, particularly those in “Item 1A: Risk Factors,” could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.

These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain efficiencies and savings from its Rapid Continuous Improvement and other cost reduction initiatives, including its ability to implement reductions in workforce, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby enhance their sales and profitability, introduce successful new products, successfully integrate acquisitions, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, the need to provide financing for the contracts and loans originated by Snap-on Credit LLC, litigation challenges, and external negative factors including instability in world credit and financial markets, weakness in the global economy, the continued weakness and uncertainty in the U.S. automotive industry, and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, and the impact of legal proceedings, energy and raw material supply and pricing, including steel and gasoline, the amount, rate and growth of Snap-on’s general and administrative expenses, including health care and postretirement costs, the impacts of non-strategic business and/or product line rationalizations, terrorist disruptions and epidemics on business. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law.

In addition, investors should be aware that generally accepted accounting principles in the United States of America (“U.S. GAAP”) prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.

Unless otherwise indicated, references in this document to “fiscal 2009” or “2009” refer to the fiscal year ended January 2, 2010; references to “fiscal 2008” or “2008” refer to the fiscal year ended January 3, 2009; references to “fiscal 2007” or “2007” refer to the fiscal year ended December 29, 2007. References in this document to “year end” 2009, 2008 and 2007 refer to January 2, 2010, January 3, 2009, and December 29, 2007, respectively.

 

 

 

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Item 1: Business

Snap-on was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of tools, diagnostics, equipment, software and service solutions for professional users. Products and services include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as customers in industry, government, agriculture, aviation and natural resources. Snap-on also derives income from various financing programs to facilitate the sales of its products.

Snap-on markets its products and brands through multiple distribution sales channels in approximately 130 countries. Snap-on’s largest geographic markets include the United States, the United Kingdom, Canada, Germany, Japan, France, Australia, Spain, the Netherlands, Italy, China and Sweden. Snap-on also reaches its customers through the company’s franchisee, company-direct, distributor and internet channels. Snap-on originated the mobile van tool distribution channel in the automotive repair market.

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on Credit LLC (“SOC”), the company’s financial services business in the United States, and Snap-on’s other wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations. See Note 19 to the Consolidated Financial Statements for information on business segments and foreign operations.

Snap-on evaluates the performance of its reportable segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools and the Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes, pension assets and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

On July 16, 2009, Snap-on terminated its SOC financial services joint venture agreement with CIT Group Inc. (“CIT”) and subsequently acquired CIT’s 50%-ownership interest in SOC for a cash purchase price of $8.1 million; as a result, SOC became a wholly owned subsidiary of Snap-on. Since the inception of the financial services joint venture agreement in 1999, CIT had been the exclusive purchaser of loans originated by SOC in the United States. Snap-on included the accounts of SOC in its Consolidated Financial Statements as Snap-on concluded that it was the primary beneficiary of the joint venture arrangement. From 2004 until the July 16, 2009 termination date, CIT’s ownership interest in SOC was reported in the company’s Consolidated Financial Statements as a noncontrolling interest.

On March 5, 2008, Snap-on acquired a 60% interest in Zhejiang Wanda Tools Co., Ltd. (“Wanda Snap-on”), a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. On December 10, 2009, Snap-on entered into an agreement to acquire the noncontrolling shareholder’s 40% interest in Wanda Snap-on for a purchase price of 52.3 million Chinese yuan (approximately $7.7 million at 2009 year-end exchange rates). The transaction is subject to local governmental approval and is expected to close during the first quarter of 2010. The acquisition of Wanda Snap-on is part of the company’s ongoing strategic initiatives to further expand its manufacturing presence in emerging growth markets and lower-cost regions. For segment reporting purposes, Wanda Snap-on is included in the Commercial & Industrial Group. See Note 2 to the Consolidated Financial Statements for further information on the company’s acquisition of Wanda Snap-on.

 

 

 

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Information Available on the Company’s Web Site

Additional information regarding Snap-on and its products is available on the company’s web site at www.snapon.com. Snap-on is not including the information contained on its web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Snap-on’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements on Schedule 14A, Current Reports on Form 8-K, and any amendments to those reports, are made available to the public at no charge, other than an investor’s own internet access charges, through the Investor Information section of the company’s web site at www.snapon.com. Snap-on makes such material available on its web site as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Copies of any materials the company files with the SEC can also be obtained free of charge through the SEC’s web site at www.sec.gov. The SEC’s Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549, or by calling 1-800-732-0330. In addition, the company’s (i) charters for the Audit, Corporate Governance and Nominating, and Organization and Executive Compensation committees of the company’s Board of Directors; (ii) Corporate Governance Guidelines; and (iii) Code of Business Conduct and Ethics are available on Snap-on’s web site. Snap-on will also post any amendments to these documents, or information about any waivers granted to directors or executive officers with respect to the Code of Business Conduct and Ethics, on the company’s web site at www.snapon.com.

Products and Services

Tools, Diagnostics and Repair Information, and Equipment

Snap-on offers a broad line of products and complementary services that are grouped into three product categories: (i) tools; (ii) diagnostics and repair information; and (iii) equipment. Further product line information is not presented as it is not practicable to do so. The following table shows the consolidated net sales of these product categories for the last three years:

 

     Net Sales

(Amounts in millions)

   2009    2008    2007

Product Category:

        

Tools

       $   1,311.3            $   1,694.9            $   1,632.2    

Diagnostics and repair information

     556.5          589.8          647.6    

Equipment

     494.7          568.6          561.4    
                    
       $ 2,362.5            $ 2,853.3            $ 2,841.2    
                    

The tools product category includes hand tools, power tools and tool storage products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets, saws and cutting tools, pruning tools, torque measuring instruments and other similar products. Power tools include pneumatic (air), hydraulic, cordless (battery) and corded (electric) tools such as impact wrenches, ratchets, chisels, drills, sanders, polishers and similar products. Tool storage includes tool chests, roll cabinets, tool control systems and other similar products. The majority of products are manufactured by Snap-on and, in completing the product line, other items are purchased from external manufacturers.

The diagnostics and repair information product category includes handheld and PC-based diagnostics products, service and repair information products, diagnostic software solutions, electronic parts catalogs, business management systems, business services, point-of-sale systems, integrated systems for vehicle service shops, original equipment manufacturers (“OEMs”) purchasing facilitation services, and warranty management systems and analytics to help dealerships manage and track performance.

Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs as well as after sales support for its customers, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on.

The equipment product category includes solutions for the diagnosis and service of automotive and industrial equipment. Products include wheel alignment equipment, wheel balancers, tire changers, vehicle lifts, test lane systems, collision repair equipment, air conditioning service equipment, brake service equipment, fluid exchange equipment, transmission troubleshooting equipment, safety testing equipment, battery chargers and hoists.

 

 

 

   2009 ANNUAL REPORT    5


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Products are marketed under a number of brand names and trademarks, many of which are well known in the vehicle service and industrial markets served. Some of the major trade names and trademarks and the products and services with which they are associated include the following:

 

Names

  

Products and Services

Snap-on

  

Hand tools, power tools, tool storage products, diagnostics, certain equipment and related accessories, mobile tool stores, web sites, electronic parts catalogs, warranty analytics solutions, business management services, OEM specialty tools and equipment development and distribution, and OEM facilitation services

ATI

  

Hand tools

BAHCO

  

Saw blades, cutting tools, pruning tools, hand tools, power tools, tool storage and diagnostics

Blackhawk

  

Collision repair equipment

Blue-Point

  

Hand tools, power tools, tool storage units, certain equipment and related accessories

Cartec

   Safety testing, brake testers, test lane equipment, dynamo-meters, suspension testers, emission testers and other equipment

CDI

  

Hand tools

Fish and Hook

  

Hand tools and tool storage

Hofmann

  

Wheel balancers, lifts, tire changers, wheel aligners, brake testers and test lane equipment

Irimo

  

Saw blades, cutting tools, hand tools, power tools and tool storage

John Bean

  

Wheel balancers, lifts, tire changers, wheel aligners, brake testers and test lane equipment

Lindström

  

Hand tools

Mitchell1

  

Service information, shop management systems and business services

Nexiq

  

Diagnostic tools, information and program distributions for fleet and heavy duty equipment

Palmera

  

Saw blades, cutting tools, hand tools, power tools and tool storage

ShopKey

  

Repair and service information, shop management systems and business services

Sioux

  

Power tools

Sun

  

Diagnostic and service equipment

Williams

  

Hand tools

 

Financial Services

Snap-on also generates revenue from various financing activities that include (i) loans and vehicle leases to franchisees; (ii) loans to franchisees’ customers; and (iii) loans to Snap-on’s industrial and other customers for the purchase of tools, equipment and diagnostics products on an extended-term payment plan. The decision to finance through Snap-on or another financing entity is solely at the election of the customer. When assessing customers for potential financing, Snap-on considers various factors regarding ability to pay including financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information.

United States

In the United States, Snap-on offers financing through SOC. Subsequent to the July 16, 2009 termination of the company’s financial services joint venture agreement with CIT, Snap-on is providing financing for the majority of new contracts originated by SOC. The financing revenue from these contracts, which are owned and serviced by SOC, is recognized by SOC over the life of the contracts, with interest computed on the average daily balances of the underlying contracts.

 

 

 

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From 1999 until July 16, 2009, CIT had been the exclusive purchaser of the financing contracts originated by SOC. Snap-on recorded the gains on the sales of the contracts as financial services revenue at the time the originated contracts were sold to CIT. For contracts originated by SOC and subsequently sold to CIT prior to July 16, 2009, SOC continues to service the contracts for an estimated servicing fee and such revenue is recognized over the contractual term of the loan.

International

Internationally, Snap-on offers financing to its franchisees and customer networks through its wholly owned finance subsidiaries located in Canada, the United Kingdom, Australia and Puerto Rico. Snap-on’s wholly owned international finance subsidiaries own and service the loans originated through their financing programs. The financing revenue from these contracts is recognized over the life of the contracts, with interest computed on the average daily balances of the underlying contracts.

Other

Franchise fee revenue, including nominal, non-refundable initial and ongoing monthly fees (primarily for sales, business training, marketing and product promotion programs), is recognized as the fees are earned.

Sales and Distribution

Snap-on markets and distributes its products and related services principally to professional tool and equipment users around the world. The two largest market sectors are the vehicle service and repair sector and the industrial sector.

Vehicle Service and Repair Sector

The vehicle service and repair sector has three main customer groups: (i) professional technicians who purchase tools and equipment for themselves; (ii) vehicle service and repair shop owners and managers – including independent shops, national chains and automotive dealerships – who purchase tools, equipment and diagnostics products for use by multiple technicians within a service or repair facility; and (iii) OEMs.

Snap-on provides innovative tool, equipment and business solutions, as well as technical sales support and training, to meet technicians’ evolving needs. Snap-on’s franchise van distribution system offers technicians the convenience of purchasing quality tools with minimal disruption of their work routine. Snap-on also provides owners and managers of shops, where technicians work, with tools, diagnostics equipment, repair and service information, including electronic parts catalogs and shop management products. Snap-on’s OEM facilitation business provides OEMs with products and services including tools, consulting and facilitation services, which include product procurement, distribution and administrative support to customers for their dealership equipment programs.

Major challenges for Snap-on and the vehicle service and repair sector include the increasing rate of technological change within motor vehicles, vehicle population growth, vehicle life and the resulting impact on the businesses of both our suppliers and customers that is necessitated by such change. Snap-on believes it is a meaningful participant in the market sector for vehicle service and repair.

Industrial Sector

Snap-on markets its products globally to a broad cross-section of industrial and commercial customers including maintenance and repair operations; manufacturing and assembly facilities; various government agencies, facilities and operations, including military operations; vocational and technical schools; aerospace and aviation; OEM and repair customers; oil and gas developers; mining operations; energy and power generation equipment fabricators and operators; agriculture; infrastructure construction companies; and other customers that require instrumentation, service tools and/or equipment for their products.

 

 

 

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The industrial sector for Snap-on has achieved growth in recent years by providing value-added products and services to an increasingly expanding global base of customers, particularly those in the market segments of natural resources (including power generation), aerospace, government and education. Through its experienced and dispersed sales organization, industrial “solutioneers” strive to develop unique and highly valued productivity solutions for customers worldwide that leverage Snap-on’s product, service and development capabilities.

Major challenges in the industrial sector include a highly competitive, cost-conscious environment, and a trend toward customers making many of their tool and equipment purchases through one integrated supplier. Snap-on believes it is a meaningful participant in the market sector for industrial tools and equipment.

Distribution Channels

Snap-on serves customers primarily through the following channels of distribution: the mobile van channel, company direct sales, distributors and e-commerce. The following discussion summarizes Snap-on’s general approach for each channel, and is not intended to be all-inclusive.

Mobile Van Channel

In the United States, the majority of sales to the vehicle service and repair sector are conducted through Snap-on’s franchise van channel. Snap-on’s franchisees primarily serve vehicle service technicians and vehicle service shop owners, generally providing weekly contact at the customer’s place of business. Franchisees’ sales are concentrated in hand and power tools, tool storage products, small diagnostic and shop equipment, and diagnostics and repair information products, which can easily be transported in a van and demonstrated during a brief sales call. Franchisees purchase Snap-on’s products at a discount from suggested list prices and resell them at prices established by the franchisee. U.S. franchisees are provided a list of places of business that serves as the basis of the franchisee’s sales route.

Snap-on also offers an option termed the “Gateway Program” to potential U.S. franchisees that do not meet the franchise qualification requirements. Gateway Program participants have less upfront investment and are provided an initial base level of consigned inventory from Snap-on to assist them in gaining experience and building equity toward the future purchase of a standard franchise. Snap-on also provides certain franchisees the opportunity to add vans to their franchise or to add a limited number of additional franchises. Snap-on charges nominal initial and ongoing monthly franchise fees. Since 1991, written franchise agreements have been entered into with all new U.S. franchisees and most pre-1991 independent franchisees. At 2009 year end there were 3,183 vans operated by U.S. franchisees (approximately 96%) with written franchise agreements, or individuals employed by such franchisees, as compared with 3,231 vans (approximately 96%) at 2008 year end.

Snap-on has replicated its U.S. franchise van distribution model in certain other countries including Australia, Canada, Germany, Japan, the Netherlands, South Africa and the United Kingdom. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians and shop owners.

Through SOC, financing is available to U.S. franchisees, including financing for van and truck leases, working capital loans, and loans to enable new franchisees to fund the purchase of the franchise. Internationally, Snap-on offers financing to its franchisees and customer networks through its wholly owned international finance subsidiaries. The decision to finance through Snap-on or another financing entity is solely at the election of the customer.

Snap-on supports its franchisees with a field organization of regional offices, franchise performance teams, Diagnostic Sales Developers (“DSDs”), customer care centers and distribution centers. Snap-on also provides sales and business training, and marketing and product promotion programs, as well as customer and franchisee financing programs through SOC and its other wholly owned international finance subsidiaries, all of which are designed to strengthen franchisee sales. In the United States and Canada, the National Franchise Advisory Council and the Snap-on Tools Canadian Franchise Advisory Council, both of which are composed primarily of franchisees that are elected by franchisees, assist Snap-on in identifying and implementing enhancements to the franchise program.

In the United States, franchisees work closely with the DSDs. The DSD specialists train franchisees on the sale of higher-price-point diagnostics and demonstrate and sell vehicle service shop management and information systems. DSDs work independently, and with franchisees, to identify and generate sales among vehicle service technicians, shop owners and managers. DSDs are Snap-on employees who, beginning in 2008, are compensated through a combination of base salary and commission; a franchisee receives a brokerage fee from certain sales made by the DSDs to the franchisee’s customers. Most products sold through franchisees and the DSDs are sold under the Snap-on, Blue-Point and Sun brand names.

 

 

 

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Snap-on also has a company-owned van program in the United States that is designed to (i) provide another pool of potential franchisees and field organization personnel; (ii) service customers in select new and/or open routes not currently serviced by franchisees; and (iii) allow Snap-on to pilot new sales and promotional ideas prior to introducing them to franchisees. As of 2009 year end, company-owned vans comprised approximately 5% of the total U.S. van population; Snap-on may elect to increase the number of company-owned vans in the future.

Company Direct Sales

A significant proportion of shop equipment sales in the United States under the John Bean and Blackhawk brands, diagnostic products under the Snap-on brand and information products under the Mitchell1 brand are made by direct and independent sales forces that have responsibility for national and other accounts. As the vehicle service and repair sector consolidates (with more business conducted by national chains and franchised service centers), the company believes these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of equipment and diagnostic products and services. Snap-on also sells these products and services directly to OEMs and their franchised dealers.

Snap-on brand tools and equipment are marketed to industrial and governmental customers in the United States through both industrial sales representatives, who are employees, and independent industrial distributors. In most markets outside the United States, industrial sales are conducted through independent distributors. The sales representatives focus on industrial customers whose main purchase criteria are quality and service. At the end of 2009, Snap-on had industrial sales representatives in the United States (including Puerto Rico), Australia, Canada, Japan, Mexico and some European, Asian, Latin American and Middle Eastern countries, with the United States representing the majority of Snap-on’s total industrial sales.

The company also sells automotive, power equipment and power sports software solutions, both domestically and internationally, through an internal sales force. Products and services are marketed to two targeted groups: OEMs and individual dealerships. To effectively reach the large OEMs in the automotive segment, such as General Motors Company, Daimler AG, Ford Motor Company, New Chrysler Group LLC, and Toyota Motor Corporation, the company has deployed a team of business development professionals in the world’s principal automotive centers in the United States, the United Kingdom, Germany, Italy, France, Spain and Japan. In the United States and Canada, automotive products and services are sold directly to individual dealerships using an experienced sales force. In reaching customers such as John Deere (Deere & Company), JC Bamford Excavators Ltd. (JCB) and Yamaha Corporation of America (Yamaha) in the power equipment and power sports segments, teams are also positioned to support the 90+ brands that Snap-on distributes to globally. Business management solutions are sold directly to the automotive OEMs in the United States and throughout Europe, including the United Kingdom.

Distributors

Sales of certain tools and equipment are made through independent distributors who purchase the items from Snap-on and resell them to end users. Hand tools under the BAHCO, Fish and Hook, and Lindström brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Wheel service and other vehicle service equipment are sold through distributors primarily under brands including Hofmann, John Bean, Cartec and Blackhawk. Diagnostics and equipment are marketed through distributors in South America and Asia, and through both a direct sales force and distributors in Europe under the Snap-on, Sun and BAHCO brands.

E-commerce

Snap-on’s e-commerce development initiatives allow Snap-on to combine the capabilities of the internet with Snap-on’s existing brand sales and distribution strengths to reach new and under-served customer segments. Snap-on offers current and prospective customers online, around-the-clock access to purchase products through its public internet web site at www.snapon.com. The site features an online catalog containing nearly 14,000 products, including Snap-on hand tools, power tools, tool storage units and diagnostic equipment available to consumers and professionals in the United States, the United Kingdom, Canada and Australia. At the end of 2009, Snap-on had more than 600,000 registered users, including approximately 43,000 industrial accounts. E-commerce and certain other system enhancement initiatives are designed to improve productivity and further leverage the one-on-one relationships and service Snap-on has with its current and prospective customers. Through business-to-business and business-to-consumer capabilities, Snap-on and its franchisees are enhancing communications with customers on a real-time, 24-hour, 7-day a week basis.

 

 

 

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Competition

Snap-on competes on the basis of its product quality and performance, product line breadth and depth, service, brand awareness and imagery, and technological innovation. While no single company competes with Snap-on across all of its product lines and distribution channels, various companies compete in one or more product categories and/or distribution channels.

Snap-on believes it is a leading manufacturer and distributor of professional tools, diagnostics, equipment, repair software and solutions, offering the broadest line of these products to the vehicle service industry. The major competitors selling to professional technicians in the automotive service and repair sector through the mobile van channel include MAC Tools (The Stanley Works), Matco (Danaher Corporation), and Cornwell. Snap-on also competes with companies that sell tools and equipment to automotive technicians through retail stores and online including Craftsman (Sears Brands LLC), RIDGID and Husky (The Home Depot, Inc.), and Kobalt (Lowes Companies, Inc.), auto parts supply outlets (such as NAPA, AutoZone, Inc. and Pep Boys), and tool supply warehouses/distributorships (such as MEDCO and Integrated Supply Network, Inc. (ISN)). Within the power tools category, Snap-on’s major competitors include Ingersoll-Rand Co. Limited, The Black & Decker Corporation, Makita Corporation, Chicago Pneumatic (Atlas Copco), and Milwaukee Electric (Techtronic Industries Co. Ltd.). In the industrial sector, major competitors include Facom Tools and Proto (The Stanley Works), Armstrong (Danaher Corporation), IRWIN (Newell Rubbermaid Inc.), Cooper Industries, Ltd., and Westward (W.W. Grainger, Inc.). The major competitors selling diagnostics and shop equipment and information to automotive dealerships, independent repair shop owners and managers in the vehicle service and repair sector include Corghi S.p.A., Fluke and Hennessy (Danaher Corporation), Robinair and OTC (SPX Corporation), Hunter Engineering, Rotary Lift and Chief Automotive (Dover Corporation), Car-O-Liner AB, Lexcom GmbH, Infomedia Ltd., Enigma, ALLDATA (AutoZone, Inc.), and the proprietary electronic parts catalog, diagnostic and information systems of OEMs.

Raw Materials and Purchased Product

Snap-on’s supply of raw materials and purchased components are generally and readily available from numerous suppliers. Snap-on believes it has secured an ample supply of both bar and coil steel for the near future to ensure stable supply to meet material demands. The company does not anticipate experiencing any significant steel pricing or availability issues in 2010.

Patents, Trademarks and Other Intellectual Property

Snap-on vigorously pursues and relies on patent protection to protect its intellectual property and its position in its markets. At 2009 year end, Snap-on and its subsidiaries held over 740 active and pending patents in the United States and over 1,330 active and pending patents outside of the United States. Sales relating to any single patent did not represent a material portion of Snap-on’s revenues in the last three years.

Examples of products that have features or designs that benefit from patent protection include wheel alignment systems, wheel balancers, tire changers, lifts, test lanes, sealed ratchets, electronic torque instruments, ratcheting screwdrivers, emissions-sensing devices and diagnostic equipment.

Much of the technology used in the manufacture of vehicle service tools and equipment is in the public domain. Snap-on relies primarily on trade secret protection to protect proprietary processes used in manufacturing. Methods and processes are patented when appropriate. Copyright protection is also utilized when appropriate.

Trademarks used by Snap-on are of continuing importance to Snap-on in the marketplace. Trademarks have been registered in the United States and more than 100 other countries, and additional applications for trademark registrations are pending. Snap-on vigorously polices proper use of its trademarks. Snap-on’s right to manufacture and sell certain products is dependent upon licenses from others; however, these products under license do not represent a material portion of Snap-on’s net sales.

 

 

 

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Domain names have become a valuable corporate asset for companies around the world, including Snap-on. Domain names often contain a trademark or service mark or even a corporate name and are often considered intellectual property. The recognition and value of the Snap-on name, trademark and domain name are core strengths of the company.

Snap-on is selectively and strategically licensing the Snap-on brand to carefully selected manufacturing and distribution companies for items such as apparel, work boots, lighting and a variety of other goods, in order to further build equity and market presence for the company’s strongest brand.

Environment

Snap-on is subject to various environmental laws, ordinances, regulations, and other requirements of government authorities in the United States and other nations. At Snap-on, these environmental liabilities are managed through the Snap-on Environmental, Hygiene and Safety Management System (“EH & SMS”), which is applied worldwide. The system is based upon continual improvement and is certified to ISO 14001:2004 and OHSAS 18001:2007, verified through Det Norske Veritas (DNV) Certification, Inc.

Snap-on believes that it complies with applicable environmental control requirements in its operations. Expenditures on environmental matters through EH & SMS have not had, and Snap-on does not for the foreseeable future expect them to have, a material effect upon Snap-on’s capital expenditures, earnings or competitive position.

Employees

At the end of January 2010, Snap-on employed approximately 11,000 people as compared to approximately 11,500 people at the end of January 2009.

Approximately 2,650 employees, or 24%, of Snap-on’s worldwide workforce, are represented by unions and/or covered under collective bargaining agreements. Approximately 1,100 employees are covered under agreements expiring in 2010. In recent years, Snap-on has not experienced any significant work slow-downs, stoppages or other labor disruptions.

The number of covered union employees whose contracts expire within the next five years approximates 1,100 employees in 2010; 700 employees in 2011; and 175 employees in 2012; there are no contracts currently scheduled to expire in 2013. There are approximately 200 employees whose contract is scheduled to expire in 2014.

There can be no assurance that future contracts with Snap-on’s unions will be renegotiated upon terms acceptable to Snap-on.

Working Capital

Most of Snap-on’s businesses are not seasonal and their inventory needs are relatively constant. As a result of the termination of the joint venture with CIT on July 16, 2009, the company used its working capital in 2009 to fund, in part, the growth of the on-book receivables originated by SOC. Snap-on did not have a significant backlog of orders at 2009 year end.

Snap-on’s liquidity and capital resources and use of working capital are discussed herein in “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

At 2009 year end, neither Snap-on nor any of its segments depend on any single customer, small group of customers or government for any material part of its revenues; prior to July 16, 2009, Snap-on’s Financial Services segment depended on CIT for more than 10% of its revenues.

Item 1A: Risk Factors

In evaluating the company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K, including the Consolidated Financial Statements and the related notes. Each of these risk factors could adversely affect the company’s business, operating results, cash flows and/or financial condition, as well as adversely affect the value of an investment in the company’s common stock.

 

 

 

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Economic conditions and world events could affect our operating results.

We, our franchisees and our customers, may continue to be adversely affected by ongoing weakness in, or worsening of, economic conditions. These conditions may result in reduced consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending. We, our franchisees and our customers, and the economy as a whole, also may be affected by future world events such as acts of terrorism, developments in the war on terrorism, conflicts in international situations, the impact of epidemics on business, and by natural disasters. These factors may affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders or order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions abroad. Unstable political, social and economic conditions may make it difficult for our franchisees, customers, suppliers and us to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition, results of operations and cash flow could be negatively affected.

Foreign operations are subject to currency exchange, political, economic and other risks that could adversely affect our business, financial condition, results of operations and cash flow.

The reporting currency for Snap-on’s consolidated financial statements is the U.S. dollar. Certain of the company’s assets, liabilities, expenses and revenues are denominated in currencies other than the U.S. dollar. In preparing the company’s Consolidated Financial Statements, those assets, liabilities, expenses and revenues are translated into U.S. dollars at applicable exchange rates. Increases or decreases in exchange rates between the U.S. dollar and those other currencies affect the U.S. dollar value of those items as reflected in the company’s Consolidated Financial Statements. Substantial fluctuations in the value of the U.S. dollar could have a significant impact on the company’s financial condition and results of operations.

Approximately 41% of our revenues in 2009 were generated outside of the United States. Future growth rates and success of our business depends in large part on continued growth in our non-U.S. operations, including growth in emerging markets. Numerous risks and uncertainties affect our non-U.S. operations. These risks and uncertainties include political, economic and social instability, such as acts of war, civil disturbance or acts of terrorism, local labor conditions, changes in government policies and regulations, including imposition or increases in withholding and other taxes on remittances and other payments by international subsidiaries, transportation delays or interruptions and difficulties in enforcement of contract and intellectual property rights. In 2009, certain of our European-based businesses were significantly impacted by the economic downturn that particularly affected various markets in Europe. Should the economic environment in these markets deteriorate from 2009 levels, our results of operations and financial position could be materially impacted, including as a result of the effects of potential impairment write-downs of goodwill and/or other intangible assets related to these businesses.

We are also affected by changes in inflation rates and interest rates. Additionally, cash generated in non-U.S. jurisdictions may be difficult to repatriate to the United States in a tax-efficient manner. Our foreign operations are also subject to other risks and challenges, such as the need to staff and manage diverse workforces, respond to the needs of multiple national and international marketplaces, and differing business climates and cultures in various countries.

The performance of Snap-on’s mobile van tool distribution business depends on the success of its franchisees.

Approximately 41% of our 2009 revenues were generated by the Snap-on Tools Group, which consists of Snap-on’s business operations serving the worldwide van channel. Except in limited circumstances, each of our mobile tool vans is operated by a franchisee pursuant to a franchise agreement. Snap-on’s success is dependent on its relationships with franchisees, individually and collectively, as they are the primary sales and service link between the company and vehicle service and repair technicians, who are an important class of end users for Snap-on’s products and services. If our franchisees are not successful, or if we do not maintain an effective relationship with our franchisees, the delivery of products, the collection of receivables and/or our relationship with end users could be adversely affected and thereby negatively impact our business, financial condition, results of operations and cash flow.

 

 

 

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In addition, if we are unable to maintain effective relationships with franchisees, the company or the franchisees may choose to terminate the relationship, which may result in (i) open routes, in which end-use customers are not provided reliable service; (ii) litigation resulting from termination; (iii) reduced collections or increased write-offs of franchisee receivables owed to Snap-on; and/or (iv) reduced collections or increased write-offs of extended credit contracts and, to a lesser extent, lease contracts that are collected by franchisees on behalf of SOC. As Snap-on has approximately 4,800 franchisees worldwide and most of these franchise relationships are governed by contract, it is not uncommon for litigation to result from the termination of these relationships.

The effects of brand rationalization, dealership closures and/or financial difficulties in the automotive industry could impact our business and operating results.

Some of our business units have substantial interrelationships with the automotive industry. Substantial and continued weakness in the automotive industry has resulted in the bankruptcy of certain automobile manufacturers, as well as suppliers and dealers who are dependent upon them. The ongoing effects of these bankruptcies and related reorganizations cannot yet be fully determined. These factors have already resulted in a reduction in the number of automobile dealerships, and could result in further reductions, through consolidations or as a result of changes in the automakers or their manner of conducting business. Additionally, the weakness of companies in that industry could affect their levels of purchases from us and the collectibility of amounts owed to us. Even though we believe that our products and services enhance productivity, a reduction in the number of automotive manufacturers and/or dealers, or their capital expenditures, could substantially affect our sales. Any of those factors could negatively affect our business, financial condition, results of operations and cash flow.

Raw material and energy price fluctuations and shortages (including steel and various fuel sources) could adversely affect the ability to obtain needed manufacturing materials and could adversely affect our results of operations.

The principal raw material used in the manufacture of our products is steel, which we purchase in competitive, price-sensitive markets. To meet Snap-on’s high quality standards, our steel needs range from specialized alloys, which are available only from a limited group of approved suppliers, to commodity types of alloys. These raw materials have historically exhibited price and demand fluctuations of a cyclical nature. Some of these materials have been, and in the future may be, in short supply. As some steel alloys require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. Additionally, unexpected price increases for other raw materials could result in higher prices to our customers or an erosion of the margins on our products.

We believe our ability to sell our products is also dependent on the number of vehicles on the road, the number of miles driven and the general aging of vehicles. These factors affect the frequency, type and amount of service and repair performed on vehicles by technicians, and therefore affect the demand for the number of technicians, the prosperity of the technicians and, subsequently, the demand technicians have for our tools, other products and services, and the value technicians place on those products and services. To the extent that gasoline prices increase, consumers may turn to other, non-gasoline based, methods of transportation, including more frequent use of public transportation. A decrease in the use of gasoline consuming vehicles may lead to fewer repairs and less demand for our products.

We use various energy sources to transport, produce and distribute products, and some of our products have components that are petroleum based. Petroleum and energy prices have recently been volatile and have periodically increased significantly over short periods of time; further volatility and changes may be caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, world events, and changes in governmental programs. Energy price increases raise both our operating costs and the costs of our materials, and we may not be able to increase our prices enough to offset these costs. Higher prices also may reduce the level of future customer orders and our profitability.

Our inability to provide acceptable financing alternatives to end-user customers and franchisees could adversely impact our operating results.

An integral component of our business and profitability is our ability to offer financing alternatives to end-user customers and franchisees. Following the July 16, 2009 termination of our joint venture arrangement with CIT, Snap-on is now providing the resources for the majority of this financing. As a result, we are more dependent upon our ability to obtain capital resources or other financing on terms that we believe are attractive to support SOC’s on-book receivables. The lack of our ability to obtain capital resources or financing, whether resulting from the state of the financial markets, our own operating performance or other factors, would negatively affect our operating results and financial condition. Adverse fluctuations in interest rates and/or our ability to provide competitive financing programs for other reasons could also have an adverse impact on our revenue and profitability.

 

 

 

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Exposure to credit risks of customers and resellers may make it difficult to collect receivables and could adversely affect operating results and financial condition.

Industry and economic conditions have the potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, such write-downs or write-offs would negatively affect our operating results for the period in which they occur and, if large, could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Regulatory changes related to financial services operations could adversely affect operating results and financial condition.

Financial services operations of all kinds are becoming subject to increasing regulation. In addition to potentially increasing the costs of doing business, new laws and regulations, or changes to existing laws and regulations, may affect the relationships between creditors and debtors or inhibit the rights of creditors to collect amounts owed to them. For example, if such changes impede our ability to collect amounts that are due to us or limit the rates we can charge, our profitability would suffer.

Instability and uncertainty in the credit and financial markets could adversely impact the availability of credit that we and our customers need to operate our businesses.

We depend upon the availability of credit to operate our business, including the financing of receivables from end-user customers that are originated by SOC. Our end-user customers, franchisees and suppliers also require access to credit for their businesses. Instability and uncertainty in the credit and financial markets could adversely impact the availability of future financing and the terms on which it might be available to Snap-on, its end-user customers, franchisees and suppliers. Inability to access credit markets, or a deterioration in the terms on which financing might be available, could have an adverse impact on our business, financial condition, results of operations and cash flow.

We have increased our financial leverage, which could affect our operations and profitability.

Over the past several years, we have increased our use of borrowed funds, primarily to finance acquisitions and, most recently, to fund the receivables of SOC. The company’s increased leverage may affect both our availability of additional capital resources in the future, as well as our operations in several ways, including:

 

   

The terms on which credit may be available to us could be less attractive, both in the economic terms of the credit and the covenants stipulated by the credit terms;

   

The possible lack of availability of additional credit;

   

Higher levels of interest expense to service outstanding debt;

   

The possibility of additional borrowings in the future to repay our indebtedness when it comes due; and

   

The possible diversion of capital resources from other uses.

While we believe we will have the ability to service our debt and obtain additional resources in the future if and when needed, that will depend upon our results of operations and financial position at the time, the then-current state of the credit and financial markets, and other factors that may be beyond our control. Therefore, we cannot give assurances that credit will be available on terms that we consider attractive, or at all, if and when necessary or beneficial to us.

Failure to achieve expected investment returns on pension plan assets, as well as changes in interest rates, could adversely impact our results of operations, financial position and cash flow.

Snap-on sponsors various defined benefit pension plans (“pension plans”). The assets of the pension plans are broadly diversified in an attempt to mitigate the risk of a large loss. The assets are invested in equity securities, fixed income securities, real estate and other real assets, other alternative investments and cash. Required funding for the company’s defined benefit pension plans is determined in accordance with guidelines set forth in the federal Employee Retirement Income Security Act (ERISA). Additional contributions to enhance the funded status of the pension plans can be made at the company’s discretion. However, there can be no assurance that the value of the pension plan assets, or the investment returns on those plan assets, will be sufficient to meet the future benefit obligations of such plans. In addition, during periods of adverse investment market conditions and declining interest rates, the company may be required to make additional cash contributions to the plans that could reduce our financial flexibility.

 

 

 

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Our pension plan obligations are affected by changes in market interest rates. Significant fluctuations in market interest rates have added, and may further add, volatility to our pension plan obligations. Declining market interest rates will increase our pension plan obligations. While our plan assets are broadly diversified, there are inherent market risks associated with investments. Our pension plan assets, in the aggregate, incurred a substantial loss in recent periods as a result of market conditions; if further adverse market conditions occur, our plan assets could incur additional losses. Since we may need to make additional contributions to address an increase in obligations and/or a loss in plan assets, the combination of declining market interest rates and/or past or future plan asset investment losses could adversely impact our financial position, results of operations and cash flows.

The company’s pension plan expense is comprised of the following factors: (i) service cost; (ii) interest on projected benefit obligations; (iii) the expected return on plan assets; (iv) the amortization of prior service costs; and (v) the effects of actuarial gains and losses. The accounting for pensions involves the estimation of a number of factors that are highly uncertain. Certain factors, such as the interest cost and the expected return on plan assets, are impacted by changes in market interest rates and the value of plan assets. A significant decrease in market interest rates and a decrease in the fair value of plan assets would increase net pension expense and may adversely affect the company’s future results of operations. See Note 11 to the Consolidated Financial Statements for further information on the company’s pension plans.

The steps taken to restructure operations, rationalize operating footprint, lower operating expenses, and achieve greater efficiencies in the supply chain could disrupt business.

We have taken steps in the past, and expect to take additional steps in 2010, intended to improve customer service and to drive further efficiencies and reduce costs, some of which could be disruptive to our business. These actions, collectively across our operating groups, are focused on the following:

 

   

Continuing to invest in initiatives focused on building a strong sales and operating presence in emerging growth markets;

   

Continuing to enhance service and value to our franchisees and customers;

   

Continuing to implement efficiency and productivity (collectively “Rapid Continuous Improvement” or “RCI”) initiatives throughout the organization to drive further efficiencies and reduce costs;

   

Continuing on the company’s existing path to improve and transform global manufacturing and the supply chain into a market-demand-based replenishment system, with lower costs;

   

Continuing to invest in developing and marketing new, innovative, higher-value-added products and advanced technologies;

   

Extending our products and services into additional and/or adjacent markets or to new customers; and

   

Continuing to provide financing for, and grow our portfolio of, on-book receivables at SOC.

We believe that by executing on these focus areas, along with a continued commitment to new innovative products and RCI initiatives to drive higher levels of productivity and lower costs, the company and its franchisees may realize stronger growth and profitability. However, failure to succeed in the implementation of any or all of these actions could result in an inability to achieve our financial goals and could be disruptive to the business.

In addition, reductions to headcount and other cost reduction measures may result in the loss of technical expertise that could adversely affect our research and development efforts and ability to meet product development schedules. Efforts to reduce components of expense could result in the recording of charges for inventory and technology-related write-offs, workforce reduction costs or other charges relating to the consolidation of facilities. If we were to incur a substantial charge to further these efforts, our earnings per share would be adversely affected in such period. If we are unable to effectively manage our cost reduction and restructuring efforts, our business, financial condition, results of operations and cash flow could be negatively affected.

Failure to maintain effective distribution of products and services could adversely impact revenue, gross margin and profitability.

We use a variety of distribution methods to sell our products and services. Successfully managing the interaction of our distribution efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks, costs and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.

 

 

 

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Risks associated with the disruption of manufacturing operations could adversely affect profitability or competitive position.

We manufacture a significant portion of the products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, lack of raw material or component availability, destruction of or damage to any facility (as a result of natural disasters, use and storage of hazardous materials or other events), or other reasons, could have a material adverse effect on our business, financial condition, results of operations and cash flow.

The inability to continue to introduce new products that respond to customer needs and achieve market acceptance could result in lower revenues and reduced profitability.

Sales from new products represent a significant portion of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete effectively unless we continue to enhance existing products or introduce new products to the marketplace in a timely manner. Product improvements and new product introductions require significant financial and other resources including significant planning, design, development, and testing at the technological, product, and manufacturing process levels. Our competitors’ new products may beat our products to market, be more effective with more features, be less expensive than our products, and/or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.

The global tool, equipment, and diagnostics and repair information industries are competitive.

We face strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressures from competitors and customers are increasing. In general, as a manufacturer and marketer of premium products and services, the expectations of Snap-on’s customers and its franchisees are high and increasing. Any inability to maintain customer satisfaction could diminish Snap-on’s premium image and reputation and could result in a lessening of its ability to command premium pricing. We expect that the level of competition will remain high in the future, which could limit our ability to maintain or increase market share or profitability.

Product liability claims and litigation could affect our business, financial condition, results of operations and cash flow.

The products that we design and/or manufacture can lead to product liability claims being filed against us. To the extent that plaintiffs are successful in showing that defects in the design or manufacture of our products led to personal injury or property damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages below the insurance retention amount. As a manufacturer, we can be subject to the costs and potential negative publicity of product recalls, which could impact our results.

Legal disputes could adversely affect our business, financial condition, results of operations and cash flow.

From time to time we are subject to legal disputes that are being litigated and/or settled in the ordinary course of business. For example, as described more fully below in “Item 3: Legal Proceedings,” Snap-on has a dispute pending in arbitration with CIT in which both parties make claims relating to matters that occurred during the course of their joint venture. That dispute, and any other dispute or future lawsuit, could result in the diversion of management’s time and attention away from business operations. Additionally, negative developments with respect to legal disputes and the costs incurred in defending ourselves could have an adverse impact on us. Adverse outcomes or settlements could also require us to pay damages, potentially in excess of amounts reserved, or incur liability for other remedies that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Information technology infrastructure is critical to supporting business objectives; failure of our information technology infrastructure to operate effectively could adversely affect our business.

We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

 

 

 

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In association with initiatives to better integrate business units, rationalize operating footprint and improve responsiveness to franchisees and customers, Snap-on is continually replacing and enhancing its existing global Enterprise Resource Planning (ERP) management information systems. As we integrate, implement and deploy new information technology processes and a common information infrastructure across our global operations, we could experience disruptions in our business that could have an adverse effect on our business, financial condition, results of operations and cash flow.

The recognition of impairment charges on goodwill or other intangible assets would adversely impact future financial position and results of operations.

We are required to perform impairment tests on our goodwill and other intangibles annually or at any time when events occur that could impact the value of our business segments. Our determination of whether impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers, including large customers associated with the automotive industry, and/or changes in technology or markets, could require a provision for impairment in a future period that could substantially impact our reported earnings and reduce our consolidated net worth and shareholders’ equity. In 2009, certain of our European-based businesses were significantly impacted by the economic downturn that particularly affected various markets in Europe. Should the economic environment in these markets deteriorate from 2009 levels, our results of operations and financial position could be materially impacted, including as a result of the effects of potential impairment write-downs of goodwill and/or other intangible assets related to these businesses.

Failure to adequately protect intellectual property could adversely affect our business.

Intellectual property rights are an important and integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business.

Our operations expose us to the risk of environmental liabilities, costs, litigation and violations that could adversely affect our financial condition, results of operations and reputation.

Certain of our operations are subject to environmental laws and regulations in the jurisdictions in which they operate, which impose limitations on the discharge of pollutants into the ground, air and water and establish standards for the generation, treatment, use, storage and disposal of hazardous wastes. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we may incur costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices. We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws will not exceed our estimates.

The inability to successfully defend claims from taxing authorities could adversely affect our financial condition, results of operations and cash flow.

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions, as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our financial condition, results of operations and cash flow.

Failure to attract and retain qualified personnel could lead to a loss of revenue and/or profitability.

Snap-on’s success depends, in part, on the efforts and abilities of its senior management team and other key employees. Their skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract and retain members of our senior management team and other key employees could have a negative effect on our operating results. In addition, transitions of important responsibilities to new individuals inherently include the possibility of disruptions to our business and operations, which could negatively affect our business, financial condition, results of operations and cash flow.

 

 

 

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We may not successfully integrate businesses we acquire, which could have an adverse impact on our business, financial condition, results of operations and cash flow.

The pursuit of future growth through acquisitions, including participation in joint ventures, involves significant risks that could have a material adverse effect on our business, financial condition, results of operations and cash flow. These risks include:

 

   

Loss of the acquired businesses’ customers;

   

An inability to integrate successfully the acquired businesses’ operations;

   

Inability to coordinate management and integrate and retain employees of the acquired businesses;

   

Difficulties in implementing and maintaining consistent standards, controls, procedures, policies and information systems;

   

Failure to realize anticipated synergies, economies of scale or other anticipated benefits, or to maintain operating margins;

   

Strain on our personnel, systems and resources, and diversion of attention from other priorities;

   

Incurrence of additional debt and related interest expense;

   

The dilutive effect of the issuance of additional equity securities;

   

Unforeseen or contingent liabilities of the acquired businesses; and

   

Large write-offs or write-downs, or the impairment of goodwill or other intangible assets.

Item 1B: Unresolved Staff Comments

None.

 

 

 

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Item 2: Properties

Snap-on maintains leased and owned manufacturing, warehouse, distribution and office facilities throughout the world. Snap-on believes that its facilities currently in use are suitable and have adequate capacity to meet its present and foreseeable future demand. Snap-on’s facilities in the United States occupy approximately 3.6 million square feet, of which 76% is owned, including its corporate and general office facility located in Kenosha, Wisconsin. Snap-on’s facilities outside the United States occupy approximately 4.2 million square feet, of which approximately 73% is owned. Certain Snap-on facilities are leased through operating and capital lease agreements. See Note 15 to the Consolidated Financial Statements for information on the company’s operating and capital leases. Snap-on management continually monitors the company’s capacity needs and makes adjustments as dictated by market and other conditions.

The following table provides information about each of Snap-on’s principal manufacturing locations and distribution centers (exceeding 50,000 square feet) as of 2009 year end:

 

Location

  

Type of Property

  

Owned/Leased

  

Segment*

U.S. Locations:

        

Elkmont, Alabama

  

Manufacturing

  

Owned

  

SOT

Conway, Arkansas

  

Manufacturing

  

Leased

  

C&I

City of Industry, California

  

Manufacturing

  

Leased

  

C&I

San Jose, California

  

Manufacturing

  

Leased

  

D&I

Columbus, Georgia

  

Distribution

  

Owned

  

C&I

Crystal Lake, Illinois

  

Distribution

  

Owned and Leased

  

SOT

Algona, Iowa

  

Manufacturing

  

Owned

  

SOT

Olive Branch, Mississippi

  

Distribution

  

Owned

  

SOT

Carson City, Nevada

  

Distribution

  

Owned and Leased

  

SOT

Murphy, North Carolina

  

Manufacturing and distribution

  

Owned

  

C&I

Robesonia, Pennsylvania

  

Distribution

  

Owned

  

SOT

Elizabethton, Tennessee

  

Manufacturing

  

Owned

  

SOT

Kenosha, Wisconsin

  

Distribution and corporate

  

Owned

  

SOT, C&I, D&I

Milwaukee, Wisconsin

  

Manufacturing

  

Owned

  

SOT

Non-U.S. Locations:

        

Santo Tome, Argentina

  

Manufacturing

  

Owned

  

C&I

Minsk, Belarus

  

Manufacturing

  

Owned

  

C&I

Santa Barbara D’oeste, Brazil

  

Manufacturing and distribution

  

Owned

  

C&I

Mississauga, Canada

  

Manufacturing

  

Leased

  

C&I

Newmarket, Canada

  

Manufacturing

  

Owned

  

SOT

Kunshan, China

  

Manufacturing

  

Owned

  

C&I

Xiaoshan, China

  

Manufacturing

  

Owned

  

C&I

Shucheng, China

  

Manufacturing

  

Owned

  

C&I

Kettering, England

  

Distribution

  

Owned

  

SOT, C&I

Bramley, England

  

Manufacturing

  

Leased

  

C&I

Bourges, France

  

Manufacturing and distribution

  

Owned and Leased

  

C&I

Sopron, Hungary

  

Manufacturing

  

Owned

  

C&I

Correggio, Italy

  

Manufacturing

  

Owned

  

C&I

Tokyo, Japan

  

Distribution

  

Leased

  

SOT

Helmond, the Netherlands

  

Distribution

  

Owned

  

C&I

Vila do Conde, Portugal

  

Manufacturing

  

Owned

  

C&I

Irun, Spain

  

Manufacturing

  

Owned

  

C&I

Placencia, Spain

  

Manufacturing

  

Owned

  

C&I

Vitoria, Spain

  

Manufacturing and distribution

  

Owned

  

C&I

Bollnäs, Sweden

  

Manufacturing

  

Owned

  

C&I

Edsbyn, Sweden

  

Manufacturing

  

Owned

  

C&I

Lidköping, Sweden

  

Manufacturing

  

Owned

  

C&I

Sandviken, Sweden

  

Distribution

  

Leased

  

C&I

 

*

Segment abbreviations:

  

C&I – Commercial & Industrial Group

  

SOT – Snap-on Tools Group

  

D&I – Diagnostics & Information Group

 

 

 

   2009 ANNUAL REPORT    19


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Snap-on ceased production at its Escondido, California, manufacturing facility in 2009 and transferred production to its City of Industry, California, facility. Snap-on also ceased manufacturing operations at its Unterneukirchen, Germany, location in 2009 and transferred production to its Correggio, Italy, facility. In 2009 Snap-on closed its Newmarket, Canada, distribution facility; the Newmarket distribution facility is currently for sale. In 2009, Snap-on also completed the construction of a new headquarters and research and development facility in Richfield, Ohio, for Snap-on Business Solutions, the company’s automotive parts and service information business.

Item 3: Legal Proceedings

See Note 15 to the Consolidated Financial Statements for information on legal proceedings.

On January 8, 2010, Snap-on filed a notice of arbitration with the American Arbitration Association concerning a dispute with CIT relating to various underpayments made during the course of their financial services joint venture, in which Snap-on has alleged damages of approximately $115 million. As a result of the dispute, Snap-on has withheld certain amounts (totaling $81.5 million as of 2009 year end) from payments made to CIT relating to ongoing business activities. On January 29, 2010, CIT filed its response denying Snap-on’s claim and asserting certain claims against Snap-on for other matters relating to the joint venture. CIT’s claims allege damages in excess of $110 million, the majority of which relates to returning the $81.5 million withheld by Snap-on. The $81.5 million retained by Snap-on is included in other accrued liabilities on Snap-on’s January 2, 2010 consolidated balance sheet. At this early stage, no determination can be made as to the likely outcome of this dispute.

Snap-on is involved in various other legal matters that are being litigated and/or settled in the ordinary course of business. Although it is not possible to predict the outcome of these other legal matters, management believes that the results of these other legal matters will not have a material impact on Snap-on’s consolidated financial position, results of operations or cash flows.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders during the fourth quarter of 2009.

PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

At 2009 year end, Snap-on had 57,745,049 shares of common stock outstanding. Snap-on’s stock is listed on the New York Stock Exchange under the ticker symbol “SNA.” At February 12, 2010, there were 6,642 registered holders of Snap-on common stock.

Snap-on’s common stock high and low prices, as of the close of trading, for the last two years by quarter were as follows:

 

     Common Stock High/Low Prices
     2009    2008

    Quarter    

   High    Low    High    Low

First

       $   41.07            $   20.66            $   53.01            $   39.78    

Second

     34.70          26.79          61.92          50.57    

Third

     38.63          26.50          59.73          50.00    

Fourth

     43.57          34.05          52.66          28.62    

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Quarterly dividends declared in both 2009 and 2008 were $0.30 per share ($1.20 per share for each year). Quarterly dividends declared in 2007 were $0.30 per share in the fourth quarter and $0.27 per share in the first three quarters ($1.11 per share for the year). Cash dividends paid in 2009, 2008 and 2007 totaled $69.0 million, $69.7 million and $64.8 million, respectively. Snap-on’s Board of Directors (“Board”) monitors and evaluates the company’s dividend practice quarterly and the Board may elect to increase, decrease or not pay a dividend on Snap-on common stock based upon the company’s financial condition, results of operations, cash requirements and future prospects of Snap-on and other factors deemed relevant by the Board.

See Note 13 to the Consolidated Financial Statements for information on securities authorized for issuance under equity compensation plans.

 

 

 

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The company did not repurchase any shares of its common stock in 2009. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, stock options and other corporate purposes. The repurchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions. At 2009 year end, the approximate value of shares that may yet be purchased pursuant to three outstanding Board authorizations was $130.1 million. The three outstanding Board authorizations are described below:

 

   

In 1996, the Board authorized the company to repurchase shares of the company’s common stock from time to time in the open market or in privately negotiated transactions (“the 1996 Authorization”). The 1996 Authorization allows the repurchase of up to the number of shares issued or delivered from treasury from time to time under the various plans the company has in place that call for the issuance of the company’s common stock. Because the number of shares that are purchased pursuant to the 1996 Authorization will change from time to time as (i) the company issues shares under its various plans; and (ii) shares are repurchased pursuant to this authorization, the number of shares authorized to be repurchased will vary from time to time. The 1996 Authorization will expire when terminated by the Board. When calculating the approximate value of shares that the company may yet purchase under the 1996 Authorization, the company assumed a price of $36.53, $36.44 and $42.26 per share of common stock as of the end of the fiscal 2009 months ended October 31, 2009, November 28, 2009, and January 2, 2010, respectively.

 

   

In 1998, the Board authorized the repurchase of an aggregate of $100 million of the company’s common stock (“the 1998 Authorization”). The 1998 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board.

 

   

In 1999, the Board authorized the repurchase of an aggregate of $50 million of the company’s common stock (“the 1999 Authorization”). The 1999 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board.

 

 

 

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Five-year Stock Performance Graph

The graph below illustrates the cumulative total shareholder return on Snap-on Common Stock since December 31, 2004, assuming that dividends were reinvested. The graph compares Snap-on’s performance to that of the Standard & Poor’s 500 Stock Index (“S&P 500”) and a Peer Group.

Snap-on Incorporated Total Shareholder Return (1) 

LOGO

 

Fiscal Year Ended (2)

   Snap-on
Incorporated
   Peer Group (3)    S&P 500

December 31, 2004

       $   100.00            $   100.00            $   100.00    

December 31, 2005

     112.47          104.39          104.91    

December 31, 2006

     146.28          122.35          121.48    

December 31, 2007

     151.42          142.07          128.16    

December 31, 2008

     126.65          91.69          80.74    

December 31, 2009

     141.25          117.53          102.11    

 

(1)

Assumes $100 was invested on December 31, 2004, and that dividends were reinvested quarterly.

(2)

The company’s fiscal year ends on the Saturday closest to December 31 of each year; the fiscal year end is assumed to be December 31 for ease of calculation.

(3)

The Peer Group consists of: The Black & Decker Corporation, Cooper Industries, Ltd., Danaher Corporation, Emerson Electric Co., Fortune Brands, Inc., Genuine Parts Company, Newell Rubbermaid Inc., Pentair, Inc., SPX Corporation, The Stanley Works and W.W. Grainger, Inc.

 

 

 

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Item 6: Selected Financial Data

The selected financial data presented below has been derived from, and should be read in conjunction with, the respective historical consolidated financial statements of the company, including the notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Five-year Data

         

(Amounts in millions, except per share data)

  2009   2008   2007   2006   2005

Results of Operations

         

Net sales

      $   2,362.5           $   2,853.3           $   2,841.2           $   2,455.1           $   2,281.0    

Gross profit

    1,057.6         1,284.6         1,266.6         1,079.8         1,011.2    

Operating expenses

    824.4         933.1         964.2         930.0         863.5    

Operating earnings before financial services

    233.2         351.5         302.4         149.8         147.7    

Financial services revenue

    58.3         81.4         63.0         49.0         53.6    

Financial services expenses

    40.8         44.1         40.6         36.0         37.9    

Operating earnings

    250.7         388.8         324.8         162.8         163.4    

Interest expense

    47.7         33.8         46.1         20.6         21.7    

Earnings before income taxes and equity earnings

    205.3         357.8         284.2         147.5         144.8    

Income tax expense

    62.7         117.8         92.5         45.9         55.2    

Earnings before equity earnings

    142.6         240.0         191.7         101.6         89.6    

Equity earnings, net of tax

    1.1         3.6         2.4         –            2.1    

Net earnings from continuing operations

    143.7         243.6         194.1         101.6         91.7    

Income (loss) from discontinued operations, net of tax

    –            –            (8.0)        2.2         4.7    

Net earnings

    143.7         243.6         186.1         103.8         96.4    

Net earnings attributable to noncontrolling interests

    (9.5)        (6.9)        (4.9)        (3.7)        (3.5)   

Net earnings attributable to Snap-on Inc.

    134.2         236.7         181.2         100.1         92.9    

Financial Position

         

Cash and cash equivalents

      $ 699.4           $ 115.8           $ 93.0           $ 63.4           $ 170.4    

Trade and other accounts receivable – net

    414.4         462.2         512.6         494.1         432.2    

Contract receivables – net

    32.9         22.8         31.8         20.0         17.4    

Finance receivables – net

    122.3         37.1         42.5         45.1         36.3    

Inventories – net

    274.7         359.2         322.4         323.0         283.2    

Current assets

    1,676.1         1,140.7         1,187.4         1,113.2         1,072.9    

Property and equipment – net

    347.8         327.8         304.8         297.1         295.5    

Total assets

    3,447.4         2,710.3         2,765.1         2,654.5         2,008.4    

Notes payable and current maturities of long-term debt

    164.7         12.0         15.9         43.6         24.8    

Accounts payable

    119.8         126.0         171.6         178.8         135.4    

Current liabilities

    739.9         547.5         639.2         682.0         506.1    

Long-term debt

    902.1         503.4         502.0         505.6         201.7    

Total debt

    1,066.8         515.4         517.9         549.2         226.5    

Total shareholders’ equity attributable to Snap-on Inc.

    1,290.0         1,186.5         1,280.1         1,076.3         962.2    

Working capital

    936.2         593.2         548.2         431.2         566.8    

Common Share Summary

         

Average shares outstanding – diluted

    57.9         58.1         58.6         59.2         58.4    

Earnings per share, continuing operations:

         

Basic

      $ 2.33           $ 4.12           $ 3.27           $ 1.68           $ 1.53    

Diluted

    2.32         4.07         3.23         1.65         1.51    

Net earnings per share attributable to Snap-on Inc.:

         

Basic

    2.33         4.12         3.13         1.72         1.61    

Diluted

    2.32         4.07         3.09         1.69         1.59    

Cash dividends paid per share

    1.20         1.20         1.11         1.08         1.00    

Shareholders’ equity per basic share

    22.36         20.63         22.11         18.46         16.65    

Fiscal year-end per share price

    42.26         41.10         48.13         47.64         37.56    

 

 

 

 

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Snap-on terminated its financial services joint venture agreement with CIT on July 16, 2009, and subsequently purchased CIT’s 50%-ownership interest in SOC for $8.1 million. Since July 16, 2009, Snap-on is providing financing for the majority of new contracts originated by SOC. New contracts originated by SOC are reflected as contract and finance receivables on the company’s balance sheet and the company is recording the interest yield on these receivables over the life of the contracts as financial services revenue. Previously, the company recorded gains on contracts sold to CIT as financial services revenue. The lower levels of both financial services revenues and financial services operating income in 2009 primarily resulted from the change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-balance-sheet finance portfolio.

 

 

Results of operations for all years presented prior to 2008 have been restated to reflect the 2007 sale of the Sun Electric Systems (“SES”) business based in the Netherlands as discontinued operations. Snap-on recorded an $8.0 million net loss from the sale of SES in 2007. See Note 16 to the Consolidated Financial Statements for information on the sale of SES.

 

 

Operating expenses and operating earnings in 2006 included a $38.0 million pretax charge ($23.4 million after tax or $0.40 per diluted share) to settle certain legal matters related to certain then current and former franchisees. Results in 2006 also included the impact of the company’s acquisition of Snap-on Business Solutions for the approximate five-week period from the November 28, 2006 acquisition date to year end.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management Overview

Unless otherwise indicated, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “fiscal 2009” or “2009” refer to the fiscal year ended January 2, 2010; references to “fiscal 2008” or “2008” refer to the fiscal year ended January 3, 2009; references to “fiscal 2007” or “2007” refer to the fiscal year ended December 29, 2007. References to “year end” 2009, 2008 and 2007 refer to January 2, 2010, January 3, 2009, and December 29, 2007, respectively.

The economic slowdown and tightened credit environment that began in 2008 continued into 2009, as customers curtailed spending in response to the worsening global recession. Despite the challenges of the ongoing recession, we continued investing in, and even accelerated, certain of our strategic growth initiatives aimed at strengthening our business models, pursuing geographic and customer diversification, expanding our presence in emerging markets and driving value creation processes, including innovation and Rapid Continuous Improvement (described below). We continue to believe that the advancement of these strategic initiatives will help create an environment to achieve long-term value for company shareholders, associates, franchisees and other distributor partners across our varied business segments and channels.

Net sales in 2009 of $2,362.5 million decreased $490.8 million, or 17.2%, from 2008 levels, with unfavorable currency translation contributing $98.5 million, or 20.0%, of the sales decline. Operating earnings of $250.7 million in 2009 decreased $138.1 million from 2008 levels primarily due to the lower sales volumes. In 2009, operating earnings contributions from the company’s ongoing efficiency and productivity (collectively “Rapid Continuous Improvement” or “RCI”) initiatives and other cost reduction activities, including benefits from restructuring, material cost reductions, and savings from cost containment actions, more than offset the impacts of costs to carry manufacturing capacity in light of lower demand and inventory reduction efforts, unfavorable currency effects, lower financial services income and higher year-over-year restructuring costs.

On July 16, 2009, Snap-on terminated its joint venture agreement with CIT Group Inc. (“CIT”) relating to the parties’ Snap-on Credit LLC (“SOC”) financial services joint venture and subsequently purchased CIT’s 50%-ownership interest in the joint venture for $8.1 million pursuant to the terms of the joint venture agreement. Since July 16, 2009, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts. Previously, SOC sold new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year decline in both financial services revenues and operating earnings. As a result of this change, Snap-on anticipates that financial services revenue and operating income will, through the second quarter of 2010, decline compared to prior-year periods as the company builds its portfolio of on-book finance receivables. Snap-on expects that operating income from financial services will improve as the on-book finance portfolio grows.

In response to the global economic challenges, we accelerated certain RCI and other strategic initiatives in 2009, including those planned investments that we see as potentially enabling near-term growth, such as the further expansion of our manufacturing capacity in China and Eastern Europe. In 2010, we intend to aggressively manage the balance between investing and capturing growth opportunities with the need for additional cost reduction actions beyond those already implemented or planned. In 2009, we experienced adverse effects from foreign currency exchange rate movements; given our increasingly global footprint, foreign currency rates could continue to have a more pronounced effect on our sales and operating profit comparisons.

Our strategic priorities and plans for 2010 will continue to build on the improvement initiatives underway to achieve sustainable, profitable growth. Global market conditions in 2010, however, may affect the level and timing of resources deployed in pursuit of these initiatives.

In the Commercial & Industrial Group, segment net sales in 2009 of $1,083.8 million were down 23.1% from 2008 levels, primarily as a result of the economic downturn that particularly impacted sales volumes in various European markets. Excluding $63.9 million of unfavorable foreign currency translation, organic (excluding foreign currency translation effects) sales in 2009 declined $261.6 million, or 19.4%, year over year. Operating earnings of $48.3 million in 2009 declined $119.0 million from 2008 levels as the impacts of lower sales, costs to carry manufacturing capacity in light of lower demand and inventory reduction efforts, primarily in Europe, and higher restructuring costs were only partially offset by $52.3 million of savings from ongoing RCI and restructuring initiatives, including savings from cost containment actions. The Commercial & Industrial Group incurred $18.2 million of restructuring costs in 2009 primarily to improve the segment’s cost structure in Europe.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

The Commercial & Industrial Group intends to build on the following strategic priorities in 2010:

 

   

Continuing to invest in emerging market growth initiatives, including China, India and Eastern Europe;

   

Increasing market share in key industrial market segments by reaching new customers, expanding our business with existing customers, and continually expanding value-added content;

   

Continuing to invest in innovation that delivers productivity-enhancing solutions that utilize the latest technology; and

   

Continuing to rationalize the operating footprint and reduce structural costs.

In the Snap-on Tools Group, progress continued on fundamental, strategic initiatives to strengthen the group and enhance franchisee profitability and satisfaction.

Segment net sales of $998.5 million in 2009 declined $105.5 million, or 9.6%, from 2008 levels, primarily due to the continued challenging global economy. Excluding $23.7 million of unfavorable currency translation, organic sales declined 7.6%. However, supply chain improvements and an ongoing transition to a market-demand-based replenishment system continued to improve complete and on-time delivery of a broad assortment of products in 2009. Operating earnings in 2009 of $110.8 million declined $6.9 million from 2008 levels, as the impacts of the lower sales and $20.9 million of unfavorable currency effects were largely offset by $43.5 million of savings from ongoing RCI and other cost reduction initiatives, including benefits from restructuring, material cost reductions and savings from cost containment actions.

The Snap-on Tools Group intends to continue to build on the progress made in enhancing the franchise proposition and delivering customer productivity solutions, with specific initiatives in 2010 focused on the following:

 

   

Continuing to improve franchisee profitability and satisfaction;

   

Continuing to fill open territories in the United States and Canada;

   

Developing new programs to expand market coverage;

   

Continuing to invest in new product innovation and development; and

   

Increasing operational flexibility in back office support functions, manufacturing and the supply chain through RCI initiatives and investment, as required.

By executing in these areas, we believe that we, as well as our franchisees, will continue to serve more customers better and more profitably.

In the Diagnostics & Information Group, segment net sales of $530.6 million in 2009 declined $97.2 million, or 15.5%, from 2008 levels, while operating earnings in 2009 increased $6.5 million year over year to $119.4 million. The increase in operating earnings primarily reflects the impacts of a more favorable sales mix of higher-margin diagnostics and software products, despite the lower sales, and $24.8 million of savings from ongoing RCI and other cost reduction initiatives, including savings from cost containment actions.

The improved sales mix of diagnostics and Mitchell1 information products in 2009 benefited from the development and launch of new products and the continued expansion of functionality, content and product integration. Sales of the company’s electronic parts catalogs to original equipment manufacturers (“OEMs”) and their franchised dealer networks declined from 2008 levels primarily due to lower non-recurring hardware, training and installation revenue resulting from the completion of a major multi-year deployment in 2008, and the impact of automotive dealership closures in North America. Fewer major essential tool distribution programs by OEMs in North America and the impact of the wind down of a major facilitation program in Europe also impacted 2009 sales. In addition, many OEM dealerships delayed capital investment programs in 2009 as they evaluated the impacts of the substantial and continued weakness in the automotive industry. Despite lower year-over-year sales, the 2006 acquisition of Snap-on Business Solutions continues to provide a strong base for relationships with key OEM customers, strengthening our position as a provider of essential productivity solutions.

 

 

 

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The Diagnostics & Information Group intends to focus on the following strategic priorities in 2010:

 

   

Continuing software and hardware upgrades;

   

Expanding product range with new products and services;

   

Increasing penetration in geographic markets;

   

Leveraging integration of software solutions; and

   

Continuing productivity advancements through RCI initiatives and leveraging of resources.

Financial Services revenue and operating earnings in 2009 decreased to $58.3 million and $17.5 million, respectively. Financial services revenue and operating earnings in 2008 totaled $81.4 million and $37.3 million, respectively. As discussed above, on July 16, 2009, Snap-on terminated its financial services joint venture agreement with CIT. Since July 16, 2009, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The decrease in year-over-year financial services revenue and operating earnings is primarily due to the change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables. Originations of $498.1 million in 2009 decreased $12.6 million, or 2.5%, from 2008 levels.

Financial Services intends to focus on the following strategic priorities in 2010:

 

   

Delivering financial products and services that attract and sustain profitable franchisees;

   

Delivering financial products and services that foster lifetime customer loyalty;

   

Delivering high quality in all of our financial products and processes through the use of RCI initiatives; and

   

Improving overall portfolio performance.

Cash Flows

Net cash provided from operating activities was $347.1 million in 2009 as compared to $220.4 million in 2008. The $126.7 million increase in cash flow from operating activities in 2009 resulted primarily from net changes in operating assets and liabilities, partially offset by lower 2009 net earnings.

Net cash used by investing activities of $241.7 million in 2009 included additions to, and collections of, finance receivables of $265.5 million and $82.0 million, respectively, following the July 2009 termination of the financial services joint venture agreement with CIT. Capital expenditures in 2009 of $64.4 million included continued spending to support the company’s strategic growth initiatives, including the expansion of manufacturing capabilities in emerging growth markets and lower-cost regions. Capital expenditures in 2009 also included spending to complete the construction of a new headquarters and research and development facility for the company’s automotive parts and service information business, which was completed in the fourth quarter. Subsequent to the July 16, 2009 termination of the financial services joint venture agreement with CIT, Snap-on acquired CIT’s 50%-ownership interest in SOC for $8.1 million.

Net cash provided by financing activities totaled $475.6 million in 2009. In 2009, Snap-on issued $550 million of unsecured fixed rate, long-term notes. Snap-on is using the $545.9 million of net proceeds from the sale of these notes for general corporate purposes, including the funding of receivables contracts originated by SOC and the repayment of $150 million of floating rate debt on January 12, 2010. Cash dividends paid to shareholders totaled $69.0 million in 2009; the company did not repurchase any shares of its common stock in 2009.

 

 

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Results of Operations

2009 vs. 2008

Results of operations for 2009 and 2008 are as follows:

 

(Amounts in millions)

  2009   2008   Change

Net sales

      $ 2,362.5           100.0%           $ 2,853.3           100.0%           $     (490.8)           -17.2%    

Cost of goods sold

      (1,304.9)      -55.2%           (1,568.7)      -55.0%         263.8        16.8%    
                       

Gross profit

    1,057.6       44.8%         1,284.6       45.0%         (227.0)       -17.7%    

Operating expenses

    (824.4)      -34.9%         (933.1)      -32.7%         108.7        11.6%    
                       

Operating earnings before financial services

    233.2       9.9%         351.5       12.3%         (118.3)       -33.7%    

Financial services revenue

    58.3       100.0%         81.4       100.0%         (23.1)       -28.4%    

Financial services expenses

    (40.8)      -70.0%         (44.1)      -54.2%         3.3        7.5%    
                       

Operating earnings from financial services

    17.5       30.0%         37.3       45.8%         (19.8)       -53.1%    
                       

Operating earnings

    250.7       10.4%         388.8       13.2%         (138.1)       -35.5%    

Interest expense

    (47.7)      -2.0%         (33.8)      -1.1%         (13.9)       -41.1%    

Other income (expense) – net

    2.3       0.1%         2.8       0.1%         (0.5)       -17.9%    
                       

Earnings before income taxes and equity earnings

    205.3       8.5%         357.8       12.2%         (152.5)       -42.6%    

Income tax expense

    (62.7)      -2.6%         (117.8)      -4.0%         55.1        46.8%    
                       

Earnings before equity earnings

    142.6       5.9%         240.0       8.2%         (97.4)       -40.6%    

Equity earnings, net of tax

    1.1       –                3.6       0.1%         (2.5)       -69.4%    
                       

Net earnings

    143.7       5.9%         243.6       8.3%         (99.9)       -41.0%    

Net earnings attributable to noncontrolling interests

    (9.5)      -0.4%         (6.9)      -0.2%         (2.6)       -37.7%    
                       

Net earnings attributable to Snap-on Inc.

      $ 134.2       5.5%           $ 236.7       8.1%           $ (102.5)       -43.3%    
                       

 

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

Snap-on’s 2009 fiscal year contained 52 weeks of operating results; Snap-on’s 2008 fiscal year contained 53 weeks of operating results. The impact of the additional week in 2008, which occurred in the fourth quarter, was not material to Snap-on’s 2008 net sales or operating earnings.

Net sales in 2009 of $2,362.5 million were down $490.8 million, or 17.2%, from 2008 levels. Excluding $98.5 million of unfavorable currency translation, organic sales in 2009 declined 14.2% from 2008 levels. Snap-on has significant international operations and is subject to certain risks inherent with foreign operations, including currency translation fluctuations. The year-over-year sales comparison was significantly impacted by weakened consumer and business demand as customers curtailed spending in response to the global recession that continued throughout 2009.

Sales in the Commercial & Industrial Group of $1,083.8 million declined $325.5 million, or 23.1%, from 2008 levels; excluding $63.9 million of unfavorable currency translation, year-over-year organic sales declined 19.4%. Sales in the Snap-on Tools Group of $998.5 million were down $105.5 million, or 9.6%, from 2008 levels; excluding $23.7 million of unfavorable currency translation, year-over-year organic sales declined 7.6%. In the Diagnostics & Information Group, sales of $530.6 million were down $97.2 million, or 15.5%, from 2008 levels; excluding $15.6 million of unfavorable currency translation, year-over-year organic sales declined 13.3%.

 

 

 

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Gross profit in 2009 was $1,057.6 million as compared to $1,284.6 million in 2008. The $227.0 million decline in year-over-year gross profit is primarily due to the lower sales and costs to carry manufacturing capacity, mainly in the Commercial & Industrial Group, in light of lower demand and inventory reduction efforts. The decline in 2009 gross profit also included $54.0 million of unfavorable currency effects, $13.4 million of higher restructuring costs, primarily to improve the company’s cost structure in Europe, and $5.7 million of higher software development costs. These declines were partially offset by $54.6 million of savings from ongoing RCI and other cost reduction initiatives, including benefits from restructuring, material cost reductions, and savings from cost containment actions in light of the weakened economy. Year-over-year “last in, first out” (“LIFO”) related inventory valuation benefits as a result of inventory reductions in 2009 were largely offset by the effects of increased inventory write-offs and the liquidation of slow-moving and excess inventories. As a result of these factors, gross profit margin of 44.8% in 2009 declined 20 basis points (100 basis points equals 1.0 percent) from 45.0% in 2008.

Operating expenses in 2009 were $824.4 million as compared to $933.1 million in 2008. The $108.7 million reduction in year-over-year operating expenses primarily resulted from $66.0 million of benefits from ongoing RCI, restructuring and other cost reduction initiatives, including savings from cost containment actions in light of the weakened economy, $28.2 million of favorable currency translation, $20.1 million of lower performance-based incentive compensation expense, and $6.3 million of lower restructuring costs. These declines were partially offset by $11.5 million of higher bad debt expense, including increased credit exposure at North American automotive dealerships. In addition, operating expenses in 2009 included $12.0 million of increased pension expense primarily as a result of declines in pension asset values. As a percentage of net sales, operating expenses were 34.9% in 2009 as compared to 32.7% in 2008.

Operating earnings from financial services was $17.5 million on $58.3 million of revenue in 2009, as compared with operating earnings of $37.3 million on $81.4 million of revenue in 2008. On July 16, 2009, Snap-on terminated its financial services joint venture agreement with CIT and subsequently purchased CIT’s 50%-ownership interest in SOC. Since July 16, 2009, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year declines in both revenues and operating earnings. See Notes 2 and 3 to the Consolidated Financial Statements for further information.

Consolidated operating earnings in 2009 of $250.7 million declined $138.1 million, or 35.5%, from $388.8 million in 2008. In addition to the impact of the lower sales, the year-over-year decrease in operating earnings was due to $27.2 million of unfavorable currency effects, $19.8 million of lower operating earnings from financial services and $7.3 million of higher restructuring costs.

Interest expense of $47.7 million in 2009 increased $13.9 million from the prior year primarily due to higher debt levels as a result of the issuance of $550 million of fixed rate, long-term notes in 2009. See Note 9 to the Consolidated Financial Statements for information on the company’s debt and credit facilities.

Other income (expense) – net was income of $2.3 million in 2009 as compared to income of $2.8 million in 2008. Other income (expense) – net primarily included interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 32.0% in 2009 and 33.6% in 2008. The lower effective tax rate in 2009 is primarily due to higher realization of tax credits and a reduction of tax contingency reserves, partially offset by an unfavorable mix of foreign earnings. See Note 8 to the Consolidated Financial Statements for information on income taxes.

On March 5, 2008, Snap-on acquired a 60% interest in Zhejiang Wanda Tools Co., Ltd. (“Wanda Snap-on”), a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. For segment reporting purposes, the results of operations and assets of Wanda Snap-on are included in the Commercial & Industrial Group. Pro forma financial information has not been presented as the effects of the acquisition were not material to Snap-on’s results of operations or financial position. See Note 2 to the Consolidated Financial Statements for additional information on the Wanda Snap-on acquisition.

Net earnings attributable to Snap-on in 2009 were $134.2 million, or $2.32 per diluted share, as compared to net earnings attributable to Snap-on of $236.7 million, or $4.07 per diluted share, in 2008.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Exit and Disposal Activities

Snap-on recorded costs of $22.0 million for exit and disposal activities in 2009 as compared to $14.7 million of such costs in 2008. See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.

Segment Results

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on has aggregated its 11 operating segments into four reportable business segments based on their similar economic, business and other characteristics. Snap-on’s reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on’s wholly owned finance subsidiaries.

Snap-on evaluates the performance of its reportable segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools and the Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment’s operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes, pension assets and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

Commercial & Industrial Group

 

(Amounts in millions)

   2009    2008    Change

External net sales

       $      962.9        88.8%            $   1,260.5        89.4%            $    (297.6)       -23.6%    

Intersegment net sales

     120.9        11.2%          148.8        10.6%          (27.9)       -18.8%    
                             

Segment net sales

     1,083.8            100.0%          1,409.3            100.0%          (325.5)       -23.1%    

Cost of goods sold

     (735.5)       -67.9%          (878.9)       -62.4%          143.4        16.3%    
                             

Gross profit

     348.3        32.1%          530.4        37.6%          (182.1)       -34.3%    

Operating expenses

     (300.0)       -27.6%          (363.1)       -25.7%          63.1        17.4%    
                             

Segment operating earnings

       $ 48.3        4.5%            $ 167.3        11.9%            $ (119.0)           -71.1%    
                             

Segment net sales of $1,083.8 million in 2009 declined $325.5 million, or 23.1%, from 2008 levels. Excluding $63.9 million of unfavorable currency translation, organic sales declined 19.4% year over year primarily as a result of the economic downturn that particularly affected sales volumes in various European markets in 2009.

Segment gross profit of $348.3 million in 2009 was down $182.1 million, or 34.3%, from 2008 levels. The $182.1 million decline in year-over-year gross profit is primarily due to the lower sales and costs to carry manufacturing capacity, mainly in Europe, in light of lower demand and inventory reduction efforts. The decline in 2009 gross profit also included $21.2 million of unfavorable currency effects and $5.3 million of inflationary cost increases. These declines were partially offset by benefits of $29.3 million from ongoing RCI, restructuring and other cost reduction and cost containment initiatives, including $11.7 million of material cost reductions. Operating expenses of $300.0 million in 2009 were down $63.1 million from 2008 levels primarily due to $23.0 million of savings from ongoing RCI, restructuring and other cost reduction and cost containment initiatives, $18.0 million of favorable currency translation, and lower volume-related and other expenses. Restructuring costs in 2009 of $18.2 million increased $14.0 million from 2008 levels primarily due to increased actions to improve the segment’s cost structure in Europe. As a result of these factors, segment operating earnings in 2009 declined $119.0 million from 2008 levels and, as a percentage of segment net sales, declined from 11.9% in 2008 to 4.5% in 2009. The $119.0 million decrease in year-over-year operating earnings included $3.2 million of unfavorable currency effects.

 

 

 

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Snap-on Tools Group

 

(Amounts in millions)

   2009    2008    Change

Segment net sales

       $      998.5            100.0%            $   1,104.0            100.0%            $    (105.5)             -9.6%    

Cost of goods sold

     (561.7)       -56.3%          (636.5)       -57.7%          74.8        11.8%    
                             

Gross profit

     436.8        43.7%          467.5        42.3%               (30.7)       -6.6%    

Operating expenses

     (326.0)       -32.6%          (349.8)       -31.6%          23.8        6.8%    
                             

Segment operating earnings

       $ 110.8        11.1%            $ 117.7        10.7%            $ (6.9)       -5.9%    
                             

Segment net sales of $998.5 million in 2009 declined $105.5 million, or 9.6%, from 2008 levels primarily due to the continued challenging sales environment in 2009. Excluding $23.7 million of unfavorable currency translation, organic sales declined 7.6% year over year. U.S. sales in the Snap-on Tools Group declined 9.5% year over year, while organic sales in the company’s international franchise operations were down slightly. At year-end 2009, van count in the United States was up slightly compared to both October 3, 2009, and year-end 2008 levels.

Segment gross profit of $436.8 million in 2009 decreased $30.7 million, or 6.6%, from 2008 levels. As a percentage of sales, gross profit margin in 2009 improved to 43.7% as compared to 42.3% last year. In addition to the lower sales and costs to carry manufacturing capacity in light of lower demand and inventory reduction efforts, gross profit in 2009 was also affected by $26.0 million of unfavorable currency effects. These declines in gross profit were partially offset by $16.5 million of savings from material and other cost reduction initiatives, including savings from cost containment actions. Year-over-year LIFO-related inventory valuation benefits of $14.6 million ($9.9 million of LIFO-related benefits in 2009 and $4.7 million of LIFO-related expense in 2008) as a result of inventory reductions in 2009 were largely offset by the effects of increased inventory write-offs and the liquidation of slow-moving and excess inventories. Operating expenses of $326.0 million in 2009 declined $23.8 million from prior-year levels primarily due to $27.0 million of benefits from RCI and other cost reduction and cost containment initiatives, lower volume-related and other expenses, and $5.1 million of favorable currency translation. Restructuring costs in 2009 totaled $1.5 million as compared to $7.3 million last year. As a result of these factors, segment operating earnings in 2009 decreased $6.9 million from 2008 levels; however, as a percentage of segment net sales, operating earnings in 2009 improved from 10.7% in 2008 to 11.1% in 2009. The $6.9 million decrease in year-over-year operating earnings included $20.9 million of unfavorable currency effects.

Diagnostics & Information Group

 

(Amounts in millions)

   2009    2008    Change

External net sales

       $   401.1        75.6%            $   488.8        77.9%            $       (87.7)       -17.9%    

Intersegment net sales

     129.5        24.4%          139.0        22.1%          (9.5)       -6.8%    
                             

Segment net sales

     530.6            100.0%          627.8            100.0%          (97.2)       -15.5%    

Cost of goods sold

     (258.1)       -48.6%          (341.1)       -54.3%          83.0        24.3%    
                             

Gross profit

     272.5        51.4%          286.7        45.7%          (14.2)       -5.0%    

Operating expenses

     (153.1)       -28.9%          (173.8)       -27.7%          20.7        11.9%    
                             

Segment operating earnings

       $ 119.4        22.5%            $ 112.9        18.0%            $ 6.5              5.8%    
                             

Segment net sales of $530.6 million in 2009 declined $97.2 million, or 15.5%, from 2008 levels. Excluding $15.6 million of unfavorable currency translation, organic sales declined 13.3% year over year primarily due to lower essential tool and facilitation program sales to OEM dealerships.

Segment gross profit of $272.5 million in 2009 decreased $14.2 million, or 5.0%, from 2008 levels; however, as a percentage of segment net sales, gross profit margin in 2009 improved to 51.4% as compared to 45.7% last year. The $14.2 million decrease in year-over-year gross profit primarily reflects the impacts of lower sales, $6.8 million of unfavorable currency effects and $6.2 million of higher software development costs. These declines in gross profit were partially offset by contributions from a more favorable sales mix of higher-margin diagnostics and software products, and $8.8 million of savings from ongoing RCI and other cost reduction initiatives, including savings from cost containment actions. Operating expenses of $153.1 million were down $20.7 million from 2008 levels primarily due to $16.0 million of savings from RCI and other cost containment actions, lower volume-related and other expenses, and $5.1 million of favorable currency translation. These declines in operating expenses were partially offset by $3.3 million of higher bad debt expense in 2009 primarily related to increased credit exposure at North American automotive dealerships. The year-over-year operating expense comparison was also impacted by the adjustment of a pre-acquisition contingency acquired with Snap-on Business Solutions that reduced 2008 operating expenses by $5.4 million. As a result of these factors, segment operating earnings of $119.4 million in 2009 increased $6.5 million from 2008 levels and, as a percentage of segment net sales, improved from 18.0% in 2008 to 22.5% in 2009. The $6.5 million increase in year-over-year operating earnings included $1.7 million of unfavorable currency effects.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Financial Services

 

(Amounts in millions)

   2009    2008    Change

Financial services revenue

       $     58.3            100.0%            $     81.4            100.0%            $   (23.1)           -28.4%    

Financial services expenses

     (40.8)       -70.0%          (44.1)       -54.2%          3.3        7.5%    
                             

Segment operating earnings

       $ 17.5        30.0%            $ 37.3        45.8%            $ (19.8)       -53.1%    
                             

Segment operating earnings were $17.5 million on $58.3 million of revenue in 2009, as compared with $37.3 million of operating earnings on $81.4 million of revenue in 2008. On July 16, 2009, Snap-on terminated its financial services joint venture agreement with CIT and subsequently purchased CIT’s 50%-ownership interest in SOC. Since July 16, 2009, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year declines in both revenues and operating earnings. Originations of $498.1 million in 2009 decreased $12.6 million, or 2.5%, from 2008 levels. The $19.8 million decrease in year-over-year financial services operating earnings included $1.4 million of unfavorable currency effects. See Notes 2 and 3 to the Consolidated Financial Statements for further information.

Corporate

Snap-on’s general corporate expenses totaled $45.3 million in 2009 as compared to $46.4 million in 2008. The $1.1 million decline in year-over-year corporate expenses is primarily due to lower performance-based incentive compensation and other expenses, partially offset by $12.0 million of higher pension expense primarily due to declines in pension asset values.

Supplemental Data

The supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing operating performance of the company’s non-financial services (“Operations”) and “Financial Services” businesses.

The supplemental Operations data reflects the results of operations and financial position of Snap-on’s tools, diagnostics, equipment, software and other non-financial services operations with Financial Services on the equity method. The supplemental Financial Services data reflects the results of operations and financial position of Snap-on’s U.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings from Snap-on Incorporated and Financial Services is charged intersegment interest expense on those intersegment borrowings at market rates. Long-term debt for Operations includes the company’s third party external borrowings, net of intersegment borrowings to Financial Services. Cash and cash equivalents for Financial Services primarily represents cash allocated from Operations based on outstanding intersegment borrowings made by Financial Services to Operations. Income taxes are charged (credited) to Financial Services on the basis of the specific tax attributes generated by the U.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the consolidated financial statements.

 

 

 

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Supplemental Consolidating Data – The supplemental Statements of Earnings information for 2009 and 2008 are as follows:

 

     Operations*    Financial Services

(Amounts in millions)

   2009    2008    2009    2008

Net sales

       $ 2,362.5            $ 2,853.3            $          –               $          –       

Cost of goods sold

       (1,304.9)           (1,568.7)         –             –       
                           

Gross profit

     1,057.6          1,284.6          –             –       

Operating expenses

     (824.4)         (933.1)         –             –       
                           

Operating earnings before financial services

     233.2          351.5          –             –       

Financial services revenue

     –             –             58.3          81.4    

Financial services expenses

     –             –             (40.8)         (44.1)   
                           

Operating earnings from financial services

     –             –             17.5          37.3    
                           

Operating earnings

     233.2          351.5          17.5          37.3    

Interest expense

     (47.7)         (33.8)         –             –       

Intersegment interest income (expense) – net

     3.0          (2.3)         (3.0)         2.3    

Other income (expense) – net

     3.0          2.5          (0.7)         0.3    
                           

Earnings before income taxes and equity earnings

     191.5          317.9          13.8          39.9    

Income tax expense

     (60.1)         (104.6)         (2.6)         (13.2)   
                           

Earnings before equity earnings

     131.4          213.3          11.2          26.7    

Financial services – net earnings attributable to Snap-on Incorporated

     6.9          24.5          –             –       

Equity earnings, net of tax

     1.1          3.6          –             –       
                           

Net earnings

     139.4          241.4          11.2          26.7    

Net earnings attributable to noncontrolling interests

     (5.2)         (4.7)         (4.3)         (2.2)   
                           

Net earnings attributable to Snap-on Incorporated

       $ 134.2            $ 236.7            $ 6.9            $ 24.5    
                           

 

*

Snap-on Incorporated with Financial Services on the equity method.

 

 

 

   2009 ANNUAL REPORT    33


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Supplemental Consolidating Data – The 2009 supplemental year-end Balance Sheet information is as follows:

 

    2009

(Amounts in millions)

  Operations*    Financial
Services

ASSETS

    

Current assets

    

Cash and cash equivalents

      $     577.1            $ 122.3    

Intersegment receivables

    4.8          0.1    

Trade and other accounts receivable – net

    411.5          2.9    

Contract receivables – net

    7.4          25.5    

Finance receivables – net

    –             122.3    

Inventories – net

    274.7          –       

Deferred income tax assets

    69.3          0.2    

Prepaid expenses and other assets

    60.1          2.8    
            

Total current assets

    1,404.9          276.1    

Property and equipment – net

    346.4          1.4    

Investment in Financial Services

    205.6          –       

Deferred income tax assets

    73.6          14.6    

Long-term contract receivables – net

    10.9          59.8    

Long-term finance receivables – net

    –             177.9    

Goodwill

    814.3          –       

Other intangibles – net

    206.2          –       

Other assets

    65.2          1.0    
            

Total assets

      $     3,127.1              $     530.8    
            

 

 

 

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Table of Contents

 

 

 

Supplemental Consolidating Data – Balance Sheet Information (continued):

 

     2009

(Amounts in millions)

   Operations*   Financial
Services

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities

    

Notes payable and current maturities of long-term debt

       $ 164.7           $     –       

Accounts payable

     119.3         0.5    

Intersegment payables

     4.2         0.7    

Accrued benefits

     48.4         0.3    

Accrued compensation

     61.6         3.2    

Franchisee deposits

     40.5         –       

Other accrued liabilities

     215.7         85.7    
            

Total current liabilities

     654.4         90.4    

Long-term debt and intersegment long-term debt

     674.8         227.3    

Deferred income tax liabilities

     97.8         –       

Retiree health care benefits

     60.7         –       

Pension liabilities

     255.9         –       

Other long-term liabilities

     77.9         7.5    
            

Total liabilities

     1,821.5         325.2    
            

Total shareholders’ equity attributable to Snap-on Incorporated

     1,290.0         205.6    

Noncontrolling interests

     15.6         –       
            

Total shareholders’ equity

     1,305.6         205.6    
            

Total liabilities and shareholders’ equity

       $     3,127.1           $        530.8    
            

 

*

Snap-on Incorporated with Financial Services on the equity method.

 

 

 

   2009 ANNUAL REPORT    35


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Fourth Quarter

Results of operations for the fourth quarters of 2009 and 2008 are as follows:

 

     Fourth Quarter     
(Amounts in millions)    2009    2008    Change

Net sales

       $ 618.1            100.0%            $ 667.8            100.0%            $     (49.7)            -7.4%    

Cost of goods sold

        (333.7)       -54.0%            (367.8)       -55.1%          34.1        9.3%    
                             

Gross profit

     284.4        46.0%          300.0        44.9%          (15.6)       -5.2%    

Operating expenses

     (213.2)       -34.5%          (211.4)       -31.7%          (1.8)       -0.9%    
                             

Operating earnings before financial services

     71.2        11.5%          88.6        13.2%          (17.4)       -19.6%    

Financial services revenue

     6.7        100.0%          19.7        100.0%          (13.0)       -66.0%    

Financial services expenses

     (10.5)       -156.7%          (10.8)       -54.8%          0.3        2.8%    
                             

Operating earnings (loss) from financial services

     (3.8)       -56.7%          8.9        45.2%          (12.7)       NM        
                             

Operating earnings

     67.4        10.8%          97.5        14.2%          (30.1)       -30.9%    

Interest expense

     (14.7)       -2.4%          (8.7)       -1.3%          (6.0)       -69.0%    

Other income (expense) – net

     1.3        0.2%          (0.5)       -0.1%          1.8        NM        
                             

Earnings before income taxes and equity earnings

     54.0        8.6%          88.3        12.8%          (34.3)       -38.8%    

Income tax expense

     (16.5)       -2.6%          (28.2)       -4.1%          11.7        41.5%    
                             

Earnings before equity earnings

     37.5        6.0%          60.1        8.7%          (22.6)       -37.6%    

Equity earnings, net of tax

     0.6        0.1%          0.4        0.1%          0.2        50.0%    
                             

Net earnings

     38.1        6.1%          60.5        8.8%          (22.4)       -37.0%    

Net earnings attributable to noncontrolling interests

     (1.5)       -0.2%          (1.9)       -0.3%          0.4        21.1%    
                             

Net earnings attributable to Snap-on Inc.

       $ 36.6        5.9%            $ 58.6        8.5%            $ (22.0)       -37.5%    
                             

 

NM: Not meaningful

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

Snap-on’s 2009 fiscal year contained 52 weeks of operating results; Snap-on’s 2008 fiscal year contained 53 weeks of operating results, with the extra week occurring in the fourth quarter. The impact of the additional week in 2008 was not material to Snap-on’s fourth quarter 2008 net sales or operating earnings.

Net sales in the fourth quarter of 2009 of $618.1 million were down $49.7 million, or 7.4%, from 2008 levels. Excluding $27.2 million of favorable currency translation, organic sales in the fourth quarter of 2009 declined 11.1% from 2008 levels, primarily due to the challenging global economic environment that persisted throughout 2009.

Sales in the Commercial & Industrial Group of $302.2 million were down $24.6 million, or 7.5%, from 2008 levels. Excluding $17.3 million of favorable currency translation, organic sales in the Commercial & Industrial Group declined 12.2% primarily due to the continued economic downturn, particularly as it has affected Europe. Sales in the Snap-on Tools Group of $251.2 million declined $1.2 million, or 0.5%, from 2008 levels. Excluding $8.5 million of favorable currency translation, organic sales in the Snap-on Tools Group declined 3.7%. In the Diagnostics & Information Group, sales of $129.1 million were down $23.8 million, or 15.6%, from 2008 levels. Excluding $1.9 million of favorable currency translation, organic sales in the Diagnostics & Information Group declined 16.6%.

 

 

 

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Gross profit in the fourth quarter of 2009 was $284.4 million as compared to $300.0 million in 2008; as a percentage of sales, gross margin improved 110 basis points from 44.9% last year to 46.0% this year. The $15.6 million decline in year-over-year gross profit is primarily due to the lower sales, costs to carry manufacturing capacity, mainly in the Commercial & Industrial Group, and $4.7 million of higher restructuring costs, primarily to improve the company’s cost structure in Europe. These declines were partially offset by $17.5 million of savings from ongoing RCI and other cost reduction initiatives, including benefits from restructuring, material cost reductions and savings from cost containment actions in light of the weakened economy, and $7.0 million of favorable currency effects. Year-over-year LIFO-related inventory valuation benefits as a result of inventory reductions in 2009 were more than offset by the effects of increased inventory write-offs and the liquidation of slow-moving and excess inventories.

Operating expenses in the fourth quarter of 2009 were $213.2 million as compared to $211.4 million in 2008. The $1.8 million increase in year-over-year operating expenses is primarily due to $7.4 million of unfavorable currency translation, $6.1 million of higher stock-based (mark to market) compensation expense, $4.5 million of increased bad debt expense, and $3.0 million of higher pension expense primarily as a result of declines in pension asset values. These increases were partially offset by $19.2 million of benefits from ongoing RCI, restructuring and other cost reduction initiatives, including savings from cost containment actions in light of the weakened economy, $4.7 million of lower restructuring costs, and lower volume-related expenses. The year-over-year operating expense comparison was also impacted by the adjustment of a pre-acquisition contingency acquired with Snap-on Business Solutions that reduced fourth-quarter 2008 operating expenses by $5.4 million. As a percentage of net sales, operating expenses were 34.5% in the fourth quarter of 2009 as compared to 31.7% in the fourth quarter of 2008.

Operating loss from financial services was $3.8 million on $6.7 million of revenue in the fourth quarter of 2009, as compared with $8.9 million of operating earnings on $19.7 million of revenue in 2008. Since the July 16, 2009 termination of the financial services joint venture agreement with CIT, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year declines in both revenues and operating earnings. Originations of $132.0 million in the fourth quarter of 2009 increased 7.4% from comparable prior-year levels. See Notes 2 and 3 to the Consolidated Financial Statements for further information.

Consolidated operating earnings in the fourth quarter of 2009 of $67.4 million declined $30.1 million, or 30.9%, from the $97.5 million achieved in the fourth quarter of 2008.

Interest expense of $14.7 million in the fourth quarter of 2009 increased $6.0 million from the prior year primarily due to higher debt levels as a result of the issuance of $550 million of fixed rate, long-term notes in 2009. See Note 9 to the Consolidated Financial Statements for information on the company’s debt and credit facilities.

Other income (expense) – net was income of $1.3 million in the fourth quarter of 2009 as compared to expense of $0.5 million in 2008. Other income (expense) – net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 31.4% in the fourth quarter of 2009 and 32.6% in the fourth quarter of 2008. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on in the fourth quarter of 2009 were $36.6 million, or $0.63 per diluted share. Net earnings attributable to Snap-on in the fourth quarter of 2008 were $58.6 million, or $1.01 per diluted share.

 

 

 

   2009 ANNUAL REPORT    37


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Commercial & Industrial Group

 

     Fourth Quarter     

(Amounts in millions)

   2009    2008    Change

External net sales

       $   268.4        88.8%             $  295.1            90.3%             $   (26.7)       -9.0%     

Intersegment net sales

     33.8        11.2%           31.7        9.7%           2.1        6.6%     
                             

Segment net sales

     302.2            100.0%           326.8        100.0%           (24.6)       -7.5%     

Cost of goods sold

     (200.6)       -66.4%           (203.2)       -62.2%           2.6        1.3%     
                             

Gross profit

     101.6        33.6%           123.6        37.8%           (22.0)       -17.8%     

Operating expenses

     (79.9)       -26.4%           (84.5)       -25.8%           4.6        5.4%     
                             

Segment operating earnings

       $ 21.7        7.2%             $ 39.1        12.0%             $ (17.4)           -44.5%     
                             

Segment net sales of $302.2 million in the fourth quarter of 2009 declined $24.6 million, or 7.5%, from 2008 levels. Excluding $17.3 million of favorable currency translation, organic sales declined $41.9 million, or 12.2%, primarily as a result of the continued economic downturn that has particularly impacted sales volumes in various European markets. The year-over-year sales decline was partially offset by continued higher sales in emerging growth markets and increased sales of equipment in North America.

Segment gross profit of $101.6 million in the fourth quarter of 2009 was down $22.0 million, or 17.8%, from 2008 levels. As a percentage of segment net sales, gross profit margin of 33.6% declined 420 basis points from 37.8% last year. The $22.0 million decline in year-over-year gross profit is primarily due to the lower sales and costs to carry manufacturing capacity, primarily in Europe, in light of lower demand and inventory reduction efforts. Gross profit was also negatively impacted by $5.8 million of higher restructuring costs, primarily to improve the segment’s cost structure in Europe. These decreases in gross profit were partially offset by $9.9 million of savings from ongoing RCI, restructuring and other cost reduction and cost containment initiatives, including $2.3 million of material cost reductions, and $5.1 million of favorable currency effects. Operating expenses of $79.9 million in the quarter were down $4.6 million from 2008 levels primarily due to $6.5 million of savings from restructuring and other cost reduction and cost containment initiatives, lower volume-related expenses, and $1.6 million of lower restructuring costs. These decreases in operating expenses were partially offset by $4.2 million of unfavorable currency translation and $2.6 million of other expense increases, including higher spending to support expansion in emerging growth markets. As a result of these factors, segment operating earnings of $21.7 million in the fourth quarter of 2009 declined $17.4 million from 2008 levels, with the majority of the decline attributable to the segment’s European-based tools business. As a percentage of segment net sales, operating earnings for the Commercial & Industrial Group declined from 12.0% in 2008 to 7.2% in 2009.

Snap-on Tools Group

 

     Fourth Quarter     

(Amounts in millions)

   2009    2008    Change

Segment net sales

       $   251.2            100.0%            $   252.4            100.0%            $      (1.2)       -0.5%    

Cost of goods sold

     (137.1)       -54.6%          (147.3)       -58.4%          10.2        6.9%    
                             

Gross profit

     114.1        45.4%          105.1        41.6%          9.0        8.6%    

Operating expenses

     (80.9)       -32.2%          (85.3)       -33.8%          4.4        5.2%    
                             

Segment operating earnings

       $ 33.2        13.2%            $ 19.8        7.8%            $ 13.4              67.7%    
                             

Segment net sales of $251.2 million in the fourth quarter of 2009 declined $1.2 million, or 0.5%, from 2008 levels. Excluding $8.5 million of favorable currency translation, organic sales declined 3.7% year over year. Sales in the company’s U.S. franchise operations declined 3.8% year over year despite a slight increase in the number of vans in the quarter; organic sales in the company’s international franchise operations were down slightly. As of 2009 year end, van levels in the United States were up slightly compared with both third-quarter 2009 and year-end 2008 levels.

 

 

 

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Segment gross profit of $114.1 million in the fourth quarter of 2009 increased $9.0 million, or 8.6%, from 2008 levels. As a percentage of sales, gross profit margin improved 380 basis points from 41.6% in 2008 to 45.4% in 2009. The $9.0 million increase in year-over-year gross profit includes $5.5 million of savings from material cost reductions, $4.2 million of favorable manufacturing utilization as a result of increasing U.S. production levels, $1.3 million of favorable currency effects and $1.1 million of lower restructuring costs. These increases in gross profit were partially offset by the lower level of organic sales in 2009. Year-over-year LIFO-related inventory valuation benefits of $7.0 million ($6.7 million of LIFO-related benefits in 2009 and $0.3 million of LIFO-related expense in 2008) as a result of inventory reductions in 2009 were offset by the effects of increased inventory write-offs and the liquidation of slow-moving and excess inventories. Operating expenses of $80.9 million in the fourth quarter of 2009 declined $4.4 million from 2008 levels primarily due to $8.5 million of savings from RCI, restructuring and other cost reduction and cost containment initiatives, and $2.9 million of lower restructuring costs. These decreases in operating expenses were partially offset by $2.5 million of unfavorable currency translation. As a result of these factors, segment operating earnings in the fourth quarter of 2009 increased $13.4 million from 2008 levels and, as a percentage of segment net sales, improved from 7.8% in 2008 to 13.2% in 2009. The $13.4 million increase in year-over-year operating earnings included $1.2 million of unfavorable currency effects.

Diagnostics & Information Group

 

     Fourth Quarter     

(Amounts in millions)

   2009    2008    Change

External net sales

       $   98.5        76.3%            $   120.3        78.7%            $   (21.8)       -18.1%    

Intersegment net sales

     30.6        23.7%          32.6        21.3%          (2.0)       -6.1%    
                             

Segment net sales

     129.1            100.0%          152.9            100.0%          (23.8)       -15.6%    

Cost of goods sold

     (60.4)       -46.8%          (81.5)       -53.3%          21.1              25.9%    
                             

Gross profit

     68.7        53.2%          71.4        46.7%          (2.7)       -3.8%    

Operating expenses

     (38.7)       -30.0%          (37.1)       -24.3%          (1.6)       -4.3%    
                             

Segment operating earnings

       $ 30.0        23.2%            $ 34.3        22.4%            $ (4.3)       -12.5%    
                             

Segment net sales of $129.1 million in the fourth quarter of 2009 declined $23.8 million, or 15.6%, from 2008 levels. Excluding $1.9 million of favorable currency translation, organic sales declined 16.6% year over year primarily due to lower facilitation program, essential tools and electronic parts catalog sales to OEM dealerships.

Segment gross profit of $68.7 million in the fourth quarter of 2009 decreased $2.7 million, or 3.8%, from 2008 levels primarily due to the lower sales and $2.0 million of higher software development costs. As a percentage of segment net sales, gross profit margin of 53.2% in the quarter improved 650 basis points from 46.7% last year primarily due to a more favorable sales mix of higher-margin diagnostics and software products, and $2.1 million of savings from ongoing RCI and other cost reduction and cost containment initiatives. Operating expenses of $38.7 million in the fourth quarter of 2009 increased $1.6 million from prior-year levels. In addition to $2.5 million of higher bad debt expense primarily related to increased credit exposure at North American automotive dealerships, the year-over-year operating expense comparison was also impacted by the adjustment of a pre-acquisition contingency acquired with Snap-on Business Solutions that reduced fourth-quarter 2008 operating expenses by $5.4 million. These increases in year-over-year operating expenses were partially offset by $4.2 million of savings from RCI, restructuring and other cost reduction and cost containment initiatives, and by lower volume-related expenses. As a result of these factors, segment operating earnings of $30.0 million in the fourth quarter of 2009 decreased $4.3 million from $34.3 million in 2008, but improved as a percentage of segment net sales from 22.4% in 2008 to 23.2% in 2009. The $4.3 million decrease in year-over-year operating earnings included $0.1 million of unfavorable currency effects.

Financial Services

 

     Fourth Quarter     

(Amounts in millions)

   2009    2008    Change

Financial services revenue

       $     6.7            100.0%            $     19.7            100.0%            $     (13.0)       -66.0%    

Financial services expenses

     (10.5)       -156.7%          (10.8)       -54.8%          0.3                2.8%    
                             

Segment operating earnings (loss)

       $ (3.8)       -56.7%            $ 8.9        45.2%            $ (12.7)       NM        
                             

 

NM:

Not meaningful

 

 

 

   2009 ANNUAL REPORT    39


Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Segment operating loss was $3.8 million on $6.7 million of revenue in the fourth quarter of 2009, as compared with $8.9 million of operating earnings on $19.7 million of revenue in the fourth quarter of 2008. Since the July 16, 2009 termination of the financial services joint venture agreement with CIT, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year declines in both revenues and operating earnings. Originations of $132.0 million in the fourth quarter of 2009 increased $9.1 million, or 7.4%, from comparable prior-year levels. The $12.7 million decrease in year-over-year financial services operating earnings included $0.3 million of favorable currency effects. See Notes 2 and 3 to the Consolidated Financial Statements for further information.

Corporate

Snap-on’s general corporate expenses of $13.7 million in the fourth quarter of 2009 increased $9.1 million from $4.6 million in the fourth quarter of 2008 primarily due to $6.1 million of higher stock-based (mark to market) incentive and other compensation expense ($3.5 million of expense in 2009 and $2.6 million of benefit in 2008) and $3.0 million of higher pension expense, primarily as a result of declines in pension asset values.

2008 vs. 2007

Results of operations for 2008 and 2007 are as follows:

 

(Amounts in millions)    2008    2007    Change

Net sales

       $   2,853.3            100.0%            $   2,841.2            100.0%            $        12.1        0.4%    

Cost of goods sold

     (1,568.7)       -55.0%          (1,574.6)       -55.4%          5.9        0.4%    
                             

Gross profit

     1,284.6        45.0%          1,266.6        44.6%          18.0        1.4%    

Operating expenses

     (933.1)       -32.7%          (964.2)       -33.9%          31.1        3.2%    
                             

Operating earnings before financial services

     351.5        12.3%          302.4        10.7%          49.1        16.2%    

Financial services revenue

     81.4        100.0%          63.0        100.0%          18.4        29.2%    

Financial services expenses

     (44.1)       -54.2%          (40.6)       -64.4%          (3.5)       -8.6%    
                             

Operating earnings from financial services

     37.3        45.8%          22.4        35.6%          14.9        66.5%    
                             

Operating earnings

     388.8        13.2%          324.8        11.2%          64.0        19.7%    

Interest expense

     (33.8)       -1.1%          (46.1)       -1.6%          12.3        26.7%    

Other income (expense) – net

     2.8        0.1%          5.5        0.2%          (2.7)       -49.1%    
                             

Earnings before income taxes and equity earnings

     357.8        12.2%          284.2        9.8%          73.6        25.9%    

Income tax expense

     (117.8)       -4.0%          (92.5)       -3.2%          (25.3)       -27.4%    
                             

Earnings before equity earnings

     240.0        8.2%          191.7        6.6%          48.3        25.2%    

Equity earnings, net of tax

     3.6        0.1%          2.4        0.1%          1.2        50.0%    
                             

Net earnings from continuing operations

     243.6        8.3%          194.1        6.7%          49.5        25.5%    

Discontinued operations, net of tax

     –            –                 (8.0)       -0.3%          8.0            100.0%    
                             

Net earnings

     243.6        8.3%          186.1        6.4%          57.5        30.9%    

Net earnings attributable to
non-controlling interests

     (6.9)       -0.2%          (4.9)       -0.2%          (2.0)       -40.8%    
                             

Net earnings attributable to Snap-on Inc.

       $ 236.7        8.1%            $ 181.2        6.2%            $ 55.5        30.6%    
                             

 

Percentage Disclosure: All income statement line item percentages below “Operating earnings from financial services” are calculated as a percentage of the sum of Net sales and Financial services revenue.

 

 

 

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Snap-on’s 2008 fiscal year contained 53 weeks of operating results; Snap-on’s 2007 fiscal year contained 52 weeks of operating results. The impact of the additional week, which occurred in the fourth quarter, was not material to Snap-on’s fourth quarter 2008 net sales or operating earnings.

Net sales in 2008 of $2,853.3 million increased $12.1 million, or 0.4%, from 2007 levels. Excluding $35.5 million of currency translation, net sales in 2008 declined $23.4 million, or 0.8%, from 2007 levels. The year-over-year sales comparison was significantly impacted by weakened consumer and business demand in 2008, particularly in the fourth quarter, as customers curtailed spending – primarily for purchases of higher-priced products – in response to the worsening global recession.

Sales in the Commercial & Industrial Group of $1,409.3 million increased $58.7 million, or 4.3%, from 2007 levels; excluding $37.0 million of currency translation, organic sales (net sales, excluding currency translation effects), increased 1.6% from 2007 levels. Sales in the Snap-on Tools Group of $1,104.0 million declined $3.7 million, or 0.3%, from 2007 levels; excluding $1.2 million of favorable currency translation, organic sales declined $4.9 million, or 0.4%, from 2007 levels. In the Diagnostics & Information Group, sales of $627.8 million declined $22.8 million, or 3.5%, from 2007 levels; excluding $1.6 million of currency translation, organic sales declined $21.2 million, or 3.3%, from 2007 levels.

Gross profit in 2008 was $1,284.6 million as compared to $1,266.6 million in 2007. The $18.0 million gross profit improvement was primarily driven by $23.4 million of savings from ongoing RCI initiatives, $16.6 million of lower restructuring costs and $9.8 million of currency translation, partially offset by $24.6 million of higher production, material and freight costs. Contributions from higher sales and pricing were more than offset by the mix impact of lower sales of higher-margin products. In addition, gross profit in 2008 included $4.7 million of LIFO-related inventory valuation expense; gross profit in 2007 included LIFO-related inventory valuation benefits of $0.3 million. As a result of these factors, gross profit margin was 45.0% in 2008, up 40 basis points from 44.6% in 2007.

Operating expenses in 2008 were $933.1 million as compared to $964.2 million in 2007. The $31.1 million, or 3.2%, improvement in operating expenses includes $28.8 million of contributions from RCI initiatives, $10.9 million of lower franchisee termination costs, $5.0 million of lower performance-based incentive compensation and $4.3 million of lower stock-based incentive compensation. Operating expenses in 2008 also benefited from a $5.4 million adjustment of a pre-acquisition contingency acquired with the Snap-on Business Solutions acquisition in 2006. These declines in operating expenses were partially offset by $10.3 million of currency translation, $5.0 million of higher restructuring costs and $2.4 million of increased spending to further expand the company’s presence in emerging growth markets and lower-cost regions. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of $6.4 million of gains from the sale of facilities. As a percentage of net sales, operating expenses in 2008 improved 120 basis points to 32.7%, as compared to 33.9% in 2007.

Operating earnings from financial services was $37.3 million on revenue of $81.4 million in 2008, as compared with $22.4 million of operating earnings on revenue of $63.0 million in 2007. The $14.9 million increase in year-over-year operating earnings primarily reflects the impact of lower market discount rates in 2008.

Consolidated operating earnings in 2008 were $388.8 million, an increase of $64.0 million, or 19.7%, from the $324.8 million achieved in 2007. The $64.0 million increase in year-over-year operating earnings includes $0.8 million of unfavorable currency translation.

Interest expense of $33.8 million in 2008 declined $12.3 million from $46.1 million in 2007 primarily due to declining interest rates on our floating rate debt and lower average debt levels.

Other income (expense) – net was income of $2.8 million in 2008, as compared to income of $5.5 million in 2007. Other income (expense) – net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 33.6% in 2008 and 33.1% in 2007. See Note 8 to the Consolidated Financial Statements for information on income taxes.

On March 5, 2008, Snap-on acquired a 60% interest in Wanda Snap-on, a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. For segment reporting purposes, the results of operations and assets of Wanda Snap-on are included in the Commercial & Industrial Group. The net sales and operating earnings impact of Wanda Snap-on were not material to Snap-on’s fourth quarter or full-year 2008 Consolidated Financial Statements.

 

 

 

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On June 29, 2007, Snap-on sold its Sun Electric Systems (“SES”) business based in the Netherlands for a nominal cash purchase price. The sale of the SES business is reflected in the accompanying Consolidated Statements of Earnings as “Discontinued operations, net of tax.” Snap-on recorded an after-tax loss of $8.0 million, or $0.14 per diluted share, in its 2007 results of operations related to the sale and results of operations of SES. For segment reporting purposes, the results of operations of SES were previously included in the Diagnostics & Information Group. See Note 16 to the Consolidated Financial Statements for information on SES.

Net earnings attributable to Snap-on in 2008 were $236.7 million, or $4.07 per diluted share. Net earnings attributable to Snap-on in 2007 of $181.2 million, or $3.09 per diluted share, included an after-tax loss of $8.0 million, or $0.14 per diluted share, for discontinued operations related to the sale of SES.

Exit and Disposal Activities

Snap-on recorded costs of $14.7 million for exit and disposal activities in 2008 as compared to $26.3 million of such costs in 2007. See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.

Segment Results

Commercial & Industrial Group

 

(Amounts in millions)

   2008    2007    Change

External net sales

       $   1,260.5        89.4%            $   1,208.6        89.5%            $       51.9        4.3%    

Intersegment net sales

     148.8        10.6%          142.0        10.5%          6.8        4.8%    
                             

Segment net sales

     1,409.3            100.0%          1,350.6            100.0%          58.7        4.3%    

Cost of goods sold

     (878.9)       -62.4%          (867.1)       -64.2%          (11.8)       -1.4%    
                             

Gross profit

     530.4        37.6%          483.5        35.8%          46.9        9.7%    

Operating expenses

     (363.1)       -25.7%          (352.0)       -26.1%          (11.1)       -3.2%    
                             

Segment operating earnings

       $ 167.3        11.9%            $ 131.5        9.7%            $ 35.8            27.2%    
                             

Segment net sales of $1,409.3 million in 2008 increased $58.7 million, or 4.3%, from 2007 levels. Excluding $37.0 million of currency translation, sales increased $21.7 million, or 1.6%, year over year primarily due to higher sales of tools, kits and tool storage products to industrial customers, increased sales of power tools and imaging alignment systems, and continued strong sales growth in emerging markets.

Segment gross profit of $530.4 million in 2008 increased $46.9 million, or 9.7%, over 2007 levels. The $46.9 million increase in gross profit includes contributions from higher sales and pricing, $17.4 million of lower restructuring costs, $15.1 million of savings from RCI initiatives, and $10.7 million of currency translation. These increases in gross profit were partially offset by $9.9 million of higher production and material costs. As a percentage of net sales, gross profit of 37.6% improved 180 basis points over 35.8% in 2007. Operating expenses of $363.1 million increased $11.1 million from 2007 levels primarily due to $10.0 million of currency translation, $3.4 million of inflationary cost increases, and higher volume-related and other expenses, including $2.4 million of costs to further expand the company’s sales and manufacturing presence in emerging growth markets and lower cost regions. These increases in operating expenses were partially offset by $10.1 million of savings from RCI initiatives. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of $5.4 million of gains on the sale of facilities in Europe. As a result of these factors, segment operating earnings of $167.3 million in 2008 increased $35.8 million, or 27.2%, from 2007 levels and, as a percentage of net sales, improved from 9.7% in 2007 to 11.9% in 2008. The $35.8 million increase in year-over-year operating earnings includes $0.7 million of favorable currency translation.

Snap-on Tools Group

 

(Amounts in millions)

   2008    2007    Change

Segment net sales

       $   1,104.0             100.0%            $   1,107.7             100.0%            $     (3.7)             -0.3%    

Cost of goods sold

     (636.5)       -57.7%          (618.2)       -55.8%          (18.3)       -3.0%    
                             

Gross profit

     467.5        42.3%          489.5        44.2%          (22.0)       -4.5%    

Operating expenses

     (349.8)       -31.6%          (364.4)       -32.9%          14.6        4.0%    
                             

Segment operating earnings

       $ 117.7        10.7%            $ 125.1        11.3%            $ (7.4)       -5.9%    
                             

 

 

 

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Segment net sales of $1,104.0 million in 2008 decreased $3.7 million, or 0.3%, from 2007 levels. Excluding $1.2 million of favorable currency translation, 2008 sales declined $4.9 million, or 0.4%, from 2007 levels, as continued higher sales in the company’s international franchise operations were more than offset by lower U.S. franchise sales. Sales to U.S. franchisees declined 3.2% year over year primarily due to a more challenging economic environment for sales of higher-priced products and hand tools, partially offset by increased sales of power tools and diagnostics products. At year-end 2008, van count in the United States was up slightly compared to both September 27, 2008, and December 29, 2007, levels. Sales in the company’s international franchise operations increased 6.6% year over year primarily due to strong growth in the United Kingdom, Japan and Australia.

Segment gross profit of $467.5 million in 2008 declined $22.0 million, or 4.5%, from 2007 levels. The $22.0 million gross profit decline primarily reflects the impacts of lower U.S. sales, including a shift in product mix to higher sales of lower-margin products, and $13.7 million of increased production and material costs. In addition, gross profit in 2008 included $4.7 million of LIFO-related inventory valuation expense; gross profit in 2007 included $0.3 million of LIFO-related inventory valuation benefits. These declines in gross profit were partially offset by contributions from higher pricing, $6.3 million of benefits from RCI initiatives, and $3.1 million of lower warranty expense. Operating expenses of $349.8 million in 2008 decreased $14.6 million, or 4.0%, from prior-year levels largely due to $10.9 million of lower franchisee termination costs and $6.7 million of benefits from RCI initiatives. These decreases to operating expenses were partially offset by $4.1 million of higher restructuring costs. As a result of these factors, segment operating earnings of $117.7 million in 2008 declined $7.4 million from $125.1 million in 2007 and, as a percentage of net sales, declined from 11.3% in 2007 to 10.7% in 2008. The $7.4 million decline in year-over-year operating earnings includes $0.8 million of unfavorable currency translation.

Diagnostics & Information Group

 

(Amounts in millions)

   2008    2007    Change

External net sales

       $   488.8        77.9%            $   524.9        80.7%            $   (36.1)       -6.9%    

Intersegment net sales

     139.0        22.1%          125.7        19.3%          13.3        10.6%    
                             

Segment net sales

     627.8            100.0%          650.6        100.0%          (22.8)       -3.5%    

Cost of goods sold

     (341.1)       -54.3%          (357.0)       -54.9%          15.9        4.5%    
                             

Gross profit

     286.7        45.7%          293.6        45.1%          (6.9)       -2.4%    

Operating expenses

     (173.8)       -27.7%          (194.1)       -29.8%          20.3        10.5%    
                             

Segment operating earnings

       $ 112.9        18.0%            $ 99.5        15.3%            $ 13.4            13.5%    
                             

Segment net sales of $627.8 million in 2008 declined $22.8 million, or 3.5%, from 2007 levels, including $1.6 million from currency translation. Higher sales of diagnostics and Mitchell1 information products were more than offset by approximately $40 million of lower OEM program sales and by lower sales at Snap-on Business Solutions, including expected lower sales from the planned exit of certain non-core product lines. The year-over-year decline in OEM program sales is primarily a consequence of the 2007 rollout of a major essential tool program in North America that was not repeated and the impact of the wind down of a facilitation program in Europe.

Segment gross profit of $286.7 million in 2008 decreased $6.9 million, or 2.4%, from 2007 levels as the impacts of lower sales, $3.0 million of higher software development and other costs, $0.9 million of increased restructuring costs, and $0.8 million of currency translation were partially offset by gross profit contributions from a more favorable product mix and $2.0 million of benefits from RCI initiatives. Operating expenses of $173.8 million in 2008 declined $20.3 million from 2007 levels as $13.3 million of savings from RCI initiatives, lower volume-related expenses, and $0.4 million of currency translation were partially offset by $0.9 million of higher restructuring costs. In addition, operating expenses in 2008 benefited from a $5.4 million adjustment of a pre-acquisition contingency acquired with the Snap-on Business Solutions acquisition in 2006. As a result of these factors, segment operating earnings of $112.9 million in 2008 increased $13.4 million, or 13.5%, from $99.5 million in 2007 and, as a percentage of net sales, improved from 15.3% in 2007 to 18.0% in 2008. The $13.4 million increase in year-over-year operating earnings was reduced by $0.4 million of unfavorable currency translation

Financial Services

 

(Amounts in millions)

   2008    2007    Change

Financial services revenue

       $     81.4            100.0%            $     63.0            100.0%            $       18.4        29.2%    

Financial services expenses

     (44.1)       -54.2%          (40.6)       -64.4%          (3.5)       -8.6%    
                             

Segment operating earnings

       $ 37.3        45.8%            $ 22.4        35.6%            $ 14.9              66.5%    
                             

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Segment operating earnings in 2008 were $37.3 million on $81.4 million of revenue as compared with $22.4 million of operating earnings on $63.0 million of revenue in 2007. The $14.9 million increase in year-over-year operating earnings primarily reflects the impact of lower market discount rates in 2008. Originations of $510.8 million in 2008 increased 1.0% from originations of $505.6 million in 2007.

Corporate

Snap-on’s general corporate expenses totaled $46.4 million in 2008, as compared to $53.7 million incurred in 2007. The $7.3 million decline in year-over-year corporate expenses primarily reflects lower performance-based and stock-based incentive compensation in 2008.

Liquidity and Capital Resources

Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. Snap-on believes that its cash from operations, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for working capital, loans originated by SOC, scheduled debt repayments, capital expenditures, restructuring activities, acquisitions, common stock repurchases and dividend payments. Due to Snap-on’s credit rating over the years, external funds have been available at a reasonable cost. As of the close of business on February 17, 2010, Snap-on’s long-term debt and commercial paper was rated Baa1 and P-2 by Moody’s Investors Service and A- and A-2 by Standard & Poor’s. Snap-on believes that its current credit arrangements are sound and that the strength of its balance sheet affords the company the financial flexibility to respond to both internal growth opportunities and those available through acquisitions. In light of the current state of the credit and financial markets and the company’s borrowing levels, however, the company cannot provide any assurances of the availability of future financing or the terms on which it might be available, or that its debt ratings may not decrease.

The following discussion focuses on information included in the accompanying Consolidated Balance Sheets.

At 2009 year end, working capital (current assets less current liabilities) of $936.2 million increased $343.0 million from $593.2 million at 2008 year end, including $583.6 million of higher levels of cash and cash equivalents.

The following represents the company’s working capital position at 2009 and 2008 year end:

 

(Amounts in millions)

   2009    2008

Cash and cash equivalents

       $      699.4            $        115.8    

Trade and other accounts receivable – net

     414.4          462.2    

Contract receivables – net

     32.9          22.8    

Finance receivables – net

     122.3          37.1    

Inventories – net

     274.7          359.2    

Other current assets

     132.4          143.6    
             

Total current assets

     1,676.1          1,140.7    
             

Notes payable and current maturities of long-term debt

     (164.7)         (12.0)   

Accounts payable

     (119.8)         (126.0)   

Other current liabilities

     (455.4)         (409.5)   
             

Total current liabilities

     (739.9)         (547.5)   
             

Total working capital

       $ 936.2            $ 593.2    
             

Cash and cash equivalents at 2009 year end totaled $699.4 million as compared to $115.8 million at the end of 2008. The $583.6 million increase in cash and cash equivalents is primarily due to the company’s issuance of $550 million of fixed rate, long-term notes and increased cash flows from operating activities. Snap-on is using the $545.9 million of proceeds from the sale of these notes, net of $4.1 million of transaction costs, for general corporate purposes, including the funding of receivables contracts originated by SOC and the January 2010 repayment of floating rate debt upon its maturity.

 

 

 

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Trade and other accounts receivable – net at 2009 year end of $414.4 million declined $47.8 million from 2008 year-end levels. Excluding $10.7 million of currency translation impacts, trade and other accounts receivable – net declined $58.5 million from 2008 levels primarily due to lower sales. Days sales outstanding (year-end trade and other accounts receivable – net divided by full-year sales, times 360 days) at 2009 year end was 63 days as compared to 58 days at 2008 year end; using 2009 exchange rates, the 2008 days sales outstanding would have been 62 days.

The current portions of net contract and finance receivables at 2009 year end totaled $155.2 million as compared to $59.9 million last year. The long-term portions of net contract and finance receivables at 2009 year end totaled $248.6 million as compared to $67.3 million last year. The combined $276.6 million increase in net current and long-term contract and finance receivables over year-end 2008 levels is primarily due to the growth of the company’s on-balance-sheet finance portfolio following the July 16, 2009 termination of the financial services joint venture agreement with CIT. Since July 16, 2009, Snap-on is providing financing for the majority of new contract and finance receivables originated by SOC and the related receivables are included on the company’s balance sheet; previously, SOC sold most of its loan originations to CIT.

Inventories of $274.7 million at 2009 year end declined $84.5 million from 2008 levels primarily due to reduced production levels as a result of lower customer demand and the company’s efforts to reduce global inventory levels. Excluding currency translation impacts, inventories declined $98.4 million from 2008 year-end levels. Inventory turns (trailing 12 months of cost of goods sold, divided by the average of the beginning and ending inventory balance for the trailing 12 months) were 4.1 turns and 4.6 turns at year-end 2009 and 2008, respectively. Inventories accounted for using the first-in, first-out (“FIFO”) method as of 2009 and 2008 year end approximated 66% and 64% of total inventories, respectively. All other inventories are accounted for using the LIFO method. The company’s LIFO reserve was $68.4 million at 2009 year end and $83.3 million at 2008 year end.

Notes payable and current maturities of long-term debt of $164.7 million at 2009 year end included $150 million of floating rate debt that matured on January 12, 2010, and $14.7 million of other notes. At 2008 year end, the $150 million note was included in “Long-term debt” on the accompanying Consolidated Balance Sheets as its scheduled maturity was in excess of one year of the 2008 year-end balance sheet date. The $150 million note was repaid on January 12, 2010, with available cash.

Accounts payable at 2009 year end of $119.8 million declined $6.2 million from 2008 levels; excluding currency translation impacts, accounts payable declined $9.3 million from 2008 levels.

Other accrued liabilities of $301.4 million at 2009 year end included $81.5 million withheld from payments made to CIT relating to ongoing business activities. On January 8, 2010, Snap-on filed a notice of arbitration concerning a dispute with CIT relating to various underpayments made during the course of their financial services joint venture, in which Snap-on has alleged damages of approximately $115 million. As a result of the dispute, Snap-on has withheld certain amounts (totaling $81.5 million as of 2009 year end) from payments made to CIT relating to ongoing business activities. On January 29, 2010, CIT filed its response denying Snap-on’s claim and asserting certain claims against Snap-on for other matters relating to the joint venture. CIT’s claims allege damages in excess of $110 million, the majority of which relates to returning the $81.5 million withheld by Snap-on. At this early stage, no determination can be made as to the likely outcome of this dispute. See “Item 3: Legal Proceedings” and Note 15 to the Consolidated Financial Statements.

Long-term debt of $902.1 million at 2009 year end included (i) $200 million of unsecured 6.25% notes that mature in 2011; (ii) $100 million of unsecured 5.85% notes that mature in 2014; (iii) $150 million of unsecured 5.50% notes that mature in 2017; (iv) $200 million of unsecured 6.70% notes that mature in 2019; (v) $250 million of unsecured 6.125% notes that mature in 2021; and (vi) $2.1 million of other long-term debt.

Average commercial paper and notes payable outstanding were $15.2 million in 2009 and $68.1 million in 2008. The weighted-average interest rate on these instruments was 6.94% in 2009 and 4.33% in 2008. At 2009 year end, the weighted-average interest rate on outstanding notes payable was 5.34% as compared to 8.32% in 2008.

Snap-on has a five-year, $500 million multi-currency revolving credit facility that terminates on August 10, 2012; at 2009 year end, no amounts were outstanding under this revolving credit facility. The $500 million revolving credit facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio of total debt to the sum of total debt plus shareholders’ equity of not greater than 0.60 to 1.00; or (ii) a ratio of total debt to the sum of net income plus interest expense, income taxes, depreciation, amortization and other non-cash or extraordinary charges for the preceding four fiscal quarters then ended of not greater than 3.50 to 1.00. At 2009 year end, the company’s actual ratios of 0.45 and 3.36, respectively, were both within the permitted ranges as set forth in this financial covenant.

 

 

 

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Snap-on also had $20 million of unused available debt capacity under its committed bank lines of credit at 2009 year end. The committed bank lines consist of two $10 million lines of credit that expire on July 27, 2010, and August 29, 2010, respectively.

In addition to the financial covenant required by the $500 million multi-currency revolving credit facility, discussed above, Snap-on’s debt agreements and credit facilities also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. At 2009 year end, Snap-on was in compliance with all covenants of its debt agreements and credit facilities.

Snap-on believes that it has sufficient available cash and committed and uncommitted lines of credit and liquidity facilities to cover its expected funding needs on both a short-term and long-term basis. Snap-on manages its aggregate short-term borrowings so as not to exceed its availability under its revolving credit facilities and committed lines of credit. If the need were to arise, Snap-on believes that it could access short-term debt markets, predominantly through commercial paper issuances and existing lines of credit, to fund its short-term requirements and to ensure near-term liquidity. Snap-on regularly monitors the credit and financial markets and, in the future, may take advantage of what it believes are favorable market conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include the funding of new loans originated by SOC and the possible resolution of the related dispute with CIT, the repayment of $150 million of floating rate debt on January 12, 2010, the acquisition of the noncontrolling interest in Wanda Snap-on, capital expenditures and restructuring activities, payments of dividends and interest, and funding for share repurchases, if any. Snap-on also expects to make contributions of $9.0 million to its foreign pension plans and $1.5 million to its domestic pension plans in 2010. Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its domestic pension plans in 2010.

Snap-on’s long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs.

Since 1999, CIT had been the exclusive purchaser of the credit and installment financing contracts originated by SOC in the United States. On July 16, 2009, Snap-on terminated its SOC financial services joint venture agreement with CIT and subsequently purchased CIT’s 50%-ownership interest in SOC for $8.1 million. Since July 16, 2009, Snap-on is providing financing for the majority of new loans originated by SOC. Snap-on estimates the incremental cash requirements for SOC will approximate $300 million over the next 12 months. Snap-on believes, based on current market conditions, that it has adequate financial resources to provide for the financing needs of SOC including available cash on hand, and cash flow provided from operating activities and available credit facilities, including access to public debt markets.

The following discussion focuses on information included in the accompanying Consolidated Statements of Cash Flow.

Operating Activities

Net cash provided by operating activities was $347.1 million in 2009, $220.4 million in 2008 and $235.5 million in 2007. The $126.7 million increase in net cash provided by operating activities in 2009 resulted primarily from net changes in operating assets and liabilities, partially offset by lower net earnings. The $126.7 million increase included $98.4 million from lower inventories, primarily due to reduced production levels as a result of lower customer demand and the company’s efforts to reduce global inventory levels, and $20.9 million as a result of amounts withheld from CIT. At 2009 year end, “Other accrued liabilities” on the accompanying Consolidated Balance Sheets included $81.5 million withheld from payments made to CIT relating to ongoing business activities. At 2008 year end, other accrued liabilities included amounts payable to CIT of $9.4 million. The $72.1 million year-over-year increase in other accrued liabilities relating to CIT included $51.2 million associated with refinancings that are not included in net cash provided by operating activities. See “Item 3: Legal Proceedings” and Note 15 to the Consolidated Financial Statements for further information.

Depreciation expense was $49.9 million in 2009, $47.9 million in 2008 and $53.5 million in 2007. Amortization expense was $24.7 million in 2009, $24.1 million in 2008 and $22.2 million in 2007. See Note 6 to the Consolidated Financial Statements for information on acquired intangible assets.

Following the July 16, 2009 acquisition of CIT’s ownership interest in SOC, Snap-on began presenting “Provisions for losses on finance receivables” on the Consolidated Statements of Cash Flows as part of “Net cash provided by operating activities.” The non-cash provision for loan losses on finance receivables totaled $6.2 million in 2009. For financial statement periods prior to October 3, 2009, the provisions for loan losses on finance receivables, which primarily related to the company’s international finance subsidiaries, are included in “(Increase) decrease in contract receivables;” prior period amounts were not restated as the amounts were not significant, individually or in the aggregate, to Snap-on’s Consolidated Statements of Cash Flows.

 

 

 

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Investing Activities

Following the July 16, 2009 acquisition of CIT’s ownership interest in SOC, Snap-on began presenting “Additions to finance receivables” and “Collections of finance receivables” on the Consolidated Statements of Cash Flows as part of “Net cash used by investing activities.” Finance receivables are comprised of extended-term installment loans to technicians (i.e. franchisees’ customers) to enable them to purchase tools, diagnostics and equipment on an extended-term payment plan, generally with average payment terms of 32 months. In 2009, additions to finance receivables totaled $265.5 million and collections of finance receivables totaled $82.0 million. For financial statement periods prior to October 3, 2009, the net additions and collections of finance receivables, which primarily related to the company’s international finance subsidiaries, are included in “(Increase) decrease in contract receivables;” prior period amounts were not restated as the amounts were not significant, individually or in the aggregate, to Snap-on’s Consolidated Statements of Cash Flows.

Capital expenditures in 2009, 2008 and 2007 totaled $64.4 million, $73.9 million and $61.9 million, respectively. Capital expenditures in 2009 included continued spending to support strategic growth initiatives, including the accelerated expansion of manufacturing capabilities in emerging growth markets and lower-cost regions. Capital expenditures in 2009 also included spending to complete the construction of a new headquarters and research and development facility for the company’s automotive parts and service information business, which was completed in the fourth quarter. Capital expenditures in all three years included higher levels of efficiency and cost-reduction capital investments, including the installation of new production equipment and machine tooling to enhance manufacturing and distribution operations, as well as provide ongoing replacements of manufacturing and distribution equipment. Capital spending over the last three years also included spending for the replacement and enhancement of the company’s existing global enterprise resource planning (ERP) management information systems, which will continue over the next several years. The higher level of spending in 2008 included increased spending to begin construction of the new headquarters and research and development facility discussed above. Snap-on believes that its cash generated from operations, as well as its available cash on hand and funds available from its credit facilities will be sufficient to fund the company’s capital expenditure requirements in 2010.

On July 16, 2009, Snap-on terminated its SOC financial services joint venture agreement with CIT and subsequently acquired CIT’s 50%-ownership interest in SOC for a cash purchase price of $8.1 million. The $8.1 million purchase price represented the book value, and approximated the fair value, of CIT’s ownership interest in SOC as of the acquisition date.

On March 5, 2008, Snap-on acquired a 60% interest in Wanda Snap-on, a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. On December 10, 2009, Snap-on entered into an agreement to acquire the noncontrolling shareholder’s 40% interest in Wanda Snap-on for a purchase price of 52.3 million Chinese yuan (approximately $7.7 million at 2009 year-end exchange rates). The transaction is subject to local governmental approval and is expected to close during the first quarter of 2010. See Note 2 to the Consolidated Financial Statements for additional information on the Wanda Snap-on acquisition.

Financing Activities

On February 24, 2009, Snap-on sold $300 million of unsecured fixed rate notes consisting of $100 million of unsecured 5.85% notes that mature in 2014, and $200 million of unsecured 6.70% notes that mature in 2019; interest on these notes is being paid semi-annually beginning on September 1, 2009. On August 14, 2009, Snap-on sold $250 million of unsecured, 6.125% long-term notes that mature in 2021; interest on these notes is to be paid semi-annually beginning on March 1, 2010. Snap-on is using the $545.9 million of net proceeds from the sale of these notes for general corporate purposes, including the funding of receivables contracts originated by SOC and the repayment of $150 million of floating rate debt on January 12, 2010.

Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and dealer stock purchase plans, stock options and other corporate purposes. At 2009 year end, Snap-on had remaining availability to repurchase up to an additional $130.1 million in common stock pursuant to Board authorizations; Snap-on did not repurchase any shares of common stock in 2009. The purchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions. Snap-on repurchased 1,230,000 shares of common stock for $69.8 million in 2008 and 1,860,000 shares of common stock for $94.4 million in 2007. Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities will be sufficient to fund the company’s share repurchases, if any, in 2010.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2009, 2008 and 2007 totaled $69.0 million, $69.7 million and $64.8 million, respectively.

 

     2009    2008    2007

Cash dividends paid per common share

       $     1.20            $     1.20            $     1.11    

Cash dividends paid as a percent of prior-year retained earnings

     4.7%          5.4%          5.5%    

Snap-on believes that its cash generated from operations, available cash on hand and funds available from its credit facilities will be sufficient to pay dividends in 2010.

Off-Balance-Sheet Arrangements

Except as included below in the section labeled “Contractual Obligations and Commitments” and Note 15 to the Consolidated Financial Statements, the company had no off-balance-sheet arrangements at 2009 year end.

Contractual Obligations and Commitments

A summary of Snap-on’s future contractual obligations and commitments at 2009 year end are as follows:

 

(Amounts in millions)

   Total    2010    2011-2012    2013-2014    2015 and
thereafter

Contractual obligations:

              

Current maturities of long-term debt

       $   150.0            $   150.0            $       –               $       –               $       –       

Long-term debt

     902.1          –             201.9          100.1          600.1    

Interest on fixed rate debt

     404.2          55.3          93.4          80.7          174.8    

Operating leases

     93.8          25.7          32.2          17.5          18.4    

Capital leases

     28.2          2.2          4.4          3.9          17.7    

Acquisitions

     7.7          7.7          –             –             –       

Purchase obligations

     5.6          4.9          0.7          –             –       
                                  

Total

       $ 1,591.6            $ 245.8            $ 332.6            $ 202.2            $ 811.0    
                                  

The company has excluded payments related to its pension and postretirement benefit plans from the contractual obligation table above; see Notes 11 and 12 to the Consolidated Financial Statements for information on the company’s benefit plans and payments. The contractual obligation table above also does not include normal inventory-related and service purchases or income tax liabilities recorded in accordance with U.S. GAAP; see Note 8 to the Consolidated Financial Statements for information on income taxes.

Environmental Matters

Snap-on is subject to various federal, state and local government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Snap-on’s policy is to comply with these requirements and the company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with its business. Some risk of environmental damage is, however, inherent in some of Snap-on’s operations and products, as it is with other companies engaged in similar businesses.

Snap-on is and has been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous or toxic by one or more regulatory agencies. The company believes that, as a general matter, its handling, manufacture, use and disposal of these substances are in accordance with environmental laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question the company’s handling, manufacture, use or disposal of these substances.

 

 

 

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New Accounting Standards

See Note 1 to the Consolidated Financial Statements for information on new accounting standards.

Critical Accounting Policies and Estimates

The Consolidated Financial Statements and related notes contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates.

The company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements.

Snap-on considers the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company’s consolidated financial statements and the uncertainties that could impact the company’s financial position, results of operations and cash flows.

Revenue Recognition: Snap-on recognizes revenue from the sale of tools, diagnostics and equipment solutions when contract terms are met, collectibility is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. For sales contingent upon customer acceptance or product installation, revenue recognition is deferred until such obligations are fulfilled. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and gross profit margin adjusted for known trends. Provisions for customer volume rebates, discounts and allowances are also recorded as a reduction of reported revenues at the time of sale based on historical experience and known trends. Revenue related to maintenance and subscription agreements is recognized over the terms of the respective agreements.

Snap-on also recognizes revenue related to multiple element arrangements, including sales of software and software-related services. When a sales arrangement contains multiple elements, such as hardware and software products and/or services, Snap-on uses vendor specific objective evidence (“VSOE”) of fair value to allocate revenue to each element based on its relative fair value and, when necessary, uses the residual method to assign value to the delivered elements when VSOE only exists for the undelivered elements. Snap-on limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services. The amount assigned to future delivery of products or services is recognized when the product is delivered and/or when the services are performed. In instances where the product and/or services are performed over an extended period, as is the case with subscription agreements or the providing of ongoing support, revenue is generally recognized on a straight-line basis over the term of the applicable agreement, which generally ranges from 12 to 60 months.

Franchise fee revenue, including nominal, non-refundable initial and ongoing monthly fees (primarily for sales and business training and marketing and product promotion programs), is recognized as the fees are earned.

Financial Services Revenue: Snap-on also generates revenue from various financing programs that include (i) loans to franchisees; (ii) loans to franchisees’ customers; and (iii) loans to Snap-on’s industrial and other customers for the purchase of tools and equipment and diagnostics products on an extended-term payment plan. These financing programs are offered through Snap-on’s wholly owned finance subsidiaries. Financial services revenue consists of installment contract revenue and franchisee loan receivable revenue. For periods prior to July 16, 2009, financial services revenue also included gains from SOC’s sales of originated contracts to CIT. The decision to finance through Snap-on or another financing entity is solely at the election of the customer. When assessing customers for potential financing, Snap-on considers various factors regarding ability to pay including customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information.

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

 

 

 

Prior to July 16, 2009, SOC substantially sold all of its loan originations to CIT on a limited recourse basis; SOC retained the right to service such loans for a contractual servicing fee. At the time the loan originations were sold to CIT, SOC recognized a servicing asset since the contractual servicing fee provided SOC with more than adequate compensation for the level of services provided. Contractual servicing fees were $8.3 million in 2009, $9.2 million in 2008 and $9.3 million in 2007.

Snap-on’s international finance subsidiaries own the loans originated through their financing programs; loans retained by SOC prior to July 16, 2009, and loans originated by SOC subsequent to July 16, 2009, are also owned by Snap-on. Revenue from interest income on the on-book financing portfolio is recognized over the life of the contracts, with interest computed on the average daily balances of the underlying contracts.

Impairment of Goodwill and Other Indefinite-lived Intangible Assets: Goodwill and other indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the company in the second quarter of each year.

Snap-on evaluates the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. Estimated cash flows and related goodwill are grouped at the reporting unit level. The company has determined that its reporting units for testing goodwill impairment are its operating segments or components of an operating segment that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. In conjunction with the evaluation completed in the second quarter of 2009 and in accordance with U.S. GAAP, Snap-on combined two of its previous reporting units into one operating segment and one reporting unit as a result of recent management realignment and other operational changes. Management made this determination in a manner consistent with how the company’s operating segments are managed. Based on this analysis, the company has identified 11 reporting units within its four reportable segments.

Snap-on evaluates the recoverability of goodwill by utilizing an income approach that estimates the fair value of the future discounted cash flows of the reporting units to which the goodwill relates. The future projections, which are based on both past performance and the projections and assumptions used in the company’s current and long range operating plans, are subject to change as a result of changing economic and competitive conditions. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, capital expenditures, working capital levels, the benefits of recent acquisitions and expected synergies, and weighted-average cost of capital that reflects the specific risk profile of the reporting unit being tested. The company’s methodologies for valuing goodwill are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2009 impairment calculations were evaluated in light of current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the reporting units’ projections of future operating results and cash flows and replicates how market participants would value the company’s reporting units in an orderly transaction.

In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the company would then perform an additional assessment that would compare the implied fair value of goodwill with the carrying amount of goodwill. The determination of implied fair value of goodwill would require management to compare the estimated fair value of the reporting unit to the estimated fair value of the assets and liabilities of the reporting unit; if necessary, the company may consult with valuation specialists to assist with the assessment of the estimated fair value of the assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than the carrying value, an impairment loss would be recorded.

Snap-on also evaluates the recoverability of its indefinite-lived trademarks by utilizing an income approach that estimates the fair value of the future discounted cash flows of each of its trademarks. The future projections, which are based on both past performance and the projections and assumptions used in the company’s current and long range operating plans, are subject to change as a result of changing economic and competitive conditions. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth and royalty rates, expected synergies, and a weighted-average cost of equity that reflects the specific risk profile of the trademark being tested. The company’s methodologies for valuing trademarks are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2009 impairment calculations were evaluated in light of current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the trademarks’ projected future cash flows and replicates how market participants would value the company’s trademarks in an orderly transaction.

 

 

 

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Snap-on did not recognize any impairment on its goodwill or other indefinite-lived intangible assets in 2009, 2008 or 2007. Inherent in fair value determinations are significant judgments and estimates, including material assumptions about future revenue, profitability and cash flows, the company’s operational plans and its interpretation of current economic indicators. Should the operations of the businesses with which goodwill or other indefinite-lived intangible assets are associated incur significant declines in profitability and cash flow due to significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers, and/or changes in technology or markets, some or all of the recorded goodwill or other indefinite-lived intangible assets could be subject to impairment and could result in a material adverse effect on Snap-on’s financial position or results of operations.

Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2009, the results of which did not result in any impairment. Although the company consistently uses the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results. In performing its annual impairment testing the company performed a sensitivity analysis on the material assumptions used in the discounted cash flow valuation models for each of its 11 reporting units. Based on the company’s second quarter 2009 impairment testing and assuming a hypothetical 10% decrease in the estimated fair values of each of its 11 reporting units, the hypothetical fair value of each of the company’s 11 reporting units would have been greater than its carrying value. See Note 6 to the Consolidated Financial Statements for further information about goodwill and other intangible assets.

Impairment of Long-lived and Amortized Intangible Assets: Snap-on performs impairment evaluations of its long-lived assets, including property, plant and equipment and intangible assets with finite lives, whenever business conditions or events indicate that those assets may be impaired. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair market value and a charge is recorded to current operations.

Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, could require a provision for impairment in a future period.

Allowances for Doubtful Accounts: Snap-on maintains allowances for doubtful accounts to absorb probable loan losses inherent in its portfolio of receivables. Determination of the allowances requires management to exercise significant judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, therefore, net income. Snap-on evaluates the collectibility of its receivables based on a combination of various financial and qualitative factors that may affect customers’ ability to pay. These factors may include customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. Snap-on does not believe that accounts receivable represent significant concentrations of credit risk because of its diversified portfolio of individual customers and geographical areas.

The allowances for doubtful accounts represent management’s best estimate of the losses expected from the company’s trade accounts, contract and finance receivable portfolios based on ongoing assessments and evaluations of collectibility and historical loss experience. The levels of the allowances are based on many quantitative and qualitative factors including historical loss experience by loan type, portfolio duration, delinquency trends, economic conditions and credit risk quality. Management regularly performs detailed reviews of its portfolios to determine if an impairment has occurred and to assess the adequacy of the allowances based on historical and current trends as well as other factors affecting credit losses. Additions to the allowances for doubtful accounts are charged to current period earnings; amounts determined to be uncollectible are charged directly against the allowances, while amounts recovered on previously charged-off accounts increase the allowances. If the financial condition of the company’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional reserves would be required.

Excess and Obsolete Inventory: Snap-on records allowances for exces