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

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “organic sales” refer to sales from continuing operations calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), excluding acquisition-related sales and the impact of foreign currency translation. Management evaluates the company’s sales performance based on organic sales growth, which primarily reflects growth from the company’s existing businesses as a result of increased output, customer base and geographic expansion, new product development and/or pricing, and excludes sales contributions from acquired operations the company did not own as of the comparable prior-year reporting period. The company’s organic sales disclosures also exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying growth trends in our businesses and facilitating comparisons of our sales performance with prior periods.

We believe our growth in 2016 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, as continued strengthening in the automotive repair sector combined with headwinds in certain industrial end markets that were most pronounced in the first 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 2016 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 innovation that solves specific challenges in the repair facility. For example, the October 31, 2016 acquisition of Car-O-Liner Holding AB (“Car-O-Liner”) broadened our established capabilities in serving vehicle repair facilities and further expanded our presence with repair shop owners and managers;

	•		Further extending in 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 validates 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.

Snap-on has significant international operations and is subject to risks inherent with foreign operations, including foreign currency translation fluctuations.


26		SNAP-ON INCORPORATED

Recent Acquisitions

On November 16, 2016, Snap-on acquired Ryeson Corporation (d/b/a Sturtevant Richmont) for a preliminary cash purchase price of $12.9 million (or $12.5 million, net of cash acquired). The preliminary purchase price is subject to change based upon the finalization of a working capital adjustment that is expected to be completed in the first quarter of 2017. Sturtevant Richmont, based in Carol Stream, Illinois, designs, manufactures and distributes mechanical and electronic torque wrenches as well as wireless torque error proofing systems for a variety of industrial applications. The acquisition of Sturtevant Richmont enhanced and expanded Snap-on’s capabilities in providing solutions that address torque requirements, which are increasingly essential to critical mechanical performance. For segment reporting purposes, the results of operations and assets of Sturtevant Richmont have been included in the Commercial & Industrial Group since the acquisition date.

On October 31, 2016, Snap-on acquired Car-O-Liner for a preliminary cash purchase price of $151.8 million (or $147.9 million, net of cash acquired). The preliminary purchase price is subject to change based upon the finalization of a working capital adjustment that is expected to be completed in the first quarter of 2017. Car-O-Liner, based in Gothenburg, Sweden, designs and manufactures collision repair equipment, and information and truck alignment systems. The acquisition of Car-O-Liner complemented and increased Snap-on’s existing equipment and repair and service information product offerings, broadened its established capabilities in serving vehicle repair facilities and further expanded the company’s presence with repair shop owners and managers. For segment reporting purposes, substantially all of Car-O-Liner’s results of operations and assets have been included in the Repair Systems & Information Group since the acquisition date, with the remaining portions included in the Commercial & Industrial Group.

On July 27, 2015, Snap-on acquired the assets of Ecotechnics S.p.A. (“Ecotechnics”) for a cash purchase price of $11.8 million. 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.

For segment reporting purposes, the results of operations and assets of Ecotechnics and Pro-Cut have been included in the Repair Systems & Information Group since the respective acquisition dates.

Pro forma financial information has not been presented for any of these acquisitions as the net effects, individually and collectively, were neither significant nor material to Snap-on’s results of operations or financial position.

Consolidated net sales of $3,430.4 million in 2016 increased $77.6 million, or 2.3%, from 2015 levels, reflecting a $96.2 million, or 2.9%, increase in organic sales (a non-GAAP financial measure that excludes acquisition-related sales and the impact of foreign currency translation) and $32.9 million of acquisition-related sales, partially offset by $51.5 million of unfavorable foreign currency translation.

Operating earnings before financial services of $655.5 million in 2016 were up $60.9 million, or 10.2%, from 2015 levels, reflecting contributions from higher sales and improved operating margins, including contributions from “Rapid Continuous Improvement” or “RCI” initiatives, partially offset by $21.5 million of 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.


		2016 ANNUAL REPORT		27

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

Operating earnings of $854.2 million in 2016 increased $89.4 million, or 11.7%, from $764.8 million last year. In 2016, net earnings attributable to Snap-on Incorporated were $546.4 million or $9.20 per diluted share. Net earnings attributable to Snap-on Incorporated in 2015 were $478.7 million or $8.10 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, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. Segment net sales of $1,148.3 million in 2016 decreased $15.3 million, or 1.3%, from 2015 levels, reflecting $20.6 million of unfavorable foreign currency translation partially offset by $4.2 million of acquisition-related sales and a $1.1 million, or 0.1%, organic sales gain. The organic sales increase primarily includes higher sales in the segment’s European-based hand tools business and in its Asia/Pacific and power tools operations, largely offset by lower sales to customers in critical industries, primarily in the international aerospace and natural resources market segments. Operating earnings of $168.0 million in 2016 decreased $1.4 million, or 0.8%, from 2015 levels, including $1.1 million of unfavorable foreign currency effects.

The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2017:

	•		Continuing to invest in emerging market growth initiatives;

	•		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 initiatives.

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. Segment net sales of $1,633.9 million in 2016 increased $65.2 million, or 4.2%, from 2015 levels, reflecting an $86.4 million, or 5.6%, organic sales gain partially offset by $21.2 million of unfavorable foreign currency translation. The organic sales increase includes higher sales in both the company’s U.S. and international franchise operations. Operating earnings of $281.1 million in 2016 increased $25.1 million, or 9.8%, from 2015 levels, primarily as a result of higher sales and savings from RCI initiatives, partially offset by $15.3 million of unfavorable foreign currency effects.

The Snap-on Tools Group made continued progress in 2016 on its fundamental, strategic initiatives to strengthen the franchise network and enhance franchisee profitability. In 2017, the Snap-on Tools Group intends to further build on the progress made in 2016, 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 its franchisees, will have the opportunity to continue to serve customers more effectively, more profitably and with improved satisfaction.

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 dealership service and repair shops (“OEM dealerships”), through direct and distributor channels. Segment net sales of $1,179.9 million in 2016 increased $66.7 million, or 6.0%, from 2015 levels, reflecting a $52.1 million, or 4.7%, organic sales gain and $28.7 million of acquisition-related sales, partially offset by $14.1 million of unfavorable foreign currency translation. The organic sales increase primarily reflects higher sales to independent repair shop owners and managers, as well as increased sales to OEM dealerships, including higher sales of diagnostic and repair information products, and increased sales of undercar equipment. Operating earnings of $297.8 million in 2016 increased $24.4 million, or 8.9%, from 2015 levels, primarily due to higher sales, including acquisition-related sales, and savings from RCI initiatives, partially offset by $5.1 million of unfavorable foreign currency effects.


28		SNAP-ON INCORPORATED

The Repair Systems & Information Group intends to focus on the following strategic priorities in 2017:

	•		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 to further improve functionality, performance and efficiency;

	•		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 $281.4 million in 2016 and $240.3 million in 2015; originations of $1,075.7 million in 2016 increased $82.0 million, or 8.3%, from 2015 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 2016, operating earnings from financial services of $198.7 million increased $28.5 million, or 16.7%, from $170.2 million last year, including $1.8 million of unfavorable foreign currency effects.

Financial Services intends to focus on the following strategic priorities in 2017:

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

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

	•		Maintaining healthy portfolio performance levels.

Cash Flows

Net cash provided by operating activities of $576.1 million in 2016 increased $68.9 million from $507.2 million in 2015 primarily due to $69.0 million of higher net earnings. Net cash provided by operating activities was $403.1 million in 2014.

Net cash used by investing activities of $473.4 million in 2016 included additions to finance receivables of $915.0 million, partially offset by collections of $671.7 million. It also included, on a preliminary basis, a total of $160.4 million (net of $4.3 million of cash acquired) for the acquisitions of Car-O-Liner and Sturtevant Richmont. Net cash used by investing activities of $306.4 million in 2015 included additions to finance receivables of $844.2 million, partially offset by collections of $624.8 million, as well as $11.8 million for the acquisition of Ecotechnics. Net cash used by investing activities of $273.2 million in 2014 included additions to finance receivables of $746.2 million, partially offset by collections of $591.4 million, as well as $41.3 million for the acquisition of Pro-Cut. Capital expenditures in 2016, 2015 and 2014 totaled $74.3 million, $80.4 million and $80.6 million, respectively. Capital expenditures in all three years included investments to support the company’s execution of its strategic growth initiatives and Value Creation Processes around safety, quality, customer connection, innovation and RCI.

Net cash used by financing activities of $116.0 million in 2016 included $147.5 million for dividend payments to shareholders and $120.4 million for the repurchase of 758,000 shares of Snap-on’s common stock, partially offset by $134.2 million of proceeds from a net increase in notes payable and other short-term borrowings and $41.8 million of proceeds from stock purchase and option plan exercises. Net cash used by financing activities of $236.7 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 $212.1 million in 2014 included the repayment of $100 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.


		2016 ANNUAL REPORT		29

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

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 2016” or “2016” refer to the fiscal year ended December 31, 2016; references to “fiscal 2015” or “2015” refer to the fiscal year ended January 2, 2016; and references to “fiscal 2014” or “2014” refer to the fiscal year ended January 3, 2015. References in this document to 2016, 2015 and 2014 year end refer to December 31, 2016, January 2, 2016, and January 3, 2015, respectively.

Snap-on’s 2016 and 2015 fiscal years each 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 was not material to Snap-on’s full year 2014 net sales or net earnings.

Results of Operations

2016 vs. 2015

Results of operations for 2016 and 2015 are as follows:


(Amounts in millions)	2016			2015			Change
Net sales	$	3,430.4	100.0%	$	3,352.8	100.0%	$	77.6	2.3%
Cost of goods sold		(1,720.8)	-50.2%		(1,704.5)	-50.8%		(16.3)	-1.0%

Gross profit		1,709.6	49.8%		1,648.3	49.2%		61.3	3.7%
Operating expenses		(1,054.1)	-30.7%		(1,053.7)	-31.5%		(0.4)	–

Operating earnings before financial services		655.5	19.1%		594.6	17.7%		60.9	10.2%

Financial services revenue		281.4	100.0%		240.3	100.0%		41.1	17.1%
Financial services expenses		(82.7)	-29.4%		(70.1)	-29.2%		(12.6)	-18.0%

Operating earnings from financial services		198.7	70.6%		170.2	70.8%		28.5	16.7%


Operating earnings		854.2	23.0%		764.8	21.3%		89.4	11.7%
Interest expense		(52.2)	-1.4%		(51.9)	-1.4%		(0.3)	-0.6%
Other income (expense) – net		(0.6)	–		(2.4)	-0.1%		1.8	NM

Earnings before income taxes and equity earnings		801.4	21.6%		710.5	19.8%		90.9	12.8%
Income tax expense		(244.3)	-6.6%		(221.2)	-6.2%		(23.1)	-10.4%

Earnings before equity earnings		557.1	15.0%		489.3	13.6%		67.8	13.9%
Equity earnings, net of tax		2.5	0.1%		1.3	–		1.2	NM

Net earnings		559.6	15.1%		490.6	13.6%		69.0	14.1%
Net earnings attributable to noncontrolling interests		(13.2)	-0.4%		(11.9)	-0.3%		(1.3)	-10.9%

Net earnings attributable to Snap-on Inc.	$	546.4	14.7%	$	478.7	13.3%	$	67.7	14.1%

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.

Net sales of $3,430.4 million in 2016 increased $77.6 million, or 2.3%, from 2015 levels, reflecting a $96.2 million, or 2.9%, organic sales gain and $32.9 million of acquisition-related sales, partially offset by $51.5 million of unfavorable foreign currency translation.


30		SNAP-ON INCORPORATED

Gross profit of $1,709.6 million in 2016 compared to $1,648.3 million last year. Gross margin (gross profit as a percentage of net sales) of 49.8% in 2016 improved 60 basis points (100 basis points (“bps”) equals 1.0 percent) from 49.2% last year as benefits from higher sales and savings from RCI initiatives were partially offset by 20 bps of unfavorable foreign currency effects. Restructuring costs included in gross profit were $0.8 million and zero in 2016 and 2015, respectively.

Operating expenses of $1,054.1 million in 2016 compared to $1,053.7 million last year. The operating expense margin (operating expenses as a percentage of net sales) of 30.7% in 2016 improved 80 bps from 31.5% last year primarily due to sales volume leverage and savings from RCI initiatives, 30 bps of lower stock-based (mark-to-market) compensation and other expenses, including lower costs associated with the company’s employee and franchisee stock purchase plans, and 20 bps of lower pension expense. Restructuring costs included in operating expenses were $0.1 million and zero in 2016 and 2015, respectively.

Operating earnings before financial services of $655.5 million in 2016, including $21.5 million of unfavorable foreign currency effects, increased $60.9 million, or 10.2%, as compared to $594.6 million last year. As a percentage of net sales, operating earnings before financial services of 19.1% in 2016 improved 140 bps from 17.7% last year.

Financial services revenue of $281.4 million in 2016 compared to revenue of $240.3 million last year. Financial services operating earnings of $198.7 million in 2016, including $1.8 million of unfavorable foreign currency effects, increased $28.5 million, or 16.7%, as compared to $170.2 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 $854.2 million in 2016, including $23.3 million of unfavorable foreign currency effects, increased $89.4 million, or 11.7%, from $764.8 million last year. As a percentage of revenues (net sales plus financial services revenue), operating earnings of 23.0% in 2016 improved 170 bps from 21.3% last year.

Interest expense of $52.2 million in 2016 increased $0.3 million from $51.9 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 $0.6 million and $2.4 million in 2016 and 2015, respectively. Other income (expense) – net 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 31.0% in 2016 and 31.7% in 2015. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $546.4 million, or $9.20 per diluted share, in 2016 increased $67.7 million, or $1.10 per diluted share, from 2015 levels. Net earnings attributable to Snap-on in 2015 were $478.7 million or $8.10 per diluted share.

Exit and Disposal Activities

In 2016, the company’s Repair Systems & Information Group recorded $0.9 million of severance costs for exit and disposal activities, all of which qualified for accrual treatment; no costs for exit and disposal activities were recorded in 2015. The exit and disposal accrual of $2.8 million as of 2016 year end is expected to be fully utilized in 2017. Snap-on anticipates funding the remaining cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the company’s existing credit facilities. The estimated costs for the exit and disposal activities were based on management’s best business judgment under prevailing circumstances.

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, power generation, transportation 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.


		2016 ANNUAL REPORT		31

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

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)	2016			2015			Change
External net sales	$	863.0	75.2%	$	895.5	77.0%	$	(32.5)	-3.6%
Intersegment net sales		285.3	24.8%		268.1	23.0%		17.2	6.4%

Segment net sales		1,148.3	100.0%		1,163.6	100.0%		(15.3)	-1.3%
Cost of goods sold		(698.3)	-60.8%		(717.1)	-61.6%		18.8	2.6%

Gross profit		450.0	39.2%		446.5	38.4%		3.5	0.8%
Operating expenses		(282.0)	-24.6%		(277.1)	-23.8%		(4.9)	-1.8%

Segment operating earnings	$	168.0	14.6%	$	169.4	14.6%	$	(1.4)	-0.8%

Segment net sales of $1,148.3 million in 2016 decreased $15.3 million, or 1.3%, from 2015 levels, reflecting $20.6 million of unfavorable foreign currency translation partially offset by $4.2 million of acquisition-related sales and a $1.1 million, or 0.1%, organic sales gain. The organic sales increase primarily includes a mid single-digit gain in the segment’s European-based hand tools business and low single-digit increases in both the segment’s Asia/Pacific and power tools operations. These organic sales gains were largely offset by a mid single-digit decline in sales to customers in critical industries, primarily in the international aerospace and natural resources market segments.

Segment gross profit of $450.0 million in 2016 compared to $446.5 million last year. Gross margin of 39.2% in 2016 improved 80 bps from 38.4% last year primarily due to savings from RCI and other cost reduction initiatives, and 20 bps of favorable foreign currency effects.

Segment operating expenses of $282.0 million in 2016 compared to $277.1 million last year. The operating expense margin of 24.6% in 2016 increased 80 bps from 23.8% last year primarily due to higher costs, including costs associated with continued expansion initiatives in Asia, a 20 bps benefit realized in 2015 from a gain on the sale of a former manufacturing facility, and 10 bps of unfavorable foreign currency effects.

As a result of these factors, segment operating earnings of $168.0 million in 2016, including $1.1 million of unfavorable foreign currency effects, decreased $1.4 million from 2015 levels. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group was 14.6% in both years.

Snap-on Tools Group


(Amounts in millions)	2016			2015			Change
Segment net sales	$	1,633.9	100.0%	$	1,568.7	100.0%	$	65.2	4.2%
Cost of goods sold		(929.8)	-56.9%		(885.7)	-56.5%		(44.1)	-5.0%

Gross profit		704.1	43.1%		683.0	43.5%		21.1	3.1%
Operating expenses		(423.0)	-25.9%		(427.0)	-27.2%		4.0	0.9%

Segment operating earnings	$	281.1	17.2%	$	256.0	16.3%	$	25.1	9.8%


32		SNAP-ON INCORPORATED

Segment net sales of $1,633.9 million in 2016 increased $65.2 million, or 4.2%, from 2015 levels, reflecting an $86.4 million, or 5.6%, organic sales gain partially offset by $21.2 million of unfavorable foreign currency translation. The organic sales increase includes mid single-digit gains in both the company’s U.S. and international franchise operations.

Segment gross profit of $704.1 million in 2016 compared to $683.0 million last year. Gross margin of 43.1% in 2016 declined 40 bps from 43.5% last year as 70 bps of unfavorable foreign currency effects were partially offset by benefits from higher sales.

Segment operating expenses of $423.0 million in 2016 compared to $427.0 million last year. The operating expense margin of 25.9% in 2016 improved 130 bps from 27.2% last year primarily due to sales volume leverage and savings from RCI and other cost reduction initiatives, as well as 20 bps of lower stock-based costs associated with the company’s franchisee stock purchase plan.

As a result of these factors, segment operating earnings of $281.1 million in 2016, including $15.3 million of unfavorable foreign currency effects, increased $25.1 million from 2015 levels. Operating margin for the Snap-on Tools Group of 17.2% in 2016 improved 90 bps from 16.3% last year.

Repair Systems & Information Group


(Amounts in millions)	2016			2015			Change
External net sales	$	933.5	79.1%	$	888.6	79.8%	$	44.9	5.1%
Intersegment net sales		246.4	20.9%		224.6	20.2%		21.8	9.7%

Segment net sales		1,179.9	100.0%		1,113.2	100.0%		66.7	6.0%
Cost of goods sold		(624.4)	-52.9%		(594.4)	-53.4%		(30.0)	-5.0%

Gross profit		555.5	47.1%		518.8	46.6%		36.7	7.1%
Operating expenses		(257.7)	-21.9%		(245.4)	-22.0%		(12.3)	-5.0%

Segment operating earnings	$	297.8	25.2%	$	273.4	24.6%	$	24.4	8.9%

Segment net sales of $1,179.9 million in 2016 increased $66.7 million, or 6.0%, from 2015 levels, reflecting a $52.1 million, or 4.7%, organic sales gain and $28.7 million of acquisition-related sales, partially offset by $14.1 million of unfavorable foreign currency translation. The organic sales increase includes a high single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, and low single-digit increases in both sales of undercar equipment and sales to OEM dealerships.

Segment gross profit of $555.5 million in 2016 compared to $518.8 million last year. Gross margin of 47.1% in 2016 improved 50 bps from 46.6% last year, as benefits from higher sales and savings from RCI initiatives were partially offset by 10 bps of unfavorable currency effects. Restructuring costs included in gross profit were $0.8 million and zero in 2016 and 2015, respectively.

Segment operating expenses of $257.7 million in 2016 compared to $245.4 million last year. The operating expense margin of 21.9% in 2016 improved 10 bps from 22.0% last year primarily due to sales volume leverage and savings from RCI initiatives, partially offset by 20 bps of impact from the Car-O-Liner acquisition. Restructuring costs included in operating expenses were $0.1 million and zero in 2016 and 2015, respectively.

As a result of these factors, segment operating earnings of $297.8 million in 2016, including $5.1 million of unfavorable foreign currency effects, increased $24.4 million from 2015 levels. Operating margin for the Repair Systems & Information Group of 25.2% in 2016 improved 60 bps from 24.6% last year.

Financial Services


(Amounts in millions)	2016			2015			Change
Financial services revenue	$	281.4	100.0%	$	240.3	100.0%	$	41.1	17.1%
Financial services expenses		(82.7)	-29.4%		(70.1)	-29.2%		(12.6)	-18.0%

Segment operating earnings	$	198.7	70.6%	$	170.2	70.8%	$	28.5	16.7%


		2016 ANNUAL REPORT		33

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

Financial services revenue of $281.4 million in 2016 increased $41.1 million, or 17.1%, from $240.3 million last year primarily reflecting $38.1 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $2.7 million of increased revenue from higher average yields on finance receivables. In 2016 and 2015, the respective average yield on finance receivables was 18.0% and 17.8%, and the respective average yield on contract receivables was 9.4% and 9.5%. Originations of $1,075.7 million in 2016 increased $82.0 million, or 8.3%, from 2015 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $82.7 million in 2016 increased from $70.1 million last year primarily due to changes in both the size of the portfolio and in the provisions for credit losses. As a percentage of the average financial services portfolio, financial services expenses were 4.9% and 4.8% in 2016 and 2015, respectively.

Financial services operating earnings of $198.7 million in 2016, including $1.8 million of unfavorable foreign currency effects, increased $28.5 million, or 16.7%, from 2015 levels.

See Note 1 and Note 3 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s general corporate expenses in 2016 of $91.4 million decreased $12.8 million from $104.2 million last year. The year-over-year decrease in general corporate expenses primarily reflects $6.9 million of lower pension expense, $6.4 million of lower stock-based (mark-to-market) compensation expense and $2.3 million of lower stock-based costs associated with the company’s employee stock purchase plan, partially offset by $2.8 million of higher acquisition-related and other costs.

Fourth Quarter

Results of operations for the fourth quarters of 2016 and 2015 are as follows:


	Fourth Quarter						Change
(Amounts in millions)	2016			2015
Net sales	$	889.8	100.0%	$	851.7	100.0%	$	38.1	4.5%
Cost of goods sold		(445.9)	-50.1%		(439.4)	-51.6%		(6.5)	-1.5%

Gross profit		443.9	49.9%		412.3	48.4%		31.6	7.7%
Operating expenses		(267.8)	-30.1%		(250.0)	-29.3%		(17.8)	-7.1%

Operating earnings before financial services		176.1	19.8%		162.3	19.1%		13.8	8.5%

Financial services revenue		74.2	100.0%		63.1	100.0%		11.1	17.6%
Financial services expenses		(22.6)	-30.5%		(18.1)	-28.7%		(4.5)	-24.9%

Operating earnings from financial services		51.6	69.5%		45.0	71.3%		6.6	14.7%


Operating earnings		227.7	23.6%		207.3	22.7%		20.4	9.8%
Interest expense		(13.1)	-1.4%		(13.0)	-1.4%		(0.1)	-0.8%
Other income (expense) – net		(0.3)	–		(0.5)	-0.1%		0.2	NM

Earnings before income taxes and equity earnings		214.3	22.2%		193.8	21.2%		20.5	10.6%
Income tax expense		(64.9)	-6.7%		(59.3)	-6.5%		(5.6)	-9.4%

Earnings before equity earnings		149.4	15.5%		134.5	14.7%		14.9	11.1%
Equity earnings, net of tax		0.3	–		–	–		0.3	NM

Net earnings		149.7	15.5%		134.5	14.7%		15.2	11.3%
Net earnings attributable to noncontrolling interests		(3.4)	-0.3%		(3.1)	-0.3%		(0.3)	-9.7%

Net earnings attributable to Snap-on Inc.	$	146.3	15.2%	$	131.4	14.4%	$	14.9	11.3%

NM: Not meaningful


34		SNAP-ON INCORPORATED

Net sales of $889.8 million in the fourth quarter of 2016 increased $38.1 million, or 4.5%, from 2015 levels, reflecting a $30.0 million, or 3.6%, organic sales gain and $23.3 million of acquisition-related sales, partially offset by $15.2 million of unfavorable foreign currency translation.

Gross profit of $443.9 million in the fourth quarter of 2016 compared to $412.3 million last year. Gross margin of 49.9% in the quarter improved 150 bps from 48.4% last year primarily due to benefits from higher sales and savings from RCI initiatives.

Operating expenses of $267.8 million in the fourth quarter of 2016 compared to $250.0 million last year. The operating expense margin of 30.1% in the quarter increased 80 bps from 29.3% last year primarily due to 60 bps of higher acquisition-related and other expenses, including operating expenses for Car-O-Liner and Sturtevant Richmont, and a 30 bps benefit realized in the fourth quarter of 2015 primarily from a gain on the sale of a former manufacturing facility, partially offset by 20 bps of lower pension expense.

Operating earnings before financial services of $176.1 million in the fourth quarter of 2016, including $3.7 million of unfavorable foreign currency effects, increased $13.8 million, or 8.5%, as compared to $162.3 million last year. As a percentage of net sales, operating earnings before financial services of 19.8% in the quarter improved 70 bps from 19.1% last year.

Financial services revenue of $74.2 million in the fourth quarter of 2016 compared to revenue of $63.1 million last year. Financial services operating earnings of $51.6 million in the fourth quarter of 2016, including $0.6 million of unfavorable foreign currency effects, increased $6.6 million, or 14.7%, as compared to $45.0 million last year. The year-over-year increases in both revenue and operating earnings primarily reflect continued growth of the company’s financial services portfolio.

Operating earnings of $227.7 million in the fourth quarter of 2016, including $4.3 million of unfavorable foreign currency effects, increased $20.4 million, or 9.8%, from $207.3 million last year. As a percentage of revenues, operating earnings of 23.6% in the quarter improved 90 bps from 22.7% last year.

Interest expense of $13.1 million in the fourth quarter of 2016 increased $0.1 million from $13.0 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 $0.3 million and $0.5 million in the respective fourth quarters of 2016 and 2015. 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 30.8% in 2016 and 31.1% in 2015. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on of $146.3 million, or $2.47 per diluted share, in the fourth quarter of 2016 increased $14.9 million, or $0.25 per diluted share, from 2015 levels. Net earnings attributable to Snap-on in the fourth quarter of 2015 were $131.4 million or $2.22 per diluted share.

Segment Results

Commercial & Industrial Group


	Fourth Quarter
(Amounts in millions)	2016			2015			Change
External net sales	$	218.5	76.3%	$	212.0	75.2%	$	6.5	3.1%
Intersegment net sales		67.8	23.7%		69.8	24.8%		(2.0)	-2.9%

Segment net sales		286.3	100.0%		281.8	100.0%		4.5	1.6%
Cost of goods sold		(170.9)	-59.7%		(174.2)	-61.8%		3.3	1.9%

Gross profit		115.4	40.3%		107.6	38.2%		7.8	7.2%
Operating expenses		(71.5)	-25.0%		(65.7)	-23.3%		(5.8)	-8.8%

Segment operating earnings	$	43.9	15.3%	$	41.9	14.9%	$	2.0	4.8%


		2016 ANNUAL REPORT		35

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

Segment net sales of $286.3 million in the fourth quarter of 2016 increased $4.5 million, or 1.6%, from 2015 levels, reflecting a $6.5 million, or 2.4%, organic sales gain and $4.2 million of acquisition-related sales, partially offset by $6.2 million of unfavorable foreign currency translation. The organic sales increase primarily includes a high single-digit gain in the segment’s European-based hand tools business and a low single-digit increase to customers in critical industries, largely as a result of higher sales to the military. These organic sales gains were partially offset by a mid single-digit decline in the segment’s power tools operations and a low single-digit decline in the segment’s Asia/Pacific operations.

Segment gross profit of $115.4 million in the fourth quarter of 2016 compared to $107.6 million last year. Gross margin of 40.3% in the quarter improved 210 bps from 38.2% last year primarily due to benefits from higher sales and savings from RCI initiatives, and 100 bps of favorable foreign currency effects.

Segment operating expenses of $71.5 million in the fourth quarter of 2016 compared to $65.7 million last year. The operating expense margin of 25.0% in the quarter increased 170 bps from 23.3% last year primarily due to higher costs, including operating expenses for Car-O-Liner and Sturtevant Richmont, a 70 bps benefit realized in the fourth quarter of 2015 from a gain on the sale of a former manufacturing facility, and 10 bps of unfavorable foreign currency effects.

As a result of these factors, segment operating earnings of $43.9 million in the fourth quarter of 2016, including $1.8 million of favorable foreign currency effects, increased $2.0 million from 2015 levels. Operating margin for the Commercial & Industrial Group of 15.3% in the fourth quarter of 2016 improved 40 bps from 14.9% last year.

Snap-on Tools Group


	Fourth Quarter
(Amounts in millions)	2016			2015			Change
Segment net sales	$	417.5	100.0%	$	411.2	100.0%	$	6.3	1.5%
Cost of goods sold		(242.0)	-58.0%		(237.5)	-57.8%		(4.5)	-1.9%

Gross profit		175.5	42.0%		173.7	42.2%		1.8	1.0%
Operating expenses		(102.0)	-24.4%		(101.8)	-24.7%		(0.2)	-0.2%

Segment operating earnings	$	73.5	17.6%	$	71.9	17.5%	$	1.6	2.2%

Segment net sales of $417.5 million in the fourth quarter of 2016 increased $6.3 million, or 1.5%, from 2015 levels, reflecting a $12.2 million, or 3.0%, organic sales gain partially offset by $5.9 million of unfavorable foreign currency translation. The organic sales increase includes a low single-digit gain in the company’s U.S. franchise operations and a mid single-digit gain in the company’s international franchise operations.

Segment gross profit of $175.5 million in the fourth quarter of 2016 compared to $173.7 million last year. Gross margin of 42.0% in the quarter declined 20 bps from 42.2% last year as 60 bps of unfavorable foreign currency effects were partially offset by benefits from higher sales.

Segment operating expenses of $102.0 million in the fourth quarter of 2016 compared to $101.8 million last year. The operating expense margin of 24.4% in the quarter improved 30 bps from 24.7% last year primarily due to sales volume leverage.

As a result of these factors, segment operating earnings of $73.5 million in the fourth quarter of 2016, including $3.8 million of unfavorable foreign currency effects, increased $1.6 million from 2015 levels. Operating margin for the Snap-on Tools Group of 17.6% in the fourth quarter of 2016 improved 10 bps from 17.5% last year.


36		SNAP-ON INCORPORATED

Repair Systems & Information Group


	Fourth Quarter
(Amounts in millions)	2016			2015			Change
External net sales	$	253.8	79.4%	$	228.5	81.4%	$	25.3	11.1%
Intersegment net sales		66.0	20.6%		52.1	18.6%		13.9	26.7%

Segment net sales		319.8	100.0%		280.6	100.0%		39.2	14.0%
Cost of goods sold		(166.8)	-52.2%		(149.6)	-53.3%		(17.2)	-11.5%

Gross profit		153.0	47.8%		131.0	46.7%		22.0	16.8%
Operating expenses		(70.5)	-22.0%		(58.9)	-21.0%		(11.6)	-19.7%

Segment operating earnings	$	82.5	25.8%	$	72.1	25.7%	$	10.4	14.4%

Segment net sales of $319.8 million in the fourth quarter of 2016 increased $39.2 million, or 14.0%, from 2015 levels, reflecting a $24.6 million, or 8.9%, organic sales gain and $19.1 million of acquisition-related sales, partially offset by $4.5 million of unfavorable foreign currency translation. The organic sales increase includes a double-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, a mid single-digit increase in sales to OEM dealerships and a low single-digit gain in sales of undercar equipment.

Segment gross profit of $153.0 million in the fourth quarter of 2016 compared to $131.0 million last year. Gross margin of 47.8% in the quarter improved 110 bps from 46.7% last year primarily due to benefits from higher sales and savings from RCI initiatives.

Segment operating expenses of $70.5 million in the fourth quarter of 2016 compared to $58.9 million last year. The operating expense margin of 22.0% increased 100 bps from 21.0% last year primarily due to 90 bps of impact from the Car-O-Liner acquisition.

As a result of these factors, segment operating earnings of $82.5 million in the fourth quarter of 2016, including $1.7 million of unfavorable foreign currency effects, increased $10.4 million from 2015 levels. Operating margin for the Repair Systems & Information Group of 25.8% in the fourth quarter of 2016 improved 10 bps from 25.7% last year.

Financial Services


	Fourth Quarter
(Amounts in millions)	2016			2015			Change
Financial services revenue	$	74.2	100.0%	$	63.1	100.0%	$	11.1	17.6%
Financial services expenses		(22.6)	-30.5%		(18.1)	-28.7%		(4.5)	-24.9%

Segment operating earnings	$	51.6	69.5%	$	45.0	71.3%	$	6.6	14.7%

Financial services revenue of $74.2 million in the fourth quarter of 2016 increased $11.1 million, or 17.6%, from $63.1 million last year primarily reflecting $9.6 million of higher revenue as a result of continued growth of the company’s financial services portfolio and $1.3 million of increased revenue from higher average yields on finance receivables, partially offset by $0.1 million of lower revenue from lower average yields on contract receivables. In the fourth quarters of 2016 and 2015, the respective average yield on finance receivables was 18.2% and 17.8%, and the respective average yield on contract receivables was 9.3% and 9.5%. Originations of $260.3 million in the fourth quarter of 2016 increased $8.3 million, or 3.3%, from 2015 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses of $22.6 million in the fourth quarter of 2016 increased from $18.1 million last year primarily due to changes in both the size of the portfolio and in the provisions for credit losses. As a percentage of the average financial services portfolio, financial services expenses were 1.3% and 1.2% in the fourth quarters of 2016 and 2015, respectively.


		2016 ANNUAL REPORT		37

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

Financial services operating earnings of $51.6 million in the fourth quarter of 2016, including $0.6 million of unfavorable foreign currency effects, increased $6.6 million, or 14.7%, from 2015 levels.

See Note 1 and Note 3 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s fourth quarter 2016 general corporate expenses of $23.8 million increased $0.2 million from $23.6 million last year primarily due to higher acquisition-related and other costs partially offset by $1.6 million of lower pension expense.

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

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, reflecting a $220.8 million, or 7.1%, organic sales gain and $12.0 million of acquisition-related sales, partially offset by $157.7 million of unfavorable foreign currency translation.


38		SNAP-ON INCORPORATED

Gross profit of $1,648.3 million in 2015 compared to $1,584.3 million in 2014. Gross margin of 49.2% in 2015 improved 90 bps from 48.3% in 2014 primarily due to benefits from higher sales and savings from RCI initiatives, as well as 20 bps of lower restructuring costs. Restructuring costs included in gross profit were zero and $5.7 million in 2015 and 2014, respectively.

Operating expenses of $1,053.7 million in 2015 compared to $1,048.7 million in 2014. The operating expense margin of 31.5% in 2015 improved 50 bps from 32.0% in 2014 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 in 2014. As a percentage of net sales, operating earnings before financial services of 17.7% in 2015 improved 140 bps from 16.3% in 2014.

Financial services revenue of $240.3 million in 2015 compared to revenue of $214.9 million in 2014. 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 in 2014. 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 in 2014. As a percentage of revenues, operating earnings of 21.3% in 2015 improved 170 bps from 19.6% in 2014.

Interest expense of $51.9 million in 2015 decreased $1.0 million from $52.9 million in 2014. 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. 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.

Segment 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%


		2016 ANNUAL REPORT		39

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

Segment net sales of $1,163.6 million in 2015 decreased $11.2 million, or 1.0%, from 2014 levels, reflecting $75.3 million of unfavorable foreign currency translation partially offset by a $64.1 million, or 5.8%, organic sales gain. The organic sales increase primarily included 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 in 2014. Gross margin of 38.4% in 2015 improved 10 bps from 38.3% in 2014, 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 in 2014. The operating expense margin of 23.8% in 2015 improved 100 bps from 24.8% in 2014 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 for the Commercial & Industrial Group of 14.6% in 2015 improved 110 bps from 13.5% in 2014.

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, reflecting a $154.2 million, or 10.9%, organic sales gain partially offset by $40.7 million of unfavorable foreign currency translation. The organic sales increase included double-digit 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 in 2014. Gross margin of 43.5% in 2015 improved 20 bps from 43.3% in 2014 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 in 2014. The operating expense margin of 27.2% in 2015 improved 80 bps from 28.0% in 2014 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% in 2014.

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%


40		SNAP-ON INCORPORATED

Segment net sales of $1,113.2 million in 2015 increased $18.0 million, or 1.6%, from 2014 levels, reflecting a $51.8 million, or 4.9%, organic sales gain and $12.0 million of acquisition-related sales, partially offset by $45.8 million of unfavorable foreign currency translation. The organic sales increase primarily included 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 in 2014. Gross margin of 46.6% in 2015 improved 60 bps from 46.0% in 2014 primarily due to contributions from higher sales and savings from RCI initiatives, and 40 bps of lower restructuring costs. 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 in 2014. The operating expense margin of 22.0% in 2015 improved 110 bps from 23.1% in 2014 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% in 2014.

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 in 2014 primarily reflecting $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 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 in 2014 primarily due to $7.9 million of higher pension expense.

Non-GAAP Supplemental Data

The following non-GAAP 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.


		2016 ANNUAL REPORT		41

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

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.

Non-GAAP Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2016, 2015 and 2014 is as follows:


	Operations*						Financial Services
(Amounts in millions)	2016		2015		2014		2016		2015		2014
Net sales	$	3,430.4	$	3,352.8	$	3,277.7	$	–	$	–	$	–
Cost of goods sold		(1,720.8)		(1,704.5)		(1,693.4)		–		–		–

Gross profit		1,709.6		1,648.3		1,584.3		–		–		–
Operating expenses		(1,054.1)		(1,053.7)		(1,048.7)		–		–		–

Operating earnings before financial services		655.5		594.6		535.6		–		–		–

Financial services revenue		–		–		–		281.4		240.3		214.9
Financial services expenses		–		–		–		(82.7)		(70.1)		(65.8)

Operating earnings from financial services		–		–		–		198.7		170.2		149.1


Operating earnings		655.5		594.6		535.6		198.7		170.2		149.1
Interest expense		(51.9)		(51.4)		(52.2)		(0.3)		(0.5)		(0.7)
Intersegment interest income (expense) – net		72.2		62.7		56.7		(72.2)		(62.7)		(56.7)
Other income (expense) – net		(0.7)		(2.4)		(0.8)		0.1		–		(0.1)

Earnings before income taxes and equity earnings		675.1		603.5		539.3		126.3		107.0		91.6
Income tax expense		(197.7)		(181.9)		(165.8)		(46.6)		(39.3)		(33.7)

Earnings before equity earnings		477.4		421.6		373.5		79.7		67.7		57.9
Financial services – net earnings attributable to Snap-on		79.7		67.7		57.9		–		–		–
Equity earnings, net of tax		2.5		1.3		0.7		–		–		–

Net earnings		559.6		490.6		432.1		79.7		67.7		57.9
Net earnings attributable to noncontrolling interests		(13.2)		(11.9)		(10.2)		–		–		–

Net earnings attributable to Snap-on	$	546.4	$	478.7	$	421.9	$	79.7	$	67.7	$	57.9

Snap-on with Financial Services on the equity method.


42		SNAP-ON INCORPORATED

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2016 and 2015 year end is as follows:


	Operations*				Financial Services
(Amounts in millions)	2016		2015		2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	77.5	$	92.7	$	0.1	$	0.1
Intersegment receivables		15.0		15.9		–		–
Trade and other accounts receivable – net		598.2		562.2		0.6		0.3
Finance receivables – net		–		–		472.5		447.3
Contract receivables – net		7.9		8.0		80.2		74.1
Inventories – net		530.5		497.8		–		–
Prepaid expenses and other assets		122.4		111.5		1.1		1.2

Total current assets		1,351.5		1,288.1		554.5		523.0

Property and equipment – net		423.8		412.1		1.4		1.4
Investment in Financial Services		288.7		251.8		–		–
Deferred income tax assets		49.1		40.6		23.7		19.8
Intersegment long-term notes receivable		584.7		398.7		–		–
Long-term finance receivables – net		–		–		934.5		772.7
Long-term contract receivables – net		11.2		12.1		275.5		254.5
Goodwill		895.5		790.1		–		–
Other intangibles – net		184.6		195.0		–		–
Other assets		47.9		49.9		0.1		1.0

Total assets	$	3,837.0	$	3,438.4	$	1,789.7	$	1,572.4

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


		2016 ANNUAL REPORT		43

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

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information (continued):


	Operations*				Financial Services
(Amounts in millions)	2016		2015		2016		2015
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	151.4	$	18.4	$	150.0	$	–
Accounts payable		170.3		148.2		0.6		0.1
Intersegment payables		–		–		15.0		15.9
Accrued benefits		52.8		52.1		–		–
Accrued compensation		85.7		86.9		4.1		4.1
Franchisee deposits		66.7		64.4		–		–
Other accrued liabilities		292.1		277.4		22.8		25.0

Total current liabilities		819.0		647.4		192.5		45.1

Long-term debt and intersegment long-term debt		–		–		1,293.5		1,260.4
Deferred income tax liabilities		13.1		14.1		–		0.2
Retiree health care benefits		36.7		37.9		–		–
Pension liabilities		246.5		227.8		–		–
Other long-term liabilities		86.5		80.5		15.0		14.9

Total liabilities		1,201.8		1,007.7		1,501.0		1,320.6


Total shareholders’ equity attributable to Snap-on		2,617.2		2,412.7		288.7		251.8
Noncontrolling interests		18.0		18.0		–		–

Total equity		2,635.2		2,430.7		288.7		251.8

Total liabilities and equity	$	3,837.0	$	3,438.4	$	1,789.7	$	1,572.4

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


44		SNAP-ON INCORPORATED

Liquidity and Capital Resources

Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. On January 17, 2017, Snap-on repaid $150 million of unsecured 5.50% notes (the “2017 Notes”) upon maturity with available cash and cash generated from issuances of commercial paper. 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 scheduled debt payments (including the January 15, 2018 repayment of $250 million of unsecured 4.25% notes at maturity (the “2018 Notes”)), payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, 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 3, 2017, 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 F1 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, including through access to financial markets for potential new financing, 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 2016 year end, working capital (current assets less current liabilities) of $894.5 million decreased $224.1 million from $1,118.6 million as of 2015 year end primarily as a result of the inclusion of the 2017 Notes and $130 million of outstanding commercial paper borrowings in “Notes payable and current maturities of long-term debt,” partially offset by the other net changes in working capital discussed below. As of 2015 year end, the 2017 Notes 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.

The following represents the company’s working capital position as of 2016 and 2015 year end:


(Amounts in millions)	2016		2015
Cash and cash equivalents	$	77.6	$	92.8
Trade and other accounts receivable – net		598.8		562.5
Finance receivables – net		472.5		447.3
Contract receivables – net		88.1		82.1
Inventories – net		530.5		497.8
Prepaid expenses and other assets		116.5		106.3

Total current assets		1,884.0		1,788.8


Notes payable and current maturities of long-term debt		(301.4)		(18.4)
Accounts payable		(170.9)		(148.3)
Other current liabilities		(517.2)		(503.5)

Total current liabilities		(989.5)		(670.2)


Working capital	$	894.5	$	1,118.6

Cash and cash equivalents of $77.6 million as of 2016 year end decreased $15.2 million from 2015 year-end levels primarily due to (i) the funding of $915.0 million of new finance receivables; (ii) the funding of $160.4 million, net of cash acquired, for the acquisitions of Car-O-Liner and Sturtevant Richmont; (iii) dividend payments to shareholders of $147.5 million; (iv) the repurchase of 758,000 shares of the company’s common stock for $120.4 million; and (v) the funding of $74.3 million of capital expenditures. These decreases in cash and cash equivalents were partially offset by (i) $671.7 million of cash from collections of finance receivables; (ii) $576.1 million of cash generated from operations, net of $60.0 million of discretionary cash contributions to the company’s domestic pension plans; (iii) $134.2 million of net proceeds from notes payable and other short-term borrowings; and (iv) $41.8 million of cash proceeds from stock purchase and option plan exercises.


		2016 ANNUAL REPORT		45

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

Of the $77.6 million of cash and cash equivalents as of 2016 year end, $59.0 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.

Trade and other accounts receivable – net of $598.8 million as of 2016 year end increased $36.3 million from 2015 year-end levels primarily due to higher sales and an increase in days sales outstanding, and $21.5 million of receivables related to the Car-O-Liner and Sturtevant Richmont acquisitions, partially offset by $13.8 million of foreign currency translation. 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 63 days at 2016 year end and 60 days at 2015 year end.

The current portions of net finance and contract receivables of $560.6 million as of 2016 year end compared to $529.4 million at 2015 year end. The long-term portions of net finance and contract receivables of $1,221.2 million as of 2016 year end compared to $1,039.3 million at 2015 year end. The combined $213.1 million increase in net current and long-term finance and contract receivables over 2015 year-end levels is primarily due to continued growth of the company’s financial services portfolio, partially offset by $15.1 million of foreign currency translation.

Inventories – net of $530.5 million as of 2016 year end increased $32.7 million from 2015 year-end levels primarily due to $21.5 million of inventories related to the Car-O-Liner and Sturtevant Richmont acquisitions, as well as to support continued higher customer demand and new product introductions, partially offset by $17.8 million of foreign currency translation. As of 2016 and 2015 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 3.3 turns and 3.5 turns, respectively. Inventories accounted for using the first-in, first-out (“FIFO”) method as of 2016 and 2015 year end approximated 59% and 57%, respectively, of total inventories. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve was $73.2 million and $73.3 million as 2016 and 2015 year end, respectively.

Notes payable and current maturities of long-term debt of $301.4 million as of 2016 year end consisted of $150 million of the 2017 Notes, $130 million of commercial paper borrowings and $21.4 million of other notes. Notes payable at 2015 year end totaled $18.4 million and there were no commercial paper borrowings outstanding. As of 2015 year end, the 2017 Notes 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.

Average notes payable outstanding, including commercial paper borrowings, were $49.3 million and $78.5 million in 2016 and 2015, respectively. The weighted-average interest rate of 7.09% in 2016 increased from 4.36% last year primarily due to higher interest rates on local borrowings in emerging growth markets (where interest rates are generally higher). Average commercial paper borrowings were $26.6 million and $52.2 million in 2016 and 2015, respectively, and the weighted-average interest rate of 0.73% in 2016 increased from 0.41% last year. At 2016 year end, the weighted-average interest rate on outstanding notes payable of 2.85% compared with 15.82% at 2015 year end. The 2016 year-end rate benefited from lower interest rates on commercial paper borrowings. The 2015 year-end rate reflected higher rates on local borrowings in emerging growth markets; no commercial paper was outstanding at 2015 year end.

Accounts payable of $170.9 million as of 2016 year end increased $22.6 million from 2015 year-end levels primarily due to the timing of payments and $10.9 million of accounts payable related to the Car-O-Liner and Sturtevant Richmont acquisitions, partially offset by $3.8 million of foreign currency translation.

Other accrued liabilities of $307.9 million as of 2016 year end increased $11.9 million from 2015 year-end levels primarily due to a $7.6 million increase in derivative liabilities and $6.4 million of other accrued liabilities related to the Car-O-Liner and Sturtevant Richmont acquisitions, partially offset by $8.3 million of foreign currency translation.


46		SNAP-ON INCORPORATED

Long-term debt of $708.8 million as of 2016 year end consisted of (i) $250 million of the 2018 Notes; (ii) $200 million of unsecured 6.70% notes that mature in 2019; (iii) $250 million of unsecured 6.125% notes that mature in 2021; and (iv) $8.8 million of other long-term debt, including fair value adjustments related to interest rate swaps. As of 2016 year end, the 2018 Notes were included in “Long-term debt” on the accompanying Consolidated Balance Sheet as their scheduled maturity was in excess of one year of the 2016 year-end balance sheet date.

Snap-on has a five-year, $700 million multi-currency revolving credit facility that terminates on December 15, 2020 (the “Credit Facility”); as of December 31, 2016, no amounts were outstanding under the Credit Facility. 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 2016 year end, the company’s actual ratios of 0.24 and 1.02, respectively, were both within the permitted ranges set forth in this financial covenant. Snap-on generally issues commercial paper to fund its financing needs on a short-term basis and uses the Credit Facility as back-up liquidity to support such commercial paper issuances.

Snap-on’s Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2016 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 can 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 may take advantage of what it believes are favorable market conditions to issue long-term debt to further improve its liquidity and capital resources in 2017. Near-term liquidity requirements for Snap-on include scheduled debt payments (including the repayment of the 2018 Notes; as noted above, the 2017 Notes were repaid on January 17, 2017), payments of interest and dividends, funding to support new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, as they arise. Snap-on intends to make contributions of $7.1 million to its foreign pension plans and $2.3 million to its domestic pension plans in 2017, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2017.

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

Depreciation expense was $61.4 million in 2016, $57.8 million in 2015 and $54.8 million in 2014. Amortization expense was $24.2 million in 2016 and $24.7 million in both 2015 and 2014. See Note 6 to the Consolidated Financial Statements for information on goodwill and other intangible assets.


		2016 ANNUAL REPORT		47

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

Investing Activities

Net cash used by investing activities of $473.4 million in 2016 included additions to finance receivables of $915.0 million, partially offset by collections of $671.7 million. Net cash used by investing activities of $306.4 million in 2015 included additions to finance receivables of $844.2 million, partially offset by collections of $624.8 million. Net cash used by investing activities of $273.2 million in 2014 included additions to finance receivables of $746.2 million, partially offset by collections of $591.4 million. 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 average payment terms approaching four years.

Net cash used by investing activities in 2016 also included, on a preliminary basis, a total of $160.4 million (net of $4.3 million of cash acquired) for the acquisitions of Car-O-Liner and Sturtevant Richmont. 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. See Note 2 to the Consolidated Financial Statements for information on acquisitions.

Capital expenditures in 2016, 2015 and 2014 totaled $74.3 million, $80.4 million and $80.6 million, respectively. Capital expenditures in all three years included continued investments related to the company’s execution of its strategic Value Creation Processes and strategic growth initiatives. The company also invested in (i) new product, efficiency, safety and cost reduction initiatives that are intended 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. Capital expenditures in 2015 also included the purchase of a previously leased manufacturing facility in the United Kingdom. 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 2017.

Financing Activities

Net cash used by financing activities of $116.0 million in 2016 included $134.2 million of proceeds from a net increase in notes payable and other short-term borrowings. Net cash used by financing activities of $236.7 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 $212.1 million in 2014 included the repayment of $100 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.

Proceeds from stock purchase and option plan exercises totaled $41.8 million in 2016, $41.6 million in 2015 and $33.0 million in 2014. 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 2016, Snap-on repurchased 758,000 shares of its common stock for $120.4 million under its previously announced share repurchase programs. As of 2016 year end, Snap-on had remaining availability to repurchase up to an additional $207.2 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 723,000 shares of its common stock for $110.4 million in 2015 and Snap-on repurchased 680,000 shares of its common stock for $79.3 million in 2014. 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 2017.


48		SNAP-ON INCORPORATED

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2016, 2015 and 2014 totaled $147.5 million, $127.9 million and $107.6 million, respectively. On November 3, 2016, the company announced that its Board increased the quarterly cash dividend by 16.4% to $0.71 per share ($2.84 per share annualized). Quarterly dividends in 2016 were $0.71 per share in the fourth quarter and $0.61 per share in the first three quarters ($2.54 per share for the year). 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).


	2016		2015		2014
Cash dividends paid per common share	$	2.54	$	2.20	$	1.85
Cash dividends paid as a percent of prior-year retained earnings		4.9%		4.8%		4.6%

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 2017.

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 2016 year end.

Contractual Obligations and Commitments

A summary of Snap-on’s future contractual obligations and commitments as of 2016 year end are as follows:


(Amounts in millions)	Total		2017		2018-2019		2020-2021		2022 and thereafter
Contractual obligations:
Notes payable and current maturities of long-term debt	$	301.4	$	301.4	$	–	$	–	$	–
Long-term debt		708.8		–		450.0		258.8		–
Interest on fixed rate debt		111.9		39.7		46.6		25.6		–
Operating leases		81.5		23.0		32.2		15.8		10.5
Capital leases		20.2		3.7		6.2		4.7		5.6
Purchase obligations		54.0		45.8		8.2		–		–

Total	$	1,277.8	$	413.6	$	543.2	$	304.9	$	16.1

On January 17, 2017, Snap-on repaid the 2017 Notes (included in the table above) upon maturity with available cash and cash generated from issuances of commercial paper.

Snap-on intends to make contributions of $7.1 million to its foreign pension plans and $2.3 million to its domestic pension plans in 2017, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2017. 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 Note 11 and Note 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, $9.4 million of unrecognized tax benefits have been excluded from the table above; see Note 8 to the Consolidated Financial Statements for information on income taxes.


		2016 ANNUAL REPORT		49

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

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.

New Accounting Standards

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

Critical Accounting Policies and Estimates

The Consolidated Financial Statements and related notes contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 units. 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 2016 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.


50		SNAP-ON INCORPORATED

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 2016 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the trademarks’ projected future cash flows and replicates how market participants would value the company’s trademarks in an orderly transaction.

Inherent in fair value determinations are significant judgments and estimates, including material assumptions about future revenue, profitability and cash flows, the company’s operational plans and its interpretation of current economic indicators. Should the operations of the businesses with which goodwill or other indefinite-lived intangible assets are associated incur significant declines in profitability and cash flow due to significant and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including effects from the sale or disposal of a reporting unit, some or all of the recorded goodwill or other indefinite-lived intangible assets could be subject to impairment and could result in a material adverse effect on Snap-on’s financial position or results of operations.

Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2016, the results of which did not result in any impairment. As of 2016 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 2016 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.

Pension Benefits: The pension benefit obligation and related pension expense are calculated in accordance with GAAP and are impacted by certain actuarial assumptions. Changes in these assumptions are primarily influenced by factors outside of Snap-on’s control, such as changes in economic conditions, 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.

Snap-on’s domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. In 2016, the long-term investment performance objective for Snap-on’s domestic plans’ assets was to achieve net of expense returns that met or exceeded the 7.6% domestic expected return on plan assets assumption. 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. As of 2016 year end, Snap-on’s domestic pension plans’ assets comprised approximately 86% of the company’s worldwide pension plan assets.


		2016 ANNUAL REPORT		51

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

Based on forward-looking capital market expectations, Snap-on selected an expected return on plan assets assumption for its U.S. pension plans of 7.5%, a decrease of 10 bps from 2016, to be used in determining pension expense for 2017. In estimating the domestic expected return on plan assets, Snap-on utilizes a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a “building block” approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums, calculated using the geometric mean, are then adjusted based on current relative valuation levels, macro-economic conditions, and the expected alpha related to active investment management. The asset return assumption is also adjusted by an implicit expense load for estimated administrative and investment-related expenses. Since asset allocation is a key determinant of expected investment returns, the current and expected mix of plan assets are also considered when setting the assumption.

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 plans’ assets by 50 bps would have increased Snap-on’s 2016 domestic pension expense by approximately $4.7 million.

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 2016 and 2015 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 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.

The selection of the 4.5% weighted-average discount rate for Snap-on’s domestic pension plans as of 2016 year end (compared to 4.7% 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 2016 domestic pension expense and projected benefit obligation by approximately $6.7 million and $65.3 million, respectively. As of 2016 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 2.9% (compared to 3.7% 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 foreign discount rate assumption by 50 bps would have increased Snap-on’s 2016 foreign pension expense and projected benefit obligation by approximately $1.7 million and $23.4 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.

To determine the 2017 net periodic benefit cost, Snap-on is using weighted-average discount rates for its domestic and foreign pension plans of 4.5% and 2.9%, respectively, and an expected return on plan assets for its domestic pension plans of 7.5%. The expected returns on plan assets for foreign pension plans ranged from 1.8% and 6.3% as of 2016 year end. The net change in these two key assumptions from those used in 2016 is expected to increase pension expense in 2017. Other factors, such as changes in plan demographics and discretionary contributions, may further increase or decrease pension expense in 2017. See Note 11 to the Consolidated Financial Statements for further information on pension plans.


52		SNAP-ON INCORPORATED

Allowances for Doubtful Accounts on Finance and Contract Receivables: The allowances for doubtful accounts on finance and contract receivables are maintained at levels management believes are adequate to cover probable losses inherent in Snap-on’s finance and contract receivables portfolios as of the measurement date. The allowances represent management’s estimate of the losses inherent in the company’s receivables portfolios based on ongoing assessments and evaluations of collectability and historical loss experience. Determination of the proper level of allowances by portfolio requires management to exercise significant judgment about the timing, frequency and severity of losses that could materially affect the provision for doubtful accounts and, as a result, net earnings. The allowances take into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, loss migration, delinquency trends, collection experience, current economic conditions and credit risk characteristics. Some of these factors are influenced by items such as the customers’ financial condition, debt-servicing ability, past payment experience, and credit bureau and proprietary Snap-on credit model information, as well as the value of the underlying collateral. Changes in economic conditions and assumptions, including the resulting credit quality metrics relative to the performance of the finance and contract receivables portfolios, create uncertainty and could result in changes to both the allowances and provisions for doubtful accounts.

Management utilizes established policies and procedures in an effort to ensure the estimates and assumptions are well controlled, reviewed and consistently applied. As of December 31, 2016, the ratios of the allowances for doubtful accounts to finance and contract receivables (the “allowance ratios”) were 3.34% and 1.03%, respectively. As of January 2, 2016, the respective allowance ratios were 3.04% and 1.25%. While management believes it exercises prudent judgment and applies reasonable assumptions in establishing its estimates for allowances for finance and contract receivables, there can be no assurance that changes in economic conditions or other factors would not adversely impact the financial health of our customers and result in changes to the estimates used in the allowance calculations. For reference, a 100 bps increase in the allowance ratios for both finance and contract receivables as of December 31, 2016, would have increased Snap-on’s 2016 provision expense and related allowances for doubtful accounts by approximately $14.6 million and $3.8 million, respectively.

For additional information on Snap-on’s allowances for doubtful accounts, see Note 1 and Note 3 to the Consolidated Financial Statements.

Outlook

Snap-on expects to make continued progress in 2017 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 extending 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 2017 will be in a range of $80 million to $90 million. Snap-on also anticipates that its full year 2017 effective income tax rate will be comparable to its 2016 full year rate.


		2016 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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