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EX-32.1 - SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Snap-on Incdex321.htm
EX-31.2 - SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Snap-on Incdex312.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Snap-on Incdex311.htm
EX-10.2 - SUPPLEMENTAL RETIREMENT PLAN FOR OFFICERS (AS AMENDED THROUGH JUNE 11, 2010) - Snap-on Incdex102.htm
EX-10.1 - DEFERRED COMPENSATION PLAN (AS AMENDED THROUGH JUNE 11, 2010) - Snap-on Incdex101.htm
EX-32.2 - SECTION 906 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Snap-on Incdex322.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

x

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

For the quarterly period ended July 3, 2010

OR

 

¨

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

For the transition period from                                                                  to            

Commission File Number 1-7724

 

 

LOGO

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   39-0622040
(State of incorporation)   (I.R.S. Employer Identification No.)
2801 80th Street, Kenosha, Wisconsin   53143
(Address of principal executive offices)   (Zip code)

(262) 656-5200

(Registrant’s telephone number, including area code)

 

 

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

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

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

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

Class

     

Outstanding at July 23, 2010

Common Stock, $1.00 par value

    58,094,741 shares

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page
Part I: Financial Information     

Item 1.

      Financial Statements   
   

Condensed Consolidated Statements of Earnings (unaudited) – Three and Six Months Ended July 3, 2010, and July 4, 2009

   3
   

Condensed Consolidated Balance Sheets (unaudited) – July 3, 2010, and January 2, 2010

   4-5
   

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) – Six Months Ended July 3, 2010, and July 4, 2009

   6
   

Condensed Consolidated Statements of Comprehensive Income (unaudited) – Three and Six Months Ended July  3, 2010, and July 4, 2009

   7
   

Condensed Consolidated Statements of Cash Flow (unaudited) – Six Months Ended July 3, 2010, and July 4, 2009

   8
   

Notes to Condensed Consolidated Financial Statements (unaudited)

   9-31

Item 2.

      Management’s Discussion and Analysis of Financial Condition and Results of Operations    32-53

Item 3.

      Quantitative and Qualitative Disclosures About Market Risk    54-55

Item 4.

      Controls and Procedures    55
Part II: Other Information   

Item 1.

      Legal Proceedings    56

Item 2.

      Unregistered Sales of Equity Securities and Use of Proceeds    56

Item 6.

      Exhibits    57
      Signatures    58
      Exhibit Index    59

 

2


Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1: Financial Statements

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Amounts in millions, except per share data)

(Unaudited)

 

     Three Months Ended    Six Months Ended
     July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Net sales

       $     647.6             $     590.0             $     1,269.2             $     1,162.6     

Cost of goods sold

     (343.8)          (336.0)          (677.8)          (649.9)    
                           

Gross profit

     303.8           254.0           591.4           512.7     

Operating expenses

     (224.8)          (200.3)          (440.7)          (404.7)    
                           

Operating earnings before financial services

     79.0           53.7           150.7           108.0     

Financial services revenue

     13.9           25.6           23.6           45.6     

Financial services expenses

     (12.2)          (9.0)          (23.6)          (19.0)    
                           

Operating earnings from financial services

     1.7           16.6           –               26.6     
                           

Operating earnings

     80.7           70.3           150.7           134.6     

Interest expense

     (13.2)          (11.6)          (27.2)          (20.2)    

Other income (expense) – net

     (0.8)          1.1           (0.5)          0.8     
                           

Earnings before income taxes and equity earnings (loss)

     66.7           59.8           123.0           115.2     

Income tax expense

     (20.3)          (17.6)          (39.3)          (35.9)     
                           

Earnings before equity earnings (loss)

     46.4           42.2           83.7           79.3     

Equity earnings (loss), net of tax

     0.5           (0.2)          1.2           (0.1)     
                           

Net earnings

     46.9           42.0           84.9           79.2     

Net earnings attributable to noncontrolling interests

     (1.6)          (4.6)          (2.8)          (7.0)    
                           

Net earnings attributable to Snap-on Incorporated

       $ 45.3             $ 37.4             $ 82.1             $ 72.2     
                           

Net earnings per share attributable to Snap-on Incorporated:

           

Basic

       $ 0.78             $ 0.65             $ 1.42             $ 1.25     

Diluted

     0.78           0.65           1.41           1.25     

Weighted-average shares outstanding:

           

Basic

     58.0           57.7           57.9           57.6     

Effect of dilutive options

     0.3           0.2           0.4           0.3     
                           

Diluted

     58.3           57.9           58.3           57.9     
                           

Dividends declared per common share

       $     0.30             $     0.30             $     0.60             $     0.60     

See Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

 

     July 3,
2010
   January 2,
2010

Assets

     

Current assets

     

Cash and cash equivalents

       $ 430.8             $ 699.4     

Trade and other accounts receivable – net

     407.5           414.4     

Contract receivables – net

     35.6           32.9     

Finance receivables – net

     169.1           122.3     

Inventories – net

     296.5           274.7     

Deferred income tax assets

     74.2           69.5     

Prepaid expenses and other assets

     72.4           62.9     
             

Total current assets

     1,486.1           1,676.1     

Property and equipment

     

Land

     21.1           22.9     

Buildings and improvements

     254.6           250.1     

Machinery, equipment and computer software

     593.3           621.7     
             
     869.0           894.7     

Accumulated depreciation and amortization

     (544.8)          (546.9)    
             

Property and equipment – net

     324.2           347.8     

Deferred income tax assets

     92.1           88.2     

Long-term contract receivables – net

     91.2           70.7     

Long-term finance receivables – net

     278.6           177.9     

Goodwill

     773.1           814.3     

Other intangibles – net

     195.0           206.2     

Other assets

     73.0           66.2     
             

Total assets

       $     3,313.3             $     3,447.4     
             

See Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share data)

(Unaudited)

 

     July 3,
2010
   January 2,
2010

Liabilities and shareholders’ equity

     

Current liabilities

     

Notes payable and current maturities of long-term debt

       $ 13.6             $ 164.7     

Accounts payable

     128.5           119.8     

Accrued benefits

     41.0           48.7     

Accrued compensation

     64.7           64.8     

Franchisee deposits

     35.4           40.5     

Other accrued liabilities

     363.2           301.4     
             

Total current liabilities

     646.4           739.9     

Long-term debt

     909.8           902.1     

Deferred income tax liabilities

     87.9           97.8     

Retiree health care benefits

     58.8           60.7     

Pension liabilities

     262.3           255.9     

Other long-term liabilities

     83.8           85.4     
             

Total liabilities

     2,049.0           2,141.8     
             

Shareholders’ equity

     

Shareholders’ equity attributable to Snap-on Incorporated

     

Preferred stock (authorized 15,000,000 shares of $1 par value; none outstanding)

     –               –         

Common stock (authorized 250,000,000 shares of $1 par value; issued 67,283,366 and 67,265,454 shares)

     67.3           67.3     

Additional paid-in capital

     163.6           154.4     

Retained earnings

     1,576.0           1,528.9     

Accumulated other comprehensive loss

     (170.5)          (68.4)    

Treasury stock at cost (9,192,525 and 9,520,405 shares)

     (387.7)          (392.2)    
             

Total shareholders’ equity attributable to Snap-on Incorporated

     1,248.7           1,290.0     

Noncontrolling interests

     15.6           15.6     
             

Total shareholders’ equity

     1,264.3           1,305.6     
             

Total liabilities and shareholders’ equity

       $     3,313.3             $     3,447.4     
             

See Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Amounts in millions, except per share data)

(Unaudited)

The following summarizes the changes in total shareholders’ equity for the six month period ending July 3, 2010:

 

     Shareholders’ equity attributable to Snap-on Incorporated          
            
(Amounts in millions, except per share data)   

Common

Stock

  

Additional

Paid-in

Capital

  

Retained

Earnings

   Accumulated
Other
Comprehensive
Income (Loss)
  

Treasury

Stock

   Noncontrolling
Interests
  

Total

Shareholders’

Equity

      

Balance at January 2, 2010

     $ 67.3         $ 154.4         $ 1,528.9         $ (68.4)        $ (392.2)        $     15.6         $     1,305.6   

Net earnings for the six months ended July 3, 2010 (excludes $0.3 million of net loss attributable to a redeemable noncontrolling interest)

     –             –             82.1         –             –             3.1         85.2   

Foreign currency translation

     –             –             –             (102.1)        –             –             (102.1)  

Cash dividends – $0.60 per share

     –             –             (35.0)        –             –             –             (35.0)  

Dividend reinvestment plan and other

     –             0.7         –             –             –              (3.1)        (2.4)  

Stock compensation plans

     –             13.6         –             –             4.5         –             18.1   

Tax benefit from certain stock options

     –             0.6         –             –             –             –             0.6   

Acquisition of noncontrolling interest

     –             (5.7)        –             –             –             –             (5.7)  
      

Balance at July 3, 2010

     $     67.3         $ 163.6       $     1,576.0         $     (170.5)        $     (387.7)        $     15.6         $     1,264.3   
      

The following summarizes the changes in total shareholders’ equity for the six month period ending July 4, 2009:

 

     Shareholders’ equity attributable to Snap-on Incorporated          
            
(Amounts in millions, except per share data)   

Common

Stock

  

Additional

Paid-in

Capital

   Retained
Earnings
   Accumulated
Other
Comprehensive
Income (Loss)
  

Treasury

Stock

   Noncontrolling
Interests
  

Total

Shareholders’
Equity

      

Balance at January 3, 2009

     $ 67.2         $ 155.5         $ 1,463.7         $ (106.5)        $ (393.4)        $ 18.0         $ 1,204.5   

Net earnings for the six months ended July 4, 2009 (excludes $0.5 million of net loss attributable to a redeemable noncontrolling interest)

     –             –             72.2         –             –             7.5         79.7   

Foreign currency translation

     –             –             –             35.7         –             –             35.7   

Change in cash flow hedges

     –             –             –             2.1         –             1.1         3.2   

Cash dividends – $0.60 per share

     –             –             (34.4)        –             –             –             (34.4)   

Dividend reinvestment plan and other

     –             0.7         –             –             –             (2.8)        (2.1)  

Stock compensation plans

     –             (0.5)        –             –             0.8         –             0.3   

Tax deficiency from certain stock options

     –             (0.7)        –             –             –             –             (0.7)  
      

Balance at July 4, 2009

     $     67.2         $     155.0         $     1,501.5         $     (68.7)        $     (392.6)        $     23.8         $     1,286.2   
      

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

     Three Months Ended    Six Months Ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009
           

Comprehensive income (loss)

           

Net earnings

       $ 46.9             $ 42.0             $ 84.9             $ 79.2     

Other comprehensive income (loss):

           

Foreign currency translation

     (59.8)          88.8           (102.1)          35.7     

Change in fair value of cash flow hedges, net of tax

     –               0.9           –               3.2     
                           

Total comprehensive income (loss)

       $ (12.9)            $ 131.7             $ (17.2)            $ 118.1     

Comprehensive income attributable to non-redeemable noncontrolling interest

     (1.6)          (5.2)          (3.1)          (8.6)    

Comprehensive loss attributable to redeemable noncontrolling interest

     –               0.2           0.3           0.5     
                           

Comprehensive income (loss) attributable to Snap-on Incorporated

       $     (14.5)            $     126.7             $     (20.0)            $     110.0     
                           

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

SNAP-ON INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Amounts in millions)

(Unaudited)

 

     Six Months Ended
     July 3,
2010
   July 4,
2009
     

Operating activities:

     

Net earnings

       $ 84.9             $ 79.2     

Adjustments to reconcile net earnings to net cash provided (used) by operating activities:

     

Depreciation

     24.7           24.8     

Amortization of other intangibles

     11.8           12.3     

Provision for losses on finance receivables

     8.0           –         

Stock-based compensation expense (income)

     6.0           (4.2)    

Excess tax benefits from stock-based compensation

     (0.2)          –         

Deferred income tax provision (benefit)

     (17.0)          18.2     

Loss on sale of assets

     –               0.4     

Changes in operating assets and liabilities, net of effects of acquisition:

     

(Increase) decrease in trade and other accounts receivable

     (11.7)          56.5     

(Increase) decrease in contract receivables

     (24.8)          2.1     

(Increase) decrease in inventories

     (36.2)          62.5     

(Increase) decrease in prepaid and other assets

     (23.1)          0.7     

Increase (decrease) in accounts payable

     14.2           (19.0)    

Increase (decrease) in accruals and other liabilities

     29.3           (63.2)    
             

Net cash provided by operating activities

     65.9           170.3     

Investing activities:

     

Additions to finance receivables

     (246.3)          –         

Collections of finance receivables

     108.3           –         

Capital expenditures

     (12.3)          (33.6)    

Acquisition of business

     (7.7)          –         

Disposal of property and equipment

     1.8           0.1     

Other

     –               3.2     
             

Net cash used by investing activities

     (156.2)          (30.3)    

Financing activities:

     

Proceeds from issuance of long-term debt

     –               297.7     

Repayment of long-term debt

     (150.0)          –         

Proceeds from short-term borrowings

     10.2           –         

Repayments of short-term borrowings

     (11.7)          –         

Net increase in other short-term borrowings

     0.5           4.2     

Proceeds from stock purchase and option plans

     13.0           3.4     

Cash dividends paid

     (35.0)          (34.4)    

Excess tax benefits from stock-based compensation

     0.2           –         

Other

     (3.9)          (3.4)    
             

Net cash provided (used) by financing activities

     (176.7)          267.5     

Effect of exchange rate changes on cash and cash equivalents

     (1.6)          1.1     
             

Increase (decrease) in cash and cash equivalents

     (268.6)          408.6     

Cash and cash equivalents at beginning of year

     699.4           115.8     
             

Cash and cash equivalents at end of period

       $ 430.8             $ 524.4     
             

Supplemental cash flow disclosures:

     

Cash paid for interest

       $     (28.7)            $     (13.9)    

Net cash paid for income taxes

     (52.7)          (23.4)    

See Notes to Condensed Consolidated Financial Statements

 

8


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Summary of Accounting Policies

These financial statements should be read in conjunction with, and have been prepared in conformity with, the accounting principles reflected in the consolidated financial statements and related notes included in Snap-on Incorporated’s (“Snap-on” or “the company”) 2009 Annual Report on Form 10-K for the fiscal year ended January 2, 2010. The company’s 2010 fiscal second quarter ended on July 3, 2010; the 2009 fiscal second quarter ended on July 4, 2009.

The Condensed Consolidated Financial Statements include the accounts of Snap-on and its wholly-owned and majority-owned subsidiaries, including the accounts of Snap-on Credit LLC (“SOC”), the company’s financial services operation in the United States. Prior to July 16, 2009, SOC was a consolidated financial services joint venture with CIT Group Inc. (“CIT”), and Snap-on was the primary beneficiary of the joint venture arrangement. On July 16, 2009, pursuant to the terms of the joint venture agreement, Snap-on terminated the joint venture agreement with CIT and subsequently purchased CIT’s 50%-ownership interest in SOC for $8.1 million.

Snap-on accounts for investments in unconsolidated affiliates where Snap-on has a greater than 20% but less than 50% ownership interest under the equity method of accounting. Investments in unconsolidated affiliates of $35.5 million at July 3, 2010, and $37.7 million at 2009 year end are included in “Other assets” on the accompanying Condensed Consolidated Balance Sheets. Equity investment dividends received during the first quarter of 2010 totaled $2.0 million; no equity investment dividends were received in the 2010 second quarter or in the 2009 full year. The Condensed Consolidated Financial Statements do not include the accounts of the company’s independent franchisees. Snap-on’s Condensed Consolidated Financial Statements are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions have been eliminated.

In the second quarter of 2010, Snap-on realigned its management organization and, as a result, its reportable business segments. This organizational change reflects the company’s efforts to better support the product and service needs of the company’s primary customer segments. The accompanying segment data has been restated to reflect these realignments. Refer to Note 16 for information on Snap-on’s reportable business segments.

Certain prior year amounts were reclassified on the Condensed Consolidated Financial Statements related to the company’s Financial Services’ operations. Following the July 16, 2009 acquisition of CIT’s 50%-ownership interest in SOC, Snap-on began providing financing for the majority of new loans originated by SOC; previously, substantially all of the loans originated by SOC were sold to CIT. Depending on the type of loan, the new contracts originated by SOC, as well as the contracts originated by Snap-on’s wholly owned international finance subsidiaries, are reflected as either contract or finance receivables on the Condensed Consolidated Balance Sheets. “Trade and other accounts receivable – net,” and the current and long-term portions of net contract and finance receivables are also disclosed on the Condensed Consolidated Balance Sheets. For periods ending prior to July 16, 2009, all current (payment terms of one year or less) accounts receivable were included in “Accounts receivable – net” and long-term (payment terms greater than one year) accounts receivable were included in “Other assets.”

The Condensed Consolidated Statements of Cash Flow reflect the “Provision for losses on finance receivables” originated by (i) SOC after July 16, 2009, and (ii) Snap-on’s wholly owned international finance subsidiaries, as part of “Net cash provided by operating activities.” Subsequent to the company’s acquisition of CIT’s ownership interest in SOC, “Additions to finance receivables” and “Collections of finance receivables” are presented as part of “Net cash used by investing activities.” For financial statement periods ending prior to July 16, 2009, the provision for losses on finance receivables and the net additions and collections of finance receivables, which primarily related to the company’s wholly owned international finance subsidiaries, are included in “(Increase) decrease in contract receivables” as part of “Net cash provided by operating activities;” prior-year amounts were not restated as the amounts were not significant, individually or in the aggregate, to Snap-on’s Condensed Consolidated Statements of Cash Flow. See Note 3 for further information on accounts receivable.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

As of July 3, 2010, and January 2, 2010, “Other accrued liabilities” on the accompanying Condensed Consolidated Balance Sheets included $107.8 million and $81.5 million, respectively, of amounts withheld from payments made to the company’s former financial services joint venture partner, CIT, relating to ongoing business activities. The amount withheld relates to a dispute between the parties concerning various payments made during the course of the joint venture. The $26.3 million increase in other accrued liabilities relating to CIT from year-end 2009 levels included $20.6 million associated with refinancings that are not included in net cash provided by operating activities. See Note 14 for further information.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Condensed Consolidated Financial Statements for the three and six month periods ended July 3, 2010, and July 4, 2009, have been made. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Financial Instruments

The fair value of the company’s derivative financial instruments is generally determined using quoted prices in active markets for similar assets and liabilities. The carrying value of the company’s non-derivative financial instruments either approximates fair value, due to their short-term nature, or fair value is based upon a discounted cash flow analysis or quoted market values. See Note 9 for further information on financial instruments.

New Accounting Standards

Fair Value Measurements and Disclosures

In January 2010, previously released guidance on fair value measurements and disclosures was amended. The amendment requires disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also requires more detailed disclosure about the activity within Level 3 fair value measurements. The fair value measurements hierarchy gives the highest priority (“Level 1”) to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority (“Level 3”) to unobservable inputs. Fair value measurements primarily based on observable market information are given a “Level 2” priority. A portion of the amendment was effective for Snap-on at the beginning of its 2010 fiscal first quarter and requires the disclosure of transfers into and out of Level 1 and Level 2 fair value measurements; the amendment’s requirements related to Level 3 disclosures are effective for Snap-on at the beginning of its 2011 fiscal year. This guidance affects new disclosures only and had no impact on the company’s Condensed Consolidated Financial Statements.

Revenue Arrangements with Multiple Deliverables

In October 2009, previously released guidance on revenue arrangements with multiple deliverables was amended; this guidance becomes effective for Snap-on at the beginning of its 2011 fiscal year. The amendment addresses how to determine whether an

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The amendment may be applied retrospectively or prospectively for new or materially modified arrangements and early adoption is permitted. The company is currently assessing the impact of adopting this guidance and does not believe that the adoption will have a significant impact on the company’s Condensed Consolidated Financial Statements.

Certain Revenue Arrangements that Include Software Elements

In October 2009, previously released guidance on certain revenue arrangements that include software elements was amended; this guidance becomes effective for Snap-on at the beginning of its 2011 fiscal year. The amendment removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a product’s essential functionality and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance. The amendment may be applied retrospectively or prospectively for new or materially modified arrangements and early adoption is permitted. The company is currently assessing the impact of adopting this guidance and does not believe that the adoption will have a significant impact on the company’s Condensed Consolidated Financial Statements.

Note 2: Acquisitions

On April 6, 2010, Snap-on acquired the remaining 40% interest in Wanda Snap-on (Zhejiang) Co. Ltd (“Wanda Snap-on”), the company’s tool manufacturing operation in Xiaoshan, China, for a purchase price of $7.7 million and $0.1 million of transaction costs. Snap-on acquired a 60% interest in Wanda Snap-on for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs, on March 5, 2008. The acquisition of Wanda Snap-on is part of the company’s ongoing strategic initiatives to further expand its manufacturing presence in emerging growth markets and lower-cost regions. On July 1, 2010, Wanda Snap-on was officially renamed Snap-on Asia Manufacturing (Zhejiang) Co. Ltd. (“Xiaoshan”).

The following summarizes the changes in the Wanda Snap-on redeemable noncontrolling interest for the six month periods ended July 3, 2010, and July 4, 2009:

 

     Six Months Ended
(Amounts in millions)    July 3,
2010
   July 4,
2009

Beginning of year

       $ 3.3             $ 4.3     

Net loss

     (0.3)          (0.5)    

Acquisition of noncontrolling interest

     (3.0)          –       
             

End of period

       $     –               $     3.8     
             

For segment reporting purposes, the results of operations and assets of Xiaoshan (formerly Wanda Snap-on) are included in the Commercial & Industrial Group. Pro forma financial information has not been presented as the net sales and operating earnings impact of the Xiaoshan acquisition were not material to Snap-on's results of operations or financial position.

On July 16, 2009, Snap-on terminated its SOC financial services joint venture agreement with CIT and subsequently acquired CIT’s 50%-ownership interest in SOC for a cash purchase price of $8.1 million. As a result of acquiring CIT’s ownership interest, SOC became a wholly owned subsidiary of Snap-on. The $8.1 million purchase price represented the book value, and approximated the fair value, of CIT’s ownership interest in SOC as of the acquisition date; no goodwill or intangible assets were recorded as a result of this acquisition.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Since 2004, Snap-on has included the accounts of SOC in its consolidated financial statements as Snap-on concluded that it was the primary beneficiary of the joint venture arrangement. For segment reporting purposes, the results of operations and assets of SOC will continue to be included in Financial Services.

Note 3: Accounts Receivable

Snap-on’s accounts receivable consist of (i) trade and other accounts receivable; (ii) contract receivables; and (iii) finance receivables. Trade and other accounts receivable primarily arise from the sale of tools, diagnostics and equipment to a broad range of industrial and commercial customers and to Snap-on’s independent franchise van channel on a non-extended-term basis with payment terms generally ranging from 30 days to 120 days. Contract receivables, with payment terms of up to 10 years, are comprised of extended-term installment loans to a broad base of industrial and other customers worldwide, including shop owners, both independents and national chains, for their purchase of tools, diagnostics and equipment. Contract receivables also include extended-term installment loans to franchisees to meet a number of financing needs including van and truck leases, working capital loans, and loans to enable new franchisees to fund the purchase of the franchise. Finance receivables are comprised of extended-term installment loans to technicians (i.e. franchisees’ customers) to enable them to purchase tools, diagnostics and equipment on an extended-term payment plan, generally with average payment terms of 32 months. Contract and finance receivables are generally secured by the underlying tools, diagnostics or equipment financed and, for installment loans to franchisees, other franchisee assets.

The components of Snap-on’s current accounts receivable as of July 3, 2010, and January 2, 2010, are as follows:

 

(Amounts in millions)    July 3,
2010
   January 2,
2010

Trade and other accounts receivable

       $ 434.0             $ 440.8     

Contract receivables, net of unearned finance charges of $5.0 million and $4.0 million

     38.2           34.5     

Finance receivables, net of unearned finance charges of $6.4 million and $6.8 million

     175.1           126.2     
             

Total

     647.3           601.5     
             

Allowances for doubtful accounts:

     

Trade and other accounts receivable

     (26.5)          (26.4)    

Contract receivables

     (2.6)          (1.6)    

Finance receivables

     (6.0)          (3.9)    
             

Total

     (35.1)          (31.9)    
             

Total current accounts receivable – net

       $ 612.2             $ 569.6     
             

Trade and other accounts receivable – net

       $ 407.5             $ 414.4     

Contract receivables – net

     35.6           32.9     

Finance receivables – net

     169.1           122.3     
             

Total current accounts receivable – net

       $     612.2             $     569.6     
             

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The components of Snap-on’s contract and finance receivables with payment terms beyond one year as of July 3, 2010, and January 2, 2010, are as follows:

 

(Amounts in millions)    July 3,
2010
   January 2,
2010

Contract receivables, net of unearned finance charges of $6.7 million and $5.9 million

       $ 93.8             $ 73.2     

Finance receivables, net of unearned finance charges of $7.9 million and $8.0 million

     290.2           184.1     
             

Total

     384.0           257.3     
             

Allowances for doubtful accounts:

     

Contract receivables

     (2.6)          (2.5)    

Finance receivables

     (11.6)          (6.2)    
             

Total

     (14.2)          (8.7)    
             

Total long-term accounts receivable – net

       $ 369.8             $ 248.6     
             

Contract receivables – net

       $ 91.2             $ 70.7     

Finance receivables – net

     278.6           177.9     
             

Total long-term accounts receivable – net

       $     369.8             $     248.6     
             

SOC originates contract and finance receivables on sales of Snap-on product sold through the U.S. franchisee and customer network and to Snap-on’s industrial and other customers; Snap-on’s foreign finance subsidiaries provide similar financing internationally. Interest income on contract and finance receivables is recognized using the effective interest method and is included in “Financial services revenue” on the accompanying Condensed Consolidated Statements of Earnings. The recognition of finance income is generally suspended and the estimated uncollectible receivable amount written off to the allowance for doubtful accounts when the contract or finance receivable becomes approximately 90 days or 150 days delinquent, depending on the type of loan. The accrual of finance income is resumed when the receivable becomes contractually current and collection doubts are removed. Financing receivables on non-accrual status at July 3, 2010, and January 2, 2010, were insignificant.

Prior to July 16, 2009, SOC sold substantially all new contract and finance loan originations to CIT on a limited recourse basis; SOC retained the right to service such loans for a contractual servicing fee. As of July 3, 2010, the remaining portfolio of receivables owned by CIT that is being serviced by SOC was approximately $384 million, down from approximately $590 million at 2009 year end and $830 million at July 16, 2009. As loan originations were sold to CIT, SOC recognized a servicing asset since the contractual servicing fee provided SOC with more than adequate compensation for the level of services provided. Contractual servicing fees were $1.3 million and $2.9 million for the three and six month periods ended July 3, 2010, respectively, and $2.2 million and $4.5 million for the three and six month periods ended July 4, 2009, respectively.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Servicing assets are included in “Prepaid expenses and other assets” in the accompanying Condensed Consolidated Balance Sheets. The remaining servicing assets of $1.1 million as of July 3, 2010, are being amortized over the remaining life of the contracts. The following summarizes the servicing assets activity for the three and six month periods ended July 3, 2010, and July 4, 2009:

 

     Three Months Ended    Six Months Ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Servicing assets at beginning of period

       $ 1.3             $ 3.1             $ 1.5             $ 3.9     

Originated

     –             1.2           –             2.2     

Amortized

     (0.2)          (1.9)          (0.4)          (3.7)    
                           

Servicing assets at end of period

       $     1.1             $     2.4             $     1.1             $     2.4     
                           

Note 4: Inventories

Inventories by major classification are as follows:

 

(Amounts in millions)    July 3,
2010
   January 2,
2010

Finished goods

       $ 278.8             $ 254.3     

Work in progress

     25.5           28.3     

Raw materials

     60.6           60.5     
             

Total FIFO value

     364.9           343.1     

Excess of current cost over LIFO cost

     (68.4)          (68.4)    
             

Total inventories – net

       $     296.5             $     274.7     
             

Inventories accounted for using the first-in, first-out (“FIFO”) method as of July 3, 2010, and January 2, 2010, approximated 63% and 66% of total inventories, respectively. The company accounts for its non-U.S. inventory on the FIFO basis. As of July 3, 2010, approximately 27% of the company’s U.S. inventory was accounted for using the FIFO basis and 73% was accounted for using the last-in, first-out (“LIFO”) basis. There were no LIFO inventory liquidations in the three and six month periods ended July 3, 2010, and July 4, 2009.

Note 5: Intangible and Other Assets

The changes in the carrying amount of goodwill by segment for the six month period ended July 3, 2010, were as follows:

 

(Amounts in millions)    Commercial
&  Industrial
Group
   Snap-on
Tools Group
   Repair
Systems &
Information
Group
   Total

Balance as of January 2, 2010

       $ 311.8             $ 12.5             $ 490.0             $ 814.3     

Currency translation

     (35.1)          –             (6.1)          (41.2)    
                           

Balance as of July 3, 2010

       $     276.7             $     12.5             $     483.9             $     773.1     
                           

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Additional disclosures related to other intangible assets are as follows:

 

     July 3, 2010    January 2, 2010
(Amounts in millions)    Gross
Carrying
Value
   Accumulated
Amortization
   Gross
Carrying
Value
   Accumulated
Amortization

Amortized other intangible assets:

           

Customer relationships

       $ 133.7             $ (32.3)             $ 135.1             $ (28.3)     

Developed technology

     18.9           (13.6)           19.4           (13.1)     

Internally developed software

     58.7           (34.6)           54.4           (30.5)     

Patents

     30.7           (18.9)           30.8           (18.4)     

Trademarks

     1.9           (0.5)           1.9           (0.5)     

Other

     8.4           (1.8)           11.4           (2.0)     
                           

Total

     252.3           (101.7)           253.0           (92.8)     

Non-amortized trademarks

     44.4           –                46.0           –          
                           

Total other intangible assets

       $     296.7             $     (101.7)             $     299.0             $     (92.8)     
                           

Snap-on completed its annual impairment testing of goodwill and other indefinite-lived intangible assets in the second quarter of 2010, the results of which did not result in any impairment. Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, loss of key customers and/or changes in technology or markets, could require a provision for impairment in a future period.

The weighted-average amortization periods related to other intangible assets are as follows:

 

(In years)    Weighted-
average
Amortization
    

Customer relationships

   16   

Developed technology

     5   

Internally developed software

     3   

Patents

   12   

Trademarks

   30   

Other

   46   

Snap-on is amortizing its customer relationships on an accelerated basis over a 16 year weighted-average life; the remaining intangibles are amortized on a straight-line basis. The weighted-average amortization period for all amortizable intangibles on a combined basis is 15 years.

The company’s customer relationships generally have contractual terms of three to five years and are typically renewed without significant cost to the company. The weighted-average 16 year life for customer relationships is based on the company’s historical renewal experience. Intangible asset renewal costs are expensed as incurred.

The aggregate amortization expense was $5.9 million and $11.8 million for the three and six month periods ended July 3, 2010, respectively, and $6.2 million and $12.3 million for the three and six month periods ended July 4, 2009, respectively. Based on current levels of amortizable intangible assets and estimated weighted-average useful lives, estimated annual amortization expense is expected to be $23.0 million in 2010, $19.9 million in 2011, $16.3 million in 2012, $11.1 million in 2013, $9.8 million in 2014 and $9.4 million in 2015.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The company has various insurance policies on the lives of certain former executive officers. Snap-on’s investment in these policies is recorded net of policy loans in “Other assets” on the accompanying Condensed Consolidated Balance Sheets. The policy loans carry a variable interest rate (currently at 5.49%), require interest only payments annually, and are collateralized by the cash value of the life insurance policies. The interest rate charged on the policy loans may be adjusted annually based on a corporate bond yield as published by Moody’s Investors Service. A summary of the net cash value of life insurance as of July 3, 2010, and January 2, 2010, is as follows:

 

(Amounts in millions)    July 3,
2010
   January 2,
2010

Cash surrender value of life insurance

       $     9.4             $     9.4     

Policy loans outstanding

     (9.1)          (9.1)    
             

Net cash value of life insurance

       $ 0.3             $ 0.3     
             

Note 6: Exit and Disposal Activities

Snap-on recorded costs associated with exit and disposal activities for the three and six month periods ended July 3, 2010, and July 4, 2009, as follows:

 

     Three Months Ended    Six Months Ended

(Amounts in millions)

   July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Exit and disposal costs:

           

Cost of goods sold

           

Commercial & Industrial Group

       $     2.0             $     3.8             $     3.3             $ 4.4     

Snap-on Tools Group

     –             0.2           –             0.2     

Repair Systems & Information Group

     0.5           1.6           1.5           2.1     
                           

Total cost of goods sold

     2.5           5.6           4.8           6.7     
                           

Operating expenses

           

Commercial & Industrial Group

     –             1.4           0.3           2.4     

Snap-on Tools Group

     0.5           0.9           0.6           0.8     

Repair Systems & Information Group

     0.1           0.8           0.6           0.2     

Corporate

     –             –             –             0.3     
                           

Total operating expenses

     0.6           3.1           1.5           3.7     
                           

Financial Services

     –             (0.1)          –             0.2     

Total restructuring expense

           

Commercial & Industrial Group

     2.0           5.2           3.6           6.8     

Snap-on Tools Group

     0.5           1.1           0.6           1.0     

Repair Systems & Information Group

     0.6           2.4           2.1           2.3     

Financial Services

     –             (0.1)          –             0.2     

Corporate

     –             –             –             0.3     
                           

Total restructuring expenses

       $     3.1             $     8.6             $ 6.3             $     10.6     
                           

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Of the $3.1 million and $6.3 million of costs incurred during the three and six month periods ended July 3, 2010, respectively, $2.4 million and $5.4 million, respectively, qualified for accrual treatment. Costs associated with exit and disposal activities in 2010 primarily related to headcount reductions from (i) the ongoing evaluation of the company’s cost structure; (ii) ongoing efforts to enhance efficiency and productivity; and (iii) various other management and realignment actions.

Snap-on’s exit and disposal accrual activity for the first and second quarters of 2010 was as follows:

 

    Balance at   First Quarter   Balance at   Second Quarter   Balance at
(Amounts in millions)   January 2,
2010
  Additions   Usage   April 3,
2010
  Additions   Usage   July 3,
2010

Severance costs:

             

Commercial & Industrial Group

      $     4.8            $ 1.5            $ (2.1)           $     4.2            $     1.6            $     (0.8)           $     5.0     

Snap-on Tools Group

    1.7          –           (0.5)         1.2          –           (0.3)         0.9     

Repair Systems & Information Group

    5.8          1.4          (1.7)         5.5          0.3          (1.8)         4.0     

Facility-related costs:

             

Commercial & Industrial Group

    0.7          –           –           0.7          –           (0.1)         0.6     

Snap-on Tools Group

    0.4          0.1          (0.1)         0.4          0.5          (0.1)         0.8     
                                         

Total

      $     13.4            $     3.0            $     (4.4)           $     12.0            $     2.4            $     (3.1)           $     11.3     
                                         

Since year-end 2009, Snap-on has reduced headcount by approximately 105 employees as part of its restructuring actions. While the majority of the exit and disposal accrual will be utilized in 2010, approximately $0.6 million of facility-related costs will extend beyond 2010 due to a longer-term lease obligation.

Snap-on expects to fund the remaining cash requirements of its exit and disposal activities with available cash on hand, cash flows from operations and borrowings under the company’s existing credit facilities. The estimated costs for the exit and disposal activities were based on management’s best business judgment under prevailing circumstances.

Note 7: Income Taxes

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 32.7% in the first six months of 2010 and 33.2% in the first six months of 2009.

For the six months ended July 3, 2010, Snap-on’s unrecognized tax benefits decreased by $3.3 million. This decrease was primarily attributable to settlements reached with taxing authorities.

Snap-on and its subsidiaries file income tax returns in the United States and in various state, local and foreign jurisdictions. Snap-on and its subsidiaries are routinely examined by tax authorities in certain of these jurisdictions and it is reasonably possible that some of these examinations may be resolved within the next 12 months. Due to the potential resolution of these global examinations, it is reasonably possible that Snap-on’s gross unrecognized tax benefits may decrease by a range of zero to $2.9 million over the next 12 months.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 8: Short-term and Long-term Debt

Short-term and long-term debt as of July 3, 2010, and January 2, 2010, consisted of the following:

 

(Amounts in millions)    July 3,
2010
   January 2,
2010
    

Floating rate unsecured note due January 2010

       $     –                $     150.0        

6.25% unsecured notes due August 2011

     200.0           200.0        

5.85% unsecured notes due 2014

     100.0           100.0        

5.50% unsecured notes due 2017

     150.0           150.0        

6.70% unsecured notes due 2019

     200.0           200.0        

6.125% unsecured notes due 2021

     250.0           250.0        

Other debt*

     23.4           16.8        
                
     923.4           1,066.8        

Less: notes payable and current maturities of long-term debt

     (13.6)          (164.7)       
                

Total long-term debt

       $     909.8             $     902.1        
                

 

 

*

Includes fair value adjustments related to interest rate swaps

On January 12, 2010, Snap-on repaid the $150.0 million floating rate unsecured debt with available cash.

Snap-on has a five-year, $500 million multi-currency revolving credit facility that terminates on August 10, 2012; at July 3, 2010, no amounts were outstanding under this revolving credit facility. The $500 million revolving credit facility’s financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio of total debt to the sum of total debt plus shareholders’ equity of not greater than 0.60 to 1.00; or (ii) a ratio of total debt to the sum of net income plus interest expense, income taxes, depreciation, amortization and other non-cash or extraordinary charges for the preceding four fiscal quarters then ended of not greater than 3.50 to 1.00. As of July 3, 2010, the company’s actual ratios of 0.43 and 2.66, respectively, were both within the permitted ranges set forth in this financial covenant.

Snap-on also had $20 million of unused available debt capacity under its committed bank lines of credit as of July 3, 2010, which consisted of two $10 million lines of credit that expire on August 29, 2010, and July 26, 2011, respectively. As of the filing date of this Form 10-Q, Snap-on plans to renew the August 29, 2010 bank line of credit in the third quarter of 2010.

In addition to the financial covenant required by the $500 million multi-currency revolving credit facility discussed above, Snap-on’s debt agreements and credit facilities also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of July 3, 2010, Snap-on was in compliance with all covenants of its debt agreements and credit facilities.

Note 9: Financial Instruments

Derivatives: All derivative instruments are reported in the Condensed Consolidated Financial Statements at fair value. Changes in the fair value of derivatives are recorded each period in earnings or on the accompanying Condensed Consolidated Balance Sheets, depending on whether the derivative is designated and effective as part of a hedged transaction. Gains or losses on derivative instruments recorded in “Accumulated other comprehensive income (loss)” (“Accumulated OCI”) must be reclassified to earnings in the period in which earnings are affected by the underlying hedged item and the ineffective portion of all hedges must be recognized in earnings in the period that such portion is determined to be ineffective.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure; (ii) whether or not overall risk is being reduced; and (iii) if there is a correlation between the value of the derivative instrument and the underlying hedged item. On the date a derivative contract is entered into, Snap-on designates the derivative as a fair value hedge, a cash flow hedge, a hedge of a net investment in a foreign operation, or a natural hedging instrument whose change in fair value is recognized as an economic hedge against changes in the values of the hedged item. Snap-on does not use derivative instruments for speculative or trading purposes.

The company is exposed to global market risks, including the effect of changes in foreign currency exchange rates and interest rates, and therefore uses derivatives to manage financial exposures that occur in the normal course of business. The primary risks managed by using derivative instruments are foreign currency risk and interest rate risk.

Foreign Currency Risk Management: Snap-on has significant international operations and is subject to certain risks inherent with foreign operations that include currency fluctuations and restrictions on the movement of funds. Foreign currency exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency, including intercompany loans denominated in foreign currencies. To manage these exposures, Snap-on identifies naturally offsetting positions and then purchases hedging instruments to protect the residual net exposures. Snap-on manages most of these exposures on a consolidated basis, which allows for netting of certain exposures to take advantage of natural offsets. Foreign exchange forward contracts are used to hedge the net exposures. Gains or losses on net foreign currency hedges are intended to offset losses or gains on the underlying net exposures in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. Snap-on’s foreign exchange forward contracts are typically not designated as hedges. The fair value changes of these contracts are reported in earnings as foreign exchange gain or loss, which is included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings.

At July 3, 2010, Snap-on had $192.7 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $104.6 million in euros, $70.1 million in Swedish kronor, $27.7 million in Australian dollars, $21.3 million in British pounds, $14.1 million in Singapore dollars, $5.3 million in Norwegian kroner, $3.0 million in Mexican pesos, $1.7 million in South Korean won, and $1.5 million in other currencies, and sell contracts comprised of $38.5 million in Canadian dollars, $10.9 million in Japanese yen, $3.5 million in Turkish lira, $1.8 million in New Zealand dollars, and $1.9 million in other currencies. At January 2, 2010, Snap-on had $197.8 million of net foreign exchange forward buy contracts outstanding comprised of buy contracts of $104.4 million in euros, $69.1 million in Swedish kronor, $30.4 million in Australian dollars, $25.1 million in British pounds, $12.3 million in Singapore dollars, $5.0 million in Norwegian kroner, $2.5 million in Mexican pesos, and $3.2 million in other currencies, and sell contracts comprised of $39.5 million in Canadian dollars, $7.7 million in Japanese yen, $3.3 million in Turkish lira, and $3.7 million in other currencies.

Interest Rate Risk Management: Snap-on aims to control funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s assets and liabilities through the use of interest rate swaps agreements.

Interest Rate Swap Agreements: Snap-on enters into interest rate swap agreements to manage interest costs and risks associated with changing interest rates. Interest rate swap agreements are accounted for as either cash flow hedges or fair value hedges. The differentials paid or received on interest rate swap agreements are recognized as adjustments to interest expense. For fair value hedges, the effective portion of the change in fair value of the derivative is recorded in “Long-term debt” on the accompanying Condensed Consolidated Balance Sheets, while any ineffective portion is recorded as an adjustment to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. The notional amount of interest rate swaps outstanding and designated as fair value hedges was $150 million at July 3, 2010, and $50 million at January 2, 2010. No interest rate swaps classified as cash flow hedges were outstanding as of July 3, 2010, and January 2, 2010.

 

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Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Treasury Lock Agreements: Snap-on has previously entered into treasury lock agreements to manage the potential change in interest rates in anticipation of issuing fixed rate debt. Prior to the company’s termination of its financial services joint venture agreement with CIT in 2009, Snap-on also entered into treasury lock agreements to manage the risk associated with changing benchmark interest rates on its extended contract installment loans that were sold to CIT. Treasury lock agreements are accounted for as cash flow hedges. The effective differentials paid or received on treasury lock agreements related to credit installment loans are recognized as adjustments to “Financial services revenue” on the accompanying Condensed Consolidated Statements of Earnings. The effective differentials paid or received on treasury lock agreements related to the anticipated issuance of fixed rate debt are recognized as adjustments to “Interest expense” on the accompanying Condensed Consolidated Statements of Earnings. During the second quarter of 2009, Snap-on settled treasury locks of $28 million related to the settlement of extended credit installment receivables sold to CIT. During the first six months of 2009, Snap-on settled treasury locks of $79 million related to the settlement of extended credit installment receivables sold to CIT and $100 million related to the forecasted principal debt issuance related to the company’s offering of $300 million of fixed rate, long-term notes on February 24, 2009. There were no treasury locks outstanding at July 3, 2010, or January 2, 2010.

Fair Value Measurements: Snap-on has derivative assets and liabilities that are measured at Level 2 fair value on a recurring basis. The following table represents the fair value of derivative instruments included within the Condensed Consolidated Balance Sheets:

 

          July 3, 2010    January 2, 2010
(Amounts in millions)   

Balance Sheet

Presentation

   Asset
Derivatives
Fair Value
   Liability
Derivatives
Fair Value
   Asset
Derivatives
Fair Value
   Liability
Derivatives
Fair Value

Derivatives Designated as Hedging Instruments:

              

Interest rate swap agreements

   Other assets        $ 11.5             $ –               $ 2.5             $ –       

Derivatives Not Designated as Hedging Instruments:

              

Foreign exchange forwards

   Prepaid expenses and other assets        $ 5.3             $ –               $ 3.1             $ –       

Foreign exchange forwards

   Other accrued liabilities      –             21.7           –             8.5     
                              

Total

          $ 5.3             $ 21.7             $ 3.1             $ 8.5     
                              

Total derivative instruments

          $     16.8             $     21.7             $     5.6             $     8.5     
                              

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. Level 2 fair value measurements for derivative assets and liabilities are measured using quoted prices in active markets for similar assets and liabilities. Interest rate swaps are valued based on the six-month LIBOR swap rate for similar instruments. Foreign exchange forward contracts are valued based on exchange rates quoted by domestic and foreign banks for similar instruments. The company did not have any assets or liabilities measured at Level 1 or Level 3 or implement any changes in its valuation techniques as of and for the six month period ended July 3, 2010.

 

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Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table represents the effect of derivative instruments designated as fair value hedges as included in the Condensed Consolidated Statements of Earnings:

 

        Effective Portion of Gain /
(Loss) Recognized in  Income

Three months ended
  Effective Portion of Gain /
(Loss) Recognized in  Income

Six months ended
(Amounts in millions)  

Statement of Earnings

Presentation

  July 3,
2010
  July 4,
2009
  July 3,
2010
  July 4,
2009

Derivatives Designated as Fair Value Hedges:

         

Interest rate swap agreements

 

Interest expense

      $     1.4            $     0.3            $     2.2            $     0.9     

The following tables represent the effect of derivative instruments designated as cash flow hedges as included in Accumulated OCI on the Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Earnings:

 

     Effective Portion of Gain /
(Loss) Recognized  in

Accumulated OCI
Three months ended
   Statement of    Effective Portion of Gain /
(Loss) Reclassified  from
Accumulated OCI into

Income
Three months ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   Earnings
Presentation
   July 3,
2010
   July 4,
2009

Derivatives Designated as Cash Flow Hedges:

              

Treasury lock agreements

       $     –               $     (0.1)        Financial services
revenue
       $     –               $     (1.0)    

 

     Effective Portion of Gain /
(Loss) Recognized in
Accumulated OCI

Six months ended
   Statement of    Effective Portion of Gain /
(Loss) Reclassified  from
Accumulated OCI into
Income

Six months ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   Earnings
Presentation
   July 3,
2010
   July 4,
2009

Derivatives Designated as Cash Flow Hedges:

              

Treasury lock agreements

       $     –               $     0.8         Interest expense        $     –               $     –       

Treasury lock agreements

     –             (0.3)        Financial services
revenue
     –             (2.6)    

Firm commitment agreements

     –             –           Net sales      –             (0.1)    

 

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Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The following table represents the effect of derivative instruments not designated as hedging instruments as included in the Condensed Consolidated Statements of Earnings:

 

          Gain / (Loss) Recognized  in
Income

Three months ended
   Gain / (Loss) Recognized  in
Income

Six months ended
(Amounts in millions)   

Statement of Earnings

Presentation

   July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Derivatives Not Designated as Hedging Instruments:

              

Foreign exchange forwards

  

Other income (expense) – net

       $     (8.8)            $     18.3             $     (20.9)            $     3.3    

As discussed above, Snap-on’s foreign exchange forward contracts are typically not designated as hedges for financial reporting purposes. The fair value changes of derivatives not designated as hedging instruments are reported in earnings as foreign exchange gain or loss in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. The $8.8 million derivative loss recognized in the second quarter of 2010 was offset by transaction gains on net exposures of $7.4 million, resulting in a net foreign exchange loss for the second quarter of $1.4 million. The $18.3 million derivative gain recognized in the second quarter of 2009 was offset by transaction losses on net exposures of $17.6 million, resulting in a net foreign exchange gain for the second quarter of $0.7 million. The $20.9 million derivative loss recognized in the first six months of 2010 was offset by transaction gains on net exposures of $19.7 million, resulting in a year to date net foreign exchange loss of $1.2 million. The $3.3 million derivative gain recognized in the first six months of 2009 was offset by transaction losses on net exposures of $3.2 million, resulting in a year to date net foreign exchange gain of $0.1 million. The resulting net foreign exchange gains and losses are included in “Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings. See Note 15 for additional information on “Other income (expense) – net.”

See the accompanying Condensed Consolidated Statements of Comprehensive Income for additional information on changes in comprehensive income.

As of July 3, 2010, the maximum maturity date of any fair value hedge was 11 years. During the next 12 months, Snap-on expects to reclassify into earnings net gains from Accumulated OCI of approximately $48,000 after tax at the time the underlying hedge transactions are realized.

Counterparty Risk: Snap-on is exposed to credit losses in the event of non-performance by the counterparties to its interest rate swap and foreign exchange contracts. Snap-on does not obtain collateral or other security to support financial instruments subject to credit risk, but monitors the credit standing of the counterparties and enters into agreements only with financial institution counterparties with a credit rating of A- or better. Snap-on does not anticipate non-performance by its counterparties, but cannot provide assurances.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Fair Value of Financial Instruments: The fair values of financial instruments that do not approximate the carrying values in the financial statements are as follows:

 

     July 3, 2010    January 2, 2010
(Amounts in millions)    Carrying
Value
   Fair
Value
   Carrying
Value
   Fair
Value

Contract receivables – net

       $     126.8            $     150.6            $     103.6            $     113.0    

Finance receivables – net

     447.7          536.1          300.2          358.8    

Long-term debt and notes payable and current maturities of long-term debt

     923.4          1,009.1          1,066.8          1,118.0    

The following methods and assumptions were used in estimating the fair value of financial instruments:

 

   

Contract and finance receivables include both short-term and long-term receivables. The fair value was based on a discounted cash flow analysis that was performed over the average life of the financing receivables using a current market discount rate of a similar term adjusted for credit quality.

 

   

Long-term debt and current maturities fair value was estimated based on quoted market values of Snap-on’s publicly traded senior debt. The carrying value of long-term debt includes adjustments related to fair value hedges.

 

   

The fair value of all other financial instruments including cash equivalents, trade and other accounts receivable, accounts payable, notes payable, and other financial instruments approximates such instruments’ carrying value due to their short-term nature.

Note 10: Pension Plans

Snap-on’s net pension expense included the following components:

 

     Three Months Ended    Six Months Ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Service cost

       $     3.7             $     3.7             $     8.3             $     8.2     

Interest cost

     13.4           13.6           27.2           26.8     

Expected return on assets

     (14.4)          (14.9)          (28.8)          (30.0)    

Actuarial loss

     4.8           2.0           9.7           3.3     

Prior service cost

     0.3           0.3           0.6           0.6     
                           

Net pension expense

       $     7.8             $     4.7             $     17.0             $     8.9     
                           

Snap-on also expects to make contributions of $9.0 million to its foreign pension plans and $1.5 million to its domestic pension plans in 2010. Snap-on funds its pension plans as required by governmental regulation. Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its domestic pension plans in 2010, and future pension contributions could increase.

 

23


Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Note 11: Postretirement Health Care Plans

Snap-on’s postretirement health care expense included the following components:

 

     Three Months Ended    Six Months Ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Service cost

       $     –              $     –              $     0.1             $     0.1     

Interest cost

     1.0           1.3           1.9           2.4     

Expected return on plan assets

     (0.2)          (0.2)          (0.4)          (0.4)    

Prior service credit

     (0.1)          (0.1)          (0.2)          (0.2)    
                           

Net postretirement expense

       $     0.7             $     1.0             $     1.4             $     1.9     
                           

Note 12: Stock-Based Compensation

The 2001 Incentive Stock and Awards Plan, as amended (“2001 Plan”), which was approved by shareholders, provides for the grant of stock options, performance share awards, and restricted stock awards (which may be designated as “restricted stock units” or “RSUs”). As of July 3, 2010, the 2001 Plan had 1,489,953 shares available for future grants; the company uses treasury stock to deliver shares under the 2001 Plan.

Net stock-based expense was $2.9 million and $5.9 million for the three and six month periods ended July 3, 2010, respectively. The reversal of performance award accruals not expected to vest and the impact of mark-to-market adjustments on stock appreciation rights resulted in a net credit to income of $4.2 million for both the three and six month periods ended July 4, 2009. Cash received from option exercises during the three and six month periods ended July 3, 2010, totaled $11.0 million and $13.0 million, respectively. Cash received from option exercises during the three and six month periods ended July 4, 2009, totaled $3.3 million and $3.4 million, respectively. The tax benefit realized from the exercise of share-based payment arrangements was $0.3 million and $0.6 million for the three and six month periods ended July 3, 2010, respectively. The tax benefit realized from the exercise of share-based payment arrangements was insignificant for the three month period ended July 4, 2009, and was $3.4 million for the six month period ended July 4, 2009.

Stock Options

Stock options are granted with an exercise price equal to the market value of a share of common stock on the date of grant and have a contractual term of ten years. Stock option grants vest ratably on the first, second and third anniversaries of the date of grant.

 

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Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding stock option exercise behaviors for different participating groups to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option. The following weighted-average assumptions were used in calculating the fair value of stock options granted during the three and six month periods ended July 3, 2010, and July 4, 2009, using the Black-Scholes valuation model:

 

     Three Months Ended    Six Months Ended
     July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Expected term of option (in years)

   5.74     5.70     5.85     5.87 

Expected volatility factor

   34.41%    33.00%    33.98%    30.17%

Expected dividend yield

     2.75%      2.76%      2.76%      2.72%

Risk-free interest rate

     2.23%      2.05%      2.39%      1.77%

A summary of stock option activity as of and for the six month period ended July 3, 2010, is presented below:

 

     Shares
(in thousands)
   Exercise Price
Per Share
(* )
   Remaining
Contractual
Term
(* )
(in years)
   Aggregate
Intrinsic
Value

(in millions)

Outstanding at January 2, 2010

   2,259             $     39.47           

Granted

      542           41.09           

Exercised

    (106)          30.74           

Forfeited or expired

      (52)          38.34           
             

Outstanding at July 3, 2010

   2,643           40.18         7.04              $     10.4     
             

Exercisable at July 3, 2010

   1,608           40.97         5.78            6.8     

 

*

Weighted-average

The weighted-average grant date fair value of options granted during the six month periods ended July 3, 2010, and July 4, 2009, was $10.90 and $6.74, respectively. The intrinsic value of options exercised was $0.8 million and $1.6 million during the three and six month periods ended July 3, 2010, respectively, and was insignificant for the three and six month periods ended July 4, 2009. The fair value of stock options vested during the six month periods ended July 3, 2010, and July 4, 2009, was $4.6 million and $3.3 million, respectively.

As of July 3, 2010, there was $8.0 million of unrecognized compensation cost related to non-vested stock option compensation arrangements granted under the 2001 Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 2.0 years.

Performance Awards

Performance awards granted pursuant to the 2001 Plan are earned and expensed using the fair value of the award over a contractual term of three years based on the company’s performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the applicable performance period. For performance achieved above a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance awards initially awarded.

 

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Table of Contents

SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

In 2009, the company began granting performance-based units (designated as RSUs); such awards have a one year performance period based on the results of the consolidated financial metrics of the company followed by a two year cliff vesting schedule. For performance achieved above a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of RSUs initially awarded.

The fair value of these awards is estimated on the date of grant using the Black-Scholes valuation model. The company uses the vesting period of the performance awards as the expected term of the awards granted. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the performance award. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the length of time corresponding to the expected term of the performance award. The following weighted-average assumptions were used in calculating the fair value of performance awards granted during the six month periods ended July 3, 2010, and July 4, 2009, using the Black-Scholes valuation model:

 

     Six Months Ended
     July 3,
2010
   July 4,
2009

Expected term of performance award (in years)

   3.0               3.0           

Expected volatility factor

       42.82%              37.09%      

Risk-free interest rate

   1.44%          1.32%      

The weighted-average grant date fair value of performance awards granted during the six month periods ended July 3, 2010, and July 4, 2009, was $41.01 and $29.69, respectively. Performance share awards of 125,164 shares were paid out during the six month period ended July 4, 2009; no performance shares were paid out in the six month period ended July 3, 2010. As performance share awards generally vest only at the end of the performance award period, no shares vested during the six month periods ended July 3, 2010, and July 4, 2009. Based on the company’s 2009 performance, 65,819 RSUs granted in 2009 were earned; assuming continued employment, these RSUs will vest in February 2012.

The status of the company’s non-vested performance share awards and changes during the six month period ended July 3, 2010, is presented below:

 

     Shares
(in thousands)
   Fair Value  (* )

Non-vested performance awards at January 2, 2010

   537             $     41.73    

Granted

   286           41.01    

Vested

   –           –     

Cancellations

   (204)          43.94    
       

Non-vested performance awards at July 3, 2010

   619           36.77    
       

 

*

Weighted-average

As of July 3, 2010, there was $12.3 million of unrecognized compensation cost related to non-vested performance share awards granted under the 2001 Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 2.3 years.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Stock Appreciation Rights (“SARs”)

The company also issues SARs to certain key non-U.S. employees. SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant and have a contractual term of ten years, and vest ratably on the first, second and third anniversaries of the date of grant. SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price. SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock value over the grant price is paid in cash and not in common stock.

The fair value of SARs is remeasured each reporting period using the Black-Scholes valuation model. The company uses historical data regarding SARs exercise behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs. The following weighted-average assumptions were used in calculating the fair value of SARs granted during the three and six month periods ended July 3, 2010, and July 4, 2009, using the Black-Scholes valuation model:

 

     Three Months Ended    Six Months Ended
     July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Expected term of SARs (in years)

     5.22              5.36              5.54              5.69        

Expected volatility factor

       35.41%            34.09%            34.59%            30.25%    

Expected dividend yield

     2.75%          2.77%          2.76%          2.72%    

Risk-free interest rate

     1.82%          2.43%          2.39%          1.77%    

The total intrinsic value of SARs exercised was $0.1 million and $0.2 million during the three and six month periods ended July 3, 2010, respectively, and zero during both the three and six month periods ended July 4, 2009. The total fair value of SARs vested during the first six months of 2010 and 2009 was $1.1 million and $0.3 million, respectively.

The status of the company’s non-vested SARs as of July 3, 2010, is presented below:

 

     SARs
(in thousands)
   Fair Value  (* )

Non-vested SARs at January 2, 2010

       259                $     9.85    

Granted

       111              10.21    

Vested

       (137)             9.02    

Cancellations

   (4)             –       
       

Non-vested SARs at July 3, 2010

   229              11.27    
       

 

*

Weighted-average

As of July 3, 2010, there was $2.6 million of unrecognized compensation cost related to non-vested SARs granted under the 2001 Plan that is expected to be recognized as a charge to earnings over a weighted-average period of 2.0 years.

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Restricted Stock Awards

The company granted 22,610 restricted stock units to non-employee directors during the second quarter of 2010. All restrictions will lapse upon the recipient’s termination of service as a director or in the event of a change in control, as defined in the 2001 Plan.

Note 13: Earnings Per Share

The shares used in the computation of the company’s basic and diluted earnings per common share are as follows:

 

     Three Months Ended    Six Months Ended
     July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Weighted-average common shares outstanding

       58,017,075            57,665,601            57,898,714            57,607,666    

Dilutive effect of stock-based instruments

   281,521        256,493        405,347        274,074    
                   

Weighted-average common shares outstanding, assuming dilution

       58,298,596            57,922,094            58,304,061            57,881,740    
                   

The dilutive effect of the potential exercise of outstanding stock-based awards to acquire common shares is calculated using the treasury stock method. Options to purchase 876,690 shares and 876,797 shares of Snap-on common stock for the three and six month periods ended July 3, 2010, respectively, and options to purchase 1,508,669 shares and 1,854,776 shares of Snap-on common stock for the three and six month periods ended July 4, 2009, respectively, were not included in the computations of diluted earnings per share as the exercise prices of the options were greater than the average market price of Snap-on’s common stock for the respective periods and the effect on earnings per share would be anti-dilutive.

Note 14: Commitments and Contingencies

Snap-on provides product warranties for specific product lines and accrues for estimated future warranty cost in the period in which the sale is recorded. Snap-on calculates its reserve requirements based on historic warranty loss experience that is periodically adjusted for recent actual experience, including the timing of claims during the warranty period and actual costs incurred. The following summarizes Snap-on’s product warranty accrual activity for the three and six month periods ended July 3, 2010, and July 4, 2009:

 

     Three Months Ended    Six Months Ended
(Amounts in millions)    July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Warranty reserve:

           

Beginning of period

       $     14.5              $     12.5              $     14.3               $     15.5       

Additions

     4.1            3.3            7.5             3.8       

Usage

     (4.3)           (2.3)           (7.5)            (5.8)      
                           

End of period

       $     14.3              $     13.5              $     14.3               $     13.5       
                           

On January 8, 2010, Snap-on filed a notice of arbitration with the American Arbitration Association concerning a dispute with CIT relating to various underpayments made during the course of their financial services joint venture, in which Snap-on has alleged damages of approximately $115 million. As a result of the dispute, Snap-on has withheld certain amounts (totaling $107.8 million as of July 3, 2010, and $81.5 million as of 2009 year end) from payments made to CIT relating to ongoing business activities. On January 29, 2010, CIT filed its response denying Snap-on’s claim and asserting certain claims against Snap-on for other matters relating to the joint venture. CIT’s claims allege damages in excess of $110 million, the majority of which relates to returning the

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

amounts withheld by Snap-on. The $107.8 million retained by Snap-on as of July 3, 2010, is included in “Other accrued liabilities” on Snap-on’s July 3, 2010 Condensed Consolidated Balance Sheet. At this early stage, no determination can be made as to the likely outcome of this dispute.

Snap-on has credit risk exposure for certain SOC-originated contracts with recourse provisions related to franchisee van loans sold by SOC; as of July 3, 2010, and January 2, 2010, $16.1 million and $17.6 million, respectively, of franchisee loans contain a recourse provision to Snap-on if the loans become more than 90 days past due. The asset value of the collateral underlying these recourse loans would serve to mitigate Snap-on’s loss in the event of default. The estimated fair value of the guarantees for all loan originations with recourse as of July 3, 2010, was not material.

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

Note 15: Other Income (Expense) Net

“Other income (expense) – net” on the accompanying Condensed Consolidated Statements of Earnings consists of the following:

 

     Three Months Ended    Six Months Ended

(Amounts in millions)

   July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009

Interest income

       $     0.3             $     0.5             $     0.5             $     0.8     

Foreign exchange gain (loss)

     (1.4)          0.7           (1.2)          0.1     

Other

     0.3           (0.1)          0.2           (0.1)    
                           

Total other income (expense) – net

       $     (0.8)            $     1.1             $     (0.5)            $     0.8     
                           

Note 16: Segments

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. In the second quarter of 2010, Snap-on realigned its management organization and, as a result, its reportable business segments. This organizational change reflects the company’s efforts to better support the product and service needs of the company’s primary customer segments. These customer segments include: (i) commercial and industrial customers, including professionals in critical industries and emerging markets; (ii) professional technicians who purchase products through the company’s worldwide mobile tool distribution network; and (iii) other professional customers related to automotive repair, including owners and managers of independent and Original Equipment Manufacturer (“OEM”) dealership service and repair shops. In addition, Snap-on’s Financial Services customer segment offers financing options that include (i) loans to franchisees’ customers and Snap-on’s industrial and other customers for the purchase or lease of tools, equipment and diagnostics products on an extended term payment plan; and (ii) business loans and vehicle leases to franchisees.

The primary organizational changes in the second quarter of 2010 included the realignment of the company’s equipment products and equipment repair services operations from the Commercial & Industrial Group to the newly created Repair Systems & Information Group in order to better serve customers in the worldwide vehicle service and repair marketplace, including owners and managers of independent and OEM dealership service and repair shops. In addition to equipment products and equipment repair services, the Repair Systems & Information Group includes the business operations of the company’s former Diagnostics & Information Group, consisting of those operations providing diagnostics, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle and repair marketplace. The organizational changes also included the realignment of the company’s sales operations in Japan from the Snap-on Tools Group to the

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Commercial & Industrial Group to assist in further penetrating the customer base, particularly industrial buyers, in that region. The company also reallocated certain costs between the operating units as a result of these organizational changes, reflecting value-added activities and contributions related to the particular customer base being served. Prior year segment financial data has been restated to reflect these reportable business segment realignments.

As a result of these changes, Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving automotive service technicians through the worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional automotive-related customers, primarily owners and managers of independent repair shops and OEM dealers, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s wholly owned 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, pension assets and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

Financial data by segment was as follows:

 

     Three Months Ended    Six Months Ended

(Amounts in millions)

   July 3,
2010
   July 4,
2009
   July 3,
2010
   July 4,
2009
           

Net sales:

           

Commercial & Industrial Group

       $     258.7             $     212.1             $     505.7             $     433.2     

Snap-on Tools Group

     264.5           242.6           513.0           469.7     

Repair Systems & Information Group

     205.9           198.0           408.0           385.1     
                           

Segment net sales

     729.1           652.7           1,426.7           1,288.0     

Intersegment eliminations

     (81.5)          (62.7)          (157.5)          (125.4)    
                           

Total net sales

       $     647.6             $     590.0             $     1,269.2             $     1,162.6     

Financial services revenue

     13.9           25.6           23.6           45.6     
                           

Total revenues

       $     661.5             $     615.6             $     1,292.8             $     1,208.2     
                           

Operating earnings:

           

Commercial & Industrial Group

       $     25.5             $     2.3             $     50.9             $     21.9     

Snap-on Tools Group

     33.0           25.5           60.0           45.6     

Repair Systems & Information Group

     40.0           32.9           77.0           56.6     

Financial Services

     1.7           16.6           –             26.6     
                           

Segment operating earnings

     100.2           77.3           187.9           150.7     

Corporate

     (19.5)          (7.0)          (37.2)          (16.1)    
                           

Operating earnings

       $     80.7             $     70.3             $     150.7             $     134.6     

Interest expense

     (13.2)          (11.6)          (27.2)          (20.2)    

Other income (expense) – net

     (0.8)          1.1           (0.5)          0.8     
                           

Earnings before income taxes

       $     66.7             $     59.8             $     123.0             $     115.2     
                           

 

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SNAP-ON INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

 

Financial Data by Segment (continued):

 

(Amounts in millions)    July 3,
2010
   January 2,
2010
     

Assets:

     

Commercial & Industrial Group

       $     815.2             $     871.5     

Snap-on Tools Group

     400.6           373.1     

Repair Systems & Information Group

     901.3           943.5     

Financial Services

     694.4           530.8     
             

Total assets from reportable segments

       $     2,811.5             $     2,718.9     

Corporate

     531.5           768.0     

Segment eliminations

     (29.7)          (39.5)    
             

Total assets

       $     3,313.3             $     3,447.4     
             
     Six Months Ended

(Amounts in millions)

   July 3,
2010
   July 4,
2009
     

Capital expenditures:

     

Commercial & Industrial Group

       $     5.7             $     16.4     

Snap-on Tools Group

     3.2           8.8     

Repair Systems & Information Group

     2.8           7.9     

Financial Services

     0.1           0.1     
             

Total from reportable segments

     11.9           33.2     

Corporate

     0.5           0.4     
             

Total capital expenditures

       $     12.3             $     33.6     
             

Depreciation and amortization:

     

Commercial & Industrial Group

       $     11.0             $     11.1     

Snap-on Tools Group

     8.2           8.1     

Repair Systems & Information Group

     16.2           16.6     

Financial Services

     0.3           0.5     
             

Total from reportable segments

     35.7           36.3     

Corporate

     0.8           0.8     
             

Total depreciation and amortization

       $     36.5             $     37.1     
             

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution Regarding Forward-Looking Statements:

Statements in this document that are not historical facts, including statements that (i) are in the future tense; (ii) include the words “expects,” “plans,” “targets,” “estimates,” “believes,” “anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”) or its management; (iii) are specifically identified as forward-looking; or (iv) describe Snap-on’s or management’s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in its Annual Report on Form 10-K for the fiscal year ended January 2, 2010, which are incorporated herein by reference, could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.

These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain efficiencies and savings from its Rapid Continuous Improvement and other cost reduction initiatives, including its ability to implement reductions in workforce, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher costs and/or lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, its ability to refine its brand and franchise strategies, retain and attract franchisees, further improve service and value to franchisees and thereby enhance their sales and profitability, introduce successful new products, successfully integrate acquisitions, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, the need to provide financing for the contracts and loans originated by Snap-on Credit LLC, litigation challenges, and external negative factors including instability in world credit and financial markets, weakness in the global economy, continued weakness in the U.S. automotive industry, and significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations, and the impact of legal proceedings, energy and raw material supply and pricing, including steel and gasoline, the amount, rate and growth of Snap-on’s general and administrative expenses, including health care and postretirement costs (resulting from, among other matters, new U.S. health care legislation and reforms), the impacts of non-strategic business and/or product line rationalizations and terrorist disruptions on business. Interim results of operations are not necessarily indicative of the results to be expected for the full fiscal year. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document, except as required by law.

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

 

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SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

RESULTS OF OPERATIONS

In the second quarter of 2010, Snap-on realigned its management organization and, as a result, its reportable business segments. This organizational change reflects the company’s efforts to better support the product and service needs of the company’s primary customer segments. As a result of this realignment, Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the newly created Repair Systems & Information Group; and (iv) Financial Services. Prior year segment financial data has been restated to reflect these reportable business segment realignments. See Note 16 to the Condensed Consolidated Financial Statements and “Segment Results” in this Management’s Discussion and Analysis for further information on the company’s reportable business segments.

Results of operations for the three month periods ended July 3, 2010, and July 4, 2009, are as follows:

 

     Three Months Ended

(Amounts in millions)

   July 3, 2010    July 4, 2009    Change

Net sales

       $     647.6         100.0%            $     590.0         100.0%            $     57.6         9.8%    

Cost of goods sold

     (343.8)        -53.1%          (336.0)        -56.9%          (7.8)        -2.3%    
                             

Gross profit

     303.8         46.9%          254.0         43.1%          49.8         19.6%    

Operating expenses

     (224.8)        -34.7%          (200.3)        -34.0%          (24.5)        -12.2%    
                             

Operating earnings before financial services

     79.0         12.2%          53.7         9.1%          25.3         47.1%    

Financial services revenue

     13.9         100.0%          25.6         100.0%          (11.7)        -45.7%    

Financial services expenses

     (12.2)        -87.8%          (9.0)        -35.2%          (3.2)        -35.6%    
                             

Operating earnings from financial services

     1.7         12.2%          16.6         64.8%          (14.9)        -89.8%    
                             

Operating earnings

     80.7         12.2%          70.3         11.4%          10.4         14.8%    

Interest expense

     (13.2)        -2.0%          (11.6)        -1.9%          (1.6)        -13.8%    

Other income (expense) – net

     (0.8)        -0.1%          1.1         0.2%          (1.9)        NM       
                             

Earnings before income taxes and equity earnings (loss)

     66.7         10.1%          59.8         9.7%          6.9         11.5%    

Income tax expense

     (20.3)        -3.1%          (17.6)        -2.9%          (2.7)        -15.3%    
                             

Earnings before equity earnings (loss)

     46.4         7.0%          42.2         6.8%          4.2         10.0%    

Equity earnings (loss), net of tax

     0.5         0.1%          (0.2)        –             0.7         NM       
                             

Net earnings

     46.9         7.1%          42.0         6.8%          4.9         11.7%    

Net earnings attributable to noncontrolling interests

     (1.6)        -0.3%          (4.6)        -0.7%          3.0         65.2%    
                             

Net earnings attributable to Snap-on Inc.

       $     45.3         6.8%            $     37.4         6.1%            $     7.9         21.1%    
                             

 

NM: Not meaningful

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

Net sales in the second quarter of 2010 of $647.6 million were up $57.6 million, or 9.8%, from 2009 levels; excluding $0.9 million of favorable currency translation, organic sales in the quarter increased 9.6% from 2009 levels.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

Sales in the Commercial & Industrial Group of $258.7 million in the second quarter of 2010 were up $46.6 million, or 22.0%, from 2009 levels; excluding $0.9 million of unfavorable currency translation, organic sales increased 22.5%. Sales in the Snap-on Tools Group of $264.5 million increased $21.9 million, or 9.0%, from 2009 levels; excluding $2.8 million of favorable currency translation, organic sales increased 7.8%. Sales in the Repair Systems & Information Group of $205.9 million increased $7.9 million, or 4.0%, from 2009 levels; excluding $1.4 million of unfavorable currency translation, organic sales increased 4.7%.

Gross profit in the second quarter of 2010 was $303.8 million as compared to $254.0 million in 2009. The $49.8 million gross profit increase is primarily due to the higher sales volumes, $6.8 million of savings from ongoing efficiency and productivity (collectively, “Rapid Continuous Improvement” or “RCI”) initiatives and other cost reduction activities, including benefits from restructuring actions, $5.1 million of favorable currency effects and $3.1 million of lower restructuring costs. The year-over-year gross profit comparison also benefited from favorable manufacturing utilization as a result of increasing production levels; in the second quarter of 2009, the company incurred costs to carry excess manufacturing capacity, primarily in Europe, as a result of lower production and inventory reduction efforts. As a percentage of sales, gross margin of 46.9% in the second quarter of 2010 increased 380 basis points (100 basis points equals 1.0 percent) as compared to 43.1% in 2009.

Operating expenses in the second quarter of 2010 were $224.8 million as compared to $200.3 million in 2009. The $24.5 million increase in year-over-year operating expenses includes $14.0 million of higher long-term and current year performance-based incentive compensation expense as a result of the company’s improved year-over-year operating performance, increased volume-related expenses, $3.1 million of higher pension expense, largely due to lower than projected asset returns in previous years related to the U.S. pension plan, and higher stock-based expense. These increases were partially offset by $2.5 million of benefits from ongoing RCI, restructuring and other cost reduction initiatives and $2.5 million of lower restructuring costs. As a percentage of sales, operating expenses were 34.7% in the second quarter of 2010 as compared to 34.0% in 2009.

Operating income from Financial Services was $1.7 million on revenue of $13.9 million in the second quarter of 2010, as compared with $16.6 million of operating income on revenue of $25.6 million in 2009. On July 16, 2009, Snap-on terminated its financial services joint venture agreement with CIT Group Inc. (“CIT”) relating to the parties’ Snap-on Credit LLC (“SOC”) financial services joint venture, and subsequently purchased CIT’s 50%-ownership interest in the joint venture for $8.1 million pursuant to the terms of the joint venture agreement. Since July 16, 2009, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold substantially all new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year declines in both revenues and operating earnings. See Notes 1, 2 and 3 to the Condensed Consolidated Financial Statements for further information on SOC.

Consolidated operating earnings in the second quarter of 2010 of $80.7 million increased $10.4 million, or 14.8%, from the $70.3 million achieved in the second quarter of 2009, despite $14.9 million of lower year-over-year operating earnings from financial services. The $10.4 million increase in year-over-year consolidated operating earnings includes $4.9 million of favorable currency effects.

Interest expense of $13.2 million in the second quarter of 2010 was up $1.6 million from the prior year primarily due to higher average debt levels, partially offset by the impact of declining interest rates. See Note 8 to the Condensed Consolidated Financial Statements for information on the company’s debt and credit facilities.

Other income (expense) – net was expense of $0.8 million in the second quarter of 2010 as compared to income of $1.1 million in 2009. Other income (expense) – net primarily included interest income as well as hedging and currency exchange rate transaction gains and losses. See Note 15 to the Condensed Consolidated Financial Statements for further information.

 

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Snap-on’s effective income tax rate on earnings attributable to Snap-on was 31.2% in the second quarter of 2010 and 31.9% in the second quarter of 2009. The second quarter 2010 effective income tax rate benefited from the favorable settlement of a tax audit. The second quarter 2009 effective income tax rate reflects the realization of a tax benefit in a foreign jurisdiction partially offset by a higher mix of U.S. earnings. See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes.

On April 6, 2010, Snap-on acquired the remaining 40% interest in Wanda Snap-on (Zhejiang) Co. Ltd (“Wanda Snap-on”), the company’s tool manufacturing operation in Xiaoshan, China, for a purchase price of $7.7 million and $0.1 million of transaction costs. Snap-on acquired a 60% interest in Wanda Snap-on for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs, on March 5, 2008. The acquisition of Wanda Snap-on is part of the company’s ongoing strategic initiatives to further expand its manufacturing presence in emerging growth markets and lower-cost regions. On July 1, 2010, Wanda Snap-on was officially renamed Snap-on Asia Manufacturing (Zhejiang) Co. Ltd. (“Xiaoshan”). For segment reporting purposes, the results of Xiaoshan, which have been included in Snap-on’s consolidated financial statements since the date of acquisition, are included in the Commercial & Industrial Group. Pro forma financial information is not presented as the impact of the acquisition was not material to Snap-on’s results of operations or financial position.

Net earnings attributable to Snap-on in the second quarter of 2010 were $45.3 million, or $0.78 per diluted share. Net earnings attributable to Snap-on in the second quarter of 2009 were $37.4 million, or $0.65 per diluted share.

 

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Results of operations for the six month periods ended July 3, 2010, and July 4, 2009, are as follows:

 

     Six Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

Net sales

       $     1,269.2         100.0%            $     1,162.6         100.0%            $     106.6         9.2%    

Cost of goods sold

     (677.8)        -53.4%          (649.9)        -55.9%          (27.9)        -4.3%    
                             

Gross profit

     591.4         46.6%          512.7         44.1%          78.7         15.4%    

Operating expenses

     (440.7)        -34.7%          (404.7)        -34.8%          (36.0)        -8.9%    
                             

Operating earnings before financial services

     150.7         11.9%          108.0         9.3%          42.7         39.5%    

Financial services revenue

     23.6         100.0%          45.6         100.0%          (22.0)        -48.2%    

Financial services expenses

     (23.6)        -100.0%          (19.0)        41.7%          (4.6)        -24.2%    
                             

Operating earnings from financial services

     –            –              26.6         58.3%          (26.6)        -100.0%    
                             

Operating earnings

     150.7         11.6%          134.6         11.1%          16.1         12.0%    

Interest expense

     (27.2)        -2.1%          (20.2)        -1.7%          (7.0)        -34.7%    

Other income (expense) – net

     (0.5)        –              0.8         0.1%          (1.3)        NM      
                             

Earnings before income taxes and equity earnings (loss)

     123.0         9.5%          115.2         9.5%          7.8         6.8%    

Income tax expense

     (39.3)        -3.0%          (35.9)        -2.9%          (3.4)        -9.5%    
                             

Earnings before equity earnings (loss)

     83.7         6.5%          79.3         6.6%          4.4         5.5%    

Equity earnings (loss), net of tax

     1.2         0.1%          (0.1)        –              1.3         NM      
                             

Net earnings

     84.9         6.6%          79.2         6.6%          5.7         7.2%    

Net earnings attributable to noncontrolling interests

     (2.8)        -0.2%          (7.0)        -0.6%          4.2         60.0%    
                             

Net earnings attributable to Snap-on Inc.

       $     82.1         6.4%            $     72.2         6.0%            $     9.9         13.7%    
                             

 

NM: Not meaningful

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

Net sales in the first six months of 2010 of $1,269.2 million were up $106.6 million, or 9.2%, from 2009 levels; excluding $25.3 million of favorable currency translation, organic sales increased 6.8% from 2009 levels. Snap-on has significant international operations and is subject to certain risks inherent with foreign operations, including currency translation fluctuations.

Sales in the Commercial & Industrial Group of $505.7 million for the first six months of 2010 increased $72.5 million, or 16.7%, from 2009 levels; excluding $8.0 million of favorable currency translation, organic sales increased 14.6%. Sales in the Snap-on Tools Group of $513.0 million increased $43.3 million, or 9.2%, from 2009 levels; excluding $12.9 million of favorable currency translation, organic sales increased 6.3%. Sales in the Repair Systems & Information Group of $408.0 million increased $22.9 million, or 5.9%, from 2009 levels; excluding $4.3 million of favorable currency translation, organic sales increased 4.8%.

Gross profit in the first six months of 2010 was $591.4 million as compared to $512.7 million in 2009. The $78.7 million gross profit increase is primarily due to the higher sales volumes, $16.2 million of favorable currency effects, $14.0

 

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million of savings from ongoing RCI and other cost reduction activities, including benefits from restructuring and cost containment actions, and $1.9 million of lower restructuring costs. The year-over-year gross profit comparison also benefited from favorable manufacturing utilization as a result of increasing production levels; in the first six months of 2009, the company incurred costs to carry excess manufacturing capacity, primarily in Europe, as a result of lower production and inventory reduction efforts. As a result of these factors, gross margin of 46.6% in 2010 increased 250 basis points from 44.1% in 2009.

Operating expenses in the first six months of 2010 were $440.7 million, as compared to $404.7 million in 2009. In addition to higher volume-related and other expenses, the $36.0 million increase in year-over-year operating expenses includes $14.8 million of higher long-term and current year performance-based incentive compensation expense as a result of the company’s improved year-over-year operating performance, $8.1 million of higher pension expense, largely due to lower than projected asset returns in previous years related to the U.S. pension plan, $7.2 million of unfavorable currency effects and $4.6 million of higher stock-based expense. These increases were partially offset by $8.9 million of benefits from ongoing RCI and other cost reduction activities, including benefits from restructuring and cost containment actions, and $2.2 million of lower restructuring costs. As a percentage of sales, operating expenses were 34.7% in the first six months of 2010 as compared to 34.8% in 2009.

Operating income from Financial Services was zero on revenue of $23.6 million in the first six months of 2010, as compared with $26.6 million of operating income on revenue of $45.6 million in 2009, reflecting the July 16, 2009 termination of Snap-on’s financial services joint venture with CIT. See Notes 1, 2 and 3 to the Condensed Consolidated Financial Statements for further information on SOC.

Consolidated operating earnings in the first six months of 2010 of $150.7 million were up $16.1 million, or 12.0%, from the $134.6 million achieved in the first six months of 2009, despite $26.6 million of lower year-over-year operating earnings from financial services. The $16.1 million increase in year-over-year consolidated operating earnings includes $9.6 million of favorable currency effects.

Interest expense of $27.2 million in the first six months of 2010 was up $7.0 million from the prior year primarily due to higher average debt levels, partially offset by the impact of declining interest rates. See Note 8 to the Condensed Consolidated Financial Statements for information on the company’s debt and credit facilities.

Other income (expense) – net was expense of $0.5 million in the first six months of 2010, as compared to income of $0.8 million in 2009. Other income (expense) – net primarily included interest income as well as hedging and currency exchange rate transaction gains and losses. See Note 15 to the Condensed Consolidated Financial Statements for further information.

Snap-on’s effective income tax rate on earnings attributable to Snap-on was 32.7% in the first six months of 2010 and 33.2% in the first six months of 2009. The 2010 effective income tax rate benefited from the favorable settlement of a tax audit. See Note 7 to the Condensed Consolidated Financial Statements for information on income taxes.

Net earnings attributable to Snap-on in the first six months of 2010 were $82.1 million, or $1.41 per diluted share, as compared with $72.2 million, or $1.25 per diluted share, in 2009.

Exit and Disposal Activities

Snap-on recorded costs of $3.1 million and $6.3 million for exit and disposal activities in the three and six month periods ended July 3, 2010, respectively, as compared to $8.6 million and $10.6 million for exit and disposal activities in the three and six month periods ended July 4, 2009, respectively. Snap-on currently anticipates that full-year 2010 exit and disposal costs will approximate $15 million; full year 2009 exit and disposal costs totaled $22.0 million. See Note 6 to the Condensed Consolidated Financial Statements for information on Snap-on’s exit and disposal activities.

 

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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. In the second quarter of 2010, Snap-on realigned its management organization and, as a result, its reportable business segments. This organizational change reflects the company’s efforts to better support the product and service needs of the company’s primary customer segments. These customer segments include: (i) commercial and industrial customers, including professionals in critical industries and emerging markets; (ii) professional technicians who purchase products through the company’s worldwide mobile tool distribution network; and (iii) other professional customers related to automotive repair, including owners and managers of independent and Original Equipment Manufacturer (“OEM”) dealership service and repair shops. In addition, Snap-on’s Financial Services customer segment offers financing options that include (i) loans to franchisees’ customers and Snap-on’s industrial and other customers for the purchase or lease of tools, equipment and diagnostics products on an extended term payment plan; and (ii) business loans and vehicle leases to franchisees.

The primary organizational changes in the second quarter of 2010 included the realignment of the company’s equipment products and equipment repair services operations from the Commercial & Industrial Group to the newly created Repair Systems & Information Group in order to better serve customers in the worldwide vehicle service and repair marketplace, including owners and managers of independent and OEM dealership service and repair shops. In addition to equipment products and equipment repair services, the Repair Systems & Information Group includes the business operations of the company’s former Diagnostics & Information Group, consisting of those operations providing diagnostics, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle and repair marketplace. The organizational changes also included the realignment of the company’s sales operations in Japan from the Snap-on Tools Group to the Commercial & Industrial Group to assist in further penetrating the customer base, particularly industrial buyers, in that region. The company also reallocated certain costs between the operating units as a result of these organizational changes, reflecting value-added activities and contributions related to the particular customer base being served. Prior year segment financial data has been restated to reflect these reportable business segment realignments.

As a result of these changes, Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, primarily through direct and distributor channels. The Snap-on Tools Group consists of business operations primarily serving automotive service technicians through the worldwide mobile tool distribution channel. The Repair Systems & Information Group consists of business operations serving other professional automotive-related customers, primarily owners and managers of independent repair shops and OEM dealers, through direct and distributor channels. Financial Services consists of the business operations of Snap-on’s wholly owned 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, pension assets and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

 

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Commercial & Industrial Group

 

     Three Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

External net sales

       $     217.7         84.2%            $     189.7         89.4%            $     28.0         14.8%    

Intersegment net sales

     41.0         15.8%          22.4         10.6%          18.6         83.0%    
                             

Segment net sales

     258.7         100.0%          212.1         100.0%          46.6         22.0%    

Cost of goods sold

     (166.1)        -64.2%          (146.7)        -69.2%          (19.4)        -13.2%    
                             

Gross profit

     92.6         35.8%          65.4         30.8%          27.2         41.6%    

Operating expenses

     (67.1)        -25.9%          (63.1)        -29.7%          (4.0)        -6.3%    
                             

Segment operating earnings

       $     25.5         9.9%            $     2.3         1.1%            $     23.2         NM      
                             

 

NM: Not meaningful

Segment net sales of $258.7 million in the second quarter of 2010 increased $46.6 million, or 22.0%, from 2009 levels. Excluding $0.9 million of unfavorable currency translation, organic sales increased $47.5 million, or 22.5%, reflecting higher sales across all operating units, particularly those businesses serving critical industries and emerging markets.

Segment gross profit of $92.6 million in the second quarter of 2010 was up $27.2 million, or 41.6%, from 2009 levels. The $27.2 million increase in year-over-year gross profit is primarily due to the higher sales, $5.2 million of savings from ongoing RCI and restructuring initiatives, $1.8 million of lower restructuring costs and $0.6 million of favorable currency effects. The year-over-year gross profit comparison also benefited from favorable manufacturing utilization, primarily in Europe, as a result of increasing production levels; in the second quarter of 2009, the segment incurred costs to carry excess manufacturing capacity as a result of lower production and inventory reduction efforts. As a result of these factors, gross margin for the second quarter of 2010 improved to 35.8%, up 500 basis points from 30.8% in the second quarter of 2009. Operating expenses of $67.1 million in the second quarter of 2010 were up $4.0 million from 2009 levels primarily due to higher volume-related and other expenses, partially offset by $1.4 million of lower restructuring costs and $0.8 million of benefits from ongoing restructuring initiatives. As a result of these factors, segment operating earnings of $25.5 million in the second quarter of 2010 increased $23.2 million from 2009 levels. As a percentage of segment net sales, operating earnings for the Commercial & Industrial Group increased from 1.1% in 2009 to 9.9% in 2010. The $23.2 million increase in year-over-year operating earnings includes $0.5 million of favorable currency effects.

 

     Six Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

External net sales

       $     428.7         84.8%            $     382.4         88.3%            $     46.3         12.1%    

Intersegment net sales

     77.0         15.2%          50.8         11.7%          26.2         51.6%    
                             

Segment net sales

     505.7         100.0%          433.2         100.0%          72.5         16.7%    

Cost of goods sold

     (324.4)        -64.1%          (282.9)        -65.3%          (41.5)        -14.7%    
                             

Gross profit

     181.3         35.9%          150.3         34.7%          31.0         20.6%    

Operating expenses

     (130.4)        -25.8%          (128.4)        -29.6%          (2.0)        -1.6%    
                             

Segment operating earnings

       $     50.9         10.1%            $     21.9         5.1%            $     29.0         132.4%    
                             

Segment net sales of $505.7 million in the first six months of 2010 increased $72.5 million, or 16.7%, from 2009 levels. Excluding $8.0 million of favorable currency translation, organic sales increased $64.5 million, or 14.6%, reflecting higher sales to customers in critical industries, continued higher sales in emerging growth markets, increased sales in the segment’s European-based tools business, and higher sales of power and specialty tools.

 

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Segment gross profit of $181.3 million in the first six months of 2010 was up $31.0 million, or 20.6%, from 2009 levels. The $31.0 million increase in year-over-year gross profit is primarily due to the higher sales, $8.7 million of savings from ongoing RCI and other cost reduction activities, including benefits from restructuring and cost containment actions, $2.0 million of favorable currency effects and $1.1 million of lower restructuring costs. The year-over-year gross profit comparison also benefited from favorable manufacturing utilization, primarily in Europe, as a result of increasing production levels; in the first six months of 2009, the segment incurred costs to carry excess manufacturing capacity as a result of lower production and inventory reduction efforts. As a result of these factors, gross margin of 35.9% for the first six months of 2010 improved 120 basis points from 34.7% for the first six months of 2009. Operating expenses of $130.4 million in the first six months of 2010 were up $2.0 million from 2009 levels primarily due to higher volume-related and other expenses and $2.7 million of unfavorable currency effects. These increases were partially offset by $3.9 million of savings from ongoing restructuring and other cost reduction and cost containment initiatives, and $2.1 million of lower restructuring costs. As a result of these factors, segment operating earnings of $50.9 million in the first six months of 2010 increased $29.0 million from 2009 levels. As a percentage of segment net sales, operating earnings for the Commercial & Industrial Group increased from 5.1% in 2009 to 10.1% in 2010. The $29.0 million increase in year-over-year operating earnings includes $0.7 million of unfavorable currency effects.

Snap-on Tools Group

 

     Three Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

Segment net sales

       $     264.5         100.0%            $     242.6         100.0%            $     21.9         9.0%    

Cost of goods sold

     (149.0)        -56.3%          (141.5)        -58.3%          (7.5)        -5.3%    
                             

Gross profit

     115.5         43.7%          101.1         41.7%          14.4         14.2%    

Operating expenses

     (82.5)        -31.2%          (75.6)        -31.2%          (6.9)        -9.1%    
                             

Segment operating earnings

       $     33.0         12.5%            $     25.5         10.5%            $     7.5         29.4%    
                             

Segment net sales of $264.5 million in the second quarter of 2010 increased $21.9 million, or 9.0%, from 2009 levels. Excluding $2.8 million of favorable currency translation, organic sales increased 7.8% year over year, including a 9.3% sales increase in the United States. As of July 3, 2010, van count in the United States was unchanged from first quarter 2010 levels and up slightly compared with June 2009 levels.

Segment gross profit of $115.5 million in the second quarter of 2010 increased $14.4 million, or 14.2%, from 2009 levels. The $14.4 million increase in year-over-year gross profit primarily reflects the effect of higher sales and benefits from favorable manufacturing utilization as a result of increasing U.S. production levels, and $4.9 million of favorable currency effects. As a percentage of sales, gross margin of 43.7% improved 200 basis points from 41.7% in 2009. Operating expenses of $82.5 million in the second quarter of 2010 increased $6.9 million from 2009 levels primarily due to higher volume-related and other expenses, $1.3 million of increased stock-based expense related to the franchisee stock purchase plan and $0.7 million of unfavorable currency effects. These increases to operating expenses were partially offset by $0.4 million of lower restructuring costs. As a result of these factors, segment operating earnings of $33.0 million in the second quarter of 2010 increased $7.5 million from 2009 levels and, as a percentage of segment net sales, improved from 10.5% in 2009 to 12.5% in 2010. The $7.5 million increase in year-over-year operating earnings includes $4.2 million of favorable currency effects.

 

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     Six Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

Segment net sales

       $     513.0         100.0%            $     469.7         100.0%            $     43.3         9.2%    

Cost of goods sold

     (292.3)        -57.0%          (274.0)        -58.3%          (18.3)        -6.7%    
                             

Gross profit

     220.7         43.0%          195.7         41.7%          25.0         12.8%    

Operating expenses

     (160.7)        -31.3%          (150.1)        -32.0%          (10.6)        -7.1%    
                             

Segment operating earnings

       $ 60.0         11.7%            $ 45.6         9.7%            $ 14.4         31.6%    
                             

Segment net sales of $513.0 million in the first six months of 2010 increased $43.3 million, or 9.2%, from 2009 levels. Excluding $12.9 million of favorable currency translation, organic sales increased 6.3% year over year. Sales in the United States increased 6.9% year over year and organic sales in the company’s international franchise operations increased 4.6% year over year. As of July 3, 2010, van count in the United States was unchanged from first quarter 2010 levels and up slightly compared with June 2009 levels.

Segment gross profit of $220.7 million in the first six months of 2010 increased $25.0 million, or 12.8%, from 2009 levels. The $25.0 million increase primarily reflects the effect of higher sales and favorable manufacturing utilization, $12.3 million of favorable currency effects and $1.7 million of savings from ongoing restructuring initiatives. These increases were partially offset by the effects of inventory write-offs, lower gross profit from the sale of slow-moving and excess inventories and $1.5 million of material cost increases. The year-over-year gross profit comparison was also impacted by $2.4 million of lower warranty expense in the first six months of 2009 due to favorable historic warranty trend rates. As a percentage of sales, gross margin of 43.0% improved 130 basis points from 41.7% in 2009. Operating expenses of $160.7 million in the first six months of 2010 increased $10.6 million from 2009 levels primarily due to higher volume-related and other expenses, $3.1 million of unfavorable currency effects and $1.3 million of higher stock-based expense related to the franchisee stock purchase plan. These increases were partially offset by $1.4 million of savings from ongoing cost reduction and cost containment initiatives and $0.2 million of lower restructuring costs. As a result of these factors, segment operating earnings of $60.0 million in the first six months of 2010 increased $14.4 million from 2009 levels and, as a percentage of segment net sales, improved from 9.7% in 2009 to 11.7% in 2010. The $14.4 million increase in year-over-year operating earnings includes $9.2 million of favorable currency effects

Repair Systems & Information Group

 

     Three Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

External net sales

       $     165.4         80.3%            $     157.7         79.6%            $     7.7         4.9%    

Intersegment net sales

     40.5         19.7%          40.3         20.4%          0.2         0.5%    
                             

Segment net sales

     205.9         100.0%          198.0         100.0%          7.9         4.0%    

Cost of goods sold

     (110.2)        -53.5%          (110.5)        -55.8%          0.3         0.3%    
                             

Gross profit

     95.7         46.5%          87.5         44.2%          8.2         9.4%    

Operating expenses

     (55.7)        -27.1%          (54.6)        -27.6%          (1.1)        -2.0%    
                             

Segment operating earnings

       $ 40.0         19.4%            $ 32.9         16.6%            $ 7.1         21.6%    
                             

Segment net sales of $205.9 million in the second quarter of 2010 increased $7.9 million, or 4.0%, from 2009 levels. Excluding $1.4 million of unfavorable currency translation, organic sales increased 4.7% year over year primarily due to higher worldwide sales of equipment and increased essential tool and facilitation program sales, partially offset by anticipated lower electronic parts catalog sales in North America as a result of OEM dealership consolidations.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

(continued)

 

Segment gross profit of $95.7 million in the second quarter of 2010 increased $8.2 million, or 9.4%, from 2009 levels. As a percentage of sales, gross margin improved 230 basis points from 44.2% in the second quarter of 2009 to 46.5% in the second quarter of 2010. The $8.2 million increase in gross profit primarily reflects the effect of higher sales, $1.6 million of benefits from ongoing RCI and restructuring initiatives and $1.1 million of lower restructuring costs. Operating expenses of $55.7 million in the second quarter of 2010 increased $1.1 million from 2009 levels as increased product development, volume-related and other expenses were partially offset by $1.7 million of savings from ongoing RCI, restructuring and other cost reduction initiatives, $1.0 million of lower bad debt expense and $0.7 million of lower restructuring costs. As a result of these factors, segment operating earnings of $40.0 million in the second quarter of 2010 increased $7.1 million from $32.9 million in 2009, and improved as a percentage of segment net sales to 19.4% in 2010 as compared to 16.6% in 2009. The $7.1 million increase in year-over-year operating earnings did not include any currency effects.

 

     Six Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

External net sales

       $     327.5         80.3%            $     310.5         80.6%            $     17.0         5.5%    

Intersegment net sales

     80.5         19.7%          74.6         19.4%          5.9         7.9%    
                             

Segment net sales

     408.0         100.0%          385.1         100.0%          22.9         5.9%    

Cost of goods sold

     (218.6)        -53.6%          (218.4)        -56.7%          (0.2)        -0.1%    
                             

Gross profit

     189.4         46.4%          166.7         43.3%          22.7         13.6%    

Operating expenses

     (112.4)        -27.5%          (110.1)        -28.6%          (2.3)        -2.1%    
                             

Segment operating earnings

       $ 77.0         18.9%            $ 56.6         14.7%            $ 20.4         36.0%    
                             

Segment net sales of $408.0 million in the first six months of 2010 increased $22.9 million, or 5.9%, from 2009 levels. Excluding $4.3 million of favorable currency translation, organic sales increased 4.8% year over year primarily due to higher sales of equipment, increased essential tool and facilitation program sales, and higher sales of information and diagnostics products, partially offset by anticipated lower electronic parts catalog sales in North America as a result of OEM dealership consolidations.

Segment gross profit of $189.4 million in the first six months of 2010 increased $22.7 million, or 13.6%, from 2009 levels. As a percentage of sales, gross margin improved 310 basis points from 43.3% in 2009 to 46.4% in 2010. The $22.7 million increase in gross profit primarily reflects the effect of higher sales, $3.6 million of benefits from ongoing RCI, restructuring and other cost reduction and cost containment initiatives, $2.9 million of savings from material cost reductions, $1.9 million of favorable currency effects and $0.6 million of lower restructuring costs. The gross profit comparison also benefited from favorable year-over-year manufacturing utilization as a result of increasing production levels. Operating expenses of $112.4 million in the first six months of 2010 increased $2.3 million from 2009 levels as increased product development and other expenses, $1.4 million of unfavorable currency effects and $0.4 million of higher restructuring costs were partially offset by $3.6 million of savings from ongoing RCI, restructuring and other cost reduction and cost containment initiatives and $1.1 million of lower bad debt expense. As a result of these factors, segment operating earnings of $77.0 million in the first six months of 2010 increased $20.4 million, or 36.0%, from $56.6 million in 2009, and improved as a percentage of segment net sales to 18.9% in 2010 as compared to 14.7% in 2009. The $20.4 million increase in year-over-year operating earnings includes $0.5 million of favorable currency effects.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

Financial Services

 

     Three Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

Financial services revenue

       $     13.9         100.0%            $     25.6         100.0%            $     (11.7)        -45.7%    

Financial services expenses

     (12.2)        -87.8%          (9.0)        -35.2%          (3.2)        -35.6%    
                             

Segment operating earnings

       $     1.7         12.2%            $     16.6         64.8%            $     (14.9)        -89.8%    
                             

Segment operating earnings were $1.7 million on $13.9 million of revenue in the second quarter of 2010, as compared with $16.6 million of operating earnings on $25.6 million of revenue in the second quarter of 2009. Since the July 16, 2009 termination of the financial services joint venture agreement with CIT, Snap-on is providing financing for the majority of new loans originated by SOC and SOC is recording the interest yield on the new on-book receivables over the life of the contracts as financial services revenue. Previously, SOC sold substantially all new contract originations to CIT and recorded gains on the sale of the contracts as financial services revenue. The change from recognizing gains on contract sales to CIT, to recognizing the interest yield on the on-book receivables, was a primary factor in the year-over-year declines in both revenues and operating earnings. Originations of $136.7 million in the second quarter of 2010 increased $2.7 million, or 2.0%, from prior-year levels. See Notes 1, 2 and 3 to the Condensed Consolidated Financial Statements for further information on SOC.

 

     Six Months Ended
(Amounts in millions)    July 3, 2010    July 4, 2009    Change

Financial services revenue

       $     23.6         100.0%            $     45.6         100.0%            $     (22.0)        -48.2%    

Financial services expenses

     (23.6)        -100.0%          (19.0)        -41.7%          (4.6)        -24.2%    
                             

Segment operating earnings

       $ –            –                  $     26.6         58.3%            $     (26.6)        -100.0%    
                             

Segment operating earnings were zero on $23.6 million of revenue in the first six months of 2010, as compared with $26.6 million of operating earnings on revenue of $45.6 million in 2009. Originations of $253.9 million in the first six months of 2010 increased 6.1% as compared to $239.2 million in the first six months of 2009.

Corporate

Snap-on’s general corporate expenses of $19.5 million in the second quarter of 2010 increased $12.5 million from $7.0 million in the second quarter of 2009 primarily due to an increase in long-term and current year performance-based incentive compensation expense as a result of the company’s improved year-over-year operating performance, higher stock-based expense and $3.1 million of higher pension expense, largely due to lower than projected asset returns in previous years related to the U.S. pension plan.

Snap-on’s general corporate expenses of $37.2 million in the first six months of 2010 increased $21.1 million from $16.1 million in the first six months of 2009 primarily due to an increase in long-term and current year performance-based incentive compensation expense as a result of the company’s improved year-over-year operating performance, higher stock-based expense and $8.1 million of higher pension expense, largely due to lower than projected asset returns in previous years related to the U.S. pension plan.

 

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SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

Supplemental Data

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

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

 

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SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

(continued)

 

Supplemental Consolidating Data – The supplemental Condensed Statements of Earnings information for the three month periods ended July 3, 2010, and July 4, 2009, is as follows:

 

     Operations*    Financial Services
     July 3,    July 4,    July 3,    July 4,
(Amounts in millions)    2010    2009    2010    2009

Net sales

       $     647.6             $     590.0             $     –                $     –        

Cost of goods sold

     (343.8)          (336.0)          –              –        
                           

Gross profit

     303.8           254.0           –              –        

Operating expenses

     (224.8)          (200.3)          –              –        
                           

Operating earnings before financial services

     79.0           53.7           –              –        

Financial services revenue

     –              –              13.9           25.6     

Financial services expenses

     –              –              (12.2)          (9.0)    
                           

Operating earnings from financial services

     –              –              1.7           16.6     
                           

Operating earnings

     79.0           53.7           1.7           16.6     

Interest expense

     (13.2)          (11.6)          –              –        

Intersegment interest income (expense) – net

     5.9           –              (5.9)          –        

Other income (expense) – net

     (0.9)          1.1           0.1           –        
                           

Earnings (loss) before income taxes and equity earnings (loss)

     70.8           43.2           (4.1)          16.6     

Income tax (expense) benefit

     (21.9)          (12.7)          1.6           (4.9)    
                           

Earnings (loss) before equity earnings (loss)

     48.9           30.5           (2.5)          11.7     

Financial services – net earnings (loss) attributable to Snap-on Inc.

     (2.5)          8.5           –              –        

Equity earnings (loss), net of tax

     0.5           (0.2)          –              –        
                           

Net earnings (loss)

     46.9           38.8           (2.5)          11.7     

Net earnings attributable to noncontrolling interests

     (1.6)          (1.4)          –              (3.2)    
                           

Net earnings (loss) attributable to Snap-on Inc.

       $     45.3             $     37.4             $     (2.5)            $     8.5     
                           

 

*

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

Supplemental Consolidating Data – The supplemental Condensed Statements of Earnings information for the six month periods ended July 3, 2010, and July 4, 2009, is as follows:

 

     Operations*    Financial Services
     July 3,    July 4,    July 3,    July 4,
(Amounts in millions)    2010    2009    2010    2009

Net sales

       $     1,269.2             $     1,162.6             $     –               $ –       

Cost of goods sold

     (677.8)          (649.9)          –             –       
                           

Gross profit

     591.4           512.7           –             –       

Operating expenses

     (440.7)          (404.7)          –             –       
                           

Operating earnings before financial services

     150.7           108.0           –             –       

Financial services revenue

     –             –             23.6           45.6     

Financial services expenses

     –             –             (23.6)          (19.0)    
                           

Operating earnings from financial services

     –             –             –             26.6     
                           

Operating earnings

     150.7           108.0           –             26.6     

Interest expense

     (27.2)          (20.2)          –             –       

Intersegment interest income (expense) – net

     9.6           (0.1)          (9.6)          0.1     

Other income (expense) – net

     (0.6)          0.9           0.1           (0.1)    
                           

Earnings (loss) before income taxes and equity earnings (loss)

     132.5           88.6           (9.5)          26.6     

Income tax benefit (expense)

     (43.3)          (27.9)          4.0           (8.0)    
                           

Earnings (loss) before equity earnings (loss)

     89.2           60.7           (5.5)          18.6     

Financial services – net earnings (loss) attributable to Snap-on Inc.

     (5.5)          14.0           –             –       

Equity earnings (loss), net of tax

     1.2           (0.1)          –             –       
                           

Net earnings (loss)

     84.9           74.6           (5.5)          18.6     

Net earnings attributable to noncontrolling interests

     (2.8)          (2.4)          –             (4.6)    
                           

Net earnings (loss) attributable to Snap-on Inc.

       $     82.1             $     72.2             $     (5.5)            $     14.0     
                           

 

*

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

 

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SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

Supplemental Consolidating Data – The supplemental Condensed Balance Sheet information as of July 3, 2010, and January 2, 2010, is as follows:

 

     Operations*    Financial Services
(Amounts in millions)    July 3,
2010
   January 2,
2010
   July 3,
2010
   January 2,
2010

ASSETS

           

Current assets

           

Cash and cash equivalents

       $     320.5            $     577.1            $     110.3            $     122.3    

Intersegment receivables

     6.2          4.8          –             0.1    

Trade and other accounts receivable – net

     401.3          411.5          6.2          2.9    

Contract receivables – net

     7.8          7.4          27.8          25.5    

Finance receivables – net

     –             –             169.1          122.3    

Inventories – net

     296.5          274.7          –             –       

Deferred income tax assets

     70.7          69.3          3.5          0.2    

Prepaid expenses and other assets

     69.9          60.1          4.0          2.8    
                           

Total current assets

     1,172.9          1,404.9          320.9          276.1    

Property and equipment – net

     323.0          346.4          1.2          1.4    

Investment in Financial Services

     106.6          205.6          –             –       

Deferred income tax assets

     80.7          73.6          11.4          14.6    

Long-term contract receivables – net

     9.6          10.9          81.6          59.8    

Long-term finance receivables – net

     –             –             278.6          177.9    

Goodwill

     773.1          814.3          –             –       

Other intangibles – net

     195.0          206.2          –             –       

Other assets

     73.1          65.2          0.7          1.0    
                           

Total assets

   $ 2,734.0        $ 3,127.1        $ 694.4        $ 530.8    
                           

 

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

 

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SNAP-ON INCORPORATED

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(continued)

 

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

 

     Operations*    Financial Services
(Amounts in millions)    July 3,
2010
   January 2,
2010
   July 3,
2010
   January 2,
2010

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Current liabilities

           

Notes payable and current maturities of long-term debt

       $     13.6             $     164.7             $     –               $     –       

Accounts payable

     127.7           119.3           0.8           0.5     

Intersegment payables

     –             4.2           6.2           0.7     

Accrued benefits

     41.0           48.4           –             0.3     

Accrued compensation

     62.9           61.6           1.8           3.2     

Franchisee deposits

     35.4           40.5           –             –       

Other accrued liabilities

     231.3           215.7           134.2           85.7