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

In 2020, the COVID-19 pandemic impacted the company’s sales and earnings as a result of decreased activity in the first half of the year. By safely pursuing opportunities in the COVID-19 environment, we believe our 2020 operating results demonstrate our continued commitment to providing repeatability and reliability to a wide range of professional customers performing critical and essential tasks in workplaces of consequence. Leveraging capabilities already demonstrated in the automotive repair arena, our strategy continued to focus on developing and expanding our professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including critical industries, where the cost and penalties for failure can be high. Snap-on’s value proposition of making work easier for serious professionals 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 with repair shop owners and managers, where we continued to make progress in connecting with customers and translating the resulting insights into innovation that solves specific challenges in the repair facility;
Further extending to critical industries, where we continued to grow our lines of products customized for specific industries, including through acquisitions; and
Building in emerging markets, where we continued to maintain manufacturing capacity, as well as refine product lines and distribution capabilities.

Our strategic priorities and plans for 2021 involve continuing to build on 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 (“Rapid Continuous Improvement” or “RCI”). We expect to continue to deploy these processes in our existing operations as well as into our recently acquired businesses.

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.

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.

Recent Acquisitions

On September 28, 2020, Snap-on acquired substantially all of the assets of AutoCrib, Inc. (“AutoCrib”) for a cash purchase price of $35.4 million. AutoCrib, based in Tustin, California, designs, manufactures and markets asset and tool control solutions. The acquisition of AutoCrib complemented and expanded Snap-on’s existing tool control offering to customers in a variety of industrial applications, including aerospace, automotive, military, natural resources and general industry.

On January 31, 2020, Snap-on acquired substantially all of the assets related to the TreadReader product line from Sigmavision Limited (“Sigmavision”) for a cash purchase price of $5.9 million. Sigmavision designs and manufactures handheld devices and drive-over ramps that provide tire information for use in the automotive industry. The acquisition of the TreadReader product line enhanced and expanded Snap-on’s existing capabilities in serving vehicle repair facilities and expanded the company’s presence with repair shop owners and managers.


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

On August 7, 2019, Snap-on acquired Cognitran Limited (“Cognitran”) for a cash purchase price of $30.6 million (or $29.6 million, net of cash acquired), which reflects a $0.2 million working capital adjustment finalized in fiscal 2020. Cognitran, based in Chelmsford, U.K., specializes in flexible, modular and highly scalable “Software as a Service” (SaaS) products for Original Equipment Manufacturer (“OEM”) customers and their dealers, focused on the creation and delivery of service, diagnostics, parts and repair information to the OEM dealers and connected vehicle platforms. The acquisition of Cognitran enhanced and expanded Snap-on’s capabilities in providing shop efficiency solutions through integrated upstream services to OEM customers in automotive, heavy duty, agricultural and recreational applications.

On April 2, 2019, Snap-on acquired Power Hawk Technologies, Inc. (“Power Hawk”) for a cash purchase price of $7.9 million. Power Hawk, based in Rockaway, New Jersey, designs, manufactures and distributes rescue tools and related equipment for a variety of military, governmental, fire and rescue, and emergency operations. The acquisition of the Power Hawk product line complemented and increased Snap-on’s existing product offering and broadened its established capabilities in serving critical industries.

On January 25, 2019, Snap-on acquired substantially all of the assets of TMB GeoMarketing Limited (“TMB”) for a cash purchase price of $1.3 million. TMB, based in Dorking, U.K., designs planning software used by OEMs to optimize dealer locations and manage the performance of dealer outlets. The acquisition of TMB extended Snap-on’s product line in its core dealer network solutions business.

For segment reporting purposes, the results of operations and assets of Sigmavision, Cognitran and TMB have been included in the Repair Systems & Information Group since the respective acquisition dates, and the results of operations and assets of AutoCrib and Power Hawk have been included in the Commercial & Industrial 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.

Fiscal 2019 as Compared to Fiscal 2018

A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 can be found under “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on the Form 10-K for the fiscal year ended December 28, 2019, which was filed with the SEC on February 13, 2020, and is available on the SEC’s website at www.sec.gov as well as in the “Investors” section of our corporate website at www.snapon.com.

Non-GAAP Measures

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.

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 document to “fiscal 2020” or “2020” refer to the fiscal year ended January 2, 2021; references to “fiscal 2019” or “2019” refer to the fiscal year ended December 28, 2019; and references to “fiscal 2018” or “2018” refer to the fiscal year ended December 29, 2018. References in this document to 2020, 2019 and 2018 year end refer to January 2, 2021, December 28, 2019, and December 29, 2018, respectively.

Snap-on’s 2020 fiscal year contained 53 weeks of operating results with the extra week occurring in the fourth quarter. Snap-on’s 2019 and 2018 fiscal years each contained 52 weeks of operating results. The impact of the additional week of operations in fiscal 2020 was not material to Snap-on’s full year or fourth quarter total revenues or net earnings.


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Impact of COVID-19

As discussed in Part I, Item 1A: Risk Factors, the company faces risks related to outbreaks of infectious diseases, including the ongoing COVID-19 pandemic, which caused disruption and volatility in the global capital markets and authored an economic slowdown. In response to COVID-19, national and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. The challenges posed by the COVID-19 pandemic on the global economy increased significantly in the first quarter of 2020, impacting Snap-on’s sales volumes in most geographies and across a variety of customers, including those in automotive repair. In addition, the impact of economic uncertainty caused by COVID-19 led to an increase in the credit reserve requirements for the company’s financial services portfolio.

During the second quarter of 2020, the COVID-19 pandemic and associated government measures to limit the spread of the virus heavily impacted Snap-on’s sales and earnings and, as anticipated, resulted in substantially lower performance in that period as compared to 2019. The company accommodated its operations to the virus environment, continuing without significant disruption to serve its franchisees and other professional customers as they performed essential work, while taking what it believes to be appropriate measures to ensure the health and safety of its personnel. Snap-on also provided direct assistance to its franchisees as they accommodated the turbulence caused by the virus to enable continued service to their essential technician customers. As a result of these accommodations, the impact of the virus on operations lessened as the year progressed.

The company has invested in offsetting the virus impact, including absorbing temporary closures of certain facilities, wages for quarantined associates, event cancellation fees, as well as other related costs (collectively, “direct COVID-19-related costs” or “direct costs associated with COVID-19”). Snap-on has generally maintained its headcount, manufacturing capacity and product development, in anticipation of the return to pre-COVID-19 demand levels. The company’s supply chain and distribution channels have not been materially impacted by the pandemic, and the company has taken steps to ensure access to raw materials and components, but it cannot provide assurances with respect to the future due to the evolving nature of the pandemic.

The ultimate impact of COVID-19 on our business, results of operations, financial condition and cash flows is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, which are uncertain and cannot be predicted at this time.

Summary of Consolidated Performance

Consolidated net sales of $3,592.5 million in 2020, reflecting a $140.9 million, or 3.8%, decrease in organic sales and $10.9 million of unfavorable foreign currency translation, partially offset by $14.3 million of acquisition-related sales, compared to $3,730.0 million in 2019. The lower sales volume is primarily due to decreased activity in the first half of the year as a result of the initial economic impact associated with the COVID-19 pandemic.

Operating earnings before financial services of $631.9 million in 2020, including $12.5 million of exit and disposal (“restructuring”) charges, $11.9 million of direct costs associated with COVID-19 and $13.1 million of unfavorable foreign currency effects, compared to $716.4 million in 2019, which included an $11.6 million benefit from a legal settlement in a patent-related litigation matter that was being appealed (the “legal settlement”). As a percentage of net sales, operating earnings before financial services of 17.6%, compared to 19.2% last year.

Net earnings attributable to Snap-on in 2020 of $627.0 million, or $11.44 per diluted share, included a $10.3 million, or $0.19 per diluted share, after-tax charge related to restructuring actions. Net earnings attributable to Snap-on in 2019 were $693.5 million, or $12.41 per diluted share and included an $8.7 million, or $0.15 per diluted share, after-tax benefit from the legal settlement.


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

Summary of Segment Performance

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 $1,234.6 million in 2020, reflecting a $115.8 million, or 8.6%, organic sales decline and $3.5 million of unfavorable currency translation, partially offset by $8.2 million of acquisition-related sales, compared to $1,345.7 million in 2019. The organic sales decrease primarily includes a double-digit decline in the segment’s Asia Pacific operations, a high single-digit decrease in sales to customers in critical industries and a low single-digit decline in sales in the segment’s European-based hand tools business. Operating earnings of $153.7 million in 2020, including $6.5 million of direct costs associated with COVID-19, $6.4 million of restructuring charges and $5.8 million of unfavorable foreign currency effects, compared to $188.7 million in 2019.

The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2021:

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 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 custom engineered solutions; and
Continuing to reduce structural and operating costs, as well as improve efficiencies, 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 $1,643.9 million in 2020, reflecting a $32.8 million, or 2.0%, organic sales gain, partially offset by $1.8 million of unfavorable foreign currency translation, compared to $1,612.9 million in 2019. The organic sales increase reflects a low single-digit gain in the U.S. franchise operations, partially offset by a low single-digit decline in the segment’s international operations. Operating earnings of $267.7 million in 2020, including $3.5 million of direct costs associated with COVID-19, $0.6 million of restructuring charges and $5.4 million of unfavorable foreign currency effects, compared to $245.8 million in 2019.

In 2021, the Snap-on Tools Group intends to continue these initiatives, with specific focus on the following:

Continuing to improve franchisee satisfaction, productivity, profitability and commercial health;
Developing new programs and products to expand market coverage, reaching new technician customers and increasing penetration with existing customers;
Increasing investment in new product innovation and development; and
Increasing customer service levels and productivity 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 $1,238.2 million in 2020, reflecting a $97.6 million, or 7.3%, organic sales decline and $4.8 million of unfavorable foreign currency translation, partially offset by $6.1 million of acquisition-related sales, compared to $1,334.5 million in 2019. The organic sales decrease includes double-digit declines in both sales of undercar equipment and in sales to OEM dealerships. Sales of diagnostic and repair information products to independent repair shop owners and managers were essentially flat. Operating earnings of $298.0 million in 2020, including $5.5 million of costs related to restructuring actions, $1.2 million of direct costs associated with COVID-19 and $1.9 million of unfavorable foreign currency effects, compared to $342.7 million in 2019.


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The Repair Systems & Information Group intends to focus on the following strategic priorities in 2021:

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 $349.7 million in 2020 and $337.7 million in 2019. Originations of $1,036.6 million in 2020 increased $4.8 million, or 0.5%, from 2019 levels. Operating earnings from financial services in 2020 of $248.6 million, compared to $245.9 million last year. In 2020, financial services expenses included higher provisions for credit losses related to the company’s adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), and $2.6 million of higher credit reserve requirements associated with the COVID-19 pandemic, which were recorded in the first quarter of 2020. Snap-on continues to grow its financial services portfolio by providing financing for finance and contract receivables originated by our global financial services operations.

Financial Services intends to focus on the following strategic priorities in 2021:

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 $1,008.6 million in 2020 increased $334.0 million from $674.6 million in 2019. The $334.0 million increase is primarily due to $430.2 million from net changes in operating assets and liabilities, partially offset by a $64.8 million decrease in net earnings.

Net cash used by investing activities of $187.8 million in 2020 included additions to finance receivables of $835.0 million, partially offset by collections of $750.3 million, as well as a total of $41.5 million for the acquisitions of Sigmavision and AutoCrib and a $0.2 million working capital adjustment for the 2019 Cognitran acquisition. Net cash used by investing activities of $222.1 million in 2019 included additions to finance receivables of $841.9 million, partially offset by collections of $754.3 million, as well as a total of $38.6 million (net of $1.0 million of cash acquired) for the acquisitions of TMB, Power Hawk and Cognitran. Capital expenditures in 2020 and 2019 totaled $65.6 million and $99.4 million, respectively. Capital expenditures in both years included continued investments related to 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 $84.3 million in 2020 included $243.3 million for dividend payments to shareholders, $187.2 million for repayments of notes payable and other short-term borrowings and $174.3 million for the repurchase of 1,109,000 shares of Snap-on’s common stock. These amounts were partially offset by Snap-on’s sale, on April 27, 2020, of $500 million of unsecured 3.10% notes that mature on May 1, 2050 (the “2050 Notes”) at a discount, from which Snap-on received $489.9 million of net proceeds, reflecting $4.4 million of transaction costs, and $55.8 million of proceeds from stock purchase and option plan exercises. Net cash used by financing activities of $409.4 million in 2019 included $238.4 million for the repurchase of 1,495,000 shares of Snap-on’s common stock and $216.6 million for dividend payments to shareholders, partially offset by $51.4 million of proceeds from stock purchase and option plan exercises and $17.6 million of net proceeds from other short-term borrowings.


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

Results of Operations

2020 vs. 2019

Results of operations for 2020 and 2019 are as follows:


(Amounts in millions)	2020				2019				Change
Net sales	$	3,592.5	100.0	%	$	3,730.0	100.0	%	$	(137.5)	(3.7)	%
Cost of goods sold	(1,844.0)		(51.3)	%	(1,886.0)		(50.6)	%	42.0		2.2	%
Gross profit	1,748.5		48.7	%	1,844.0		49.4	%	(95.5)		(5.2)	%
Operating expenses	(1,116.6)		(31.1)	%	(1,127.6)		(30.2)	%	11.0		1.0	%
Operating earnings before financial services	631.9		17.6	%	716.4		19.2	%	(84.5)		(11.8)	%

Financial services revenue	349.7		100.0	%	337.7		100.0	%	12.0		3.6	%
Financial services expenses	(101.1)		(28.9)	%	(91.8)		(27.2)	%	(9.3)		(10.1)	%
Operating earnings from financial services	248.6		71.1	%	245.9		72.8	%	2.7		1.1	%

Operating earnings	880.5		22.3	%	962.3		23.7	%	(81.8)		(8.5)	%
Interest expense	(54.0)		(1.3)	%	(49.0)		(1.2)	%	(5.0)		(10.2)	%
Other income (expense) – net	8.7		0.2	%	8.8		0.2	%	(0.1)		(1.1)	%
Earnings before income taxes and equity earnings	835.2		21.2	%	922.1		22.7	%	(86.9)		(9.4)	%
Income tax expense	(189.1)		(4.8)	%	(211.8)		(5.2)	%	22.7		10.7	%
Earnings before equity earnings	646.1		16.4	%	710.3		17.5	%	(64.2)		(9.0)	%
Equity earnings, net of tax	0.3		—		0.9		—		(0.6)		(66.7)	%
Net earnings	646.4		16.4	%	711.2		17.5	%	(64.8)		(9.1)	%
Net earnings attributable to noncontrolling interests	(19.4)		(0.5)	%	(17.7)		(0.5)	%	(1.7)		(9.6)	%
Net earnings attributable to Snap-on Inc.	$	627.0	15.9	%	$	693.5	17.0	%	$	(66.5)	(9.6)	%




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

Net sales of $3,592.5 million in 2020, reflecting a $140.9 million, or 3.8%, decrease in organic sales and $10.9 million of unfavorable foreign currency translation, partially offset by $14.3 million of acquisition-related sales, compared to $3,730.0 million in 2019. The lower sales volume is primarily due to decreased activity in the first half of the year as a result of the initial economic impact associated with the COVID-19 pandemic.

Gross profit of $1,748.5 million in 2020, including $7.1 million of restructuring costs, $6.2 million of direct costs associated with COVID-19 and $15.6 million of unfavorable foreign currency effects, compared to $1,844.0 million in 2019. Gross margin (gross profit as a percentage of net sales) of 48.7% in 2020 declined 70 basis points (100 basis points (“bps”) equals 1.0 percent) from last year primarily due to the impact of lower sales volumes, including costs to maintain manufacturing capacity, 20 bps from costs related to restructuring actions outside of the United States, 10 bps of direct costs associated with COVID-19 and 30 bps of unfavorable foreign currency effects. These decreases were partially offset by benefits from the company’s RCI initiatives.

Operating expenses of $1,116.6 million in 2020, including $5.7 million of direct costs associated with COVID-19 and $5.4 million of restructuring charges, compared to $1,127.6 million in 2019, which included the $11.6 million benefit related to the legal settlement. Operating expenses as a percentage of net sales of 31.1% in 2020 increased 90 bps from last year primarily due to lower sales volumes, 30 bps of a non-recurring benefit from the legal settlement in 2019, 20 bps of direct costs associated with COVID-19 and 10 bps of costs from restructuring actions. These items were partially offset by savings from cost containment actions in response to lower sales volumes.


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Operating earnings before financial services of $631.9 million in 2020, including $12.5 million of restructuring charges, $11.9 million of direct costs associated with COVID-19 and $13.1 million of unfavorable foreign currency effects, compared to $716.4 million in 2019, which benefited from the $11.6 million legal settlement. As a percentage of net sales, operating earnings before financial services of 17.6%, including 30 bps of costs from restructuring actions, 30 bps of direct costs associated with COVID-19 and 30 bps of unfavorable foreign currency effects, compared to 19.2% last year, which included 30 bps of a non-recurring benefit from the legal settlement.

Financial services revenue of $349.7 million in 2020 compared to $337.7 million last year. Financial services operating earnings of $248.6 million in 2020, including a $2.6 million charge for higher credit reserve requirements associated with the impact of the COVID-19 pandemic recorded in the first quarter of 2020, and $0.1 million of unfavorable foreign currency effects, compared to $245.9 million last year.

Operating earnings of $880.5 million in 2020, including $12.5 million of restructuring charges, $11.9 million of direct costs associated with COVID-19 and $13.2 million of unfavorable foreign currency effects, compared to $962.3 million last year, which included a benefit from the $11.6 million legal settlement. As a percentage of revenues, operating earnings of 22.3%, including 30 bps of costs from restructuring actions, 30 bps of direct costs associated with COVID-19 and 30 bps of unfavorable foreign currency effects, compared to 23.7% last year, which included 30 bps of a non-recurring benefit from the legal settlement.

Interest expense in 2020 increased $5.0 million from last year. See Note 10 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Other income (expense) – net includes net gains and losses associated with hedging and currency exchange rate transactions, non-service components of net periodic benefit costs, and interest income. See Note 18 to the Consolidated Financial Statements for information on other income (expense) – net.

The effective income tax rate on earnings attributable to Snap-on in 2020 was 23.2%, which included a 10 bps increase related to restructuring actions. The 2019 effective tax rate was 23.4%. See Note 9 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on in 2020 of $627.0 million, or $11.44 per diluted share, included a $10.3 million, or $0.19 per diluted share, after-tax charge related to restructuring actions. Net earnings attributable to Snap-on in 2019 were $693.5 million, or $12.41 per diluted share, and included an $8.7 million, or $0.15 per diluted share, after-tax benefit from the legal settlement.

Exit and Disposal Activities

Snap-on recorded costs for exit and disposal activities outside of the United States of $12.5 million in 2020. Snap-on did not record any costs for exit and disposal activities in 2019. See Note 8 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.

Segment Results

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’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, primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company’s worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s finance subsidiaries.

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


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

Commercial & Industrial Group


(Amounts in millions)	2020				2019				Change
External net sales	$	951.4	77.1	%	$	1,038.2	77.1	%	$	(86.8)	(8.4)	%
Intersegment net sales	283.2		22.9	%	307.5		22.9	%	(24.3)		(7.9)	%
Segment net sales	1,234.6		100.0	%	1,345.7		100.0	%	(111.1)		(8.3)	%
Cost of goods sold	(781.2)		(63.3)	%	(833.8)		(62.0)	%	52.6		6.3	%
Gross profit	453.4		36.7	%	511.9		38.0	%	(58.5)		(11.4)	%
Operating expenses	(299.7)		(24.3)	%	(323.2)		(24.0)	%	23.5		7.3	%
Segment operating earnings	$	153.7	12.4	%	$	188.7	14.0	%	$	(35.0)	(18.5)	%

Segment net sales of $1,234.6 million in 2020, reflecting a $115.8 million, or 8.6%, organic sales decline and $3.5 million of unfavorable currency translation, partially offset by $8.2 million of acquisition-related sales, compared to $1,345.7 million in 2019. The organic sales decrease primarily includes a double-digit decline in the segment’s Asia Pacific operations, a high single-digit decrease in sales to customers in critical industries and a low single-digit decline in sales in the segment’s European-based hand tools business.

Segment gross margin of 36.7% in 2020 declined 130 bps from last year primarily due to the impact of decreased sales volumes, including lower utilization of manufacturing capacity, 60 bps from $6.4 million of costs related to restructuring actions in the segment’s European-based hand tools business, 30 bps for direct COVID-19-related costs and 40 bps of unfavorable foreign currency effects. These items were partially offset by material cost savings and benefits from RCI initiatives.

Segment operating expenses as a percentage of net sales of 24.3% in 2020, including 30 bps of direct costs associated with COVID-19, compared to 24.0% in 2019.

As a result of these factors, segment operating earnings of $153.7 million in 2020, including $6.5 million of direct costs associated with COVID-19, $6.4 million of restructuring charges and $5.8 million of unfavorable foreign currency effects, compared to $188.7 million in 2019. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group of 12.4% in 2020 compared to 14.0% in 2019.

Snap-on Tools Group


(Amounts in millions)	2020				2019				Change
Segment net sales	$	1,643.9	100.0	%	$	1,612.9	100.0	%	$	31.0	1.9	%
Cost of goods sold	(932.1)		(56.7)	%	(914.3)		(56.7)	%	(17.8)		(1.9)	%
Gross profit	711.8		43.3	%	698.6		43.3	%	13.2		1.9	%
Operating expenses	(444.1)		(27.0)	%	(452.8)		(28.1)	%	8.7		1.9	%
Segment operating earnings	$	267.7	16.3	%	$	245.8	15.2	%	$	21.9	8.9	%

Segment net sales of $1,643.9 million in 2020, reflecting a $32.8 million, or 2.0%, organic sales gain, partially offset by $1.8 million of unfavorable foreign currency translation, compared to $1,612.9 million in 2019. The organic sales increase reflects a low single-digit gain in the U.S. franchise operations, which more than overcame the impacts of the ongoing COVID-19 pandemic, partially offset by a low single-digit decline in the segment’s international operations.

Segment gross margin in 2020 of 43.3%, including 30 bps of unfavorable foreign currency effects, was unchanged from last year.

Segment operating expenses as a percentage of net sales of 27.0% in 2020 improved 110 bps from last year primarily due to savings from cost containment actions.

As a result of these factors, segment operating earnings of $267.7 million in 2020, including $3.5 million of direct costs associated with COVID-19, $0.6 million of restructuring charges and $5.4 million of unfavorable foreign currency effects, compared to $245.8 million in 2019. Operating margin for the Snap-on Tools Group of 16.3% in 2020 compared to 15.2% last year.


34			SNAP-ON INCORPORATED

Repair Systems & Information Group


(Amounts in millions)	2020				2019				Change
External net sales	$	997.2	80.5	%	$	1,078.9	80.8	%	$	(81.7)	(7.6)	%
Intersegment net sales	241.0		19.5	%	255.6		19.2	%	(14.6)		(5.7)	%
Segment net sales	1,238.2		100.0	%	1,334.5		100.0	%	(96.3)		(7.2)	%
Cost of goods sold	(654.9)		(52.9)	%	(701.0)		(52.5)	%	46.1		6.6	%
Gross profit	583.3		47.1	%	633.5		47.5	%	(50.2)		(7.9)	%
Operating expenses	(285.3)		(23.0)	%	(290.8)		(21.8)	%	5.5		1.9	%
Segment operating earnings	$	298.0	24.1	%	$	342.7	25.7	%	$	(44.7)	(13.0)	%

Segment net sales of $1,238.2 million in 2020, reflecting a $97.6 million, or 7.3%, organic sales decline and $4.8 million of unfavorable foreign currency translation, partially offset by $6.1 million of acquisition-related sales, compared to $1,334.5 million in 2019. The organic sales decrease includes double-digit declines in both sales of undercar equipment and in sales to OEM dealerships. Sales of diagnostic and repair information products to independent repair shop owners and managers were essentially flat.

Segment gross margin in 2020 of 47.1%, including 10 bps from $0.7 million of costs from restructuring actions in Europe and 10 bps of unfavorable foreign currency effects, declined 40 bps from last year.

Segment operating expenses as a percentage of net sales of 23.0% in 2020 increased 120 bps from last year primarily due to the impact of lower sales volumes and 30 bps related to $4.8 million of costs from restructuring actions, partially offset by savings from cost containment and RCI initiatives.

As a result of these factors, segment operating earnings of $298.0 million in 2020, including $5.5 million of costs related to restructuring actions, $1.2 million of direct costs associated with COVID-19 and $1.9 million of unfavorable foreign currency effects, compared to $342.7 million last year. Operating margin for the Repair Systems & Information Group was 24.1% in 2020 compared to 25.7% in 2019.

Financial Services


(Amounts in millions)	2020				2019				Change
Financial services revenue	$	349.7	100.0	%	$	337.7	100.0	%	$	12.0	3.6	%
Financial services expenses	(101.1)		(28.9)	%	(91.8)		(27.2)	%	(9.3)		(10.1)	%
Segment operating earnings	$	248.6	71.1	%	$	245.9	72.8	%	$	2.7	1.1	%

Financial services revenue of $349.7 million in 2020 increased $12.0 million, or 3.6%, from last year, primarily reflecting $13.9 million of higher revenue as a result of growth of the company’s financial services portfolio, partially offset by $1.9 million of decreased revenue from lower average portfolio yields. In 2020 and 2019, the respective average yields on finance receivables were 17.7% and 17.6%, and the respective average yields on contract receivables were 8.5% and 9.1%. The lower yield on contract receivables in 2020 includes the impact of business operation support loans provided to franchisees in the second quarter of 2020 in response to the COVID-19 environment. Financial Services continues to work closely with franchisees and customers to support those adversely impacted by the ongoing COVID-19 pandemic. Originations of $1,036.6 million in 2020 increased $4.8 million, or 0.5%, from 2019 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as expenses 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 in 2020 increased $9.3 million from last year primarily due to increases in the provisions for credit losses including the company’s adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), $2.6 million of higher credit reserve requirements associated with the COVID-19 pandemic, recorded in the first quarter of 2020, as well as higher variable compensation and other costs. As a percentage of the average financial services portfolio, financial services expenses were 4.6% and 4.3% in 2020 and 2019, respectively.

Financial services operating earnings of $248.6 million in 2020, including $0.1 million of unfavorable foreign currency effects, increased $2.7 million, or 1.1%, from 2019 levels.

See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services.


			2020 ANNUAL REPORT			35



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

Corporate

Snap-on’s general corporate expenses in 2020 of $87.5 million compared to $60.8 million last year, which included an $11.6 million non-recurring benefit from the legal settlement recorded in the first quarter of 2019. The year-over-year increase in general corporate expenses primarily reflects higher variable compensation, brand building and other costs.

Fourth Quarter

Results of operations for the fourth quarters of 2020 and 2019 are as follows:


	Fourth Quarter
(Amounts in millions)	2020				2019				Change
Net sales	$	1,074.4	100.0	%	$	955.2	100.0	%	$	119.2	12.5	%
Cost of goods sold	(558.2)		(52.0)	%	(504.7)		(52.8)	%	(53.5)		(10.6)	%
Gross profit	516.2		48.0	%	450.5		47.2	%	65.7		14.6	%
Operating expenses	(300.0)		(27.9)	%	(279.1)		(29.3)	%	(20.9)		(7.5)	%
Operating earnings before financial services	216.2		20.1	%	171.4		17.9	%	44.8		26.1	%

Financial services revenue	93.4		100.0	%	83.9		100.0	%	9.5		11.3	%
Financial services expenses	(24.9)		(26.7)	%	(21.7)		(25.9)	%	(3.2)		(14.7)	%
Operating earnings from financial services	68.5		73.3	%	62.2		74.1	%	6.3		10.1	%

Operating earnings	284.7		24.4	%	233.6		22.5	%	51.1		21.9	%
Interest expense	(15.4)		(1.3)	%	(12.1)		(1.2)	%	(3.3)		(27.3)	%
Other income (expense) – net	2.4		0.2	%	2.4		0.2	%	—		—
Earnings before income taxes and equity earnings	271.7		23.3	%	223.9		21.5	%	47.8		21.3	%
Income tax expense	(58.2)		(5.0)	%	(48.9)		(4.7)	%	(9.3)		(19.0)	%
Earnings before equity earnings	213.5		18.3	%	175.0		16.8	%	38.5		22.0	%
Equity earnings, net of tax	0.3		—		—		—		0.3		—
Net earnings	213.8		18.3	%	175.0		16.8	%	38.8		22.2	%
Net earnings attributable to noncontrolling interests	(4.9)		(0.4)	%	(4.4)		(0.4)	%	(0.5)		(11.4)	%
Net earnings attributable to Snap-on Inc.	$	208.9	17.9	%	$	170.6	16.4	%	$	38.3	22.5	%


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 $1,074.4 million in the fourth quarter of 2020, reflecting a $102.1 million, or 10.6%, organic sales gain, $7.5 million of acquisition-related sales and $9.6 million of favorable foreign currency translation, compared to $955.2 million in 2019.

Gross profit of $516.2 million in the fourth quarter of 2020, including $0.9 million of direct costs associated with COVID-19 and $1.5 million of favorable foreign currency effects, compared to $450.5 million last year. Gross margin of 48.0% in the quarter improved 80 bps from 2019 primarily due to the impact of higher sales volumes and benefits from the company’s RCI initiatives, partially offset by 30 bps of unfavorable foreign currency effects.

Operating expenses of $300.0 million in the fourth quarter of 2020, including $1.9 million of direct costs associated with COVID-19, $1.0 million of restructuring charges in Europe and $3.0 million of unfavorable foreign currency effects, compared to $279.1 million in the fourth quarter of 2019. Operating expenses as a percentage of net sales of 27.9% in the quarter improved 140 bps from last year primarily due to the effects of higher sales volumes.

Operating earnings before financial services of $216.2 million in the fourth quarter of 2020, including $2.8 million of direct costs associated with COVID-19, $1.0 million of restructuring costs and $1.5 million of unfavorable foreign currency effects, compared to $171.4 million last year. As a percentage of net sales, operating earnings before financial services of 20.1%, including 30 bps of direct costs associated with COVID-19, 10 bps of costs from restructuring actions and 30 bps of unfavorable foreign currency effects in the quarter, improved 220 bps compared to 17.9% last year.


36			SNAP-ON INCORPORATED

Financial services revenue of $93.4 million in the fourth quarter of 2020 compared to $83.9 million in 2019. Financial services operating earnings of $68.5 million in the fourth quarter of 2020, including $0.2 million of favorable foreign currency effects, compared to $62.2 million last year.

Operating earnings of $284.7 million in the fourth quarter of 2020, including $2.8 million of direct costs associated with COVID-19, $1.0 million of restructuring charges and $1.3 million of unfavorable foreign currency effects, compared to $233.6 million last year. As a percentage of revenues, operating earnings of 24.4% in the quarter, including 20 bps of direct costs associated with COVID-19, 10 bps of costs from restructuring actions and 30 bps of unfavorable foreign currency effects, compared to 22.5% last year.

Interest expense in the fourth quarter of 2020 increased $3.3 million from last year. See Note 10 to the Consolidated Financial Statements for information on Snap-on’s debt and credit facilities.

Snap-on’s fourth quarter 2020 effective income tax rate on earnings attributable to Snap-on was 21.8%, which included a 10 bps increase related to restructuring actions, compared to 22.3% in 2019. See Note 9 to the Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on in the fourth quarter of 2020 of $208.9 million, or $3.82 per diluted share, included a $1.0 million, or $0.02 per diluted share, after-tax charge related to restructuring actions. Net earnings attributable to Snap-on in the fourth quarter of 2019 were $170.6 million, or $3.08 per diluted share.

Exit and Disposal Activities

Snap-on recorded costs for exit and disposal activities in Europe of $1.0 million in the three months ended January 2, 2021. Snap-on did not record any exit and disposal costs for the three months ended December 28, 2019. See Note 8 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.

Segment Results

Commercial & Industrial Group


	Fourth Quarter
(Amounts in millions)	2020				2019				Change
External net sales	$	284.2	78.0	%	$	268.7	76.1	%	$	15.5	5.8	%
Intersegment net sales	80.2		22.0	%	84.2		23.9	%	(4.0)		(4.8)	%
Segment net sales	364.4		100.0	%	352.9		100.0	%	11.5		3.3	%
Cost of goods sold	(226.6)		(62.2)	%	(227.5)		(64.5)	%	0.9		0.4	%
Gross profit	137.8		37.8	%	125.4		35.5	%	12.4		9.9	%
Operating expenses	(81.6)		(22.4)	%	(80.4)		(22.7)	%	(1.2)		(1.5)	%
Segment operating earnings	$	56.2	15.4	%	$	45.0	12.8	%	$	11.2	24.9	%

Segment net sales of $364.4 million in the fourth quarter of 2020 increased $11.5 million, or 3.3%, from 2019 levels, including $7.5 million of acquisition-related sales and $6.5 million of favorable foreign currency translation, partially offset by a $2.5 million, or 0.7%, organic sales decline. The organic sales decrease primarily includes a mid single-digit decline in the segment’s Asia Pacific operations and a low single-digit decline in sales to customers in critical industries, partially offset by a double-digit increase in sales in the segment’s European-based hand tools business.

Segment gross margin in the fourth quarter of 2020 of 37.8% improved 230 bps from last year primarily due to increased sales in higher gross margin businesses and benefits from the segment’s RCI initiatives. These items were partially offset by 20 bps of direct costs associated with COVID-19 and 60 bps of unfavorable foreign currency effects.

Segment operating expenses as a percentage of net sales of 22.4% in the fourth quarter improved 30 bps as compared to last year.


			2020 ANNUAL REPORT			37



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

As a result of these factors, segment operating earnings of $56.2 million in the fourth quarter of 2020, including $1.0 million of direct costs associated with COVID-19 and $1.3 million of unfavorable foreign currency effects, increased $11.2 million from 2019 levels. Operating margin for the Commercial & Industrial Group of 15.4% in the quarter compared to 12.8% last year.

Snap-on Tools Group


	Fourth Quarter
(Amounts in millions)	2020				2019				Change
Segment net sales	$	494.9	100.0	%	$	411.7	100.0	%	$	83.2	20.2	%
Cost of goods sold	(282.8)		(57.1)	%	(246.3)		(59.8)	%	(36.5)		(14.8)	%
Gross profit	212.1		42.9	%	165.4		40.2	%	46.7		28.2	%
Operating expenses	(118.5)		(24.0)	%	(111.1)		(27.0)	%	(7.4)		(6.7)	%
Segment operating earnings	$	93.6	18.9	%	$	54.3	13.2	%	$	39.3	72.4	%

Segment net sales of $494.9 million in the fourth quarter of 2020, reflecting an $81.0 million, or 19.6%, organic sales increase and $2.2 million of favorable foreign currency translation, compared to $411.7 million in the fourth quarter of 2019. The organic sales increase reflects a double-digit gain in both the segment’s U.S. and international operations.

Segment gross margin in the fourth quarter of 42.9% improved 270 bps from last year primarily due to higher sales volumes and benefits from the company’s RCI initiatives.

Segment operating expenses as a percentage of net sales of 24.0% in the fourth quarter improved 300 bps from last year primarily due to the impact of higher sales volumes and savings from cost containment actions.

As a result of these factors, segment operating earnings of $93.6 million in the fourth quarter of 2020, including $1.2 million of direct costs associated with COVID-19, increased $39.3 million from 2019 levels. Operating margin for the Snap-on Tools Group of 18.9% in the quarter compared to 13.2% last year.

Repair Systems & Information Group


	Fourth Quarter
(Amounts in millions)	2020				2019				Change
External net sales	$	295.3	81.8	%	$	274.8	82.0	%	$	20.5	7.5	%
Intersegment net sales	65.8		18.2	%	60.2		18.0	%	5.6		9.3	%
Segment net sales	361.1		100.0	%	335.0		100.0	%	26.1		7.8	%
Cost of goods sold	(194.8)		(53.9)	%	(175.3)		(52.3)	%	(19.5)		(11.1)	%
Gross profit	166.3		46.1	%	159.7		47.7	%	6.6		4.1	%
Operating expenses	(76.3)		(21.2)	%	(72.5)		(21.7)	%	(3.8)		(5.2)	%
Segment operating earnings	$	90.0	24.9	%	$	87.2	26.0	%	$	2.8	3.2	%

Segment net sales of $361.1 million in the fourth quarter of 2020, reflecting a $23.7 million, or 7.0%, organic sales increase and $2.4 million of favorable foreign currency translation, compared to $335.0 million in the fourth quarter of 2019. The organic sales increase includes a double-digit gain in sales to OEM dealerships and a high single-digit increase in sales of diagnostic and repair information products to independent repair shop owners and managers, partially offset by a low single-digit decrease in sales of undercar equipment.

Segment gross margin in the fourth quarter of 46.1%, including 10 bps of unfavorable foreign currency effects, decreased 160 bps from last year primarily due to the impact of higher sales in lower gross margin businesses.

Segment operating expenses as a percentage of net sales of 21.2% in the fourth quarter improved 50 bps from last year primarily due to the impact of higher sales volumes, partially offset by 30 bps related to $1.0 million of costs from restructuring actions in Europe and 10 bps of unfavorable foreign currency effects.


38			SNAP-ON INCORPORATED

As a result of these factors, segment operating earnings of $90.0 in the fourth quarter of 2020, including $1.0 million of costs related to restructuring actions, $0.2 million of direct costs associated with COVID-19 and $0.2 million of unfavorable foreign currency effects, compared to $87.2 million in 2019. Operating margin for the Repair Systems & Information Group of 24.9% in the quarter compared to 26.0% last year.

Financial Services


	Fourth Quarter
(Amounts in millions)	2020				2019				Change
Financial services revenue	$	93.4	100.0	%	$	83.9	100.0	%	$	9.5	11.3	%
Financial services expenses	(24.9)		(26.7)	%	(21.7)		(25.9)	%	(3.2)		(14.7)	%
Segment operating earnings	$	68.5	73.3	%	$	62.2	74.1	%	$	6.3	10.1	%

Financial services revenue of $93.4 million in the fourth quarter of 2020 increased $9.5 million, or 11.3%, from last year, primarily reflecting $9.4 million of higher revenue as a result of an additional week of interest income from the 53-week 2020 fiscal year, growth in the company’s financial services portfolio and $0.1 million of increased revenue from higher average portfolio yields. In the fourth quarters of 2020 and 2019, the respective average yields on finance receivables were 17.7% and 17.5%, and the respective average yields on contract receivables were 8.5% and 9.2%. The lower yield on contract receivables in 2020 includes the impact of business operations support loans that were provided to franchisees in the second quarter of 2020 in response to the COVID-19 environment. Originations of $272.4 million in the fourth quarter of 2020 increased $10.0 million, or 3.8%, from 2019 levels.

Financial services expenses in the fourth quarter of 2020 increased $3.2 million from last year primarily due to higher variable compensation and other costs, partially offset by lower provisions for credit losses. As a percentage of the average financial services portfolio, financial services expenses were 1.1% and 1.0% for the fourth quarters of 2020 and 2019, respectively.

Financial services operating earnings of $68.5 million in the fourth quarter of 2020, including $0.2 million of favorable foreign currency effects, increased $6.3 million, or 10.1%, from 2019 levels.

See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services.

Corporate

Snap-on’s fourth quarter 2020 general corporate expenses of $23.6 million compared to $15.1 million last year. The year-over-year increase in general corporate expenses is primarily due to higher stock-based and variable compensation costs.

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’s non-financial services (“Operations”) and “Financial Services” businesses.

The supplemental Operations data reflects the results of operations and financial position of Snap-on’s tools, 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.


			2020 ANNUAL REPORT			39



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

Non-GAAP Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2020, 2019 and 2018 is as follows:


	Operations*						Financial Services
(Amounts in millions)	2020		2019		2018		2020		2019		2018
Net sales	$	3,592.5	$	3,730.0	$	3,740.7	$	—	$	—	$	—
Cost of goods sold	(1,844.0)		(1,886.0)		(1,870.7)		—		—		—
Gross profit	1,748.5		1,844.0		1,870.0		—		—		—
Operating expenses	(1,116.6)		(1,127.6)		(1,144.0)		—		—		—
Operating earnings before financial services	631.9		716.4		726.0		—		—		—

Financial services revenue	—		—		—		349.7		337.7		329.7
Financial services expenses	—		—		—		(101.1)		(91.8)		(99.6)
Operating earnings from financial services	—		—		—		248.6		245.9		230.1

Operating earnings	631.9		716.4		726.0		248.6		245.9		230.1
Interest expense	(53.8)		(48.8)		(50.1)		(0.2)		(0.2)		(0.3)
Intersegment interest income (expense) – net	68.5		70.5		69.7		(68.5)		(70.5)		(69.7)
Other income (expense) – net	8.5		8.9		4.1		0.2		(0.1)		0.1
Earnings before income taxes and equity earnings	655.1		747.0		749.7		180.1		175.1		160.2
Income tax expense	(142.7)		(166.6)		(173.1)		(46.4)		(45.2)		(41.3)
Earnings before equity earnings	512.4		580.4		576.6		133.7		129.9		118.9
Financial services – net earnings attributable to Snap-on	133.7		129.9		118.9		—		—		—
Equity earnings, net of tax	0.3		0.9		0.7		—		—		—
Net earnings	646.4		711.2		696.2		133.7		129.9		118.9
Net earnings attributable to noncontrolling interests	(19.4)		(17.7)		(16.3)		—		—		—
Net earnings attributable to Snap-on	$	627.0	$	693.5	$	679.9	$	133.7	$	129.9	$	118.9

Snap-on with Financial Services on the equity method.


40			SNAP-ON INCORPORATED

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2020 and 2019 year end is as follows:


	Operations*				Financial Services
(Amounts in millions)	2020		2019		2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	923.2	$	184.4	$	0.2	$	0.1
Intersegment receivables	14.6		14.2		0.2		—
Trade and other accounts receivable – net	639.7		693.5		1.0		1.1
Finance receivables – net	—		—		530.2		530.1
Contract receivables – net	7.0		6.8		105.5		93.9
Inventories – net	746.5		760.4		—		—
Prepaid expenses and other assets	131.1		111.8		7.8		7.0
Total current assets	2,462.1		1,771.1		644.9		632.2

Property and equipment – net	524.4		519.8		1.8		1.7
Operating lease right-of-use assets	49.7		52.9		2.2		2.7
Investment in Financial Services	349.8		340.5		—		—
Deferred income tax assets	27.6		32.7		22.7		19.6
Intersegment long-term notes receivable	316.9		755.5		—		—
Long-term finance receivables – net	—		—		1,136.3		1,103.5
Long-term contract receivables – net	12.4		16.0		362.3		344.1
Goodwill	982.4		913.8		—		—
Other intangibles – net	260.8		243.9		—		—
Other assets	103.9		73.0		0.1		0.2
Total assets	$	5,090.0	$	4,719.2	$	2,170.3	$	2,104.0

Snap-on with Financial Services on the equity method.


			2020 ANNUAL REPORT			41



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)	2020		2019		2020		2019
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	18.5	$	202.9	$	250.0	$	—
Accounts payable	222.3		197.3		0.6		1.2
Intersegment payables	—		—		14.8		14.2
Accrued benefits	59.7		53.2		—		0.1
Accrued compensation	87.2		52.2		2.7		1.7
Franchisee deposits	78.4		68.2		—		—
Other accrued liabilities	418.8		353.7		35.9		25.7
Total current liabilities	884.9		927.5		304.0		42.9

Long-term debt and intersegment long-term debt	—		—		1,499.0		1,702.4
Deferred income tax liabilities	70.4		69.3		—		—
Retiree health care benefits	34.5		33.6		—		—
Pension liabilities	127.1		122.1		—		—
Operating lease liabilities	31.6		34.5		2.4		3.0
Other long-term liabilities	94.9		101.4		15.1		15.2
Total liabilities	1,243.4		1,288.4		1,820.5		1,763.5

Total shareholders’ equity attributable to Snap-on	3,824.9		3,409.1		349.8		340.5
Noncontrolling interests	21.7		21.7		—		—
Total equity	3,846.6		3,430.8		349.8		340.5
Total liabilities and equity	$	5,090.0	$	4,719.2	$	2,170.3	$	2,104.0

Snap-on with Financial Services on the equity method.


42			SNAP-ON INCORPORATED

Liquidity and Capital Resources

Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. Snap-on believes that its cash from operations and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for scheduled debt repayments, 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, if and as they arise.

Due to Snap-on’s credit rating over the years, external funds have been available at an acceptable cost. As of the close of business on February 5, 2021, Snap-on’s long-term debt and commercial paper were rated, respectively, A2 and P-1 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, based on current macroeconomic conditions resulting from the ongoing uncertainty caused by the COVID-19 pandemic, 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 2020 year end, working capital (current assets less current liabilities) of $1,918.1 million increased $485.2 million from $1,432.9 million as of 2019 year end primarily as a result of other net changes in working capital discussed below.

The following represents the company’s working capital position as of 2020 and 2019 year end:


(Amounts in millions)	2020		2019
Cash and cash equivalents	$	923.4	$	184.5
Trade and other accounts receivable – net	640.7		694.6
Finance receivables – net	530.2		530.1
Contract receivables – net	112.5		100.7
Inventories – net	746.5		760.4
Prepaid expenses and other assets	129.7		110.2
Total current assets	3,083.0		2,380.5

Notes payable and current maturities of long-term debt	(268.5)		(202.9)
Accounts payable	(222.9)		(198.5)
Other current liabilities	(673.5)		(546.2)
Total current liabilities	(1,164.9)		(947.6)
Working capital	$	1,918.1	$	1,432.9

Cash and cash equivalents of $923.4 million as of 2020 year end increased $738.9 million from 2019 year-end levels primarily due to: (i) $1,008.6 million of cash generated from operations; (ii) $750.3 million of cash from collections of finance receivables; (iii) $489.9 million of net proceeds from the 2050 Notes; and (iv) $55.8 million of cash proceeds from stock purchase and option plan exercises. These increases in cash and cash equivalents were partially offset by: (i) the funding of $835.0 million of new finance receivables; (ii) dividend payments to shareholders of $243.3 million; (iii) $187.2 million of net repayments on other short-term borrowings; (iv) the repurchase of 1,109,000 shares of the company’s common stock for $174.3 million; (v) the funding of $65.6 million of capital expenditures; and (vi) the funding of $41.5 million for acquisitions.

Of the $923.4 million of cash and cash equivalents as of 2020 year end, $262.7 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. Although the Tax Cuts and Jobs Act (“Tax Act”) generally eliminated U.S. federal taxation on dividends from foreign subsidiaries, such dividends may still be subject to state income taxation and foreign withholding taxes. 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 can be accomplished in a tax efficient manner.


			2020 ANNUAL REPORT			43



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

Trade and other accounts receivable – net of $640.7 million as of 2020 year end decreased $53.9 million from 2019 year-end levels primarily due to the impact of lower sales volume as a result of the COVID-19 pandemic and collections of amounts due, partially offset by $5.1 million of receivables related to acquisitions and $13.0 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 64 days and 67 days at the respective 2020 and 2019 year ends.

The current portions of net finance and contract receivables of $642.7 million as of 2020 year end compared to $630.8 million at 2019 year end. The long-term portions of net finance and contract receivables of $1,511.0 million as of 2020 year end compared to $1,463.6 million at 2019 year end. The combined $59.3 million increase in net current and long-term finance and contract receivables over 2019 year-end levels is primarily due to continued growth of the company’s financial services portfolio and $12.0 million of foreign currency translation.

Inventories – net of $746.5 million as of 2020 year end decreased $13.9 million from 2019 year-end levels primarily due to $40.1 million of inventory reductions, partially offset by $3.0 million of inventories related to acquisitions and $23.2 million of foreign currency translation. As of 2020 and 2019 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 2.4 turns and 2.6 turns, respectively. Inventories accounted for using the first-in, first-out (“FIFO”) method as of 2020 and 2019 year end approximated 57% and 58% of total inventories, respectively. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve was $84.0 million and $84.5 million at 2020 and 2019 year end, respectively.

Notes payable and current maturities of long-term debt of $268.5 million as of 2020, consisted of $250.0 million of unsecured 6.125% notes that mature on September 1, 2021 (the “2021 Notes”) and $18.5 million of other notes. Notes payable of $202.9 million as of 2019 year end consisted of $193.6 million of commercial paper borrowings and $9.3 million of other notes.

Average notes payable outstanding, including commercial paper and short-term credit facility borrowings, were $68.4 million and $175.0 million in 2020 and 2019, respectively. The 2020 weighted-average interest rate on such borrowings of 2.98% compared with 2.87% in 2019. Average commercial paper borrowings were $41.0 million and $162.2 million for 2020 and 2019, respectively, and the weighted-average interest rate of 1.53% on such borrowings in 2020 decreased from 2.27% last year. No commercial paper was outstanding as of year-end 2020. Average short-term credit facility borrowings were $13.9 million in 2020 with a weighted-average interest rate of 1.70%. No amounts were outstanding under the short-term credit facility as of year-end 2020 and no amounts were borrowed under the short-term credit facility in 2019. At 2020 year end, the weighted-average interest rate on outstanding notes payable of 8.87% compared with 2.23% at 2019 year end. The 2020 year-end rate increased primarily due to higher local borrowings in emerging markets.

Accounts payable of $222.9 million as of 2020 year end increased $24.4 million from 2019 year-end levels, primarily due to the timing of payments, $1.1 million related to acquisitions and $5.9 million of foreign currency translation.

Other accrued liabilities of $445.5 million as of 2020 year end increased $74.7 million from 2019 year-end levels primarily due to higher tax accruals, $5.2 million related to acquisitions and $8.2 million of foreign currency translation.

Long-term debt of $1,182.1 million as of 2020 year end consisted of: (i) $300.0 million of the unsecured 3.25% notes that mature on March 1, 2027 (the “2027 Notes”); (ii) $400.0 million of unsecured 4.10% notes that mature on March 1, 2048 (“the 2048 Notes”); and (iii) $500.0 million of the 2050 Notes, partially offset by $17.9 million from the net effects of debt amortization costs.


44			SNAP-ON INCORPORATED

Snap-on has an $800 million multi-currency revolving credit facility that terminates on September 16, 2024 (the “Credit Facility”); no amounts were outstanding under the Credit Facility as of January 2, 2021. Borrowings under the Credit Facility bear interest at varying rates based on either: (i) Snap-on’s then-current, long-term debt ratings; or (ii) Snap-on’s then-current ratio of consolidated debt net of certain cash adjustments (“Consolidated Net Debt”) to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the “Consolidated Net Debt to EBITDA Ratio”). 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 to the sum of Consolidated Net Debt plus total equity and less accumulated other comprehensive income or loss (the “Leverage Ratio”); or (ii) a Consolidated Net Debt to EBITDA Ratio not greater than 3.50 to 1.00. Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), elect to increase the maximum Leverage Ratio to 0.65 to 1.00 and/or increase the maximum Consolidated Net Debt to EBITDA Ratio to 4.00 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As of January 2, 2021, the company’s actual ratios of 0.12 and 0.57 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 2020 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; however, it is continuing to monitor the impact of the COVID-19 pandemic on its business and the credit and financial markets. Snap-on manages its aggregate short-term debt borrowings so as not to exceed its availability under the 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, if it believes conditions are favorable, it may take advantage of such conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include scheduled debt payments, including the maturity of the 2021 Notes, 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, if and as they arise. Snap-on intends to make contributions of $9.2 million to its foreign pension plans and $2.2 million to its domestic pension plans in 2021, as required by law. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2021.

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 $73.3 million in 2020 and $70.1 million in 2019. Amortization expense was $23.4 million in 2020 and $22.3 million in 2019. See Note 7 to the Consolidated Financial Statements for information on goodwill and other intangible assets.


			2020 ANNUAL REPORT			45



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

Investing Activities

Net cash used by investing activities of $187.8 million in 2020 included additions to finance receivables of $835.0 million, partially offset by collections of $750.3 million. Net cash used by investing activities of $222.1 million in 2019 included additions to finance receivables of $841.9 million, partially offset by collections of $754.3 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, diagnostic and equipment products on an extended-term payment plan, generally with average payment terms of approximately four years.

Net cash used by investing activities in 2020 also included a total of $41.5 million for the acquisitions of Sigmavision and AutoCrib and a $0.2 million working capital adjustment for the 2019 Cognitran acquisition. Net cash used by investing activities in 2019 included a total of $38.6 million (net of $1.0 million of cash acquired) for the acquisitions of TMB, Power Hawk and Cognitran. See Note 3 to the Consolidated Financial Statements for information on acquisitions.

Capital expenditures in 2020 and 2019 totaled $65.6 million and $99.4 million, respectively. The lower capital spending as compared to the prior year was a result of the decreased activity in response to the COVID-19 pandemic, particularly in the second and third quarters of 2020. Capital expenditures in both years included continued investments related to the company’s execution of its strategic growth initiatives and Value Creation Processes. The company also invested in: (i) new product, efficiency, safety and cost reduction initiatives that are intended to expand and improve its manufacturing and distribution 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 enhancement of the company’s global enterprise resource planning (ERP) management information systems; and (iv) a consolidated warehouse facility for the company in Pleasant Prairie, Wisconsin. 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 2021.

Financing Activities

Net cash used by financing activities of $84.3 million in 2020 included Snap-on’s sale, on April 27, 2020, of $500 million of the 2050 Notes at a discount, from which Snap-on received $489.9 million of net proceeds, reflecting $4.4 million of transaction costs, partially offset by repayments of notes payable and other short-term borrowings of $187.2 million. Net cash used by financing activities of $409.4 million in 2019 included net proceeds from other short-term borrowings of $17.6 million.

Proceeds from stock purchase and option plan exercises totaled $55.8 million in 2020 and $51.4 million in 2019. 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 2020, Snap-on repurchased 1,109,000 shares of its common stock for $174.3 million under its previously announced share repurchase programs. As of 2020 year end, Snap-on had remaining availability to repurchase up to an additional $275.7 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 1,495,000 shares of its common stock for $238.4 million in 2019. 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 2021.

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2020 and 2019 totaled $243.3 million and $216.6 million, respectively. On November 6, 2020, the company announced that its Board increased the quarterly cash dividend by 13.9% to $1.23 per share ($4.92 per share annualized). Quarterly dividends in 2020 were $1.23 per share in the fourth quarter and $1.08 per share in the first three quarters ($4.47 per share for the year). Quarterly dividends in 2019 were $1.08 per share in the fourth quarter and $0.95 per share in the first three quarters ($3.93 per share for the year).


	2020			2019
Cash dividends paid per common share	$	4.47		$	3.93
Cash dividends paid as a percentage of prior-year retained earnings	5.1		%	5.1		%

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 2021.


46			SNAP-ON INCORPORATED

Off-Balance-Sheet Arrangements

Except as included below in the section labeled “Contractual Obligations and Commitments” and Note 16 to the Consolidated Financial Statements, the company had no off-balance-sheet arrangements as of 2020 year end.

Contractual Obligations and Commitments

A summary of Snap-on’s future contractual obligations and commitments as of 2020 year end are as follows:


(Amounts in millions)	Total		2021		2022-2023		2024-2025		2026 and thereafter
Contractual obligations:
Notes payable and current maturities of long-term debt	$	268.5	$	268.5	$	—	$	—	$	—
Long-term debt	1,182.1		—		—		—		1,182.1
Interest on fixed rate debt	970.5		51.9		83.3		83.3		752.0
Operating leases	55.7		20.3		25.3		8.9		1.2
Finance leases	10.8		3.0		5.4		2.4		—
Purchase obligations	117.6		113.6		3.8		0.2		—
Total	$	2,605.2	$	457.3	$	117.8	$	94.8	$	1,935.3

Snap-on intends to make contributions of $9.2 million to its foreign pension plans and $2.2 million to its domestic pension plans in 2021, as required by law. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2021. 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 12 and Note 13 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, $9.1 million of unrecognized tax benefits have been excluded from the table above; see Note 9 to the Consolidated Financial Statements for information on income taxes.

Environmental Matters

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

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

New Accounting Standards

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


			2020 ANNUAL REPORT			47



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

Critical Accounting Policies and Estimates

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

Allowance for Credit Losses on Finance Receivables: The allowance for credit losses on finance receivables is maintained at a level management believes is adequate to cover expected losses in Snap-on’s finance receivables portfolio as of the reporting date. The allowance represents management’s estimate of the expected losses in the company’s finance receivables portfolio based on ongoing assessments and evaluations of credit losses over the expected contractual life of the receivables portfolio considering collectability, historical loss experience, current conditions and future market changes. Determination of the proper level of allowance requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the expense for credit losses and, as a result, net earnings. The allowance takes into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current and future economic conditions and credit risk characteristics. Some of these factors are influenced by items such as the customers’ financial condition, past payment experience, 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 receivables portfolio, create uncertainty and could result in changes to both the allowance for credit losses and expense for credit losses.

Management utilizes established policies and procedures in an effort to ensure the estimates and assumptions are well controlled, reviewed and consistently applied. As of January 2, 2021, the ratio of the allowance for credit losses to finance receivables was 4.38%. In 2020, financial services expenses included higher provisions for credit losses related to the company’s adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). As of December 28, 2019, the allowance ratio was 3.65%. While management believes it exercises prudent judgment and applies reasonable assumptions in establishing its estimates for allowances for finance 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 calculation. For reference, a 100 bps increase in the allowance ratios for finance receivables as of January 2, 2021, would have increased Snap-on’s 2020 expense for credit losses and related allowance for credit losses by approximately $17.5 million.

For additional information on Snap-on’s allowances for credit losses, see Note 1 and Note 4 to the Consolidated Financial Statements.

Impairment of Goodwill: Goodwill is 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 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.


48			SNAP-ON INCORPORATED

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 2020 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the reporting units’ projections of future operating results and cash flows and replicates how market participants would value the company’s reporting units in an orderly transaction.

In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the company would then record an impairment charge based on the excess of a reporting units carrying amount over its fair value.

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 is 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 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 in the second quarter of 2020, which did not result in any impairment. As of 2020 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 2020 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 7 to the Consolidated Financial Statements for further information about goodwill.

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 2020, 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 7.25% 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 2020 year end, Snap-on’s domestic pension plans’ assets comprised approximately 86% of the company’s worldwide pension plan assets.

Based on forward-looking capital market expectations, Snap-on selected an expected return on plan assets assumption for its U.S. pension plans of 6.75%, a decrease of 50 bps from 2020, to be used in determining pension expense for 2021. 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.


			2020 ANNUAL REPORT			49



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

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 2020 domestic pension expense by approximately $5.9 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 2020 and 2019 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 2.7% weighted-average discount rate for Snap-on’s domestic pension plans as of 2020 year end (compared to 3.4% as of 2019 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 2020 domestic pension expense and projected benefit obligation by approximately $4.5 million and $82.4 million, respectively. As of 2020 year end, Snap-on’s domestic projected benefit obligation comprised approximately 82% of Snap-on’s worldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 1.7% (compared to 2.1% as of 2019 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 2020 foreign pension expense and projected benefit obligation by approximately $1.9 million and $32.3 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 2021 net periodic benefit cost, Snap-on is using weighted-average discount rates for its domestic and foreign pension plans of 2.7% and 1.7%, respectively, and an expected return on plan assets for its domestic pension plans of 6.75%. The expected returns on plan assets for foreign pension plans ranged from 1.0% to 5.4% as of 2020 year end. Due to the net change in these two key assumptions, in addition to the overall benefit plan status, pension expense in 2021 is expected to decrease. Other factors, such as changes in plan demographics and discretionary contributions, may further increase or decrease pension expense in 2021. See Note 12 to the Consolidated Financial Statements for further information on pension plans.

Outlook

COVID-19 spread across the globe during 2020 and continues to impact economic activity worldwide into 2021. Snap-on is accommodating to the related risks while safely pursuing opportunities in the COVID-19 environment. In 2021, the company believes there will be ongoing advancements against the virus-related turbulence, and that the trajectory of progress may be uncertain due to the evolving nature and duration of the pandemic.

Snap-on does expect to make continued progress in 2021 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, it is projected that capital expenditures in 2021 will be in a range of $90 million to $100 million. Snap-on continues to respond to global macroeconomic challenges through its RCI process and other cost reduction initiatives.

Snap-on currently anticipates that its full year 2021 effective income tax rate will be in the range of 23% to 24%.


50			SNAP-ON INCORPORATED

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