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 2015 demonstrates Snap-on’s continued progress in providing repeatability and reliability to a wide range of professional customers performing critical tasks in workplaces of consequence, while overcoming headwinds in certain end markets and geographies that surfaced in the overall macroeconomic environment, particularly during the latter half of the year. 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 2015 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, where we continued to focus on helping our franchisees extend their reach through innovative selling processes and productivity initiatives that break the traditional time and space barriers inherent in a mobile van;

	•		Expanding in the vehicle repair garage, where we continued to make significant progress in connecting with customers and translating the resulting insights into new innovation that solves specific challenges in the repair facility. For example, the July 2015 acquisition of Ecotechnics S.p.A. (“Ecotechnics”) further broadened our established capabilities in serving vehicle repair facilities and expanded our presence with repair shop owners and managers;

	•		Extending to critical industries, where we continued to grow our lines of products customized for specific industries, despite near-term challenges in certain industrial end markets; and

	•		Building in emerging markets, where we continued to build manufacturing capacity, focused product lines and distribution capability.

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.

Our global financial services operations continue to serve a significant strategic role in offering financing options to our franchisees, to their customers, and to 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 going forward.

Recent Acquisitions

On July 27, 2015, Snap-on acquired the assets of Ecotechnics for a cash purchase price of $11.8 million, which reflects the finalization of a working capital adjustment that was completed in the fourth quarter of 2015. Ecotechnics designs and manufactures vehicle air conditioning service equipment for original equipment manufacturer (“OEM”) dealerships and the automotive aftermarket worldwide. The acquisition of the Ecotechnics product line complemented and increased Snap-on’s existing equipment product offering for OEM dealerships and independent automotive repair shops, broadened its established capabilities in serving vehicle repair facilities, and expanded the company’s presence with repair shop owners and managers.

On May 28, 2014, Snap-on acquired substantially all of the assets of Pro-Cut International Inc. (“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.


26		SNAP-ON INCORPORATED

On May 13, 2013, Snap-on acquired Challenger Lifts, Inc. (“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 Ecotechnics, Pro-Cut and Challenger have been included in the Repair Systems & Information Group since the respective acquisition dates. Pro forma financial information has not been presented as the net effects of these acquisitions, both individually and collectively, were neither significant nor material to Snap-on’s results of operations or financial position.

Consolidated net sales of $3,352.8 million in 2015 increased $75.1 million, or 2.3%, from 2014 levels, including an unfavorable $157.7 million impact from foreign currency translation and $12.0 million of acquisition-related sales. Organic sales (excluding foreign currency translation impacts and acquisition-related sales) increased $220.8 million or 7.1%.

Operating earnings before financial services of $594.6 million in 2015 were up $59.0 million, or 11.0%, from 2014 levels, reflecting contributions from higher sales and improved operating margins, including contributions from “Rapid Continuous Improvement” or “RCI initiatives,” partially offset by unfavorable foreign currency effects. Snap-on’s RCI initiatives employ a structured set of tools and processes across multiple businesses and geographies intended to eliminate waste and improve operations. Savings from Snap-on’s RCI initiatives reflect benefits from a wide variety of ongoing efficiency, productivity and process improvements, including savings generated from product design cost reductions, improved manufacturing line set-up and change-over practices, lower-cost sourcing initiatives and facility consolidations. Unless individually significant, it is not practicable to disclose each RCI activity that generated savings and/or segregate RCI savings embedded in sales volume increases.

Operating earnings of $764.8 million in 2015 increased $80.1 million, or 11.7%, from $684.7 million last year. In 2015, net earnings attributable to Snap-on Incorporated were $478.7 million or $8.10 per diluted share. Net earnings attributable to Snap-on Incorporated in 2014 were $421.9 million or $7.14 per diluted share.

The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government and technical education market segments (collectively, “critical industries”). Segment net sales of $1,163.6 million in 2015 decreased $11.2 million, or 1.0%, from 2014 levels. Excluding $75.3 million of unfavorable foreign currency translation, organic sales in 2015 increased $64.1 million, or 5.8%, due to higher sales in the segment’s power tools and Asia/Pacific operations, as well as increased sales from the segment’s European-based hand tools business; sales to customers in critical industries were essentially flat, as sales gains in several market segments were generally offset by lower sales to customers in the oil and gas sector of our natural resources market segment. Operating earnings of $169.4 million in 2015 increased $10.8 million, or 6.8%, from 2014 levels primarily as a result of higher organic sales and savings from RCI initiatives, partially offset by unfavorable foreign currency effects.

The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2016:

	•		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 reaching 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.


		2015 ANNUAL REPORT		27

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

In the Snap-on Tools Group, segment net sales of $1,568.7 million in 2015 increased $113.5 million, or 7.8%, from 2014 levels. Excluding $40.7 million of unfavorable foreign currency translation, organic sales in 2015 increased $154.2 million, or 10.9%, reflecting higher sales in both the company’s U.S. and international franchise operations. Operating earnings of $256.0 million in 2015 increased $32.9 million, or 14.7%, from 2014 levels, primarily as a result of the higher sales and savings from RCI initiatives, partially offset by unfavorable foreign currency effects.

The Snap-on Tools Group made continued progress in 2015 on its fundamental, strategic initiatives to strengthen the franchise network and enhance franchisee profitability. In 2016, the Snap-on Tools Group intends to further build on the progress made in 2015, with specific initiatives focused on the following:

	•		Continuing to improve franchisee satisfaction, productivity, profitability 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 $1,113.2 million in 2015 increased $18.0 million, or 1.6%, from 2014 levels. Excluding $45.8 million of unfavorable foreign currency translation and $12.0 million of acquisition-related sales, organic sales increased $51.8 million or 4.9%. The organic sales increase primarily reflects higher sales to 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 $273.4 million in 2015 increased $22.2 million, or 8.8%, from 2014 levels, primarily due to higher sales, including acquisition-related sales, and savings from RCI initiatives, partially offset by unfavorable foreign currency effects.

The Repair Systems & Information Group intends to focus on the following strategic priorities in 2016:

	•		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 $240.3 million in 2015 and $214.9 million in 2014; originations of $993.7 million in 2015 increased $105.1 million, or 11.8%, from 2014 levels. In recent years, Snap-on has steadily grown its financial services portfolio by providing financing for new finance and contract receivables originated by our global financial services operations. In 2015, operating earnings from financial services of $170.2 million increased $21.1 million, or 14.2%, from $149.1 million last year.

Financial Services intends to focus on the following strategic priorities in 2016:

	•		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.


28		SNAP-ON INCORPORATED

Cash Flows

Net cash provided by operating activities of $496.5 million in 2015 increased $98.6 million from prior-year levels primarily as a result of higher 2015 net earnings and net changes in operating assets and liabilities. Net cash provided by operating activities in 2013 was $392.6 million.

Net cash used by investing activities of $306.4 million in 2015 included additions to, and collections of, finance receivables of $844.2 million and $624.8 million, respectively, as well as an $11.8 million use of cash for the acquisition of Ecotechnics. 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 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 acquisition of Challenger. Capital expenditures in 2015 of $80.4 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 $226.0 million in 2015 included $127.9 million for dividend payments to shareholders, $110.4 million for the repurchase of 723,000 shares of Snap-on’s common stock and $34.0 million from a net decrease in notes payable and other short-term borrowings, partially offset by $41.6 million of proceeds from stock purchase and option plan exercises. 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 notes payable and other 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.

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 2015” or “2015” refer to the fiscal year ended January 2, 2016; references to “fiscal 2014” or “2014” refer to the fiscal year ended January 3, 2015; and references to “fiscal 2013” or “2013” refer to the fiscal year ended December 28, 2013. References in this document to 2015, 2014 and 2013 year end refer to January 2, 2016, January 3, 2015, and December 28, 2013, respectively.


		2015 ANNUAL REPORT		29

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

Results of Operations

2015 vs. 2014

Results of operations for 2015 and 2014 are as follows:


(Amounts in millions)	2015			2014			Change
Net sales	$	3,352.8	100.0%	$	3,277.7	100.0%	$	75.1	2.3%
Cost of goods sold		(1,704.5)	-50.8%		(1,693.4)	-51.7%		(11.1)	-0.7%

Gross profit		1,648.3	49.2%		1,584.3	48.3%		64.0	4.0%
Operating expenses		(1,053.7)	-31.5%		(1,048.7)	-32.0%		(5.0)	-0.5%

Operating earnings before financial services		594.6	17.7%		535.6	16.3%		59.0	11.0%

Financial services revenue		240.3	100.0%		214.9	100.0%		25.4	11.8%
Financial services expenses		(70.1)	-29.2%		(65.8)	-30.6%		(4.3)	-6.5%

Operating earnings from financial services		170.2	70.8%		149.1	69.4%		21.1	14.2%


Operating earnings		764.8	21.3%		684.7	19.6%		80.1	11.7%
Interest expense		(51.9)	-1.4%		(52.9)	-1.5%		1.0	1.9%
Other income (expense) – net		(2.4)	-0.1%		(0.9)	–		(1.5)	NM

Earnings before income taxes and equity earnings		710.5	19.8%		630.9	18.1%		79.6	12.6%
Income tax expense		(221.2)	-6.2%		(199.5)	-5.7%		(21.7)	-10.9%

Earnings before equity earnings		489.3	13.6%		431.4	12.4%		57.9	13.4%
Equity earnings, net of tax		1.3	–		0.7	–		0.6	NM

Net earnings		490.6	13.6%		432.1	12.4%		58.5	13.5%
Net earnings attributable to noncontrolling interests		(11.9)	-0.3%		(10.2)	-0.3%		(1.7)	-16.7%

Net earnings attributable to Snap-on Inc.	$	478.7	13.3%	$	421.9	12.1%	$	56.8	13.5%

NM: Not meaningful

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

Snap-on’s 2015 fiscal year contained 52 weeks of operating results. Snap-on’s 2014 fiscal year contained 53 weeks of operating results. The impact of the additional week of operations in fiscal 2014 was not material to Snap-on’s full year 2014 net sales or net earnings.

Net sales of $3,352.8 million in 2015 increased $75.1 million, or 2.3%, from 2014 levels, including $157.7 million of unfavorable foreign currency translation and $12.0 million of acquisition-related sales. Organic sales (excluding foreign currency translation impacts and acquisition-related sales) in 2015 increased $220.8 million, or 7.1%, from 2014 levels. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

Gross profit of $1,648.3 million in 2015 compared to $1,584.3 million last year. Gross margin (gross profit as a percentage of net sales) of 49.2% in 2015 improved 90 basis points (100 basis points (“bps”) equals 1.0 percent) from 48.3% last year primarily due to benefits from higher sales and savings from RCI initiatives, as well as lower restructuring costs (20 bps). Restructuring costs included in gross profit were zero and $5.7 million in 2015 and 2014, respectively.


30		SNAP-ON INCORPORATED

Operating expenses of $1,053.7 million in 2015 compared to $1,048.7 million last year. The operating expense margin (operating expenses as a percentage of net sales) of 31.5% in 2015 improved 50 bps from 32.0% last year primarily due to sales volume leverage and savings from RCI initiatives, partially offset by 20 bps of higher pension expense. Restructuring costs included in operating expenses were zero and $0.8 million in 2015 and 2014, respectively.

Operating earnings before financial services of $594.6 million in 2015, including $39.5 million of unfavorable foreign currency effects, increased $59.0 million, or 11.0%, as compared to $535.6 million last year. As a percentage of net sales, operating earnings before financial services of 17.7% in 2015 improved 140 bps from 16.3% last year.

Financial services revenue of $240.3 million in 2015 compared to revenue of $214.9 million last year. Financial services operating earnings of $170.2 million in 2015, including $2.6 million of unfavorable foreign currency effects, increased $21.1 million, or 14.2%, as compared to $149.1 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 $764.8 million in 2015, including $42.1 million of unfavorable foreign currency effects, increased $80.1 million, or 11.7%, from $684.7 million last year. As a percentage of revenues (net sales plus financial services revenue), operating earnings of 21.3% in 2015 improved 170 bps from 19.6% last year.

Interest expense of $51.9 million in 2015 decreased $1.0 million from $52.9 million last year. 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 $2.4 million and $0.9 million in 2015 and 2014, 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 31.7% in 2015 and 32.1% in 2014. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $478.7 million, or $8.10 per diluted share, in 2015 increased $56.8 million, or $0.96 per diluted share, from 2014 levels. Net earnings attributable to Snap-on in 2014 were $421.9 million or $7.14 per diluted share.

Exit and Disposal Activities

Snap-on did not record any costs for exit and disposal activities in 2015; Snap-on recorded $6.5 million of costs for exit and disposal activities in 2014. See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.


		2015 ANNUAL REPORT		31

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

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, including customers in the aerospace, natural resources, government and technical education market segments (collectively, “critical industries”), 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)	2015			2014			Change
External net sales	$	895.5	77.0%	$	952.1	81.0%	$	(56.6)	-5.9%
Intersegment net sales		268.1	23.0%		222.7	19.0%		45.4	20.4%

Segment net sales		1,163.6	100.0%		1,174.8	100.0%		(11.2)	-1.0%
Cost of goods sold		(717.1)	-61.6%		(725.1)	-61.7%		8.0	1.1%

Gross profit		446.5	38.4%		449.7	38.3%		(3.2)	-0.7%
Operating expenses		(277.1)	-23.8%		(291.1)	-24.8%		14.0	4.8%

Segment operating earnings	$	169.4	14.6%	$	158.6	13.5%	$	10.8	6.8%

Segment net sales of $1,163.6 million in 2015 decreased $11.2 million, or 1.0%, from 2014 levels. Excluding $75.3 million of unfavorable foreign currency translation, organic sales increased $64.1 million, or 5.8%, primarily due to a double-digit gain in the segment’s power tools operations and high single-digit increases from both the segment’s European-based hand tools business and Asia/Pacific operations; sales to customers in critical industries were essentially flat, as sales gains in several market segments were generally offset by lower sales to customers in the oil and gas sector of our natural resources market segment.

Segment gross profit of $446.5 million in 2015 compared to $449.7 million last year. Gross margin of 38.4% in 2015 improved 10 bps from 38.3% last year, as savings from RCI initiatives were partially offset by a shift in sales that included higher volumes of lower gross margin products, including increased sales from the segment’s power tools and Asia/Pacific operations. Restructuring costs included in gross profit were zero and $1.0 million in 2015 and 2014, respectively.

Segment operating expenses of $277.1 million in 2015 compared to $291.1 million last year. The operating expense margin of 23.8% in 2015 improved 100 bps from 24.8% last year primarily due to benefits from the sales shift noted above and a 20 bps gain from the sale of a former manufacturing facility. Restructuring costs included in operating expenses were zero and $0.4 million in 2015 and 2014, respectively.

As a result of these factors, segment operating earnings of $169.4 million in 2015, including $7.7 million of unfavorable foreign currency effects, increased $10.8 million from 2014 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group of 14.6% in 2015 improved 110 bps from 13.5% last year.


32		SNAP-ON INCORPORATED

Snap-on Tools Group


(Amounts in millions)	2015			2014			Change
Segment net sales	$	1,568.7	100.0%	$	1,455.2	100.0%	$	113.5	7.8%
Cost of goods sold		(885.7)	-56.5%		(824.9)	-56.7%		(60.8)	-7.4%

Gross profit		683.0	43.5%		630.3	43.3%		52.7	8.4%
Operating expenses		(427.0)	-27.2%		(407.2)	-28.0%		(19.8)	-4.9%

Segment operating earnings	$	256.0	16.3%	$	223.1	15.3%	$	32.9	14.7%

Segment net sales of $1,568.7 million in 2015 increased $113.5 million, or 7.8%, from 2014 levels. Excluding $40.7 million of unfavorable foreign currency translation, organic sales increased $154.2 million, or 10.9%, reflecting double-digit sales gains in both the company’s U.S. and international franchise operations.

Segment gross profit of $683.0 million in 2015 compared to $630.3 million last year. Gross margin of 43.5% in 2015 improved 20 bps from 43.3% last year primarily due to benefits from higher sales and savings from RCI initiatives, partially offset by 90 bps of unfavorable foreign currency effects.

Segment operating expenses of $427.0 million in 2015 compared to $407.2 million last year. The operating expense margin of 27.2% in 2015 improved 80 bps from 28.0% last year primarily due to sales volume leverage.

As a result of these factors, segment operating earnings of $256.0 million in 2015, including $21.3 million of unfavorable foreign currency effects, increased $32.9 million from 2014 levels. Operating margin for the Snap-on Tools Group of 16.3% in 2015 improved 100 bps from 15.3% last year.

Repair Systems & Information Group


(Amounts in millions)	2015			2014			Change
External net sales	$	888.6	79.8%	$	870.4	79.5%	$	18.2	2.1%
Intersegment net sales		224.6	20.2%		224.8	20.5%		(0.2)	-0.1%

Segment net sales		1,113.2	100.0%		1,095.2	100.0%		18.0	1.6%
Cost of goods sold		(594.4)	-53.4%		(590.9)	-54.0%		(3.5)	-0.6%

Gross profit		518.8	46.6%		504.3	46.0%		14.5	2.9%
Operating expenses		(245.4)	-22.0%		(253.1)	-23.1%		7.7	3.0%

Segment operating earnings	$	273.4	24.6%	$	251.2	22.9%	$	22.2	8.8%

Segment net sales of $1,113.2 million in 2015 increased $18.0 million, or 1.6%, from 2014 levels. Excluding $45.8 million of unfavorable foreign currency translation and $12.0 million of acquisition-related sales, organic sales increased $51.8 million or 4.9%. The organic sales increase primarily reflects mid single-digit gains in sales of undercar equipment, sales to OEM dealerships, and sales of diagnostic and repair information products to independent repair shop owners and managers.

Segment gross profit of $518.8 million in 2015 compared to $504.3 million last year. Gross margin of 46.6% in 2015 improved 60 bps from 46.0% last year primarily due to contributions from higher sales and savings from RCI initiatives, and lower restructuring costs (40 bps). These gross margin improvements 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 zero and $4.7 million in 2015 and 2014, respectively.

Segment operating expenses of $245.4 million in 2015 compared to $253.1 million last year. The operating expense margin of 22.0% in 2015 improved 110 bps from 23.1% last year primarily due to sales volume leverage, including benefits from the sales shift noted above, and savings from RCI initiatives. Restructuring costs included in operating expenses were zero and $0.4 million in 2015 and 2014, respectively.

As a result of these factors, segment operating earnings of $273.4 million in 2015, including $10.5 million of unfavorable foreign currency effects, increased $22.2 million from 2014 levels. Operating margin for the Repair Systems & Information Group of 24.6% in 2015 improved 170 bps from 22.9% last year.


		2015 ANNUAL REPORT		33

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

Financial Services


(Amounts in millions)	2015			2014			Change
Financial services revenue	$	240.3	100.0%	$	214.9	100.0%	$	25.4	11.8%
Financial services expenses		(70.1)	-29.2%		(65.8)	-30.6%		(4.3)	-6.5%

Segment operating earnings	$	170.2	70.8%	$	149.1	69.4%	$	21.1	14.2%

Financial services revenue of $240.3 million in 2015 increased $25.4 million, or 11.8%, from $214.9 million last year. The $25.4 million increase in financial services revenue primarily reflects $23.0 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $2.2 million of increased revenue from higher average yields on finance receivables. In 2015 and 2014, the average yield on finance receivables was 17.8% and 17.6%, respectively, and the average yield on contract receivables was 9.5% in both years. Originations of $993.7 million in 2015 increased $105.1 million, or 11.8%, from 2014 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 $70.1 million in 2015 compared to $65.8 million in 2014. As a percentage of the average financial services portfolio, financial services expenses were 4.8% and 5.1% in 2015 and 2014, respectively.

Financial services operating earnings of $170.2 million in 2015, including $2.6 million of unfavorable foreign currency effects, increased $21.1 million, or 14.2%, from 2014 levels.

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

Corporate

Snap-on’s general corporate expenses in 2015 of $104.2 million increased $6.9 million from $97.3 million last year primarily due to $7.9 million of higher pension expense.


34		SNAP-ON INCORPORATED

Fourth Quarter

Results of operations for the fourth quarters of 2015 and 2014 are as follows:


	Fourth Quarter
(Amounts in millions)	2015			2014			Change
Net sales	$	851.7	100.0%	$	857.4	100.0%	$	(5.7)	-0.7%
Cost of goods sold		(439.4)	-51.6%		(446.1)	-52.0%		6.7	1.5%

Gross profit		412.3	48.4%		411.3	48.0%		1.0	0.2%
Operating expenses		(250.0)	-29.3%		(266.1)	-31.1%		16.1	6.1%

Operating earnings before financial services		162.3	19.1%		145.2	16.9%		17.1	11.8%

Financial services revenue		63.1	100.0%		59.4	100.0%		3.7	6.2%
Financial services expenses		(18.1)	-28.7%		(17.2)	-29.0%		(0.9)	-5.2%

Operating earnings from financial services		45.0	71.3%		42.2	71.0%		2.8	6.6%


Operating earnings		207.3	22.7%		187.4	20.4%		19.9	10.6%
Interest expense		(13.0)	-1.4%		(13.8)	-1.5%		0.8	5.8%
Other income (expense) – net		(0.5)	-0.1%		(0.2)	–		(0.3)	NM

Earnings before income taxes and equity earnings		193.8	21.2%		173.4	18.9%		20.4	11.8%
Income tax expense		(59.3)	-6.5%		(54.9)	-5.9%		(4.4)	-8.0%

Earnings before equity earnings		134.5	14.7%		118.5	13.0%		16.0	13.5%
Equity earnings, net of tax		–	–		0.2	–		(0.2)	NM

Net earnings		134.5	14.7%		118.7	13.0%		15.8	13.3%
Net earnings attributable to noncontrolling interests		(3.1)	-0.3%		(2.5)	-0.3%		(0.6)	-24.0%

Net earnings attributable to Snap-on Inc.	$	131.4	14.4%	$	116.2	12.7%	$	15.2	13.1%

NM: Not meaningful

Snap-on’s 2015 fiscal year contained 52 weeks of operating results. Snap-on’s 2014 fiscal year contained 53 weeks of operating results, with the extra week occurring in the fourth quarter. The impact of the additional week of operations in fiscal 2014 was not material to Snap-on’s fourth quarter 2014 net sales or net earnings.

Net sales of $851.7 million in the fourth quarter of 2015 decreased $5.7 million, or 0.7%, from 2014 levels, including $33.2 million of unfavorable foreign currency translation and $2.2 million of acquisition-related sales. Organic sales in the fourth quarter of 2015 increased $25.3 million, or 3.1%, from 2014 levels. Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.

Gross profit of $412.3 million in the fourth quarter of 2015 compared to $411.3 million last year. Gross margin of 48.4% in the quarter improved 40 bps from 48.0% last year primarily due to higher organic sales and savings from RCI initiatives, partially offset by 20 bps of unfavorable foreign currency effects. Restructuring costs included in gross profit were zero and $1.0 million in the fourth quarters of 2015 and 2014, respectively.


		2015 ANNUAL REPORT		35

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

Operating expenses of $250.0 million in the fourth quarter of 2015 compared to $266.1 million last year. The operating expense margin of 29.3% in the fourth quarter of 2015 improved 180 bps from 31.1% last year primarily due to organic sales volume leverage and savings from RCI initiatives, a 50 bps benefit from lower performance-based and stock-based (mark-to-market) compensation expenses, and a 30 bps gain primarily from the sale of a former manufacturing facility. These improvements in operating expense margin were partially offset by 20 bps of higher pension expense.

Operating earnings before financial services of $162.3 million in the fourth quarter of 2015, including $9.2 million of unfavorable foreign currency effects, increased $17.1 million, or 11.8%, as compared to $145.2 million last year. As a percentage of net sales, operating earnings before financial services of 19.1% in the quarter improved 220 bps from 16.9% last year.

Financial services revenue of $63.1 million in the fourth quarter of 2015 compared to revenue of $59.4 million last year. Financial services operating earnings of $45.0 million in the fourth quarter of 2015, including $0.7 million of unfavorable foreign currency effects, increased $2.8 million, or 6.6%, as compared to $42.2 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 $207.3 million in the fourth quarter of 2015, including $9.9 million of unfavorable foreign currency effects, increased $19.9 million, or 10.6%, from $187.4 million last year. As a percentage of revenues, operating earnings of 22.7% in the quarter improved 230 bps from 20.4% last year.

Interest expense of $13.0 million in the fourth quarter of 2015 decreased $0.8 million from $13.8 million last year. 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 $0.5 million and $0.2 million in the fourth quarters of 2015 and 2014, respectively. See Note 16 to the Consolidated Financial Statements for information on other income (expense) – net.

Snap-on’s fourth-quarter effective income tax rate on earnings attributable to Snap-on was 31.1% in 2015 and 32.1% in 2014. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $131.4 million, or $2.22 per diluted share, in the fourth quarter of 2015 increased $15.2 million, or $0.25 per diluted share, from 2014 levels. Net earnings attributable to Snap-on in the fourth quarter of 2014 were $116.2 million or $1.97 per diluted share.

Segment Results

Commercial & Industrial Group


	Fourth Quarter
(Amounts in millions)	2015			2014			Change
External net sales	$	212.0	75.2%	$	237.9	79.8%	$	(25.9)	-10.9%
Intersegment net sales		69.8	24.8%		60.3	20.2%		9.5	15.8%

Segment net sales		281.8	100.0%		298.2	100.0%		(16.4)	-5.5%
Cost of goods sold		(174.2)	-61.8%		(184.8)	-62.0%		10.6	5.7%

Gross profit		107.6	38.2%		113.4	38.0%		(5.8)	-5.1%
Operating expenses		(65.7)	-23.3%		(72.9)	-24.4%		7.2	9.9%

Segment operating earnings	$	41.9	14.9%	$	40.5	13.6%	$	1.4	3.5%

Segment net sales of $281.8 million in the fourth quarter of 2015 decreased $16.4 million, or 5.5%, from 2014 levels. Excluding $14.7 million of unfavorable foreign currency translation, organic sales decreased $1.7 million, or 0.6%, primarily due to a high single-digit decline in sales to customers in critical industries, largely as a result of lower sales to the military and to customers in the oil and gas sector of our natural resources market segment. These organic sales declines were partially offset by a double-digit increase in the segment’s power tools operations and a low single-digit gain from the segment’s European-based hand tools business.


36		SNAP-ON INCORPORATED

Segment gross profit of $107.6 million in the fourth quarter of 2015 compared to $113.4 million last year. Gross margin of 38.2% in the quarter improved 20 bps from 38.0% last year, as savings from RCI initiatives and 20 bps of lower restructuring costs were partially offset by a shift in sales that included a decrease in higher gross margin sales to customers in critical industries and an increase in lower gross margin sales from the segment’s power tools operations. Restructuring costs included in gross profit were zero and $0.5 million in the fourth quarters of 2015 and 2014, respectively.

Segment operating expenses of $65.7 million in the fourth quarter of 2015 compared to $72.9 million last year. The operating expense margin of 23.3% in the quarter improved 110 bps from 24.4% last year primarily due to a 70 bps gain from the sale of a former manufacturing facility, as well as benefits from the sales shift noted above.

As a result of these factors, segment operating earnings of $41.9 million in the fourth quarter of 2015, including $1.5 million of unfavorable foreign currency effects, increased $1.4 million from 2014 levels. Operating margin for the Commercial & Industrial Group of 14.9% in the fourth quarter of 2015 improved 130 bps from 13.6% last year.

Snap-on Tools Group


	Fourth Quarter
(Amounts in millions)	2015			2014			Change
Segment net sales	$	411.2	100.0%	$	387.5	100.0%	$	23.7	6.1%
Cost of goods sold		(237.5)	-57.8%		(221.1)	-57.1%		(16.4)	-7.4%

Gross profit		173.7	42.2%		166.4	42.9%		7.3	4.4%
Operating expenses		(101.8)	-24.7%		(102.5)	-26.4%		0.7	0.7%

Segment operating earnings	$	71.9	17.5%	$	63.9	16.5%	$	8.0	12.5%

Segment net sales of $411.2 million in the fourth quarter of 2015 increased $23.7 million, or 6.1%, from 2014 levels. Excluding $9.3 million of unfavorable foreign currency translation, organic sales increased $33.0 million, or 8.7%, reflecting a high single-digit sales gain in the company’s U.S. franchise operations and a double-digit sales increase in the company’s international franchise operations.

Segment gross profit of $173.7 million in the fourth quarter of 2015 compared to $166.4 million last year. Gross margin of 42.2% in the quarter decreased 70 bps from 42.9% last year primarily due to unfavorable foreign currency effects.

Segment operating expenses of $101.8 million in the fourth quarter of 2015 compared to $102.5 million last year. The operating expense margin of 24.7% in the quarter improved 170 bps from 26.4% last year primarily due to sales volume leverage.

As a result of these factors, segment operating earnings of $71.9 million in the fourth quarter of 2015, including $4.8 million of unfavorable foreign currency effects, increased $8.0 million from 2014 levels. Operating margin for the Snap-on Tools Group of 17.5% in the fourth quarter of 2015 improved 100 bps from 16.5% last year.

Repair Systems & Information Group


	Fourth Quarter
(Amounts in millions)	2015			2014			Change
External net sales	$	228.5	81.4%	$	232.0	82.0%	$	(3.5)	-1.5%
Intersegment net sales		52.1	18.6%		50.8	18.0%		1.3	2.6%

Segment net sales		280.6	100.0%		282.8	100.0%		(2.2)	-0.8%
Cost of goods sold		(149.6)	-53.3%		(151.3)	-53.5%		1.7	1.1%

Gross profit		131.0	46.7%		131.5	46.5%		(0.5)	-0.4%
Operating expenses		(58.9)	-21.0%		(66.3)	-23.4%		7.4	11.2%

Segment operating earnings	$	72.1	25.7%	$	65.2	23.1%	$	6.9	10.6%


		2015 ANNUAL REPORT		37

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

Segment net sales of $280.6 million in the fourth quarter of 2015 decreased $2.2 million, or 0.8%, from 2014 levels. Excluding $10.3 million of unfavorable foreign currency translation and $2.2 million of acquisition-related sales, organic sales increased $5.9 million or 2.2%. The organic sales increase primarily reflects 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 to OEM dealerships; sales of undercar equipment were essentially flat year over year.

Segment gross profit of $131.0 million in the fourth quarter of 2015 compared to $131.5 million last year. Gross margin of 46.7% in the quarter improved 20 bps from 46.5% last year. Restructuring costs included in gross profit were zero and $0.5 million in the fourth quarters of 2015 and 2014, respectively.

Segment operating expenses of $58.9 million in the fourth quarter of 2015 compared to $66.3 million last year. The operating expense margin of 21.0% in the quarter improved 240 bps from 23.4% last year primarily due to organic sales volume leverage and savings from RCI initiatives. Restructuring costs included in operating expenses were zero and $0.1 million in the fourth quarters of 2015 and 2014, respectively.

As a result of these factors, segment operating earnings of $72.1 million in the fourth quarter of 2015, including $2.9 million of unfavorable foreign currency effects, increased $6.9 million from 2014 levels. Operating margin for the Repair Systems & Information Group of 25.7% in the fourth quarter of 2015 improved 260 bps from 23.1% last year.

Financial Services


	Fourth Quarter
(Amounts in millions)	2015			2014			Change
Financial services revenue	$	63.1	100.0%	$	59.4	100.0%	$	3.7	6.2%
Financial services expenses		(18.1)	-28.7%		(17.2)	-29.0%		(0.9)	-5.2%

Segment operating earnings	$	45.0	71.3%	$	42.2	71.0%	$	2.8	6.6%

Financial services revenue of $63.1 million in the fourth quarter of 2015 increased $3.7 million, or 6.2%, from $59.4 million last year. The $3.7 million increase in financial services revenue reflects $3.5 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $0.2 million of increased revenue from higher average yields on finance receivables. In the fourth quarters of 2015 and 2014, the average yield on finance receivables was 17.8% and 17.6%, respectively, and the average yield on contract receivables was 9.5% in both periods. Originations of $252.0 million in the fourth quarter of 2015 increased $19.8 million, or 8.5%, from 2014 levels.

Financial services expenses of $18.1 million in the fourth quarter of 2015 compared to financial services expenses of $17.2 million last year. As a percentage of the average financial services portfolio, financial services expenses were 1.2% and 1.3% in the fourth quarters of 2015 and 2014, respectively.

Financial services operating earnings of $45.0 million in the fourth quarter of 2015, including $0.7 million of unfavorable foreign currency effects, increased $2.8 million, or 6.6%, from 2014 levels.

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

Corporate

Snap-on’s fourth quarter 2015 general corporate expenses of $23.6 million decreased $0.8 million from $24.4 million last year, as $2.3 million of higher pension expense was more than offset by lower other expenses, including lower performance-based and mark-to-market compensation expenses.


38		SNAP-ON INCORPORATED

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

Snap-on’s 2014 fiscal year contained 53 weeks of operating results. 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 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 $25.3 million of unfavorable foreign currency translation. Organic sales 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 compared to $1,472.9 million in 2013. Gross margin of 48.3% in 2014 improved 10 bps from 48.2% in 2013, as benefits from higher sales and savings from RCI initiatives were 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.


		2015 ANNUAL REPORT		39

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

Operating expenses of $1,048.7 million in 2014 compared to $1,012.4 million in 2013. The operating expense margin of 32.0% in 2014 improved 110 bps from 33.1% in 2013 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 in 2013. 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 revenue of $214.9 million in 2014 compared to revenue of $181.0 million in 2013. Financial services operating earnings of $149.1 million in 2014, including $0.2 million of unfavorable foreign currency effects, increased $23.4 million, or 18.6%, as compared to $125.7 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 in 2013. As a percentage of revenues, operating earnings of 19.6% in 2014 improved 150 bps from 18.1% in 2013.

Interest expense of $52.9 million in 2014 decreased $3.2 million from $56.1 million in 2013 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.

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.

Segment 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.


40		SNAP-ON INCORPORATED

Segment gross profit of $449.7 million in 2014 compared to $419.5 million in 2013. Gross margin of 38.3% in 2014 decreased 20 bps from 38.5% in 2013, as benefits from increased sales and savings from RCI initiatives, as well as 10 bps of lower restructuring costs, were more than offset by higher expenses, including 30 bps 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 compared to $282.2 million in 2013. The operating expense margin of 24.8% in 2014 improved 110 bps from 25.9% in 2013 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 for the Commercial & Industrial Group of 13.5% in 2014 improved 90 bps from 12.6% in 2013.

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 compared to $585.8 million in 2013. Gross margin of 43.3% in 2014 improved 20 bps from 43.1% in 2013 primarily due to benefits from the higher sales and savings from RCI initiatives, partially offset by 30 bps 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 compared to $391.2 million in 2013. The operating expense margin of 28.0% in 2014 improved 80 bps from 28.8% in 2013 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% in 2013.

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 increase in sales of diagnostic and repair information products to independent repair shop owners and managers, and a low single-digit gain in sales of undercar equipment.


		2015 ANNUAL REPORT		41

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

Segment gross profit of $504.3 million in 2014 compared to $467.6 million in 2013. Gross margin of 46.0% in 2014 decreased 30 bps from 46.3% in 2013 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 20 bps of higher restructuring costs. Restructuring costs included in gross profit were $4.7 million and $1.7 million in 2014 and 2013, respectively.

Segment operating expenses of $253.1 million in 2014 compared to $235.7 million in 2013. The operating expense margin of 23.1% in 2014 improved 20 bps from 23.3% in 2013 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% in 2013.

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 revenue of $214.9 million in 2014 increased $33.9 million, or 18.7%, from $181.0 million in 2013. 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 on finance receivables. 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 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.

Financial services operating earnings of $149.1 million in 2014, including $0.2 million of unfavorable foreign currency effects, increased $23.4 million, or 18.6%, from 2013 levels.

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 in 2013 primarily due to lower pension expense partially offset by higher performance-based compensation and other expenses.

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.


42		SNAP-ON INCORPORATED

Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2015, 2014 and 2013 is as follows:


	Operations*						Financial Services
(Amounts in millions)	2015		2014		2013		2015		2014		2013
Net sales	$	3,352.8	$	3,277.7	$	3,056.5	$	–	$	–	$	–
Cost of goods sold		(1,704.5)		(1,693.4)		(1,583.6)		–		–		–

Gross profit		1,648.3		1,584.3		1,472.9		–		–		–
Operating expenses		(1,053.7)		(1,048.7)		(1,012.4)		–		–		–

Operating earnings before financial services		594.6		535.6		460.5		–		–		–

Financial services revenue		–		–		–		240.3		214.9		181.0
Financial services expenses		–		–		–		(70.1)		(65.8)		(55.3)

Operating earnings from financial services		–		–		–		170.2		149.1		125.7


Operating earnings		594.6		535.6		460.5		170.2		149.1		125.7
Interest expense		(51.4)		(52.2)		(54.6)		(0.5)		(0.7)		(1.5)
Intersegment interest income (expense) – net		62.7		56.7		47.7		(62.7)		(56.7)		(47.7)
Other income (expense) – net		(2.4)		(0.8)		(4.0)		–		(0.1)		0.1

Earnings before income taxes and equity earnings		603.5		539.3		449.6		107.0		91.6		76.6
Income tax expense		(181.9)		(165.8)		(138.6)		(39.3)		(33.7)		(28.1)

Earnings before equity earnings		421.6		373.5		311.0		67.7		57.9		48.5
Financial services – net earnings attributable to Snap-on		67.7		57.9		48.5		–		–		–
Equity earnings, net of tax		1.3		0.7		0.2		–		–		–

Net earnings		490.6		432.1		359.7		67.7		57.9		48.5
Net earnings attributable to noncontrolling interests		(11.9)		(10.2)		(9.4)		–		–		–

Net earnings attributable to Snap-on	$	478.7	$	421.9	$	350.3	$	67.7	$	57.9	$	48.5

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


		2015 ANNUAL REPORT		43

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

Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2015 and 2014 year end is as follows:


	Operations*				Financial Services
(Amounts in millions)	2015		2014		2015		2014
ASSETS
Current assets:
Cash and cash equivalents	$	92.7	$	132.8	$	0.1	$	0.1
Intersegment receivables		15.9		16.0		–		–
Trade and other accounts receivable – net		562.2		550.5		0.3		0.3
Finance receivables – net		–		–		447.3		402.4
Contract receivables – net		8.0		7.6		74.1		66.9
Inventories – net		497.8		475.5		–		–
Deferred income tax assets		91.0		85.4		18.9		15.6
Prepaid expenses and other assets		111.5		125.5		1.2		0.9

Total current assets		1,379.1		1,393.3		541.9		486.2

Property and equipment – net		412.1		403.4		1.4		1.1
Investment in Financial Services		251.8		218.9		–		–
Deferred income tax assets		105.4		92.9		0.9		0.3
Intersegment long-term notes receivable		398.7		232.1		–		–
Long-term finance receivables – net		–		–		772.7		650.5
Long-term contract receivables – net		12.1		12.8		254.5		229.2
Goodwill		790.1		810.7		–		–
Other intangibles – net		195.0		203.3		–		–
Other assets		49.9		50.9		1.0		1.0

Total assets	$	3,594.2	$	3,418.3	$	1,572.4	$	1,368.3

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


44		SNAP-ON INCORPORATED

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


	Operations*				Financial Services
(Amounts in millions)	2015		2014		2015		2014
LIABILITIES AND EQUITY
Current liabilities:
Notes payable	$	18.4	$	56.6	$	–	$	–
Accounts payable		148.2		144.7		0.1		0.3
Intersegment payables		–		–		15.9		16.0
Accrued benefits		52.1		53.8		–		–
Accrued compensation		86.9		95.2		4.1		4.0
Franchisee deposits		64.4		65.8		–		–
Other accrued liabilities		277.7		285.0		25.0		18.2

Total current liabilities		647.7		701.1		45.1		38.5

Long-term debt and intersegment long-term debt		–		–		1,260.4		1,094.8
Deferred income tax liabilities		169.6		158.6		0.2		0.6
Retiree health care benefits		37.9		42.5		–		–
Pension liabilities		227.8		217.9		–		–
Other long-term liabilities		80.5		72.9		14.9		15.5

Total liabilities		1,163.5		1,193.0		1,320.6		1,149.4


Total shareholders’ equity attributable to Snap-on		2,412.7		2,207.8		251.8		218.9
Noncontrolling interests		18.0		17.5		–		–

Total equity		2,430.7		2,225.3		251.8		218.9

Total liabilities and equity	$	3,594.2	$	3,418.3	$	1,572.4	$	1,368.3

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


		2015 ANNUAL REPORT		45

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

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, scheduled debt payments (including the January 15, 2017 repayment of $150 million of unsecured notes at maturity), 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 5, 2016, 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 2015 year end, working capital (current assets less current liabilities) of $1,228.2 million increased $88.3 million from $1,139.9 million as of 2014 year end.

The following represents the company’s working capital position as of 2015 and 2014 year end:


(Amounts in millions)	2015		2014
Cash and cash equivalents	$	92.8	$	132.9
Trade and other accounts receivable – net		562.5		550.8
Finance receivables – net		447.3		402.4
Contract receivables – net		82.1		74.5
Inventories – net		497.8		475.5
Other current assets		216.2		222.5

Total current assets		1,898.7		1,858.6


Notes payable		(18.4)		(56.6)
Accounts payable		(148.3)		(145.0)
Other current liabilities		(503.8)		(517.1)

Total current liabilities		(670.5)		(718.7)


Working capital	$	1,228.2	$	1,139.9

Cash and cash equivalents of $92.8 million as of 2015 year end decreased $40.1 million from 2014 year-end levels primarily due to (i) the funding of $844.2 million of new finance receivables; (ii) dividend payments to shareholders of $127.9 million; (iii) the repurchase of 723,000 shares of the company’s common stock for $110.4 million; (iv) the funding of $80.4 million of capital expenditures; (v) the net repayment of $34.0 million of notes payable and other short-term borrowings; and (vi) the acquisition of Ecotechnics for $11.8 million. These decreases in cash and cash equivalents were partially offset by (i) $624.8 million of cash from collections of finance receivables; (ii) $496.5 million of cash generated from operations; and (iii) $41.6 million of cash proceeds from stock purchase and option plan exercises.

Of the $92.8 million of cash and cash equivalents as of January 2, 2016, $63.3 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.


46		SNAP-ON INCORPORATED

Trade and other accounts receivable – net of $562.5 million as of 2015 year end increased $11.7 million from 2014 year-end levels; excluding $23.7 million of currency translation impacts, trade and other accounts receivable – net increased $35.4 million primarily due to higher organic sales, as well as receivables related to Ecotechnics. 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 60 days at 2015 year end and 61 days at 2014 year end.

The current portions of net finance and contract receivables of $529.4 million as of 2015 year end compared to $476.9 million at 2014 year end. The long-term portions of net finance and contract receivables of $1,039.3 million as of 2015 year end compared to $892.5 million at 2014 year end. The combined $199.3 million increase in net current and long-term finance and contract receivables over 2014 year-end levels is primarily due to continued growth of the company’s financial services portfolio; excluding $19.4 million of currency translation impacts, the combined increase for these receivables over 2014 year-end levels was $218.7 million.

Inventories – net of $497.8 million as of 2015 year end increased $22.3 million from 2014 year-end levels; excluding $22.5 million of currency translation impacts, inventories increased $44.8 million primarily to support continued higher customer demand and new product introductions, as well as inventories related to Ecotechnics. As of 2015 and 2014 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 3.5 turns and 3.7 turns, respectively. Inventories accounted for using the first-in, first-out (“FIFO”) method as of 2015 and 2014 year end approximated 57% and 58%, respectively, of total inventories. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve was $73.3 million and $72.6 million as of 2015 and 2014 year end, respectively.

As of 2015 year end, notes payable totaled $18.4 million; there were no commercial paper borrowings outstanding as of 2015 year end. 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 2015 and 2014 year end.

Average notes payable outstanding were $78.5 million in 2015 and $45.4 million in 2014. The weighted-average interest rate on notes payable was 4.36% in 2015 and 5.42% in 2014. As of 2015 and 2014 year end, the weighted-average interest rate on outstanding notes payable was 15.82% and 4.86%, respectively. The weighted-average interest rates in both years reflect local borrowings in emerging growth markets where interest rates are generally higher. The lower weighted-average interest rate of 4.86% on outstanding notes payable as of 2014 year end benefited from lower interest rates on commercial paper borrowings; no commercial paper was outstanding at 2015 year end.

Accounts payable of $148.3 million as of 2015 year end compared to $145.0 million at 2014 year end; excluding $5.1 million of currency translation impacts, accounts payable increased $8.4 million primarily due to the timing of payments and accounts payable related to Ecotechnics.

Other accrued liabilities of $296.3 million as of 2015 year end compared to $298.3 million at 2014 year end; excluding $10.3 million of currency translation impacts, other accrued liabilities increased $8.3 million.

Long-term debt of $861.7 million as of 2015 year end consisted of (i) $150 million of unsecured 5.50% notes that mature on January 15, 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) $11.7 million of other long-term debt, including fair value adjustments related to interest rate swaps. As of 2015 year end, the $150 million of unsecured notes that mature on January 15, 2017, were included in “Long-term debt” on the accompanying Consolidated Balance Sheet as their scheduled maturity was in excess of one year of the 2015 year-end balance sheet date.

On December 15, 2015, Snap-on amended and restated its $700 million multi-currency revolving credit facility that was set to terminate on September 27, 2018, by entering into a new five-year, $700 million multi-currency revolving credit facility that terminates on December 15, 2020 (the “Credit Facility”); no amounts were outstanding under the Credit Facility as of 2015 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 (the “Debt Ratio”); 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 (the “Debt to EBITDA Ratio”). Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), increase the maximum Debt Ratio to 0.65 to 1.00 and/or increase the maximum Debt to EBITDA Ratio to 3.75 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of 2015 year end, the company’s actual ratios of 0.23 and 0.95, respectively, were both within the permitted ranges set forth in this financial covenant.


		2015 ANNUAL REPORT		47

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

Snap-on’s Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2015 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. 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, scheduled debt payments (including the January 15, 2017 repayment of $150 million of unsecured notes at maturity), 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 $7.4 million to its foreign pension plans and $2.0 million to its domestic pension plans in 2016, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2016.

Snap-on’s long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs, including the 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 $496.5 million in 2015 compared to $397.9 million in 2014. The $98.6 million increase in net cash provided by operating activities primarily reflects higher 2015 net earnings and net changes in operating assets and liabilities. Net cash provided by operating activities was $392.6 million in 2013.

Depreciation expense was $57.8 million in 2015, $54.8 million in 2014 and $51.2 million in 2013. Amortization expense was $24.7 million in both 2015 and 2014, and $25.5 million in 2013. 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 $306.4 million in 2015 included additions to, and collections of, finance receivables of $844.2 million and $624.8 million, respectively. 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. 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.

Net cash used by investing activities in 2015 included $11.8 million for the acquisition of Ecotechnics. Net cash used by investing activities in 2014 included $41.3 million for the acquisition of Pro-Cut. Net cash used by investing activities in 2013 included $38.2 million for the acquisition of Challenger. See Note 2 to the Consolidated Financial Statements for information on acquisitions.


48		SNAP-ON INCORPORATED

Capital expenditures in 2015, 2014 and 2013 totaled $80.4 million, $80.6 million and $70.6 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 2015, the company also acquired a previously leased U.K. manufacturing facility. 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 2016.

Financing Activities

Net cash used by financing activities of $226.0 million in 2015 included the net repayment of $34.0 million of notes payable and other short-term borrowings. Net cash used by financing activities of $206.9 million in 2014 included the repayment of $100.0 million of unsecured notes at maturity, partially offset by $45.0 million of proceeds from a net increase in notes payable and other short-term borrowings. Net cash used by financing activities was $137.8 million in 2013.

Proceeds from stock purchase and option plan exercises totaled $41.6 million in 2015, $33.0 million in 2014 and $29.2 million in 2013. 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 2015, Snap-on repurchased 723,000 shares of its common stock for $110.4 million under its previously announced share repurchase programs. As of 2015 year end, Snap-on had remaining availability to repurchase up to an additional $230.6 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 680,000 shares of its common stock for $79.3 million in 2014 and Snap-on repurchased 926,000 shares of its common stock for $82.6 million in 2013. 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 2016.

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2015, 2014 and 2013 totaled $127.9 million, $107.6 million and $92.0 million, respectively. On November 9, 2015, the company announced that its Board increased the quarterly cash dividend by 15.1% to $0.61 per share ($2.44 per share annualized). Quarterly dividends in 2015 were $0.61 per share in the fourth quarter and $0.53 per share in the first three quarters ($2.20 per share for the year). Quarterly dividends 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 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).


	2015		2014		2013
Cash dividends paid per common share	$	2.20	$	1.85	$	1.58
Cash dividends paid as a percent of prior-year retained earnings		4.8%		4.6%		4.5%

Snap-on believes that its cash generated from operations, available cash on hand and funds available from its credit facilities will be sufficient to pay dividends in 2016.

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 2015 year end.


		2015 ANNUAL REPORT		49

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

Contractual Obligations and Commitments

A summary of Snap-on’s future contractual obligations and commitments as of 2015 year end are as follows:


(Amounts in millions)	Total		2016		2017 – 2018		2019 – 2020		2021 and thereafter
Contractual obligations:
Notes payable	$	18.4	$	18.4	$	–	$	–	$	–
Long-term debt		861.7		–		400.0		200.0		261.7
Interest on fixed rate debt		159.5		47.6		68.8		32.8		10.3
Operating leases		79.0		22.4		30.0		15.6		11.0
Capital leases		24.1		4.8		6.7		4.8		7.8
Purchase obligations		58.7		51.3		6.3		1.1		–

Total	$	1,201.4	$	144.5	$	511.8	$	254.3	$	290.8

Snap-on intends to make contributions of $7.4 million to its foreign pension plans and $2.0 million to its domestic pension plans in 2016, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2016. 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 on 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, $7.2 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 continues to be phased in, 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 2015, 2014 or 2013 financial results.

New Accounting Standards

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


50		SNAP-ON INCORPORATED

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 using information available as of fiscal April month end.

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 2015 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 assumptions used in performing the second quarter 2015 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.


		2015 ANNUAL REPORT		51

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

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 2015, the results of which did not result in any impairment. As of 2015 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 2015 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.

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 2015 domestic pension expense by approximately $4.6 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.

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 2015 and 2014 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 cash flows for benefits and, starting in 2015, service costs 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.


52		SNAP-ON INCORPORATED

The selection of the 4.7% weighted-average discount rate for Snap-on’s domestic pension plans as of 2015 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 2015 domestic pension expense and projected benefit obligation by approximately $6.1 million and $59.2 million, respectively. As of 2015 year end, Snap-on’s domestic projected benefit obligation comprised approximately 83% of Snap-on’s worldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 3.7% 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 2015 foreign pension expense and projected benefit obligation by approximately $1.7 million and $20.7 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.

Outlook

Snap-on expects to make continued progress in 2016 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. In pursuit of these initiatives, Snap-on expects that capital expenditures in 2016 will be in a range of $80 million to $90 million. Snap-on also anticipates that its full year 2016 effective income tax rate will be comparable to its 2015 full year rate.


		2015 ANNUAL REPORT		53

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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