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

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

Management Overview

We believe our broad-based organic sales growth in 2014 affirms Snap-on’s unique capabilities in providing repeatability and reliability to a wide range of professional customers performing critical tasks in workplaces of consequence. Leveraging capabilities already demonstrated in the automotive repair arena, our “coherent growth” strategy focuses on developing and expanding our professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high.

We believe our 2014 operating results also provide continued evidence that Snap-on’s value proposition of making work easier for serious professionals in workplaces of consequence is an ongoing strength as we move forward along our runways for coherent growth: enhancing the franchise network, expanding in the vehicle repair garage, extending to critical industries and building in emerging markets. We also believe our year-over-year improvement in operating margin further evidences the potential of our Snap-on Value Creation Processes – our suite of strategic principles and processes we employ every day designed to create value and employed in the areas of safety, quality, customer connection, innovation and rapid continuous improvement.

In 2014, we continued to invest in our most important strategic growth initiatives aimed at enhancing the franchisee network, expanding in the vehicle repair garage, extending in critical industries and building in emerging markets. Recent examples of our continued investment and expansion initiatives include the May 2014 acquisition of Pro-Cut International, Inc. (“Pro-Cut”) and the May 2013 acquisition of Challenger Lifts, Inc. (“Challenger”), which are further discussed in “Results of Operations” below. The acquisitions of both the Pro-Cut and Challenger product lines complemented and increased our existing undercar equipment product offering, broadened our established capabilities in serving vehicle repair facilities and expanded our presence with repair shop owners and managers.

Our global financial services operations continue to serve a significant strategic role in providing financing options for our franchisees, for their customers, and for customers in other parts of our business. We expect that our global financial services business, which includes both Snap-on Credit LLC (“SOC”) in the United States and our other international finance subsidiaries, will continue to be a meaningful contributor to our operating earnings.

Consolidated net sales of $3,277.7 million in 2014 increased $221.2 million, or 7.2%, from 2013 levels, including $37.0 million of acquisition-related sales and an unfavorable $25.3 million impact from foreign currency translation. Organic sales (excluding acquisition-related sales and foreign currency translation impacts) increased $209.5 million or 6.9%. Operating earnings before financial services of $535.6 million in 2014 were up $75.1 million, or 16.3%, from 2013 levels, reflecting contributions from higher sales and improved operating margins, including contributions from ongoing efficiency and productivity initiatives, as well as benefits from restructuring actions (collectively, “Rapid Continuous Improvement” or “RCI initiatives”). Operating earnings of $684.7 million in 2014 increased $98.5 million, or 16.8%, from operating earnings of $586.2 million last year. In 2014, net earnings attributable to Snap-on Incorporated were $421.9 million or $7.14 per diluted share. Net earnings attributable to Snap-on Incorporated in 2013 were $350.3 million or $5.93 per diluted share.

In the Commercial & Industrial Group, segment net sales of $1,174.8 million in 2014 increased $83.8 million, or 7.7%, from 2013 levels. Excluding $18.2 million of unfavorable foreign currency translation, organic sales in 2014 increased $102.0 million, or 9.5%, primarily due to higher sales to customers in critical industries and in the segment’s European-based hand tools business. Operating earnings of $158.6 million in 2014 increased $21.3 million, or 15.5%, from 2013 levels primarily as a result of the higher sales and the savings from RCI initiatives.


26		SNAP-ON INCORPORATED

The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2015:

	•		Investing in emerging market growth initiatives, including in China, India, Eastern Europe, the Middle East and Latin America;

	•		Expanding our business with existing customers and reach new customers in critical industries and other market segments;

	•		Broadening our product offering and engineered solutions designed particularly for critical industry segments;

	•		Increasing our customer-connection-driven understanding of work across multiple industries;

	•		Investing in innovation that, guided by that understanding of work, delivers an ongoing stream of productivity-enhancing solutions; and

	•		Continuing to reduce structural and operating costs through RCI and restructuring initiatives.

In the Snap-on Tools Group, segment net sales of $1,455.2 million in 2014 increased $96.8 million, or 7.1%, from 2013 levels; excluding $6.3 million of unfavorable foreign currency translation, organic sales in 2014 increased $103.1 million, or 7.6%, reflecting higher sales in both the company’s U.S. and international franchise operations. Operating earnings of $223.1 million in 2014 increased $28.5 million, or 14.6%, from 2013 levels, primarily as a result of the higher sales and savings from RCI initiatives.

The Snap-on Tools Group made continued progress in 2014 on its fundamental, strategic initiatives to strengthen the group and enhance franchisee profitability. In 2015, the Snap-on Tools Group intends to further build on the progress made in 2014, with specific initiatives focused on the following:

	•		Continuing to improve franchisee productivity, profitability, satisfaction and commercial health;

	•		Developing new programs and products to expand market coverage, reaching new technicians and increasing penetration with existing customers;

	•		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.

By focusing on these areas, we believe that Snap-on, as well as our franchisees, will have the opportunity to continue to serve customers more effectively, more profitably and with improved satisfaction.

In the Repair Systems & Information Group, segment net sales of $1,095.2 million in 2014 increased $85.6 million, or 8.5%, from 2013 levels. Excluding $37.0 million of acquisition-related sales and $0.5 million of unfavorable foreign currency translation, organic sales increased $49.1 million or 4.9%. The organic sales increase primarily reflects higher sales to original equipment manufacturer (“OEM”) dealership service and repair shops (“OEM dealerships”), as well as increased sales to independent repair shop owners and managers, including higher sales of diagnostic and repair information products and increased sales of undercar equipment. Operating earnings of $251.2 million in 2014 increased $19.3 million, or 8.3%, from 2013 levels, primarily due to higher sales, including acquisition-related sales, and savings from RCI initiatives.

The Repair Systems & Information Group intends to focus on the following strategic priorities in 2015:

	•		Expanding the product offering with new products and services, thereby providing more to sell to repair shop owners and managers;

	•		Continuing software and hardware upgrades;

	•		Leveraging integration of software solutions;

	•		Continuing productivity advancements through RCI initiatives and leveraging of resources; and

	•		Increasing penetration in geographic markets, including emerging markets.

Financial Services revenue was $214.9 million in 2014 and $181.0 million in 2013; originations of $888.6 million in 2014 increased $110.9 million, or 14.3%, from 2013 levels. In recent years, Snap-on has steadily grown its financial services portfolio by providing financing for new finance and contract receivables originated by both SOC and the company’s international finance subsidiaries. In 2014, operating earnings from financial services of $149.1 million increased $23.4 million, or 18.6%, from $125.7 million last year.


		2014 ANNUAL REPORT		27

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

Financial Services intends to focus on the following strategic priorities in 2015:

	•		Delivering financial products and services that attract and sustain profitable franchisees and support Snap-on’s strategies for expanding market coverage and penetration;

	•		Improving productivity levels and ensuring high quality in all financial products and processes through the use of RCI initiatives; and

	•		Maintaining healthy portfolio performance levels.

Cash Flows

Net cash provided by operating activities of $397.9 million in 2014 compared to $392.6 million in 2013. The $5.3 million increase in net cash provided by operating activities primarily reflects higher 2014 net earnings, partially offset by net changes in operating assets and liabilities, which included $9.5 million of higher cash contributions to the company’s pension plans. Snap-on made cash contributions to its pension plans totaling $44.8 million, $35.3 million and $87.5 million in 2014, 2013 and 2012, respectively. Net cash provided by operating activities in 2012 was $329.3 million.

Net cash used by investing activities of $273.2 million in 2014 included additions to, and collections of, finance receivables of $746.2 million and $591.4 million, respectively, as well as a $41.3 million use of cash for the May 2014 acquisition of Pro-Cut. Net cash used by investing activities of $250.4 million in 2013 included additions to, and collections of, finance receivables of $651.3 million and $508.8 million, respectively, as well as a $38.2 million use of cash for the May 2013 acquisition of Challenger. Net cash used by investing activities of $173.1 million in 2012 included additions to, and collections of, finance receivables of $569.6 million and $445.5 million, respectively, as well as $27.0 million of proceeds from the sale of a non-strategic equity investment at book value (i.e., no gain or loss on sale). Capital expenditures in 2014 of $80.6 million reflect continued spending to support the company’s execution of its strategic growth initiatives and Value Creation Processes, including continued investments focused on safety, quality, customer connection, innovation and RCI.

Net cash used by financing activities of $206.9 million in 2014 included the March 2014 repayment of $100.0 million of unsecured notes at maturity. Net cash used by financing activities in 2014 also included $107.6 million for dividend payments to shareholders and $79.3 million for the repurchase of 680,000 shares of Snap-on’s common stock, partially offset by $45.0 million of proceeds from a net increase in short-term borrowings and $33.0 million of proceeds from stock purchase and option plan exercises. Net cash used by financing activities of $137.8 million in 2013 included $92.0 million for dividend payments to shareholders and $82.6 million for the repurchase of 926,000 shares of Snap-on’s common stock, partially offset by $29.2 million of proceeds from stock purchase and option plan exercises. Net cash used by financing activities of $127.0 million in 2012 included $81.5 million for dividend payments to shareholders and $78.1 million for the repurchase of 1,180,000 shares of Snap-on’s common stock, partially offset by $46.8 million of proceeds from stock purchase and option plan exercises.

Fiscal Year

Snap-on’s fiscal year ends on the Saturday that is on or nearest to December 31. Unless otherwise indicated, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “fiscal 2014” or “2014” refer to the fiscal year ended January 3, 2015; references to “fiscal 2013” or “2013” refer to the fiscal year ended December 28, 2013; and references to “fiscal 2012” or “2012” refer to the fiscal year ended December 29, 2012. References in this document to 2014, 2013 and 2012 year end refer to January 3, 2015, December 28, 2013, and December 29, 2012, respectively.


28		SNAP-ON INCORPORATED

Results of Operations

2014 vs. 2013

Results of operations for 2014 and 2013 are as follows:


(Amounts in millions)	2014			2013			Change
Net sales	$	3,277.7	100.0%	$	3,056.5	100.0%	$	221.2	7.2%
Cost of goods sold		(1,693.4)	-51.7%		(1,583.6)	-51.8%		(109.8)	-6.9%

Gross profit		1,584.3	48.3%		1,472.9	48.2%		111.4	7.6%
Operating expenses		(1,048.7)	-32.0%		(1,012.4)	-33.1%		(36.3)	-3.6%

Operating earnings before financial services		535.6	16.3%		460.5	15.1%		75.1	16.3%

Financial services revenue		214.9	100.0%		181.0	100.0%		33.9	18.7%
Financial services expenses		(65.8)	-30.6%		(55.3)	-30.6%		(10.5)	-19.0%

Operating earnings from financial services		149.1	69.4%		125.7	69.4%		23.4	18.6%


Operating earnings		684.7	19.6%		586.2	18.1%		98.5	16.8%
Interest expense		(52.9)	-1.5%		(56.1)	-1.7%		3.2	5.7%
Other income (expense) – net		(0.9)	–		(3.9)	-0.1%		3.0	76.9%

Earnings before income taxes and equity earnings		630.9	18.1%		526.2	16.3%		104.7	19.9%
Income tax expense		(199.5)	-5.7%		(166.7)	-5.2%		(32.8)	-19.7%

Earnings before equity earnings		431.4	12.4%		359.5	11.1%		71.9	20.0%
Equity earnings, net of tax		0.7	–		0.2	–		0.5	NM

Net earnings		432.1	12.4%		359.7	11.1%		72.4	20.1%
Net earnings attributable to noncontrolling interests		(10.2)	-0.3%		(9.4)	-0.3%		(0.8)	-8.5%

Net earnings attributable to Snap-on Inc.	$	421.9	12.1%	$	350.3	10.8%	$	71.6	20.4%

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 2014 fiscal year contained 53 weeks of operating results, with the extra week occurring in the fourth quarter. Snap-on’s 2013 fiscal year contained 52 weeks of operating results. The impact of the additional week of operations in fiscal 2014 was not material to Snap-on’s full year or fourth quarter 2014 net sales or net earnings.

Net sales of $3,277.7 million in 2014 increased $221.2 million, or 7.2%, from 2013 levels, including $37.0 million of acquisition-related sales and an unfavorable $25.3 million impact from foreign currency translation. Organic sales (excluding acquisition-related sales and foreign currency translation impacts) in 2014 increased $209.5 million, or 6.9%, from 2013 levels. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

Gross profit of $1,584.3 million in 2014 increased $111.4 million from $1,472.9 million last year. Gross margin (gross profit as a percentage of net sales) of 48.3% in 2014 increased 10 basis points (100 basis points (“bps”) equals 1.0 percent) from 48.2% last year primarily due to benefits from higher sales and savings from RCI initiatives, partially offset by increased restructuring and other costs. Restructuring costs included in gross profit were $5.7 million and $4.4 million in 2014 and 2013, respectively.


		2014 ANNUAL REPORT		29

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

Operating expenses of $1,048.7 million in 2014 increased $36.3 million from $1,012.4 million last year primarily due to higher volume-related and other expenses. The operating expense margin (operating expenses as a percentage of net sales) of 32.0% in 2014 improved 110 bps from 33.1% last year primarily due to sales volume leverage. Restructuring costs included in operating expenses were $0.8 million and $1.9 million in 2014 and 2013, respectively.

Operating earnings before financial services of $535.6 million in 2014, including $11.3 million of unfavorable foreign currency effects, increased $75.1 million, or 16.3%, as compared to $460.5 million last year. As a percentage of net sales, operating earnings before financial services of 16.3% in 2014 improved 120 bps from 15.1% in 2013.

Financial services operating earnings of $149.1 million on revenue of $214.9 million in 2014 compared to operating earnings of $125.7 million on revenue of $181.0 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.

Operating earnings of $684.7 million in 2014, including $11.5 million of unfavorable foreign currency effects, increased $98.5 million, or 16.8%, from $586.2 million last year. As a percentage of revenues (net sales plus financial services revenue), operating earnings of 19.6% in 2014 improved 150 bps from 18.1% last year.

Interest expense of $52.9 million in 2014 decreased $3.2 million from $56.1 million last year primarily due to lower average debt levels as a result of the March 2014 repayment of $100.0 million of unsecured notes at maturity. See Note 9 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $0.9 million and $3.9 million in 2014 and 2013, respectively. Other income (expense) – net primarily reflects net losses and gains associated with hedging and currency exchange rate transactions, and interest income. See Note 16 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 32.1% in 2014 and 32.3% in 2013. See Note 8 to the Consolidated Financial Statements for information on income taxes.

On May 28, 2014, Snap-on acquired substantially all of the assets of Pro-Cut for a cash purchase price of $41.3 million. Pro-Cut designs, manufactures and distributes on-car brake lathes, related equipment and accessories used in brake servicing by automotive repair facilities. The acquisition of the Pro-Cut product line complemented and increased Snap-on’s existing undercar equipment product offering, broadened its established capabilities in serving vehicle repair facilities and expanded the company’s presence with repair shop owners and managers. For segment reporting purposes, the results of operations and assets of Pro-Cut have been included in the Repair Systems & Information Group since the date of acquisition. Pro forma financial information has not been presented as the net effects of the Pro-Cut acquisition were neither significant nor material to Snap-on’s results of operations or financial position.

On May 13, 2013, Snap-on acquired Challenger for a cash purchase price of $38.2 million. Challenger designs, manufactures and distributes a comprehensive line of vehicle lifts and accessories to a diverse customer base in the automotive repair sector. The acquisition of the Challenger vehicle lift product line complemented and increased Snap-on’s existing undercar equipment product offering, broadened its established capabilities in serving vehicle repair facilities and expanded the company’s presence with repair shop owners and managers. For segment reporting purposes, the results of operations and assets of Challenger have been included in the Repair Systems & Information Group since the date of acquisition. Pro forma financial information has not been presented as the net effects of the Challenger acquisition were neither significant nor material to Snap-on’s results of operations or financial position.

Net earnings attributable to Snap-on in 2014 of $421.9 million, or $7.14 per diluted share, increased $71.6 million, or $1.21 per diluted share, from 2013 levels. Net earnings attributable to Snap-on in 2013 were $350.3 million or $5.93 per diluted share.

Exit and Disposal Activities

Snap-on recorded costs for exit and disposal activities of $6.5 million and $6.4 million in 2014 and 2013, respectively. See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.


30		SNAP-ON INCORPORATED

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’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.

Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. 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 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)	2014			2013			Change
External net sales	$	952.1	81.0%	$	903.0	82.8%	$	49.1	5.4%
Intersegment net sales		222.7	19.0%		188.0	17.2%		34.7	18.5%

Segment net sales		1,174.8	100.0%		1,091.0	100.0%		83.8	7.7%
Cost of goods sold		(725.1)	-61.7%		(671.5)	-61.5%		(53.6)	-8.0%

Gross profit		449.7	38.3%		419.5	38.5%		30.2	7.2%
Operating expenses		(291.1)	-24.8%		(282.2)	-25.9%		(8.9)	-3.2%

Segment operating earnings	$	158.6	13.5%	$	137.3	12.6%	$	21.3	15.5%

Segment net sales of $1,174.8 million in 2014 increased $83.8 million, or 7.7%, from 2013 levels; excluding $18.2 million of unfavorable foreign currency translation, organic sales increased $102.0 million or 9.5%. The organic sales increase primarily reflects a double-digit gain in sales to customers in critical industries and a mid single-digit sales increase in the segment’s European-based hand tools business.

Segment gross profit of $449.7 million in 2014 increased $30.2 million from 2013 levels. Gross margin of 38.3% in 2014 decreased 20 bps from 38.5% last year as benefits from increased sales, savings from RCI initiatives and lower restructuring costs were more than offset by higher expenses, including $10.9 million of unfavorable foreign currency effects. Restructuring costs included in gross profit were $1.0 million and $2.5 million in 2014 and 2013, respectively.

Segment operating expenses of $291.1 million in 2014 increased $8.9 million from 2013 levels primarily due to higher volume-related and other expenses. The operating expense margin of 24.8% in 2014 improved 110 bps from 25.9% last year primarily due to sales volume leverage. Restructuring costs included in operating expenses were $0.4 million in both years.

As a result of these factors, segment operating earnings of $158.6 million in 2014, including $6.3 million of unfavorable foreign currency effects, increased $21.3 million from 2013 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group of 13.5% in 2014 improved 90 bps from 12.6% last year.


		2014 ANNUAL REPORT		31

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

Snap-on Tools Group


(Amounts in millions)	2014			2013			Change
Segment net sales	$	1,455.2	100.0%	$	1,358.4	100.0%	$	96.8	7.1%
Cost of goods sold		(824.9)	-56.7%		(772.6)	-56.9%		(52.3)	-6.8%

Gross profit		630.3	43.3%		585.8	43.1%		44.5	7.6%
Operating expenses		(407.2)	-28.0%		(391.2)	-28.8%		(16.0)	-4.1%

Segment operating earnings	$	223.1	15.3%	$	194.6	14.3%	$	28.5	14.6%

Segment net sales of $1,455.2 million in 2014 increased $96.8 million, or 7.1%, from 2013 levels. Excluding $6.3 million of unfavorable foreign currency translation, organic sales increased $103.1 million, or 7.6%, reflecting a high single-digit sales increase in the company’s U.S. franchise operations and a mid single-digit sales gain in the company’s international franchise operations.

Segment gross profit of $630.3 million in 2014 increased $44.5 million from 2013 levels. Gross margin of 43.3% in 2014 increased 20 bps from 43.1% last year primarily due to benefits from higher sales and savings from RCI initiatives, partially offset by $6.6 million of unfavorable foreign currency effects. Restructuring costs included in gross profit were zero and $0.2 million in 2014 and 2013, respectively.

Segment operating expenses of $407.2 million in 2014 increased $16.0 million from 2013 levels primarily due to higher volume-related and other expenses. The operating expense margin of 28.0% in 2014 improved 80 bps from 28.8% last year primarily due to sales volume leverage. Restructuring costs included in operating expenses were zero and $0.3 million in 2014 and 2013, respectively.

As a result of these factors, segment operating earnings of $223.1 million in 2014, including $5.0 million of unfavorable foreign currency effects, increased $28.5 million from 2013 levels. Operating margin for the Snap-on Tools Group of 15.3% in 2014 improved 100 bps from 14.3% last year.

Repair Systems & Information Group


(Amounts in millions)	2014			2013			Change
External net sales	$	870.4	79.5%	$	795.1	78.8%	$	75.3	9.5%
Intersegment net sales		224.8	20.5%		214.5	21.2%		10.3	4.8%

Segment net sales		1,095.2	100.0%		1,009.6	100.0%		85.6	8.5%
Cost of goods sold		(590.9)	-54.0%		(542.0)	-53.7%		(48.9)	-9.0%

Gross profit		504.3	46.0%		467.6	46.3%		36.7	7.8%
Operating expenses		(253.1)	-23.1%		(235.7)	-23.3%		(17.4)	-7.4%

Segment operating earnings	$	251.2	22.9%	$	231.9	23.0%	$	19.3	8.3%

Segment net sales of $1,095.2 million in 2014 increased $85.6 million, or 8.5%, from 2013 levels. Excluding $37.0 million of acquisition-related sales and $0.5 million of unfavorable foreign currency translation, organic sales in 2014 increased $49.1 million or 4.9%. The organic sales increase primarily reflects a high single-digit gain in sales to OEM dealerships, a mid single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, and a low single-digit increase in sales of undercar equipment.

Segment gross profit of $504.3 million in 2014 increased $36.7 million from 2013 levels. Gross margin of 46.0% in 2014 decreased 30 bps from 46.3% last year primarily due to a shift in sales that included higher volumes of lower gross margin products, including increased essential tool and facilitation sales to OEM dealerships, and $3.0 million of higher restructuring costs. These decreases in gross margin were partially offset by savings from RCI initiatives. Restructuring costs included in gross profit were $4.7 million and $1.7 million in 2014 and 2013, respectively.


32		SNAP-ON INCORPORATED

Segment operating expenses of $253.1 million in 2014 increased $17.4 million from 2013 levels primarily due to higher volume-related and other expenses, partially offset by savings from RCI initiatives and lower restructuring costs. The operating expense margin of 23.1% in 2014 improved 20 bps from 23.3% last year primarily due to sales volume leverage. Restructuring costs included in operating expenses were $0.4 million and $1.2 million in 2014 and 2013, respectively.

As a result of these factors, segment operating earnings of $251.2 million in 2014 increased $19.3 million from 2013 levels. Operating margin for the Repair Systems & Information Group of 22.9% in 2014 decreased 10 bps from 23.0% last year.

Financial Services


(Amounts in millions)	2014			2013			Change
Financial services revenue	$	214.9	100.0%	$	181.0	100.0%	$	33.9	18.7%
Financial services expenses		(65.8)	-30.6%		(55.3)	-30.6%		(10.5)	-19.0%

Segment operating earnings	$	149.1	69.4%	$	125.7	69.4%	$	23.4	18.6%

Financial services operating earnings of $149.1 million on revenue of $214.9 million in 2014 compared to operating earnings of $125.7 million on revenue of $181.0 million last year. The $33.9 million increase in financial services revenue primarily reflects $30.6 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $1.8 million of increased revenue from higher average yields. In 2014 and 2013, the average yield on finance receivables was 17.6% and 17.4%, respectively, and the average yield on contract receivables was 9.5% in both years. Originations of $888.6 million in 2014 increased $110.9 million, or 14.3%, from 2013 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for doubtful accounts. These expenses are generally more dependent on changes in the size of the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $65.8 million in 2014 compared to $55.3 million in 2013. As a percentage of the average financial services portfolio, financial services expenses were 5.1% and 4.7% in 2014 and 2013, respectively.

See Note 1 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s general corporate expenses of $97.3 million in 2014 decreased $6.0 million from $103.3 million last year primarily due to lower pension expense partially offset by higher performance-based compensation and other expenses.


		2014 ANNUAL REPORT		33

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

Fourth Quarter

Results of operations for the fourth quarters of 2014 and 2013 are as follows:


	Fourth Quarter
(Amounts in millions)	2014			2013			Change
Net sales	$	857.4	100.0%	$	797.5	100.0%	$	59.9	7.5%
Cost of goods sold		(446.1)	-52.0%		(419.0)	-52.5%		(27.1)	-6.5%

Gross profit		411.3	48.0%		378.5	47.5%		32.8	8.7%
Operating expenses		(266.1)	-31.1%		(254.9)	-32.0%		(11.2)	-4.4%

Operating earnings before financial services		145.2	16.9%		123.6	15.5%		21.6	17.5%

Financial services revenue		59.4	100.0%		47.4	100.0%		12.0	25.3%
Financial services expenses		(17.2)	-29.0%		(14.4)	-30.4%		(2.8)	-19.4%

Operating earnings from financial services		42.2	71.0%		33.0	69.6%		9.2	27.9%


Operating earnings		187.4	20.4%		156.6	18.5%		30.8	19.7%
Interest expense		(13.8)	-1.5%		(14.3)	-1.7%		0.5	3.5%
Other income (expense) – net		(0.2)	–		(0.8)	-0.1%		0.6	NM

Earnings before income taxes and equity earnings		173.4	18.9%		141.5	16.7%		31.9	22.5%
Income tax expense		(54.9)	-5.9%		(44.6)	-5.2%		(10.3)	-23.1%

Earnings before equity earnings		118.5	13.0%		96.9	11.5%		21.6	22.3%
Equity earnings, net of tax		0.2	–		–	–		0.2	NM

Net earnings		118.7	13.0%		96.9	11.5%		21.8	22.5%
Net earnings attributable to noncontrolling interests		(2.5)	-0.3%		(2.4)	-0.3%		(0.1)	-4.2%

Net earnings attributable to Snap-on Inc.	$	116.2	12.7%	$	94.5	11.2%	$	21.7	23.0%

NM: Not meaningful

Snap-on’s 2014 fiscal year contained 53 weeks of operating results, with the extra week occurring in the fourth quarter; Snap-on’s 2013 fiscal year contained 52 weeks of operating results. The impact of the additional week of operations in 2014 was not material to Snap-on’s fourth quarter net sales or net earnings.

Net sales of $857.4 million in the fourth quarter of 2014 increased $59.9 million, or 7.5%, from 2013 levels, including $21.5 million of unfavorable foreign currency translation and $5.7 million of acquisition-related sales. Organic sales in the fourth quarter of 2014 increased $75.7 million, or 9.8%, from 2013 levels. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

Gross profit of $411.3 million in the fourth quarter of 2014 increased $32.8 million from $378.5 million last year. Gross margin of 48.0% in the quarter increased 50 bps from 47.5% last year primarily due to savings from RCI initiatives and benefits from higher sales, partially offset by increased restructuring and other costs. Restructuring costs included in gross profit were $1.0 million and zero in the fourth quarters of 2014 and 2013, respectively.


34		SNAP-ON INCORPORATED

Operating expenses of $266.1 million in the fourth quarter of 2014 increased $11.2 million from $254.9 million last year primarily due to higher volume-related and other expenses. The operating expense margin of 31.1% in the quarter improved 90 bps from 32.0% last year primarily due to sales volume leverage. Restructuring costs included in operating expenses were $0.1 million and zero in the fourth quarters of 2014 and 2013, respectively.

Operating earnings before financial services of $145.2 million in the fourth quarter of 2014, including $1.9 million of unfavorable foreign currency effects, increased $21.6 million, or 17.5%, as compared to $123.6 million last year. As a percentage of net sales, operating earnings before financial services of 16.9% in the quarter improved 140 bps from 15.5% last year.

Financial services operating earnings of $42.2 million on revenue of $59.4 million in the fourth quarter of 2014 compared to operating earnings of $33.0 million on revenue of $47.4 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.

Operating earnings of $187.4 million in the fourth quarter of 2014, including $2.1 million of unfavorable foreign currency effects, increased $30.8 million, or 19.7%, from $156.6 million last year. As a percentage of revenues, operating earnings of 20.4% in the quarter improved 190 bps from 18.5% last year.

Interest expense of $13.8 million in 2014 decreased $0.5 million from $14.3 million last year primarily due to lower average debt levels as a result of the March 2014 repayment of $100.0 million of unsecured notes at maturity. See Note 9 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $0.2 million and $0.8 million in the fourth quarters of 2014 and 2013, respectively. See Note 16 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 32.1% in both the fourth quarters of 2014 and 2013. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on in the fourth quarter of 2014 of $116.2 million, or $1.97 per diluted share, increased $21.7 million, or $0.37 per diluted share, from 2013 levels. Net earnings attributable to Snap-on in the fourth quarter of 2013 were $94.5 million or $1.60 per diluted share.

Segment Results

Commercial & Industrial Group


	Fourth Quarter
(Amounts in millions)	2014			2013			Change
External net sales	$	237.9	79.8%	$	231.6	81.8%	$	6.3	2.7%
Intersegment net sales		60.3	20.2%		51.6	18.2%		8.7	16.9%

Segment net sales		298.2	100.0%		283.2	100.0%		15.0	5.3%
Cost of goods sold		(184.8)	-62.0%		(172.9)	-61.1%		(11.9)	-6.9%

Gross profit		113.4	38.0%		110.3	38.9%		3.1	2.8%
Operating expenses		(72.9)	-24.4%		(73.2)	-25.8%		0.3	0.4%

Segment operating earnings	$	40.5	13.6%	$	37.1	13.1%	$	3.4	9.2%

Segment net sales of $298.2 million in the fourth quarter of 2014 increased $15.0 million, or 5.3%, from 2013 levels; excluding $11.9 million of unfavorable foreign currency translation, organic sales increased $26.9 million or 9.9%. The organic sales increase primarily reflects double-digit gains in sales to customers in critical industries and in the company’s Asia/Pacific operations, as well as a mid single-digit sales increase in the segment’s European-based hand tools business.


		2014 ANNUAL REPORT		35

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

Segment gross profit of $113.4 million in the fourth quarter of 2014 increased $3.1 million from 2013 levels, including $3.7 million of unfavorable foreign currency effects. Gross margin of 38.0% in the quarter decreased 90 bps from 38.9% last year primarily due to a shift to lower gross margin sales, which included higher sales to the military and increased sales in the company’s Asia/Pacific operations, partially offset by savings from RCI initiatives. Restructuring costs included in gross profit were $0.5 million and zero in the fourth quarters of 2014 and 2013, respectively.

Segment operating expenses of $72.9 million in the fourth quarter of 2014 decreased $0.3 million from 2013 levels. The operating expense margin of 24.4% in the quarter improved 140 bps from 25.8% last year primarily due to sales volume leverage, including benefits from the sales shift noted above.

As a result of these factors, segment operating earnings of $40.5 million in the fourth quarter of 2014, including $0.5 million of unfavorable foreign currency effects, increased $3.4 million from 2013 levels. Operating margin for the Commercial & Industrial Group of 13.6% in the fourth quarter of 2014 improved 50 bps from 13.1% last year.

Snap-on Tools Group


	Fourth Quarter
(Amounts in millions)	2014			2013			Change
Segment net sales	$	387.5	100.0%	$	351.1	100.0%	$	36.4	10.4%
Cost of goods sold		(221.1)	-57.1%		(204.9)	-58.4%		(16.2)	-7.9%

Gross profit		166.4	42.9%		146.2	41.6%		20.2	13.8%
Operating expenses		(102.5)	-26.4%		(95.2)	-27.1%		(7.3)	-7.7%

Segment operating earnings	$	63.9	16.5%	$	51.0	14.5%	$	12.9	25.3%

Segment net sales of $387.5 million in the fourth quarter of 2014 increased $36.4 million, or 10.4%, from 2013 levels. Excluding $4.5 million of unfavorable foreign currency translation, organic sales increased $40.9 million, or 11.8%, reflecting a double-digit sales increase in the company’s U.S. franchise operations and a high single-digit sales gain in the company’s international franchise operations.

Segment gross profit of $166.4 million in the fourth quarter of 2014 increased $20.2 million from 2013 levels, including $1.6 million of unfavorable foreign currency effects. Gross margin of 42.9% in the quarter increased 130 bps from 41.6% last year primarily due to benefits from higher sales and savings from RCI initiatives.

Segment operating expenses of $102.5 million in the fourth quarter of 2014 increased $7.3 million from 2013 levels primarily due to higher volume-related and other expenses. The operating expense margin of 26.4% in the quarter improved 70 bps from 27.1% last year primarily due to sales volume leverage.

As a result of these factors, segment operating earnings of $63.9 million in the fourth quarter of 2014, including $0.5 million of unfavorable foreign currency effects, increased $12.9 million from 2013 levels. Operating margin for the Snap-on Tools Group of 16.5% in the fourth quarter of 2014 improved 200 bps from 14.5% last year.

Repair Systems & Information Group


	Fourth Quarter
(Amounts in millions)	2014			2013			Change
External net sales	$	232.0	82.0%	$	214.8	81.2%	$	17.2	8.0%
Intersegment net sales		50.8	18.0%		49.8	18.8%		1.0	2.0%

Segment net sales		282.8	100.0%		264.6	100.0%		18.2	6.9%
Cost of goods sold		(151.3)	-53.5%		(142.6)	-53.9%		(8.7)	-6.1%

Gross profit		131.5	46.5%		122.0	46.1%		9.5	7.8%
Operating expenses		(66.3)	-23.4%		(61.2)	-23.1%		(5.1)	-8.3%

Segment operating earnings	$	65.2	23.1%	$	60.8	23.0%	$	4.4	7.2%


36		SNAP-ON INCORPORATED

Segment net sales of $282.8 million in the fourth quarter of 2014 increased $18.2 million, or 6.9%, from 2013 levels. Excluding $5.7 million of acquisition-related sales and $5.5 million of unfavorable foreign currency translation, organic sales increased $18.0 million or 6.9%. The organic sales increase primarily reflects high single-digit gains in both sales of undercar equipment and sales to OEM dealerships, as well as a mid single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers.

Segment gross profit of $131.5 million in the fourth quarter of 2014 increased $9.5 million from 2013 levels. Gross margin of 46.5% in the quarter increased 40 bps from 46.1% last year, as savings from RCI and other cost reduction initiatives were partially offset by a shift in sales that included higher volumes of lower gross margin products, including increased essential tool and facilitation sales to OEM dealerships. Restructuring costs included in gross profit were $0.5 million and zero in the fourth quarters of 2014 and 2013, respectively.

Segment operating expenses of $66.3 million in the fourth quarter of 2014 increased $5.1 million from 2013 levels primarily due to higher volume-related and other expenses, including operating expenses for Pro-Cut, partially offset by savings from RCI initiatives. The operating expense margin of 23.4% in the quarter increased 30 bps from 23.1% last year primarily due to the operating expenses of Pro-Cut. Restructuring costs included in operating expenses were $0.1 million and zero in the fourth quarters of 2014 and 2013, respectively.

As a result of these factors, segment operating earnings of $65.2 million in the fourth quarter of 2014, including $0.9 million of unfavorable foreign currency effects, increased $4.4 million from 2013 levels. Operating margin for the Repair Systems & Information Group of 23.1% in the fourth quarter of 2014 improved 10 bps from 23.0% last year.

Financial Services


	Fourth Quarter
(Amounts in millions)	2014			2013			Change
Financial services revenue	$	59.4	100.0%	$	47.4	100.0%	$	12.0	25.3%
Financial services expenses		(17.2)	-29.0%		(14.4)	-30.4%		(2.8)	-19.4%

Segment operating earnings	$	42.2	71.0%	$	33.0	69.6%	$	9.2	27.9%

Financial services operating earnings of $42.2 million on revenue of $59.4 million in the fourth quarter of 2014, which included an additional week of operations in fiscal 2014, compared to operating earnings of $33.0 million on revenue of $47.4 million last year. The $12.0 million increase in financial services revenue primarily reflects $10.4 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $1.2 million from higher average yields. In the fourth quarters of 2014 and 2013, the average yield on finance receivables was 17.6% and 17.4%, respectively, and the average yield on contract receivables was 9.5% in both periods. Originations of $232.2 million in the fourth quarter of 2014 increased $34.6 million, or 17.5%, from 2013 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for doubtful accounts. These expenses are generally more dependent on changes in the size of the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $17.2 million in the fourth quarter of 2014 compared to financial services expenses of $14.4 million in 2013. As a percentage of the average financial services portfolio, financial services expenses were 1.3% and 1.2% in the fourth quarters of 2014 and 2013, respectively.

See Note 1 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s fourth quarter 2014 general corporate expenses of $24.4 million decreased $0.9 million from $25.3 million last year primarily due to lower pension expense partially offset by higher performance-based compensation and other expenses.


		2014 ANNUAL REPORT		37

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

2013 vs. 2012

Results of operations for 2013 and 2012 are as follows:


(Amounts in millions)	2013			2012			Change
Net sales	$	3,056.5	100.0%	$	2,937.9	100.0%	$	118.6	4.0%
Cost of goods sold		(1,583.6)	-51.8%		(1,547.9)	-52.7%		(35.7)	-2.3%

Gross profit		1,472.9	48.2%		1,390.0	47.3%		82.9	6.0%
Operating expenses		(1,012.4)	-33.1%		(980.3)	-33.4%		(32.1)	-3.3%

Operating earnings before financial services		460.5	15.1%		409.7	13.9%		50.8	12.4%

Financial services revenue		181.0	100.0%		161.3	100.0%		19.7	12.2%
Financial services expenses		(55.3)	-30.6%		(54.6)	-33.8%		(0.7)	-1.3%

Operating earnings from financial services		125.7	69.4%		106.7	66.2%		19.0	17.8%


Operating earnings		586.2	18.1%		516.4	16.7%		69.8	13.5%
Interest expense		(56.1)	-1.7%		(55.8)	-1.8%		(0.3)	-0.5%
Other income (expense) – net		(3.9)	-0.1%		(0.4)	–		(3.5)	NM

Earnings before income taxes and equity earnings		526.2	16.3%		460.2	14.9%		66.0	14.3%
Income tax expense		(166.7)	-5.2%		(148.2)	-4.8%		(18.5)	-12.5%

Earnings before equity earnings		359.5	11.1%		312.0	10.1%		47.5	15.2%
Equity earnings, net of tax		0.2	–		2.6	0.1%		(2.4)	-92.3%

Net earnings		359.7	11.1%		314.6	10.2%		45.1	14.3%
Net earnings attributable to noncontrolling interests		(9.4)	-0.3%		(8.5)	-0.3%		(0.9)	-10.6%

Net earnings attributable to Snap-on Inc.	$	350.3	10.8%	$	306.1	9.9%	$	44.2	14.4%

NM: Not meaningful

Net sales of $3,056.5 million in 2013 increased $118.6 million, or 4.0%, from 2012 levels, including $39.3 million of sales from the May 2013 acquisition of Challenger and an unfavorable $21.6 million impact from foreign currency translation. Organic sales in 2013 increased $100.9 million, or 3.5%, from 2012 levels. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

Gross profit of $1,472.9 million in 2013 increased $82.9 million as compared to $1,390.0 million in 2012, and gross margin of 48.2% in 2013 improved 90 bps from 47.3% in 2012. The year-over-year improvement in gross margin primarily reflected benefits from ongoing RCI initiatives and a $6.5 million decrease in restructuring costs. Gross profit in 2013 reflected $4.4 million of restructuring costs; gross profit in 2012 reflected $10.9 million of restructuring costs, including $6.8 million for the settlement of a pension plan following the 2011 closure of the company’s former Newmarket, Canada, facility.

Operating expenses of $1,012.4 million in 2013 increased $32.1 million as compared to $980.3 million in 2012. The operating expense margin of 33.1% in 2013 improved 30 bps from 33.4% in 2012 primarily due to benefits from sales volume leverage, savings from ongoing RCI initiatives and a $3.7 million decrease in restructuring costs. Restructuring costs included in operating expenses were $1.9 million and $5.6 million in 2013 and 2012, respectively.


38		SNAP-ON INCORPORATED

Operating earnings before financial services of $460.5 million in 2013 increased $50.8 million, or 12.4%, as compared to $409.7 million in 2012. As a percentage of net sales, operating earnings before financial services of 15.1% improved 120 bps from 13.9% in 2012.

Financial services operating earnings of $125.7 million on revenue of $181.0 million in 2013 compared to operating earnings of $106.7 million on revenue of $161.3 million in 2012. The year-over-year increases in both revenue and operating earnings primarily reflected the growth in the company’s financial services portfolio.

Operating earnings of $586.2 million in 2013, including $14.2 million of unfavorable foreign currency effects, increased $69.8 million, or 13.5%, as compared to operating earnings of $516.4 million in 2012. As a percentage of revenues, operating earnings of 18.1% in 2013 improved 140 bps from 16.7% in 2012.

Interest expense of $56.1 million in 2013 increased $0.3 million from $55.8 million in 2012. See Note 9 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net was expense of $3.9 million and $0.4 million in 2013 and 2012, respectively. See Note 16 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 32.3% in 2013 and 32.8% in 2012. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on in 2013 of $350.3 million, or $5.93 per diluted share, increased $44.2 million, or $0.73 per diluted share, from 2012 levels. Net earnings attributable to Snap-on in 2012 were $306.1 million or $5.20 per diluted share.

Exit and Disposal Activities

Snap-on recorded costs for exit and disposal activities of $6.4 million and $16.5 million in 2013 and 2012, respectively. 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)	2013			2012			Change
External net sales	$	903.0	82.8%	$	940.6	83.5%	$	(37.6)	-4.0%
Intersegment net sales		188.0	17.2%		185.3	16.5%		2.7	1.5%

Segment net sales		1,091.0	100.0%		1,125.9	100.0%		(34.9)	-3.1%
Cost of goods sold		(671.5)	-61.5%		(710.9)	-63.1%		39.4	5.5%

Gross profit		419.5	38.5%		415.0	36.9%		4.5	1.1%
Operating expenses		(282.2)	-25.9%		(287.7)	-25.6%		5.5	1.9%

Segment operating earnings	$	137.3	12.6%	$	127.3	11.3%	$	10.0	7.9%

Segment net sales of $1,091.0 million in 2013 decreased $34.9 million, or 3.1%, from 2012 levels; excluding $9.8 million of unfavorable foreign currency translation, organic sales decreased $25.1 million or 2.2%. The lower year-over-year organic sales primarily reflected a double-digit decline in sales to the military and a low single-digit sales decline in the segment’s European-based hand tools business.

Segment gross profit of $419.5 million in 2013 increased $4.5 million from 2012 levels. Gross margin of 38.5% in 2013 improved 160 bps from 36.9% in 2012 primarily due to savings from ongoing RCI initiatives, particularly in Europe, and a $1.1 million decrease in restructuring costs. Restructuring costs included in gross profit were $2.5 million and $3.6 million in 2013 and 2012, respectively.


		2014 ANNUAL REPORT		39

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

Segment operating expenses of $282.2 million in 2013 decreased $5.5 million from 2012 levels. The operating expense margin of 25.9% in 2013 increased 30 bps from 25.6% in 2012 primarily as a result of the lower sales, partially offset by a $4.9 million decrease in restructuring costs. Restructuring costs included in operating expenses were $0.4 million and $5.3 million in 2013 and 2012, respectively.

As a result of these factors, segment operating earnings of $137.3 million in 2013 increased $10.0 million, or 7.9%, from 2012 levels, including $8.8 million of unfavorable foreign currency effects. Operating margin for the Commercial & Industrial Group of 12.6% in 2013 increased 130 bps from 11.3% in 2012.

Snap-on Tools Group


(Amounts in millions)	2013			2012			Change
Segment net sales	$	1,358.4	100.0%	$	1,272.0	100.0%	$	86.4	6.8%
Cost of goods sold		(772.6)	-56.9%		(728.9)	-57.3%		(43.7)	-6.0%

Gross profit		585.5	43.1%		543.1	42.7%		42.7	7.9%
Operating expenses		(391.2)	-28.8%		(366.7)	-28.8%		(24.5)	-6.7%

Segment operating earnings	$	194.6	14.3%	$	176.4	13.9%	$	18.2	10.3%

Segment net sales of $1,358.4 million in 2013 increased $86.4 million, or 6.8%, from 2012 levels. Excluding $9.3 million of unfavorable foreign currency translation, organic sales increased $95.7 million, or 7.6%, reflecting similar increases in both the company’s U.S. and international franchise operations.

Segment gross profit of $585.8 million in 2013 increased $42.7 million from 2012 levels. Gross margin of 43.1% in 2013 increased 40 bps from 42.7% in 2012 primarily due to a $6.9 million decrease in restructuring costs. Gross profit in 2013 reflected $0.2 million of restructuring costs; gross profit in 2012 reflected $7.1 million of such costs, including $6.8 million for the settlement of the Newmarket pension plan.

Segment operating expenses of $391.2 million in 2013 increased $24.5 million from 2012 levels primarily due to higher volume-related and other expenses, including $2.6 million of increased stock-based and mark-to-market costs associated with the company’s franchisee stock purchase plan. Restructuring costs included in operating expenses were $0.3 million and $0.1 million in 2013 and 2012, respectively. The operating expense margin of 28.8% in 2013 was unchanged from 2012. See Note 13 to the Consolidated Financial Statements for information on the company’s franchisee stock purchase plan.

As a result of these factors, segment operating earnings of $194.6 million in 2013, including $2.7 million of unfavorable foreign currency effects, increased $18.2 million, or 10.3%, from 2012 levels. Operating margin for the Snap-on Tools Group of 14.3% in 2013 improved 40 bps from 13.9% in 2012.

Repair Systems & Information Group


(Amounts in millions)	2013			2012			Change
External net sales	$	795.1	78.8%	$	725.3	79.1%	$	69.8	9.6%
Intersegment net sales		214.5	21.2%		191.8	20.9%		22.7	11.8%

Segment net sales		1,009.6	100.0%		917.1	100.0%		92.5	10.1%
Cost of goods sold		(542.0)	-53.7%		(485.2)	-52.9%		(56.8)	-11.7%

Gross profit		467.6	46.3%		431.9	47.1%		35.7	8.3%
Operating expenses		(235.7)	-23.3%		(226.2)	-24.7%		(9.5)	-4.2%

Segment operating earnings	$	231.9	23.0%	$	205.7	22.4%	$	26.2	12.7%


40		SNAP-ON INCORPORATED

Segment net sales of $1,009.6 million in 2013 increased $92.5 million, or 10.1%, from 2012 levels. Excluding $39.3 million of sales from the May 2013 acquisition of Challenger and $0.9 million of unfavorable foreign currency translation, organic sales in 2013 increased $54.1 million or 5.9%. The organic sales increase primarily reflected a high single-digit gain in sales to OEM dealerships, a high single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, and a low single-digit increase in sales of undercar equipment.

Segment gross profit of $467.6 million in 2013 increased $35.7 million from 2012 levels. Gross margin of 46.3% in 2013 decreased 80 bps from 47.1% in 2012 primarily due to a shift in sales mix that included higher volumes of lower gross margin products, including sales of Challenger products. Restructuring costs included in gross profit were $1.7 million and $0.2 million in 2013 and 2012, respectively. These gross margin decreases were partially offset by continued savings from ongoing RCI initiatives.

Segment operating expenses of $235.7 million in 2013 increased $9.5 million from 2012 levels. The operating expense margin of 23.3% in 2013 improved 140 bps from 24.7% in 2012 primarily due to contributions from sales volume leverage, including the effects from the sales mix shift discussed above, and savings from ongoing RCI initiatives. Restructuring costs included in operating expenses were $1.2 million and $0.2 million in 2013 and 2012, respectively.

As a result of these factors, segment operating earnings of $231.9 million in 2013, including $2.2 million of unfavorable foreign currency effects, increased $26.2 million, or 12.7%, from 2012 levels. Operating margin for the Repair Systems & Information Group of 23.0% in 2013 increased 60 bps from 22.4% in 2012.

Financial Services


(Amounts in millions)	2013			2012			Change
Financial services revenue	$	181.0	100.0%	$	161.3	100.0%	$	19.7	12.2%
Financial services expenses		(55.3)	-30.6%		(54.6)	-33.8%		(0.7)	-1.3%

Segment operating earnings	$	125.7	69.4%	$	106.7	66.2%	$	19.0	17.8%

Financial services operating earnings of $125.7 million on revenue of $181.0 million in 2013 compared to operating earnings of $106.7 million on revenue of $161.3 million in 2012. The $19.7 million, or 12.2%, increase in financial services revenue primarily reflected $15.4 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $3.2 million of increased revenue from higher average yields. In 2013 and 2012, the average yield on finance receivables was 17.4% and 17.2%, respectively, and the average yield on contract receivables was 9.5% in both years. Originations of $777.7 million in 2013 increased $100.6 million, or 14.9%, from 2012 levels.

Financial services expenses of $55.3 million and $54.6 million in 2013 and 2012, respectively, primarily included personnel-related and other general and administrative costs, as well as provisions for doubtful accounts. These expenses are generally more dependent on changes in the size of the financial services portfolio than they are on the revenue of the segment. As a percentage of the average financial services portfolio, financial services expenses were 4.7% and 5.1% in 2013 and 2012, respectively.

See Note 1 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s general corporate expenses of $103.3 million in 2013 increased $3.6 million over 2012 levels.


		2014 ANNUAL REPORT		41

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

Non-GAAP Supplemental Data

The supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing the operating performance of Snap-on Incorporated’s (“Snap-on”) 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, diagnostic and equipment products, 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 and cash generated from Operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Income taxes are charged 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.

Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2014, 2013 and 2012 is as follows:


	Operations*						Financial Services
(Amounts in millions)	2014		2013		2012		2014		2013		2012
Net sales	$	3,277.7	$	3,056.5	$	2,937.9	$	–	$	–	$	–
Cost of goods sold		(1,693.4)		(1,583.6)		(1,547.9)		–		–		–

Gross profit		1,584.3		1,472.9		1,390.0		–		–		–
Operating expenses		(1,048.7)		(1,012.4)		(980.3)		–		–		–

Operating earnings before financial services		535.6		460.5		409.7		–		–		–

Financial services revenue		–		–		–		214.9		181.0		161.3
Financial services expenses		–		–		–		(65.8)		(55.3)		(54.6)

Operating earnings from financial services		–		–		–		149.1		125.7		106.7


Operating earnings		535.6		460.5		409.7		149.1		125.7		106.7
Interest expense		(52.2)		(54.6)		(54.0)		(0.7)		(1.5)		(1.8)
Intersegment interest income (expense) –net		56.7		47.7		42.4		(56.7)		(47.7)		(42.4)
Other income (expense) – net		(0.8)		(4.0)		(0.4)		(0.1)		0.1		–

Earnings before income taxes and equity earnings		539.3		449.6		397.7		91.6		76.6		62.5
Income tax expense		(165.8)		(138.6)		(125.3)		(33.7)		(28.1)		(22.9)

Earnings before equity earnings		373.5		311.0		272.4		57.9		48.5		39.6
Financial services – net earnings attributable to Snap-on		57.9		48.5		39.6		–		–		–
Equity earnings, net of tax		0.7		0.2		2.6		–		–		–

Net earnings		432.1		359.7		314.6		57.9		48.5		39.6
Net earnings attributable to noncontrolling interests		(10.2)		(9.4)		(8.5)		–		–		–

Net earnings attributable to Snap-on	$	421.9	$	350.3	$	306.1	$	57.9	$	48.5	$	39.6

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


42		SNAP-ON INCORPORATED

Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2014 and 2013 year end is as follows:


	Operations*				Financial Services
(Amounts in millions)	2014		2013		2014		2013
ASSETS
Current assets:
Cash and cash equivalents	$	132.8	$	214.4	$	0.1	$	3.2
Intersegment receivables		16.0		15.3		–		–
Trade and other accounts receivable – net		550.5		531.1		0.3		0.5
Finance receivables – net		–		–		402.4		374.6
Contract receivables – net		7.6		7.0		66.9		61.4
Inventories – net		475.5		434.4		–		–
Deferred income tax assets		85.4		71.1		15.6		14.3
Prepaid expenses and other assets		125.5		88.1		0.9		1.3

Total current assets		1,393.3		1,361.4		486.2		455.3

Property and equipment – net		403.4		390.9		1.1		1.6
Investment in Financial Services		218.9		193.7		–		–
Deferred income tax assets		92.9		56.8		0.3		0.3
Intersegment long-term notes receivable		232.1		9.6		–		–
Long-term finance receivables – net		–		–		650.5		560.6
Long-term contract receivables – net		12.8		12.0		229.2		205.1
Goodwill		810.7		838.8		–		–
Other intangibles – net		203.3		190.5		–		–
Other assets		50.9		58.9		1.0		1.1

Total assets	$	3,418.3	$	3,112.6	$	1,368.3	$	1,224.0

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


		2014 ANNUAL REPORT		43

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

Supplemental Consolidating Data – Supplemental Balance Sheet Information (continued):


	Operations*				Financial Services
(Amounts in millions)	2014		2013		2014		2013
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	56.6	$	13.1	$	–	$	100.0
Accounts payable		144.7		150.7		0.3		4.9
Intersegment payables		–		–		16.0		15.3
Accrued benefits		53.8		48.1		–		–
Accrued compensation		95.2		91.9		4.0		3.6
Franchisee deposits		65.8		59.4		–		–
Other accrued liabilities		285.0		229.5		18.2		22.2

Total current liabilities		701.1		592.7		38.5		146.0

Long-term debt and intersegment long-term debt		–		–		1,094.8		868.5
Deferred income tax liabilities		158.6		142.7		0.6		1.1
Retiree health care benefits		42.5		41.7		–		–
Pension liabilities		217.9		135.8		–		–
Other long-term liabilities		72.9		69.3		15.5		14.7

Total liabilities		1,193.0		982.2		1,149.4		1,030.3


Total shareholders’ equity attributable to Snap-on Inc.		2,207.8		2,113.2		218.9		193.7
Noncontrolling interests		17.5		17.2		–		–

Total equity		2,225.3		2,130.4		218.9		193.7

Total liabilities and equity	$	3,418.3	$	3,112.6	$	1,368.3	$	1,224.0

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


44		SNAP-ON INCORPORATED

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 and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, restructuring activities, the funding of pension plans, and funding for share repurchases and acquisitions, as they arise. Due to Snap-on’s credit rating over the years, external funds have been available at an acceptable cost. As of the close of business on February 6, 2015, Snap-on’s long-term debt and commercial paper were rated, respectively, A3 and P-2 by Moody’s Investors Service; A- and A-2 by Standard & Poor’s; and A- and F2 by Fitch Ratings. 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. However, Snap-on 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.

As of 2014 year end, working capital (current assets less current liabilities) of $1,139.9 million increased $59.1 million from $1,080.8 million as of 2013 year end.

The following represents the company’s working capital position as of 2014 and 2013 year end:


(Amounts in millions)	2014		2013
Cash and cash equivalents	$	132.9	$	217.6
Trade and other accounts receivable – net		550.8		531.6
Finance receivables – net		402.4		374.6
Contract receivables – net		74.5		68.4
Inventories – net		475.5		434.4
Other current assets		222.5		169.6

Total current assets		1,858.6		1,796.2


Notes payable and current maturities of long-term debt		(56.6)		(113.1)
Accounts payable		(145.0)		(155.6)
Other current liabilities		(517.1)		(446.7)

Total current liabilities		(718.7)		(715.4)

Working capital	$	1,139.9	$	1,080.8

Cash and cash equivalents of $132.9 million as of 2014 year end decreased $84.7 million from 2013 year-end levels primarily as a result of the March 2014 repayment of $100.0 million of 5.85% unsecured notes (the “2014 Notes”) at maturity. In addition to the repayment of the 2014 Notes, the net decrease in cash and cash equivalents also includes the impacts of (i) funding $746.2 million of new finance receivables; (ii) dividend payments to shareholders of $107.6 million; (iii) funding $80.6 million of capital expenditures; (iv) repurchasing 680,000 shares of the company’s common stock for $79.3 million; and (v) the acquisition of Pro-Cut for a cash purchase price of $41.3 million. These decreases in cash and cash equivalents were partially offset by (i) $591.4 million of cash from collections of finance receivables; (ii) $397.9 million of cash generated from operations; (iii) $43.5 million of cash from a net increase in notes payable, primarily due to $37.0 million of commercial paper borrowings; and (iv) $33.0 million of cash proceeds from stock purchase and option plan exercises.

Of the $132.9 million of cash and cash equivalents as of 2014 year end, $121.9 million was held outside of the United States. Snap-on maintains non-U.S. funds in its foreign operations to (i) provide adequate working capital; (ii) satisfy various regulatory requirements; and/or (iii) take advantage of business expansion opportunities as they arise. The repatriation of cash from certain foreign subsidiaries could have adverse net tax consequences on the company should Snap-on be required to pay and record U.S. income taxes and foreign withholding taxes on such funds. Alternatively, the repatriation of cash from certain other foreign subsidiaries could result in favorable net tax consequences for the company. Snap-on periodically evaluates its cash held outside the United States and may pursue opportunities to repatriate certain foreign cash amounts to the extent that it does not incur unfavorable net tax consequences.


		2014 ANNUAL REPORT		45

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

Trade and other accounts receivable – net of $550.8 million as of 2014 year end increased $19.2 million from 2013 year-end levels; excluding $24.4 million of currency translation impacts, trade and other accounts receivable – net increased $43.6 million, largely due to higher sales, including higher sales and receivables related to Pro-Cut. Days sales outstanding (trade and other accounts receivable – net as of the respective period end, divided by the respective trailing 12 months sales, times 360 days) was 61 days at 2014 year end and 62 days at 2013 year end.

The current portions of net finance and contract receivables of $476.9 million as of 2014 year end compared to $443.0 million at 2013 year end. The long-term portions of net finance and contract receivables of $892.5 million as of 2014 year end compared to $777.7 million at 2013 year end. The combined $148.7 million increase in net current and long-term finance and contract receivables over 2013 year-end levels is primarily due to continued growth of the company’s financial services portfolio; excluding $12.9 million of currency translation impacts, the combined increase for these receivables over 2013 year-end levels was $161.6 million.

Inventories of $475.5 million as of 2014 year end increased $41.1 million from 2013 year-end levels; excluding $23.9 million of currency translation impacts, inventories increased $65.0 million primarily to support continued higher customer demand and new product introductions, as well as inventories related to Pro-Cut. As of 2014 and 2013 year end, 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 3.7 turns and 3.8 turns, respectively. Inventories accounted for using the first-in, first-out (FIFO) method as of 2014 and 2013 year end approximated 58% and 60%, respectively, of total inventories. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve as of both 2014 and 2013 year end was $72.6 million.

Notes payable of $56.6 million as of 2014 year end included $37.0 million of commercial paper borrowings and $19.6 million of other notes; there were no current maturities of long-term debt as of 2014 year end. Notes payable and current maturities of long-term debt of $113.1 million as of 2013 year end included $100.0 million of 2014 Notes and $13.1 million of other notes; no commercial paper was outstanding as of 2013 year end. Snap-on repaid the 2014 Notes at maturity with available cash and commercial paper borrowings.

Average notes payable outstanding were $45.4 million in 2014 and $13.4 million in 2013. The weighted-average interest rate on notes payable was 5.42% in 2014 and 10.85% in 2013. As of 2014 and 2013 year end, the weighted-average interest rate on outstanding notes payable was 4.86% and 12.73%, respectively. The lower weighted-average interest rates in 2014 primarily reflect the impact of lower interest rates on commercial paper borrowings; no commercial paper was outstanding during 2013. The weighted-average interest rates in both years reflect local borrowings in emerging growth markets where interest rates are generally higher.

Accounts payable of $145.0 million as of 2014 year end decreased $10.6 million from 2013 year-end levels; excluding $5.7 million of currency translation impacts, accounts payable decreased $4.9 million primarily due to the timing of payments.

Other accrued liabilities of $298.3 million as of 2014 year end increased $54.6 million from prior-year levels primarily due to (i) an $18.0 million increase in income and other tax accruals, including as a result of the timing of estimated income tax payments; (ii) $12.7 million of higher accruals for in-transit inventories; (iii) a $9.1 million increase in accruals for foreign currency forward contracts; (iv) a $7.5 million increase in deferred subscription revenue; and (v) a $2.5 million increase in accruals for exit and disposal activities. Excluding $10.0 million of currency translation impacts, other accrued liabilities increased $64.6 million from 2013 year-end levels.

Pension liabilities of $217.9 million as of 2014 year end increased $82.1 million from prior-year levels; excluding $6.8 million of currency translation impacts, pension liabilities increased $88.9 million primarily due to changes in actuarial assumptions, including a 100 bps decline in the company’s worldwide weighted-average discount rate assumption (4.1% in 2014 compared to 5.1% in 2013) and increases in life expectancy assumptions. These pension liability increases were partially offset by higher-than-anticipated investment returns in 2014 on pension plan assets. See Note 11 to the Consolidated Financial Statements for further information on pension plans.

Long-term debt of $862.7 million as of 2014 year end consisted of (i) $150 million of unsecured 5.50% notes that mature in 2017; (ii) $250 million of unsecured 4.25% notes that mature in 2018; (iii) $200 million of unsecured 6.70% notes that mature in 2019; (iv) $250 million of unsecured 6.125% notes that mature in 2021; and (v) $12.7 million of other long-term debt, including fair value adjustments related to interest rate swaps.


46		SNAP-ON INCORPORATED

Snap-on has a five-year, $700 million multi-currency revolving credit facility that terminates on September 27, 2018 (the “Credit Facility”); no amounts were outstanding under the Credit Facility as of 2014 year end. Borrowings under the Credit Facility bear interest at varying rates based on Snap-on’s then-current, long-term debt ratings. The Credit Facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio not greater than 0.60 to 1.00 of consolidated net debt (consolidated debt net of certain cash adjustments) to the sum of such consolidated net debt plus total equity and less accumulated other comprehensive income or loss; or (ii) a ratio not greater than 3.50 to 1.00 of such consolidated net debt to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended. As of 2014 year end, the company’s actual ratios of 0.27 and 1.15, respectively, were both within the permitted ranges set forth in this financial covenant.

Snap-on’s Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2014 year end, Snap-on was in compliance with all covenants of its Credit Facility and other debt agreements.

Snap-on believes it has sufficient available cash and access to both committed and uncommitted credit 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 the revolving Credit Facility. 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 payments of interest and dividends, funding to support new receivables originated by our financial services businesses, capital expenditures, working capital, restructuring activities, the funding of pension plans, and funding for share repurchases and acquisitions, as they arise. Snap-on intends to make contributions of $7.1 million to its foreign pension plans and $2.0 million to its domestic pension plans in 2015, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2015.

Snap-on’s long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs, including the potential use of commercial paper, additional fixed-term debt and/or securitizations.

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

Operating Activities

Net cash provided by operating activities of $397.9 million in 2014 compared to $392.6 million in 2013. The $5.3 million increase in net cash provided by operating activities primarily reflects higher 2014 net earnings, partially offset by net changes in operating assets and liabilities, which included $9.5 million of higher cash contributions to the company’s pension plans. Snap-on made cash contributions to its pensions plans totaling $44.8 million, $35.3 million and $87.5 million in 2014, 2013 and 2012, respectively.

Depreciation expense was $54.8 million in 2014, $51.2 million in 2013 and $50.2 million in 2012. Amortization expense was $24.7 million in 2014, $25.5 million in 2013 and $26.5 million in 2012. See Note 6 to the Consolidated Financial Statements for information on goodwill and other intangible assets.

Investing Activities

Net cash used by investing activities of $273.2 million in 2014 included additions to, and collections of, finance receivables of $746.2 million and $591.4 million, respectively. Net cash used by investing activities of $250.4 million in 2013 included additions to, and collections of, finance receivables of $651.3 million and $508.8 million, respectively. Net cash used by investing activities of $173.1 million in 2012 included additions to, and collections of, finance receivables of $569.6 million and $445.5 million, respectively, as well as $27.0 million of proceeds from the sale of a non-strategic equity investment at book value. Finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees’ customers) to enable them to purchase tools and diagnostic and equipment products on an extended-term payment plan, generally with expected average payment terms of three years.


		2014 ANNUAL REPORT		47

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

Capital expenditures in 2014, 2013 and 2012 totaled $80.6 million, $70.6 million and $79.4 million, respectively. Capital expenditures in all three years included investments to support the company’s execution of its Value Creation Processes and strategic growth initiatives. The company also invested in (i) new product, efficiency, safety and cost reduction initiatives to expand and improve its manufacturing capabilities worldwide; (ii) new production and machine tooling to enhance manufacturing operations, as well as ongoing replacements of manufacturing and distribution equipment, particularly in the United States; (iii) the ongoing replacement and enhancement of the company’s global enterprise resource planning (ERP) management information systems; and (iv) improvements in the company’s corporate headquarters and research and development facilities in Kenosha, Wisconsin. In 2012, the company also completed the construction of a fourth factory in Kunshan, China. 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 2015.

Net cash used by investing activities in 2014 also included $41.3 million for the May 2014 acquisition of Pro-Cut. Net cash used by investing activities in 2013 included $38.2 million for the May 2013 acquisition of Challenger. See Note 2 to the Consolidated Financial Statements for information on acquisitions.

Financing Activities

Net cash used by financing activities was $206.9 million in 2014, $137.8 million in 2013 and $127.0 million in 2012. Net cash used by financing activities of $206.9 million in 2014 included the $100.0 million repayment of the 2014 Notes at maturity, partially offset by $45.0 million of proceeds from a net increase in short-term borrowings.

Proceeds from stock purchase and option plan exercises totaled $33.0 million in 2014, $29.2 million in 2013 and $46.8 million in 2012. 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. In 2014, Snap-on repurchased 680,000 shares of its common stock for $79.3 million under its previously announced share repurchase programs. As of 2014 year end, Snap-on had remaining availability to repurchase up to an additional $210.9 million in common stock pursuant to its Board of Directors’ (the “Board”) authorizations. The purchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions. Snap-on repurchased 926,000 shares of its common stock for $82.6 million in 2013, and Snap-on repurchased 1,180,000 shares of its common stock for $78.1 million in 2012. 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 2015.

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2014, 2013 and 2012 totaled $107.6 million, $92.0 million and $81.5 million, respectively. On November 6, 2014, the company announced that its Board increased the quarterly cash dividend by 20.5% to $0.53 per share ($2.12 per share per year). Quarterly dividends declared in 2014 were $0.53 per share in the fourth quarter and $0.44 per share in the first three quarters ($1.85 per share for the year). Quarterly dividends declared in 2013 were $0.44 per share in the fourth quarter and $0.38 per share in the first three quarters ($1.58 per share for the year). Quarterly dividends declared in 2012 were $0.38 per share in the fourth quarter and $0.34 per share in the first three quarters ($1.40 per share for the year).


	2014		2013		2012
Cash dividends paid per common share	$	1.85	$	1.58	$	1.40
Cash dividends paid as a percent of prior-year retained earnings		4.6%		4.5%		4.4%

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 2015.

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 as of 2014 year end.


48		SNAP-ON INCORPORATED

Contractual Obligations and Commitments

A summary of Snap-on’s future contractual obligations and commitments as of 2014 year end are as follows:


(Amounts in millions)	Total		2015		2016 – 2017		2018 – 2019		2020 and thereafter
Contractual obligations:
Notes payable	$	56.6	$	56.6	$	–	$	–	$	–
Long-term debt		862.7		–		150.0		450.0		262.7
Interest on fixed rate debt		207.1		47.6		87.2		46.6		25.7
Operating leases		76.5		22.3		28.0		15.1		11.1
Capital leases		28.3		6.3		8.6		4.7		8.7
Purchase obligations		42.7		35.7		6.4		0.6		–

Total	$	1,273.9	$	168.5	$	280.2	$	517.0	$	308.2

Snap-on intends to make contributions of $7.1 million to its foreign pension plans and $2.0 million to its domestic pension plans in 2015, as required by law. Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its pension plans in 2015. Snap-on has not presented estimated pension and postretirement funding contributions in the table above as the funding can vary from year to year based upon changes in the fair value of the plan assets and actuarial assumptions; see Notes 11 and 12 to the Consolidated Financial Statements for information on the company’s benefit plans and payments.

Due to the uncertainty of the timing of settlements with taxing authorities, Snap-on is unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits for its remaining uncertain tax liabilities. As a result, $6.4 million of unrecognized tax benefits have been excluded from the table above; 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. Snap-on 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.

Affordable Care Act

The Affordable Care Act (the “ACA”), which was adopted in 2010 and is being phased in over several years, significantly affects the provision of both health care services and benefits in the United States; the ACA may impact our cost of providing our employees and retirees with health insurance and/or benefits, and may also impact various other aspects of our business. The ACA did not have a material impact on our fiscal 2014, 2013 or 2012 financial results.

New Accounting Standards

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


		2014 ANNUAL REPORT		49

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

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 (“U.S. GAAP”) 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.

In addition to the company’s significant accounting policies 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.

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. Within its four reportable operating segments, the company has identified 11 reporting units.

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 operating plans, are subject to change as a result of changing economic and competitive conditions. This approach reflects management’s internal outlook at the reporting units, which management believes provides the best determination of value due to management’s insight and experience with the reporting unit. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, working capital levels, expected benefits from RCI initiatives, and a 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 2014 impairment calculations were evaluated in light of then-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 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 capital 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


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assumptions used in performing the second quarter 2014 impairment calculations were evaluated in light of then-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.

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 and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including effects from the sale or disposal of a reporting unit, 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 2014, the results of which did not result in any impairment. As of 2014 year end, the company has no accumulated impairment losses. 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 2014 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 declines in profitability and cash flow due to significant and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets and/or other events, including effects from the sale or disposal of a reporting unit, could require a provision for impairment in a future period.

Excess and Obsolete Inventory: Snap-on records allowances for excess and obsolete inventory based on historical and estimated future demand and market conditions. Allowances for raw materials are largely based on an analysis of raw material age and actual physical inspection of raw material for fitness for use. As part of evaluating the adequacy of allowances for work-in-progress and finished goods, management reviews individual product stock-keeping units (SKUs) by product category and product life cycle. Cost adjustments for each product category/product life-cycle state are generally established and maintained based on a combination of historical experience, forecasted sales and promotions, technological obsolescence, inventory age and other actual known conditions and circumstances. Should actual product marketability and raw material fitness for use be affected by conditions that are different from management estimates, further adjustments to inventory allowances may be required.

Pension Benefits: The pension benefit obligation and related pension expense are calculated in accordance with U.S. GAAP and are impacted by certain actuarial assumptions. Changes in these assumptions are primarily influenced by factors outside of Snap-on’s control and can have a significant effect on the amounts reported in the financial statements. Snap-on believes that the two most critical assumptions are (i) the expected return on plan assets; and (ii) the assumed discount rate.

Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected rate of return assumption for Snap-on’s domestic pension plan assets by 50 bps would have increased Snap-on’s 2014 domestic pension expense by approximately $4.2 million. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its domestic plans’ assets.


		2014 ANNUAL REPORT		51

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

The objective of Snap-on’s discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The domestic discount rate as of 2014 and 2013 year end was selected based on a cash flow matching methodology developed by the company’s outside actuaries and which incorporates a review of current economic conditions. This methodology matches the plans’ yearly projected benefit cash flows to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans’ projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate.

The selection of the 4.2% weighted-average discount rate for Snap-on’s domestic pension plans as of 2014 year end represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s domestic discount rate assumption by 50 bps would have increased Snap-on’s 2014 domestic pension expense and projected benefit obligation by approximately $6.0 million and $63.4 million, respectively. As of 2014 year end, Snap-on’s domestic projected benefit obligation comprised approximately 82% of Snap-on’s worldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 3.3% represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s foreign discount rate assumption by 50 bps would have increased Snap-on’s 2014 foreign pension expense and projected benefit obligation by approximately $1.9 million and $22.7 million, respectively.

Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. Prior service costs and credits resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. See Note 11 to the Consolidated Financial Statements for further information on pension plans.

Income Taxes: Snap-on records deferred income tax assets and liabilities for differences between the book basis and tax basis of the related net assets. Snap-on records a valuation allowance, when appropriate, to reduce its deferred tax assets if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. While the company has considered future taxable income and ongoing prudent and feasible tax strategies in assessing the need for the valuation allowance, if these estimates and assumptions change in the future, the company may be required to adjust its valuation allowance. This could result in a charge to, or an increase in, income in the period such determination is made.

In addition, the company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The company records accruals for the estimated outcomes of these audits and the accruals may change in the future due to new developments in each matter. See Note 8 to the Consolidated Financial Statements for further information on income taxes.

Outlook

In 2015, Snap-on expects to make continued progress along its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive repair arena and developing and expanding its professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including in critical industries, where the cost and penalties for failure can be high. Through continued deployment of its Snap-on Value Creation Processes, Snap-on also anticipates making further progress in 2015 in the areas of safety, quality, customer connection, innovation and rapid continuous improvement. In pursuit of these initiatives, Snap-on expects that capital expenditures in 2015 will be in a range of $80 million to $90 million. Snap-on also anticipates that its full year 2015 effective income tax rate will be at or below its 2014 full year rate.


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Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 7. 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

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