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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 2009, or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-7724 (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) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common stock, $1.00 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No 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 No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 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 The aggregate market value of voting and non-voting common equity held by non-affiliates (excludes 224,533 shares held by directors and executive officers) computed by reference to the price ($51.74) at which common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (June 28, 2008) was: $3.0 billion The number of shares of Common Stock ($1.00 par value) of the registrant outstanding as of February 13, 2009, was 57,460,513 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K incorporates by reference certain information that will be set forth in Snap-on’s Proxy Statement, which is expected to first be mailed to shareholders on or around March 11, 2009, prepared for the Annual Meeting of Shareholders scheduled for April 23, 2009.


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    TABLE OF CONTENTS Page PART I Item 1 Business................................................................................................................................4 Item 1A Risk Factors ........................................................................................................................11 Item 1B Unresolved Staff Comments ...............................................................................................17 Item 2 Properties ............................................................................................................................18 Item 3 Legal Proceedings ..............................................................................................................19 Item 4 Submission of Matters to a Vote of Security Holders .........................................................19 PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities...............................................................................19 Item 6 Selected Financial Data ......................................................................................................22 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations.........................................................................................................23 Item 7A Quantitative and Qualitative Disclosures About Market Risk .............................................47 Item 8 Financial Statements and Supplementary Data .................................................................49 Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ...........................................................................................................49 Item 9A Controls and Procedures ....................................................................................................49 Item 9B Other Information ................................................................................................................51 PART III Item 10 Directors, Executive Officers and Corporate Governance..................................................51 Item 11 Executive Compensation ....................................................................................................52 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............................................................................................52 Item 13 Certain Relationships and Related Transactions, and Director Independence..................53 Item 14 Principal Accounting Fees and Services.............................................................................53 PART IV Item 15 Exhibits and Financial Statement Schedules......................................................................53 Signatures .....................................................................................................................................................93 Exhibit Index..................................................................................................................................................95 Computation of Ratio of Earnings to Fixed Charges ....................................................................................98 Consent of Independent Registered Public Accounting Firm .......................................................................99 Certifications................................................................................................................................................100 2 SNAP-ON INCORPORATED


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    PART I Safe Harbor 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 this Annual Report on Form 10-K, particularly those in “Item 1A: Risk Factors,” 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 (“RCI”) 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 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 enhance 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, litigation challenges and external negative factors including significant changes in the current competitive environment, inflation, disruptions and instability in the credit and financial markets, weakness in the global economy, changes in interest rates and other monetary and market fluctuations, including changes in foreign currency exchange rates; 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, the impacts of non-strategic business and/or product line rationalizations, and terrorist disruptions on business. 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. 2008 ANNUAL REPORT 3


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    Item 1: Business Snap-on was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of tools, diagnostics, equipment, software and service solutions for professional users. Products and services include hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers, as well as customers in industry, government, agriculture, aviation and natural resources. Snap-on also derives income from various financing programs to facilitate the sales of its products. Snap-on markets its products and brands through multiple distribution sales channels in approximately 130 countries. Snap-on’s largest geographic markets include the United States, Australia, Canada, China, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom. Snap-on also reaches its customers through the company’s franchisee, company-direct, distributor and Internet channels. Snap-on originated the mobile van tool distribution channel in the automotive repair market. Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on Credit LLC (“SOC”), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. (“CIT”), and Snap-on’s wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations. See Note 19 to the Consolidated Financial Statements for information on business segments and foreign operations. Snap-on evaluates the performance of its reportable segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools, and Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. 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, deferred income taxes, pension assets and certain other assets. Intersegment amounts are eliminated to arrive at consolidated financial results. On March 5, 2008, Snap-on acquired a 60% interest in Zhejiang Wanda Tools Co., Ltd. (“Wanda Snap-on”), a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. 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. For segment reporting purposes, Wanda Snap-on is included in the Commercial & Industrial Group. See Note 2 to the Consolidated Financial Statements for further information on the company’s acquisition of Wanda Snap-on. On November 28, 2006, Snap-on acquired the ProQuest Business Solutions business and certain net assets (collectively, “Snap-on Business Solutions” or “Business Solutions”) from ProQuest Company for a purchase price of $521.7 million of cash and the assumption of approximately $19 million of debt. For segment reporting purposes, Snap-on Business Solutions is included in the Diagnostics & Information Group. See Note 2 to the Consolidated Financial Statements for further information on the company’s acquisition of Business Solutions. 4 SNAP-ON INCORPORATED


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    Information Available on the Company’s Web Site Additional information regarding Snap-on and its products is available on the company’s Web site at www.snapon.com. Snap-on is not including the information contained on its Web site as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Snap-on’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements on Schedule 14A, Current Reports on Form 8-K, and any amendments to those reports, are made available to the public at no charge, other than an investor’s own Internet access charges, through the Investor Information section of the company’s Web site at www.snapon.com/investor. Snap-on makes such material available on its Web site as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Copies of any materials the company files with the SEC can also be obtained free of charge through the SEC’s Web site at www.sec.gov. The SEC’s Public Reference Room can be contacted at 100 F Street, N.E., Washington, D.C. 20549, or by calling 1-800-732-0330. In addition, the company’s (i) charters for the Audit, Corporate Governance and Nominating, and Organization and Executive Compensation committees of the company’s Board of Directors; (ii) Corporate Governance Guidelines; and (iii) Code of Business Conduct and Ethics are available on Snap-on’s Web site. Snap-on will also post any amendments to these documents, or information about any waivers granted to directors or executive officers with respect to the Code of Business Conduct and Ethics, on the company’s Web site at www.snapon.com. These documents are also available in print upon written request directed to the Corporate Secretary, 2801 80th Street, Kenosha, Wisconsin 53143. Products and Services Snap-on offers a broad line of products and complementary services that are grouped into three product categories: (i) tools; (ii) diagnostics and repair information; and (iii) equipment. Further product line information is not presented as it is not practicable to do so. The following table shows the consolidated net sales of these product categories for the last three years: Net Sales (Amounts in millions) 2008 2007 2006 Product Category: Tools $ 1,694.9 $ 1,632.2 $ 1,453.1 Diagnostics and repair information 589.8 647.6 499.5 Equipment 568.6 561.4 502.5 $ 2,853.3 $ 2,841.2 $ 2,455.1 The tools product category includes hand tools, power tools and tool storage products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets, saws and cutting tools, pruning tools, torque measuring instruments and other similar products. Power tools include pneumatic (air), hydraulic, cordless (battery) and corded (electric) tools such as impact wrenches, ratchets, chisels, drills, sanders, polishers and similar products. Tool storage includes tool chests, roll cabinets, tool control systems and other similar products. The majority of products are manufactured by Snap-on and, in completing the product line, other items are purchased from external manufacturers. The diagnostics and repair information product category includes handheld and PC-based diagnostics products, service and repair information products, diagnostic software solutions, electronic parts catalogs, business management systems, business services, point-of-sale systems, integrated systems for vehicle service shops, equipment repair services, original equipment manufacturers (“OEMs”) purchasing facilitation services, and warranty management systems and analytics to help dealerships manage and track performance. 2008 ANNUAL REPORT 5


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    The products offered by Snap-on Business Solutions, which was acquired by the company on November 28, 2006, are included in the diagnostics and repair information product category. Snap-on Business Solutions is a world leader in automotive parts and service information. Its products are aimed at assisting OEMs and their dealers to enhance their service operations. Business Solutions’ products include integrated software, services and systems that transform complex technical data for parts catalogs into easily accessed electronic information (electronic parts catalogs). Other products and services include warranty management systems and analytics to help dealerships manage and track the complex process of warranty claims management. Over 38,000 automotive dealerships around the world use Business Solutions’ electronic parts catalogs, which are available in 29 different languages and support 15 automotive manufacturers and 31 brands. Business Solutions’ products are also sold to over 85,000 dealers in the power equipment and power sports markets. Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs as well as after sales support for its customers, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on. The equipment product category includes solutions for the diagnosis and service of automotive and industrial equipment. Products include wheel alignment equipment, wheel balancers, tire changers, vehicle lifts, test lane systems, collision repair equipment, air conditioning service equipment, brake service equipment, fluid exchange equipment, transmission troubleshooting equipment, safety testing equipment, battery chargers and hoists. Products are marketed under a number of brand names and trademarks, many of which are well known in the vehicle service and industrial markets served. Some of the major trade names and trademarks and the products and services with which they are associated include the following: Names Products and Services Snap-on Hand tools, power tools, tool storage products, diagnostics, certain equipment and related accessories, mobile tool stores, Web sites, electronic parts catalogs, warranty analytics solutions, business management services, OEM specialty tools and equipment development and distribution, and OEM facilitation services Acesa Hand tools BAHCO Saw blades and cutting tools, hand tools and tool storage Blackhawk Collision repair equipment Blue-Point Hand tools, power tools, tool storage units, certain equipment and related accessories Cartec Safety testing, brake testers, test lane equipment, dynamo-meters, suspension testers, emission testers and other equipment Fish and Hook Hand tools and tool storage Hofmann Wheel balancers, lifts, tire changers, wheel aligners, brake testers and test lane equipment Irimo Hand tools John Bean Wheel balancers, lifts, tire changers, wheel aligners, brake testers and test lane equipment Mitchell1 Service information, shop management systems and business services Nexiq Diagnostic tools, information and program distributions for fleet and heavy duty equipment Palmera Hand tools ShopKey Repair and service information, shop management systems and business services Sioux Power tools Sun Diagnostic and service equipment Williams Hand tools 6 SNAP-ON INCORPORATED


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    In addition to its sales of tool, diagnostic, service and equipment solutions, Snap-on also generates revenue from various financing activities that include (i) loans to franchisees; (ii) loans to the franchisees’ customers; and (iii) loans to Snap-on’s industrial and other customers for the purchase of tools, equipment and diagnostics products on an extended- term payment plan. Franchise fee revenue, including nominal, non-refundable initial and ongoing monthly fees (primarily for sales and business training and marketing and product promotion programs), is recognized as the fees are earned. Sales and Distribution Snap-on markets and distributes its products and related services principally to professional tool and equipment users around the world. The two largest market sectors are the vehicle service and repair sector and the industrial sector. Vehicle Service and Repair Sector The vehicle service and repair sector has three main customer groups: (i) professional technicians who purchase tools and equipment for themselves; (ii) vehicle service and repair shop owners and managers − including independent shops, national chains and automotive dealerships − who purchase tools, equipment and diagnostics products for use by multiple technicians within a service or repair facility; and (iii) OEMs. Snap-on provides innovative tool, equipment and business solutions, as well as technical sales support and training, to meet technicians’ evolving needs. Snap-on’s franchise van distribution system offers technicians the convenience of purchasing quality tools with minimal disruption of their work routine. Snap-on also provides owners and managers of shops, where technicians work, with tools, diagnostics equipment, repair and service information, including electronic parts catalogs, and shop management products. Through its Equipment Solutions (“OEM facilitation”) business, Snap-on provides OEMs with products and services including tools, consulting and facilitation services. Snap-on’s facilitation services include product procurement, distribution and administrative support to customers for their dealership equipment programs. Major challenges for Snap-on and the vehicle service and repair sector include the increasing rate of technological change within motor vehicles, vehicle population growth, vehicle life and the resulting impact on the businesses of both our suppliers and customers that is necessitated by such change. Snap-on believes it is a meaningful participant in the market sector for vehicle service and repair. Industrial Sector Snap-on markets its products globally to a broad cross-section of industrial and commercial customers including maintenance and repair operations; manufacturing and assembly facilities; various government agencies, facilities and operations, including military operations; vocational and technical schools; aerospace and aviation; OEM and repair customers; oil and gas developers; mining operations; energy and power generation equipment fabricators; agriculture; infrastructure construction companies; and other customers that require instrumentation, service tools and/or equipment for their products. The industrial sector for Snap-on has achieved growth in recent years by providing value-added products and services to an increasingly expanding global base of customers, particularly those in the market segments of natural resources, power generation, aerospace, government and education. Through its experienced and dispersed sales organization, industrial “solutioneers” strive to develop unique and highly valued productivity solutions for customers worldwide that leverage Snap-on’s product, service and development capabilities. Major challenges in the industrial sector include a highly competitive, cost-conscious environment, and a trend toward customers making many of their tool and equipment purchases through one integrated supplier. Snap-on believes it is a meaningful participant in the market sector for industrial tools and equipment. 2008 ANNUAL REPORT 7


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    Distribution Channels Snap-on serves customers primarily through the following channels of distribution: the mobile van channel, company direct sales, distributors and e-commerce. The following discussion summarizes Snap-on’s general approach for each channel, and is not intended to be all-inclusive. Mobile Van Channel In the United States, the majority of sales to the vehicle service and repair sector are conducted through Snap-on’s worldwide franchise van channel. Snap-on’s franchisees primarily serve vehicle service technicians and vehicle service shop owners, generally providing weekly contact at the customer’s place of business. Franchisees’ sales are concentrated in hand and power tools, tool storage products, small diagnostic and shop equipment, and diagnostics and repair information products, which can easily be transported in a van and demonstrated during a brief sales call. Franchisees purchase Snap-on’s products at a discount from suggested list prices and resell them at prices established by the franchisee. U.S. franchisees are provided a list of places of business that serves as the basis of the franchisee’s sales route. Snap-on also offers an option termed the “Gateway Program” to potential U.S. franchisees that do not meet the franchise qualification requirements. Gateway Program participants have less upfront investment and are provided an initial base level of consigned inventory from Snap-on to assist them in gaining experience and building equity toward the future purchase of a standard franchise. Snap-on also provides certain franchisees the opportunity to add vans to their franchise or to add a limited number of additional franchises. Snap-on charges nominal initial and ongoing monthly franchise fees. Since 1991, new U.S. franchisees, and a majority of the pre-1991 U.S. franchisees, have been enrolled as franchisees of Snap-on. At 2008 year end, 3,231 U.S. franchisees (approximately 96%) were enrolled as franchisees, or employed by franchisees, as compared with 3,269 U.S. franchisees (approximately 96%) at year-end 2007. Snap-on has replicated its U.S. franchise van distribution model in certain other countries including Australia, Canada, Germany, Japan, the Netherlands, South Africa and the United Kingdom. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians and shop owners. Through SOC, financing is available to U.S. franchisees, including financing for van and truck leases, working capital loans, and loans to enable new franchisees to fund the purchase of the franchise. Internationally, Snap-on offers financing to its franchisees and customer networks through its wholly owned finance subsidiaries. While Snap-on offers financing to qualified franchisees and their customers through SOC and its wholly owned international finance subsidiaries, the decision to finance through Snap-on or another financing entity is solely at the election of the customer. Snap-on supports its franchisees with a field organization of regional offices, franchise performance teams, Diagnostic Sales Developers (“DSDs”), customer care centers and distribution centers. Snap-on also provides sales and business training, and marketing and product promotion programs, as well as customer and franchisee financing programs through SOC and its wholly owned international finance subsidiaries, all of which are designed to strengthen franchisee sales. In the United States and Canada, the National Franchise Advisory Council and the Snap-on Tools Canadian Franchise Advisory Council, both of which are composed of franchisees that are elected by franchisees, assist Snap-on in identifying and implementing enhancements to the franchise program. In the United States, franchisees work closely with the DSDs. The DSD specialists demonstrate and sell higher-price- point diagnostics and vehicle service shop management information systems. DSDs work independently and with franchisees to identify and generate sales leads among vehicle service shop owners and managers. DSDs are Snap-on employees who, beginning in 2008, are compensated through a combination of base salary and commission; a franchisee receives a brokerage fee from certain sales made by the DSDs to the franchisee’s customers. Most products sold through franchisees and the DSDs are sold under the Snap-on, Blue-Point and Sun brand names. In late 2007 Snap-on started transitioning its former sales representative program in the United States into a new company-owned van program. This program is designed to provide another pool of potential franchisees, service customers in select new and/or open routes not currently serviced by franchisees, and allow Snap-on to pilot new sales and promotional ideas prior to introducing them to franchisees. As of fiscal 2008 year end, company-owned vans comprised less than 3% of the total U.S. van population; Snap-on may elect to increase the number of company-owned vans in the future. 8 SNAP-ON INCORPORATED


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    Company Direct Sales In the United States, a significant proportion of shop equipment sales under the Sun, John Bean and Blackhawk brands and information products under the Mitchell1 brand are made by a direct sales force that has responsibility for national and other accounts. As the vehicle service and repair sector consolidates (with more business conducted by national chains, automotive dealerships and franchised service centers), the company believes these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of equipment and diagnostic products and services. Snap-on also sells these products and services directly to OEMs. Snap-on brand tools and equipment are marketed to industrial and governmental customers in the United States through both industrial sales representatives, who are employees, and independent industrial distributors. In most markets outside the United States, industrial sales are conducted through independent distributors. The sales representatives focus on industrial customers whose main purchase criteria are quality and service. At the end of 2008, Snap-on had industrial sales representatives in the United States, Australia, Canada, Japan, Mexico, Puerto Rico and some European, Asian, Latin American and Middle Eastern countries, with the United States representing the majority of Snap-on’s total industrial sales. Business Solutions sells automotive, power equipment and power sports software solutions, both domestically and internationally, through an internal sales force. Products and services are marketed to two targeted groups: OEMs and individual dealerships. To effectively reach the large OEMs in the automotive segment, such as General Motors Corporation, Daimler AG, Ford Motor Company, Chrysler LLC, and Toyota Motor Corporation, Business Solutions has deployed a team of business development professionals in the world’s principal automotive centers in the United States, the United Kingdom, Germany, Italy, France, Spain and Japan. In the United States and Canada, automotive products and services are sold directly to individual dealerships using an experienced sales force. In reaching customers such as John Deere (Deere & Company), JC Bamford Excavators Ltd. (JCB) and Yamaha Corporation of America (Yamaha) in the power equipment and power sports segments, teams are also positioned to support the 90+ brands that Business Solutions distributes to globally. Business management solutions are sold directly to the automotive OEMs in the United States and throughout Europe, including the United Kingdom. Distributors Sales of certain tools and equipment are made through independent vehicle service and industrial distributors who purchase the items from Snap-on and resell them to end users. Hand tools under the Bahco and Fish and Hook brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Wheel service and other vehicle service equipment are sold through distributors primarily under brands including Hofmann, John Bean, Cartec and Blackhawk. Sun-branded equipment is marketed through distributors in South America and Asia, and through both a direct sales force and distributors in Europe. E-commerce Snap-on’s e-commerce development initiatives allow Snap-on to combine the capabilities of the Internet with Snap-on’s existing brand sales and distribution strengths to reach new and under-served customer segments. Snap-on offers current and prospective customers online, around-the-clock access to purchase products through its public Internet Web site at www.snapon.com. The site features an online catalog containing nearly 14,000 products, including Snap-on hand tools, power tools, tool storage units and diagnostic equipment available to consumers and professionals in the United States, the United Kingdom, Canada and Australia. At the end of 2008, Snap-on had more than 500,000 registered users, including approximately 39,000 industrial accounts. E-commerce and certain other system enhancement initiatives are designed to improve productivity and further leverage the one-on-one relationships and service Snap-on has with its current and prospective customers. Through business-to-business and business-to-consumer capabilities, Snap-on and its franchisees are enhancing communications with customers on a real-time, 24-hour, 7-day a week basis. Competition Snap-on competes on the basis of its product quality and performance, product line breadth and depth, service, brand awareness and imagery, and technological innovation. While no single company competes with Snap-on across all of its product lines and distribution channels, various companies compete in one or more product categories and/or distribution channels. 2008 ANNUAL REPORT 9


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    Snap-on believes it is a leading manufacturer and distributor of professional tools, diagnostics, equipment, repair software and solutions, offering the broadest line of these products to the vehicle service industry. The major competitors selling to professional technicians in the automotive service and repair sector through the mobile van channel include MAC Tools (The Stanley Works), Matco (Danaher Corporation), and Cornwell. Snap-on also competes with companies that sell tools and equipment to automotive technicians through non-mobile van distributors including Craftsman (Sears Brands LLC), RIDGID and Husky (The Home Depot, Inc.), and Kobalt (Lowes Companies, Inc.), auto parts supply outlets (such as NAPA, AutoZone, Inc. and Pep Boys), and tool supply warehouses/distributorships (such as MEDCO and Integrated Supply Network, Inc. (ISN)). Within the power tools category, Snap-on’s major competitors include Ingersoll-Rand Co. Limited, The Black & Decker Corporation, Makita Corporation, Chicago Pneumatic (Atlas Copco), and Milwaukee Electric (Techtronic Industries Co. Ltd.). In the industrial sector, major competitors include Facom Tools and Proto (The Stanley Works), Armstrong (Danaher Corporation), IRWIN (Newell Rubbermaid Inc.), Cooper Industries, Ltd., and Westward (W.W. Grainger, Inc.). The major competitors selling diagnostics and shop equipment and information to automotive dealerships, independent repair shop owners and managers in the vehicle service and repair sector include Corghi S.p.A., Fluke and Hennessy (Danaher Corporation), Robinair and OTC (SPX Corporation), Hunter Engineering, Rotary Lift and Chief Automotive (Dover Corporation), Car-O-Liner AB, Lexcom GmbH, Infomedia Ltd., Enigma, ALLDATA (AutoZone, Inc.), and the proprietary electronic parts catalog, diagnostic and information systems of OEMs. Raw Materials and Purchased Product Snap-on’s supply of raw materials and purchased components are generally and readily available from numerous suppliers. During 2007 and 2008, Snap-on experienced higher pricing related to certain grades and alloys of steel. Snap-on believes it has secured an ample supply of both bar and coil steel for the near future to ensure stable supply to meet material demands. The company does not anticipate experiencing any significant steel pricing or availability issues in 2009. Patents, Trademarks and Other Intellectual Property Snap-on vigorously pursues and relies on patent protection to protect its intellectual property and its position in its markets. As of January 3, 2009, Snap-on and its subsidiaries held over 860 active and pending patents in the United States and over 1,660 active and pending patents outside of the United States. Sales relating to any single patent did not represent a material portion of Snap-on’s revenues in the last three years. Examples of products that have features or designs that benefit from patent protection include wheel alignment systems, wheel balancers, tire changers, lifts, test lanes, sealed ratchets, electronic torque instruments, ratcheting screwdrivers, emissions-sensing devices and diagnostic equipment. Much of the technology used in the manufacture of vehicle service tools and equipment is in the public domain. Snap-on relies primarily on trade secret protection to protect proprietary processes used in manufacturing. Methods and processes are patented when appropriate. Copyright protection is also utilized when appropriate. Trademarks used by Snap-on are of continuing importance to Snap-on in the marketplace. Trademarks have been registered in the United States and more than 100 other countries, and additional applications for trademark registrations are pending. Snap-on vigorously polices proper use of its trademarks. Snap-on’s right to manufacture and sell certain products is dependent upon licenses from others; however, these products under license do not represent a material portion of Snap-on’s net sales. Domain names have become a valuable corporate asset for companies around the world, including Snap-on. Domain names often contain a trademark or service mark or even a corporate name and are often considered intellectual property. The recognition and value of the Snap-on name, trademark, and domain name are core strengths of the company. 10 SNAP-ON INCORPORATED


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    Snap-on is selectively and strategically licensing the Snap-on brand to carefully selected manufacturing and distribution companies for items such as apparel, work boots, lighting and a variety of other goods, in order to further build equity and market presence for the company’s strongest brand. Environment Snap-on is subject to various environmental laws, ordinances, regulations, and other requirements of government authorities in the United States and other nations. At Snap-on, these environmental liabilities are managed through the Snap-on Environmental, Hygiene and Safety Management System (“EH & SMS”), which is applied worldwide. The system is based upon continual improvement and is certified to ISO 14001:2004 and OHSAS 18001:1999, verified through Det Norske Veritas (DNV) Certification, Inc. Snap-on believes that it complies with applicable environmental control requirements in its operations. Expenditures on environmental matters through EH & SMS have not had, and Snap-on does not for the foreseeable future expect them to have, a material effect upon Snap-on’s capital expenditures, earnings or competitive position. Employees At the end of January 2009, Snap-on employed approximately 11,500 people compared to approximately 11,600 people at the end of January 2008. The year-over-year decrease reflects the impacts of restructuring-related and management realignment actions at various Snap-on facilities, partially offset by the addition of approximately 600 employees from the company’s March 5, 2008, acquisition of Wanda Snap-on, a tool manufacturer in China. Approximately 3,000 employees, or 26%, of Snap-on’s worldwide workforce, are represented by unions and/or covered under collective bargaining agreements. Approximately 1,400 employees are covered under agreements expiring in 2009. In recent years, Snap-on has not experienced any significant work slow-downs, stoppages or other labor disruptions. The number of covered union employees whose contracts expire within the next five years approximates 1,400 employees in 2009; 900 employees in 2010; 400 employees in 2011; and zero employees in 2012 and 2013. There can be no assurance that future contracts with Snap-on’s unions will be renegotiated upon terms acceptable to Snap-on. Working Capital As most of Snap-on’s business is not seasonal and its inventory needs are relatively constant, no unusual working capital needs arose during the year. Snap-on did not have a significant backlog of orders at January 3, 2009. Snap-on’s liquidity and capital resources and use of working capital are discussed herein in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Neither Snap-on nor any of its segments, except Financial Services, depend on any single customer, small group of customers or government for any material part of its revenues. As a result of SOC’s relationship with CIT, Snap-on’s Financial Services segment depends on CIT for more than 10% of its revenues. Item 1A: Risk Factors In evaluating the company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K, including the Consolidated Financial Statements and the related notes. Each of these risk factors could adversely affect the company’s business, operating results, cash flows and/or financial condition, as well as adversely affect the value of an investment in the company’s common stock. 2008 ANNUAL REPORT 11


  • Page 12

    Economic conditions and world events could affect our operating results. We, our franchisees and our customers, may be adversely affected by an economic downturn such as changes in consumer and investor confidence, instability in the credit and financial markets, volatile corporate profits, and reduced business and consumer spending. We, our franchisees and customers, and the economy as a whole, also may be affected by future world events such as acts of terrorism, developments in the war on terrorism, conflicts in international situations, and by natural disasters. These factors may affect our results of operations by reducing our sales, margins and/or net income as a result of a slowdown in customer orders or order cancellations. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions abroad. Unstable political, social and economic conditions may make it difficult for our franchisees, customers, suppliers and us to accurately forecast and plan future business activities. If such conditions persist, our business, financial condition, results of operations and cash flow could be negatively affected. The success of Snap-on’s mobile van tool distribution business depends on the success of its franchisees. Approximately 38% of our 2008 revenues were generated by the Snap-on Tools Group, which consists of Snap-on’s business operations serving the worldwide van channel. Except in limited circumstances, each of our mobile tool vans is operated by a franchisee pursuant to a franchise agreement. Snap-on’s success is dependent on its relationships with franchisees, individually and collectively, as they are the primary sales and service link between the company and vehicle service and repair technicians, who are an important class of end users for Snap-on’s products and services. If our franchisees are not successful, or if we do not maintain an effective relationship with our franchisees, the delivery of products, the collection of receivables and/or our relationship with end users could be adversely affected and thereby negatively impact our business, financial condition, results of operations and cash flow. In addition, if we are unable to maintain effective relationships with franchisees, the company or the franchisees may choose to terminate the relationship, which may result in (i) open routes, in which end-use customers are not provided reliable service; (ii) litigation resulting from termination; (iii) reduced collections or increased write-offs of franchisee receivables owed to Snap-on; and/or (iv) reduced collections or increased write-offs of extended credit contracts and, to a lesser extent, lease contracts that are collected by franchisees on behalf of SOC. As Snap-on has approximately 4,700 franchisees worldwide and most of these franchise relationships are governed by contract, it is not uncommon for litigation to result from the termination of these relationships. The automotive industry is currently experiencing financial difficulties, which could affect our business and operating results. Some of our business units have substantial interrelationships with the automotive industry. There is currently substantial weakness and turmoil in the United States’ automotive industry. This weakness could result in the failure of certain automobile manufacturers, as well as suppliers and dealers who are dependent upon them. It could also result in a reduction in the number of automobile dealerships through consolidations or as a result of changes in the automakers or their manner of conducting business. Additionally, the weakness of companies in that industry could affect their levels of purchases from us and the collectibility of amounts owed to us. Even though we believe that our products and services enhance productivity, a reduction in the number of automotive manufacturers or dealers, or their capital expenditures, could substantially affect our sales. Any of those factors could negatively affect our business, financial condition, results of operations and cash flow. Raw material and energy price fluctuations and shortages (including steel and various fuel sources) could adversely affect the ability to obtain needed manufacturing materials and could adversely affect our results of operations. The principal raw material used in the manufacture of our products is steel, which we purchase in competitive, price- sensitive markets. To meet Snap-on’s high quality standards, our steel needs range from specialized alloys, which are available only from a limited group of approved suppliers, to commodity types of alloys. These raw materials have historically exhibited price and demand fluctuations of a cyclical nature. Some of these materials have been, and in the future may be, in short supply. As some steel alloys require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. Additionally, unexpected price increases for other raw materials could result in higher prices to our customers or an erosion of the margins on our products. 12 SNAP-ON INCORPORATED


  • Page 13

    We believe our ability to sell our products is also dependent on the number of vehicles on the road, the number of miles driven and the general aging of vehicles. These factors affect the frequency, type and amount of service and repair performed on vehicles by technicians, and therefore affect the demand for the number of technicians, the prosperity of the technicians and, subsequently, the demand technicians have for our tools, other products and services, and the value technicians place on those products and services. To the extent that gasoline prices increase, consumers may turn to other, non-gasoline based, methods of transportation, including more frequent use of public transportation. A decrease in the use of gasoline consuming vehicles may lead to fewer repairs and less demand for our products. We use various energy sources to transport, produce and distribute products, and some of our products have components that are petroleum based. Petroleum and energy prices have recently been volatile and have generally increased; further volatility and changes may be caused by market fluctuations, supply and demand, currency fluctuation, production and transportation disruption, world events, and changes in governmental programs. Energy price increases raise both our operating costs and the costs of our materials, and we may not be able to increase our prices enough to offset these costs. Higher prices also may reduce the level of future customer orders and our profitability. Instability and uncertainty in the credit and financial markets could adversely impact the availability of credit. Instability and uncertainty in the credit and financial markets could adversely impact the availability of future financing and the terms on which it might be available to Snap-on, its end-user customers, franchisees and suppliers. Inability to access credit markets, or a deterioration in the terms on which financing might be available, could have an adverse impact on our business, financial condition, results of operations and cash flow. The inability to provide acceptable financing alternatives to end-user customers and franchisees could adversely impact operating results. An integral component of our business and profitability is our ability to offer financing alternatives to end-user customers and franchisees which, for our domestic financing operations, are managed through a joint venture with CIT. Since 1999, CIT has been the exclusive purchaser of the credit and installment financing arranged by SOC in the United States. A deterioration of the relationship between the joint venture partners, including if the joint venture should be unexpectedly dissolved or if CIT were to no longer purchase the credit and installment financing contracts originated by SOC, could have an adverse impact on our results of operations and ability to provide financing to end-user customers and franchisees in the United States. Adverse fluctuations in interest rates and/or the ability to provide competitive financing programs could also have an adverse impact on our revenue and profitability. Exposure to credit risks of customers and resellers may make it difficult to collect receivables and could adversely affect operating results and financial condition. Industry and economic conditions have the potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, such write-downs or write-offs would negatively affect our operating results for the period in which they occur and, if large, could have a material adverse effect on our business, financial condition, results of operations and cash flow. Failure to achieve expected investment returns on pension plan assets, as well as changes in interest rates, could adversely impact our results of operations, financial position and cash flow. Snap-on sponsors various pension benefit plans. The assets of the pension plans are broadly diversified in an attempt to mitigate the risk of a large loss. The assets are invested in equity securities, fixed income securities, real estate and other real assets, other alternative investments and cash. Required funding for the company’s defined benefit pension plans is determined in accordance with guidelines set forth in the federal Employee Retirement Income Security Act (ERISA). Additional contributions to enhance the funded status of the pension plans can be made at the company’s discretion. However, there can be no assurance that the value of the pension plan assets, or the investment returns on those plan assets, will be sufficient to meet the future benefit obligations of such plans. In addition, during periods of adverse investment market conditions and declining interest rates, the company may be required to make additional cash contributions to the plans that could reduce our financial flexibility. 2008 ANNUAL REPORT 13


  • Page 14

    Our defined benefit pension plan obligations are affected by changes in market interest rates. Significant fluctuations in market interest rates have added, and may further add, volatility to our pension plan obligations. Declining market interest rates will increase our pension plan obligations. While our plan assets are broadly diversified, there are inherent market risks associated with investments. Our defined benefit pension plan assets, in the aggregate, incurred a substantial loss in fiscal 2008 as a result of market conditions; if adverse market conditions continue, our plan assets could incur further losses. Since we may need to make additional contributions to address an increase in obligations and/or a loss in plan assets, the combination of declining market interest rates and/or plan asset investment losses could adversely impact our financial position and results of operations. The company’s defined benefit pension expense is comprised of the following factors: (i) service cost; (ii) interest on projected benefit obligations; (iii) the expected return on plan assets; (iv) the amortization of prior service costs; and (v) the effects of actuarial gains and losses. The accounting for pensions involves the estimation of a number of factors that are highly uncertain. Certain factors, such as the interest cost and the expected return on plan assets, are impacted by changes in market interest rates and the value of plan assets. A significant decrease in market interest rates and a decrease in the fair value of plan assets would increase net pension expense and may adversely affect the company’s future results of operations. See Note 11 to the Consolidated Financial Statements for further information on the company’s pension benefit plans. The steps taken to restructure operations, rationalize operating footprint, lower operating expenses, and achieve greater efficiencies in the supply chain could disrupt business. We have taken steps in the past, and expect to take additional steps in 2009, intended to improve customer service and to drive further efficiencies and reduce costs, some of which could be disruptive to our business. These actions, collectively across our operating groups, are focused on the following: • Continue to invest in initiatives focused on building a strong sales and operating presence in emerging growth markets; • Continue to enhance service and value to our franchisees and customers; • Continue to implement RCI initiatives throughout the organization to drive further efficiencies and reduce costs; • Continue on the company’s existing path to improve and transform global manufacturing and the supply chain into a market-demand-based replenishment system, with lower costs; • Continue to invest in developing and marketing new, innovative, higher-value-added products and advanced technologies; and • Extend our products and services into additional and/or adjacent markets or to new customers. We believe that by executing on these focus areas, along with a continued commitment to new innovative products and RCI initiatives to drive higher levels of productivity and lower costs, the company and its franchisees will realize stronger growth and profitability. However, failure to succeed in the implementation of any or all of these actions could result in an inability to achieve our financial goals and could be disruptive to the business. In addition, reductions to headcount and other cost reduction measures may result in the loss of technical expertise that could adversely affect our research and development efforts and ability to meet product development schedules. Efforts to reduce components of expense could result in the recording of charges for inventory and technology-related write-offs, workforce reduction costs or other charges relating to the consolidation of facilities. If we were to incur a substantial charge to further these efforts, our earnings (or loss) per share would be adversely affected in such period. If we are unable to effectively manage our cost reduction and restructuring efforts, our business, financial condition, results of operations and cash flow could be negatively affected. 14 SNAP-ON INCORPORATED


  • Page 15

    Failure to maintain effective distribution of products and services could adversely impact revenue, gross margin and profitability. We use a variety of distribution methods to sell our products and services. Successfully managing the interaction of our distribution efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks, costs and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability. Risks associated with the disruption of manufacturing operations could adversely affect profitability or competitive position. We manufacture a significant portion of the products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, lack of raw material or component availability, destruction of or damage to any facility (including natural disasters, use and storage of hazardous materials or other events), or other reasons, could have a material adverse effect on our business, financial condition, results of operations and cash flow. The inability to continue to introduce new products that respond to customer needs and achieve market acceptance could result in lower revenues and reduced profitability. Sales from new products represent a significant portion of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete effectively unless we continue to enhance existing products or introduce new products to the marketplace in a timely manner. Product improvements and new product introductions require significant financial and other resources including significant planning, design, development, and testing at the technological, product, and manufacturing process levels. Our competitors’ new products may beat our products to market, be more effective with more features, be less expensive than our products, and/or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development. The global tool, equipment, and diagnostics and repair industry is competitive. We face strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressures from competitors and customers are increasing. In general, as a manufacturer and marketer of premium products and services, the expectations of Snap-on’s customers and its franchisees are high and increasing. Any inability to maintain customer satisfaction could diminish Snap-on’s premium image and reputation and could result in a lessening of its ability to command premium pricing. We expect that the level of competition will remain high in the future, which could limit our ability to maintain or increase market share or profitability. Product liability claims and litigation could affect our business, financial condition, results of operations and cash flow. The products that we design and/or manufacture can lead to product liability claims being filed against us. To the extent that plaintiffs are successful in showing that defects in the design or manufacture of our products led to personal injury or property damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages below the insurance retention amount. As a manufacturer, we can be subject to the costs and potential negative publicity of product recalls, which could impact our results. 2008 ANNUAL REPORT 15


  • Page 16

    We may not successfully integrate businesses we acquire, which could have an adverse impact on our business, financial condition, results of operations and cash flow. The pursuit of future growth through acquisitions, including participation in joint ventures, involves significant risks that could have a material adverse effect on our business, results of operations and financial position. These risks include: • Loss of the acquired businesses’ customers; • An inability to integrate successfully the acquired businesses’ operations; • Inability to coordinate management and integrate and retain employees of the acquired businesses; • Difficulties in implementing and maintaining consistent standards, controls, procedures, policies and information systems; • Failure to realize anticipated synergies, economies of scale or other anticipated benefits, or to maintain operating margins; • Strain on our personnel, systems and resources, and diversion of attention from other priorities; • Incurrence of additional debt and related interest expense; • The dilutive effect of the issuance of additional equity securities; • Unforeseen or contingent liabilities of the acquired businesses; and • Large write-offs or write-downs, or the impairment of goodwill or other intangible assets. Information technology infrastructure is critical to supporting business objectives; failure of our information technology infrastructure to operate effectively could adversely affect our business. We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate. In association with initiatives to better integrate business units, rationalize operating footprint and improve responsiveness to franchisees and customers, Snap-on is replacing and enhancing its existing global Enterprise Resource Planning (ERP) management information systems. The integration, implementation and deployment of new information technology processes and a common information infrastructure, which began in 2006, is occurring over a multi-year period. We could experience disruptions in our business as we implement the system enhancements, which could have an adverse effect on our business, financial condition, results of operations and cash flow. The recognition of impairment charges on goodwill or other intangible assets would adversely impact future financial position and results of operations. We are required to perform impairment tests on our goodwill and other intangibles annually or at any time when events occur, which could impact the value of our business segments. Our determination of whether impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, could require a provision for impairment in a future period that could substantially affect our reported earnings and reduce our consolidated net worth and shareholders’ equity. Failure to adequately protect intellectual property could adversely affect our business. Intellectual property rights are an important and integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business. 16 SNAP-ON INCORPORATED


  • Page 17

    Our operations expose us to the risk of environmental liabilities, costs, litigation and violations that could adversely affect our financial condition, results of operations and reputation. Certain of our operations are subject to environmental laws and regulations in the jurisdictions in which they operate, which impose limitations on the discharge of pollutants into the ground, air and water and establish standards for the generation, treatment, use, storage and disposal of hazardous wastes. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we may incur costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices. We cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws will not exceed our estimates. Foreign operations are subject to currency exchange, political, economic and other risks that could adversely affect our business, financial condition, results of operations and cash flow. Approximately 43% of our revenues in 2008 were generated outside of the United States. Future growth rates and success of our business depends in large part on continued growth in our non-U.S. operations, including growth in emerging markets. Numerous risks and uncertainties affect our non-U.S. operations. These risks and uncertainties include political, economic and social instability, such as acts of war, civil disturbance or acts of terrorism, local labor conditions, changes in government policies and regulations, including imposition or increases in withholding and other taxes on remittances and other payments by international subsidiaries, transportation delays or interruptions and difficulties in enforcement of contract and intellectual property rights. We are also affected by changes in foreign currency exchange rates, inflation rates and interest rates. Additionally, cash generated in non-U.S. jurisdictions may be difficult to repatriate to the United States in a tax-efficient manner. Our foreign operations are also subject to other risks and challenges, such as the need to staff and manage diverse workforces, respond to the needs of multiple national and international marketplaces, and differing business climates and cultures in various countries. The inability to successfully defend claims from taxing authorities could adversely affect our financial condition, results of operations and cash flow. We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions, as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position. Failure to attract and retain qualified personnel could lead to a loss of revenue and/or profitability. Snap-on’s success depends, in part, on the efforts and abilities of its senior management team and other key employees. Their skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract and retain members of our senior management team and other key employees could have a negative effect on our operating results. In addition, transitions of important responsibilities to new individuals inherently include the possibility of disruptions to our business and operations, which could negatively affect our business, financial condition, results of operations and cash flow. Item 1B: Unresolved Staff Comments None. 2008 ANNUAL REPORT 17


  • Page 18

    Item 2: Properties Snap-on maintains leased and owned manufacturing, warehouse, distribution and office facilities throughout the world. Snap-on believes that its facilities currently in use are suitable and have adequate capacity to meet its present and foreseeable future demand. Snap-on’s facilities in the United States occupy approximately 3.6 million square feet, of which 72% is owned, including its corporate and general office facility located in Kenosha, Wisconsin. Snap-on’s facilities outside the United States occupy approximately 3.6 million square feet, of which approximately 63% is owned. Certain Snap-on facilities are leased through operating and capital lease agreements. See Note 15 to the Consolidated Financial Statements for information on the company’s operating and capital leases. Snap-on management continually monitors the company’s capacity needs and makes adjustments as dictated by market and other conditions. The following table provides information about each of Snap-on’s principal manufacturing locations and distribution centers (exceeding 50,000 square feet) as of January 3, 2009: Location Type of Property Owned/Leased Segment* U.S. Locations: Elkmont, Alabama Manufacturing Owned SOT Conway, Arkansas Manufacturing Leased C&I City of Industry, California Manufacturing Leased C&I Escondido, California Manufacturing Leased C&I San Jose, California Manufacturing Leased D&I Columbus, Georgia Distribution Owned C&I Crystal Lake, Illinois Distribution Owned and Leased SOT Algona, Iowa Manufacturing Owned SOT Olive Branch, Mississippi Distribution Owned SOT Carson City, Nevada Distribution Owned and Leased SOT Murphy, North Carolina Manufacturing and distribution Owned C&I Robesonia, Pennsylvania Distribution Owned SOT Elizabethton, Tennessee Manufacturing Owned SOT Kenosha, Wisconsin Distribution and corporate Owned SOT, C&I, D&I Milwaukee, Wisconsin Manufacturing Owned SOT Non-U.S. Locations: Santo Tome, Argentina Manufacturing Owned C&I Minsk, Belarus Manufacturing Leased C&I Santa Barbara D'oeste, Brazil Manufacturing and distribution Owned C&I Mississauga, Canada Manufacturing Leased C&I Newmarket, Canada Manufacturing and distribution Owned SOT Kunshan, China Manufacturing Owned C&I Xiaoshan, China Manufacturing Owned C&I Kettering, England Distribution Owned SOT and C&I Rotherham, England Manufacturing Leased C&I Bourges, France Manufacturing and distribution Owned and Leased C&I Unterneukirchen, Germany Manufacturing Leased C&I Sopron, Hungary Manufacturing Owned C&I Correggio, Italy Manufacturing Owned C&I Tokyo, Japan Distribution Leased SOT Helmond, the Netherlands Distribution Owned C&I Vila do Conde, Portugal Manufacturing Owned C&I Irun, Spain Manufacturing Owned C&I Vitoria, Spain Manufacturing and distribution Owned C&I Bollnäs, Sweden Manufacturing Owned C&I Edsbyn, Sweden Manufacturing Owned C&I Sandviken, Sweden Distribution Leased C&I * Segment abbreviations: C&I – Commercial & Industrial Group SOT – Snap-on Tools Group D&I – Diagnostics & Information Group 18 SNAP-ON INCORPORATED


  • Page 19

    Snap-on closed its Johnson City, Tennessee, manufacturing facility in 2007; the facility was sold in December 2008. Item 3: Legal Proceedings See Note 15 to the Consolidated Financial Statements for information on legal proceedings. Snap-on is involved in various 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 legal matters, management believes that the results will not have a material impact on Snap-on’s consolidated financial position, results of operations or cash flows. Item 4: Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended January 3, 2009. PART II Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities At January 3, 2009, Snap-on had 57,441,941 shares of common stock outstanding. Snap-on’s stock is listed on the New York Stock Exchange under the ticker symbol “SNA.” As of February 13, 2009, there were 7,196 registered holders of Snap-on common stock. Snap-on’s common stock high and low prices, as of the close of trading, for the last two fiscal years by quarter were as follows: Common Stock High/Low Prices 2008 2007 Quarter High Low High Low First $ 53.01 $ 39.78 $ 51.51 $ 46.85 Second 61.92 50.57 56.20 47.54 Third 59.73 50.00 55.61 46.09 Fourth 52.66 28.62 50.68 44.59 Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Quarterly dividends declared in 2008 were $0.30 per share ($1.20 per share for the year). Quarterly dividends declared in 2007 were $0.30 per share in the fourth quarter and $0.27 per share in the first three quarters ($1.11 per share for the year). Quarterly dividends declared in 2006 were $0.27 per share ($1.08 per share for the year). Cash dividends paid in 2008, 2007 and 2006 totaled $69.7 million, $64.8 million and $63.6 million, respectively. Snap-on’s Board of Directors’ (“Board”) monitors and evaluates the company’s dividend practice quarterly and the Board may elect to increase, decrease or not pay a dividend on Snap-on common stock based upon the company’s financial condition, results of operations, cash requirements and future prospects of Snap-on and other factors deemed relevant by the Board. See Note 13 to the Consolidated Financial Statements for information on securities authorized for issuance under equity compensation plans. 2008 ANNUAL REPORT 19


  • Page 20

    We did not make any repurchases of shares of our common stock during the fourth quarter of fiscal 2008. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, stock options, and other corporate purposes. We also repurchase shares when we believe market conditions are favorable. The repurchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions. As of January 3, 2009, the approximate value of shares that may yet be purchased pursuant to three outstanding Board authorizations is $117.2 million. The three outstanding Board authorizations are described below: • In fiscal 1996, the Board authorized the company to repurchase shares of the company’s common stock from time to time in the open market or in privately negotiated transactions (“the 1996 Authorization”). The 1996 Authorization allows the repurchase of up to the number of shares issued or delivered from treasury from time to time under the various plans the company has in place that call for the issuance of the company’s common stock. Because the number of shares that are purchased pursuant to the 1996 Authorization will change from time to time as (i) the company issues shares under its various plans; and (ii) shares are repurchased pursuant to this authorization, the number of shares authorized to be repurchased will vary from time to time. The 1996 Authorization will expire when terminated by the Board. When calculating the approximate value of shares that the company may yet purchase under the 1996 Authorization, the company assumed a price of $34.72, $ 30.37 and $41.10 per share of common stock as of the end of the fiscal 2008 months ended October 25, 2008; November 22, 2008; and January 3, 2009, respectively. • In fiscal 1998 the Board authorized the repurchase of an aggregate of $100 million of the company’s common stock (“the 1998 Authorization”). The 1998 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board. • In fiscal 1999 the Board authorized the repurchase of an aggregate of $50 million of the company’s common stock (“the 1999 Authorization”). The 1999 Authorization will expire when the aggregate repurchase price limit is met, unless terminated earlier by the Board. During 2008, the company repurchased 1,230,000 shares of common stock at an average purchase price of $56.73 per share. 20 SNAP-ON INCORPORATED


  • Page 21

    Five-year Stock Performance Graph The graph below illustrates the cumulative total shareholder return on Snap-on Common Stock since December 31, 2003, assuming that dividends were reinvested. The graph compares Snap-on’s performance to that of the Standard & Poor’s 500 Stock Index (“S&P 500”) and a Peer Group. Snap-on Incorporated Total Shareholder Return (1) SNAP-ON INCORPORATED PEER GROUP S&P 500 225 200 175 DOLLARS 150 125 100 75 50 2003 2004 2005 2006 2007 2008 Snap-on Fiscal Year Ended (2) Incorporated Peer Group (3) S&P 500 December 31, 2003 $ 100.00 $ 100.00 $ 100.00 December 31, 2004 109.99 120.93 110.88 December 31, 2005 123.71 125.26 116.33 December 31, 2006 161.00 146.86 134.70 December 31, 2007 166.71 171.44 142.10 December 31, 2008 139.48 110.69 89.53 (1) Assumes $100 was invested on December 31, 2003, and that dividends were reinvested quarterly. (2) The company's fiscal year ends on the Saturday closest to December 31 of each year; the fiscal year end is assumed to be December 31 for ease of calculation. (3) The Peer Group consists of: The Black & Decker Corporation, Cooper Industries, Ltd., Danaher Corporation, Emerson Electric Co., Fortune Brands, Inc., Genuine Parts Company, Newell Rubbermaid Inc., Pentair, Inc., SPX Corporation, The Stanley Works and W.W. Grainger, Inc. 2008 ANNUAL REPORT 21


  • Page 22

    Item 6: Selected Financial Data The selected financial data presented below has been derived from, and should be read in conjunction with, the respective historical consolidated financial statements of the company, including the notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. Five-year Data (Amounts in millions, except per share data) 2008 2007 2006 2005 2004 Results of Operations Net sales $ 2,853.3 $ 2,841.2 $ 2,455.1 $ 2,281.0 $ 2,311.6 Gross profit 1,284.6 1,266.6 1,079.8 1,011.2 1,003.2 Financial services revenue 81.4 63.0 49.0 53.6 78.1 Financial services expenses 44.1 40.6 36.0 37.9 44.0 Operating expenses 933.1 964.2 930.0 863.5 897.1 Operating earnings 388.8 324.8 162.8 163.4 140.2 Interest expense 33.8 46.1 20.6 21.7 23.0 Earnings before income taxes, equity earnings and minority interests 357.8 284.2 147.5 144.8 120.9 Income tax expense 117.8 92.5 45.9 55.2 38.7 Earnings before equity earnings and minority interests 240.0 191.7 101.6 89.6 82.2 Equity earnings, net of tax and minority interests (3.3) (2.5) (3.7) (1.4) (2.7) Net earnings from continuing operations 236.7 189.2 97.9 88.2 79.5 Income (loss) from discontinued operations, net of tax - (8.0) 2.2 4.7 2.2 Net earnings 236.7 181.2 100.1 92.9 81.7 Financial Position Cash and cash equivalents $ 115.8 $ 93.0 $ 63.4 $ 170.4 $ 150.0 Accounts receivable current - net 522.1 586.9 559.2 485.9 542.0 Inventories - net 359.2 322.4 323.0 283.2 341.9 Current assets 1,140.7 1,187.4 1,113.2 1,072.9 1,192.6 Property and equipment - net 327.8 304.8 297.1 295.5 313.6 Total assets 2,710.3 2,765.1 2,654.5 2,008.4 2,290.1 Accounts payable 126.0 171.6 178.8 135.4 194.9 Current liabilities 547.5 639.2 682.0 506.1 674.2 Long-term debt 503.4 502.0 505.6 201.7 203.2 Total debt 515.4 517.9 549.2 226.5 331.0 Total shareholders' equity 1,186.5 1,280.1 1,076.3 962.2 1,110.7 Working capital 593.2 548.2 431.2 566.8 518.4 Common Share Summary Average shares outstanding - diluted 58.1 58.6 59.2 58.4 58.3 Earnings per share, continuing operations: Basic $ 4.12 $ 3.27 $ 1.68 $ 1.53 $ 1.37 Diluted 4.07 3.23 1.65 1.51 1.36 Net earnings per share: Basic 4.12 3.13 1.72 1.61 1.41 Diluted 4.07 3.09 1.69 1.59 1.40 Cash dividends paid per share 1.20 1.11 1.08 1.00 1.00 Shareholders' equity per basic share 20.63 22.11 18.46 16.65 19.20 Fiscal year-end per share price 41.10 48.13 47.64 37.56 34.36 • Results of operations for all fiscal years presented prior to 2008 have been restated to reflect the June 29, 2007, sale of the Sun Electric Systems (“SES”) business based in the Netherlands as discontinued operations. Snap-on recorded an $8.0 million net loss from the sale of SES in 2007. See Note 16 to the Consolidated Financial Statements for information on the sale of SES. • Operating expenses and operating earnings in 2006 include a $38.0 million pretax charge ($23.4 million after tax or $0.40 per diluted share) to settle certain legal matters related to certain then current and former franchisees. Results in 2006 also include the impact of the company’s acquisition of Snap-on Business Solutions for the approximate five-week period from the November 28, 2006, acquisition date to year end. • Total shareholders’ equity of $1,076.3 million at year-end 2006 includes an $89.0 million reduction from the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Postretirement Plans: an amendment of Financial Accounting Standards Board Statements No. 87, 88, 106, and 132(R).” See Note 1 to the Consolidated Financial Statements for information on the company’s adoption of SFAS No. 158. 22 SNAP-ON INCORPORATED


  • Page 23

    Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations Management Overview In 2008 the world experienced a global economic slowdown and tightened credit environment. Despite the challenges of a deepening global recession, many of Snap-on’s businesses experienced sales growth in 2008 and we continued investing in our strategic growth initiatives aimed at fortifying our business models, pursuing geographic and customer diversification, expanding our presence in emerging markets, and driving value creation processes, including innovation and rapid continuous improvement. We believe the continued advancement of these strategic initiatives will help create an environment to achieve long-term value for company shareholders, associates, franchisees and other distributor partners across our varied business segments and channels. Net sales in 2008 of $2,853.3 million increased slightly from $2,841.2 million in 2007, while operating earnings of $388.8 million in 2008 increased 19.7% from $324.8 million in 2007. The significant increase in year-over-year operating earnings was primarily driven by contributions from our ongoing efficiency, productivity and cost reduction (collectively “Rapid Continuous Improvement” or “RCI”) initiatives, as well as increased income from our financial services businesses. These benefits were partially offset by higher costs in 2008 as a result of price increases for steel, fuel and other commodities. Economic challenges, however, increased significantly during the fourth quarter of 2008 as customers curtailed spending in response to the worsening global recession. As a result of the economic slowdown, Snap-on’s sales in the fourth quarter of 2008 declined 10.1% from prior year levels. In response to these economic challenges, we accelerated certain RCI initiatives and are continuing – even accelerating – certain planned investments that include further expansion of our manufacturing capacity in China and in Eastern Europe, as we see these investments as potentially enabling near-term growth. In 2009 we intend to aggressively manage the balance between investing and capturing growth opportunities with the need for additional cost reduction actions beyond those already implemented. We also experienced considerable adverse effects from foreign currency exchange rate movements in the fourth quarter of 2008. Given our increasingly global footprint, foreign currency exchange rates could have a more pronounced effect on our sales and operating profit comparisons in 2009. Our strategic priorities and plans for 2009 will continue to build on the improvement initiatives underway to achieve sustainable, profitable growth. Global market conditions, however, may affect the level and timing of resources deployed in pursuit of these initiatives in 2009. In the Commercial & Industrial Group, higher sales, including growth in emerging markets, combined with expense control and savings from restructuring initiatives delivered improvements in operating performance. Segment net sales of $1,409.3 million in 2008 were up 4.3% over 2007 levels, and operating earnings of $167.3 million in 2008 were up 27.2% over 2007 levels. Benefits from continued sales growth and improved levels of customer service, along with savings from ongoing RCI and restructuring initiatives, including increased production and sourcing of materials from lower-cost regions, were major contributors to the year-over-year earnings improvement. The Commercial & Industrial Group expects to continue to build on the following strategic priorities in 2009: • Continue to invest in emerging market growth initiatives, including China, India and Eastern Europe; • Increase market share in key industrial market segments by reaching new customers, expanding our business with existing customers, and continually expanding value-added content; • Continue to invest in innovation that delivers productivity-enhancing solutions that utilize the latest technology; • Continue to pursue key customer segments that offer long-term growth potential; and • Continue to rationalize the operating footprint and reduce structural costs. In the Snap-on Tools Group, progress continued on fundamental, strategic initiatives to strengthen the group and enhance franchisee profitability and satisfaction. Segment net sales of $1,104.0 million in 2008 were down slightly from 2007 levels primarily due to a more challenging economic environment for sales of higher-priced products and hand tools. Supply chain improvements and an ongoing transition to a market-demand-based replenishment system in 2008 continued to improve complete and on-time delivery of a broad assortment of products. Operating earnings of $117.7 million in 2008 declined from $125.1 million in 2007, 2008 ANNUAL REPORT 23


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) primarily due to increased commodity and inflation costs, higher restructuring costs, and increased “last-in, first-out” (“LIFO”) related inventory valuation expense. The Snap-on Tools Group expects to continue to build on the progress made in enhancing the franchise proposition and delivering customer productivity solutions, with specific initiatives in 2009 focused on the following: • Continue to improve franchisee profitability and satisfaction; • Continue to fill open territories in the United States; • Develop new programs to expand market coverage; • Continue to invest in new product innovation and development; and • Increase supply chain flexibility through investments in manufacturing and RCI initiatives. By executing in these areas, we believe that we, as well as our franchisees, will continue to serve more customers better and more profitably. In the Diagnostics & Information Group, segment net sales of $627.8 million in 2008 declined 3.5% from 2007 levels, while operating earnings in 2008 increased 13.5% over 2007 levels to $112.9 million. This significant increase in operating earnings reflects increased sales of certain product lines, contributions from increased productivity and lower costs as a result of RCI initiatives across all businesses, and $5.4 million from the adjustment of a pre-acquisition contingency acquired with the Snap-on Business Solutions (“Business Solutions”) acquisition in November 2006. Sales of diagnostics products worldwide and Mitchell1™ information products continued to grow as a result of the development and launch of new products and the continued expansion of functionality and product integration. These sales increases were more than offset by lower original equipment manufacturer (“OEM”) program sales and lower sales at Business Solutions. OEM sales in 2008 declined from 2007 levels primarily as a result of the rollout of a major essential tool program in North America in 2007 that was not repeated in 2008, and the impact of the wind down of a facilitation program in Europe. Despite a year-over-year sales decline, including the impact from the planned exit of certain non-core product lines, the 2006 acquisition of Business Solutions continues to provide a strong base for relationships with key OEM customers, strengthening our position as a provider of essential productivity solutions. The Diagnostics & Information Group expects to focus on the following strategic priorities in 2009: • Continue hardware and software content upgrades; • Expand product range with new products and services; • Increase penetration of geographic markets; • Leverage integration of software solutions; and • Continue productivity advancements through RCI initiatives and leveraging of resources. Financial Services revenue increased 29.2% to $81.4 million in 2008, and operating income of $37.3 million was up 66.5% from prior year, primarily due to lower market discount rates in 2008. Originations in 2008 were essentially flat with prior-year levels. Cash Flows Cash flow from operations was $215.0 million in 2008, as compared to $231.1 million in 2007. Snap-on used available cash in 2008 to invest $73.9 million in capital expenditures, repurchase 1,230,000 shares of Snap-on common stock for $69.8 million and pay dividends totaling $69.7 million. Capital expenditures in 2008 of $73.9 million reflect higher levels of spending to support strategic supply chain and other growth initiatives, including the expansion of the company’s manufacturing capabilities in lower-cost regions and emerging markets, as well as higher levels of efficiency and cost- reduction capital investments. Cash at year-end 2008 of $115.8 million was up from $93.0 million at year-end 2007. In 2007, the company used available cash to repurchase 1,860,000 shares of Snap-on common stock for $94.4 million, pay dividends totaling $64.8 million, invest $61.9 million in capital expenditures and pay down debt of $36.6 million. 24 SNAP-ON INCORPORATED


  • Page 25

    Results of Operations Fiscal 2008 vs. Fiscal 2007 Results of operations for the fiscal years ended January 3, 2009 (fiscal 2008), and December 29, 2007 (fiscal 2007), are as follows: (Amounts in millions) 2008 2007 Change Net sales $ 2,853.3 100.0% $ 2,841.2 100.0% $ 12.1 0.4% Cost of goods sold (1,568.7) -55.0% (1,574.6) -55.4% 5.9 0.4% Gross profit 1,284.6 45.0% 1,266.6 44.6% 18.0 1.4% Financial services revenue 81.4 100.0% 63.0 100.0% 18.4 29.2% Financial services expenses (44.1) -54.2% (40.6) -64.4% (3.5) -8.6% Operating income from financial services 37.3 45.8% 22.4 35.6% 14.9 66.5% Operating expenses (933.1) -32.7% (964.2) -33.9% 31.1 3.2% Operating earnings 388.8 13.2% 324.8 11.2% 64.0 19.7% Interest expense (33.8) -1.1% (46.1) -1.6% 12.3 26.7% Other income (expense) - net 2.8 0.1% 5.5 0.2% (2.7) -49.1% Earnings before income taxes, equity earnings and minority interests 357.8 12.2% 284.2 9.8% 73.6 25.9% Income tax expense (117.8) -4.0% (92.5) -3.2% (25.3) -27.4% Earnings before equity earnings and minority interests 240.0 8.2% 191.7 6.6% 48.3 25.2% Equity earnings, net of tax and minority interests (3.3) -0.1% (2.5) -0.1% (0.8) -32.0% Net earnings from continuing operations 236.7 8.1% 189.2 6.5% 47.5 25.1% Discontinued operations, net of tax – – (8.0) -0.3% 8.0 100.0% Net earnings $ 236.7 8.1% $ 181.2 6.2% $ 55.5 30.6% Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue. Snap-on’s 2008 fiscal year contained 53 weeks of operating results; Snap-on’s 2007 fiscal year contained 52 weeks of operating results. The impact of the additional week, which occurred in the fourth quarter, was not material to Snap-on’s fourth quarter or full year 2008 net sales or operating earnings. Net sales in 2008 of $2,853.3 million increased $12.1 million, or 0.4%, from 2007 levels. Excluding $35.5 million of currency translation, net sales in 2008 declined $23.4 million, or 0.8%, from 2007 levels. The year-over-year sales comparison was significantly impacted by weakened consumer and business demand in 2008, particularly in the fourth quarter, as customers curtailed spending – primarily for purchases of higher-priced products – in response to the worsening global recession. 2008 ANNUAL REPORT 25


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Sales in the Commercial & Industrial Group of $1,409.3 million increased $58.7 million, or 4.3%, from 2007 levels; excluding $37.0 million of currency translation, organic sales (net sales, excluding currency translation effects), increased 1.6% from 2007 levels. Sales in the Snap-on Tools Group of $1,104.0 million declined $3.7 million, or 0.3%, from 2007 levels; excluding $1.2 million of favorable currency translation, organic sales declined $4.9 million, or 0.4%, from 2007 levels. In the Diagnostics & Information Group, sales of $627.8 million declined $22.8 million, or 3.5%, from 2007 levels; excluding $1.6 million of currency translation, organic sales declined $21.2 million, or 3.3%, from 2007 levels. Gross profit in 2008 was $1,284.6 million, as compared to $1,266.6 million in 2007. The $18.0 million gross profit improvement was primarily driven by $23.4 million of savings from ongoing RCI initiatives, $16.6 million of lower restructuring costs and $9.8 million of currency translation, partially offset by $24.6 million of higher production, material and freight costs. Contributions from higher sales and pricing were more than offset by the mix impact of lower sales of higher-margin products. In addition, gross profit in 2008 included $4.7 million of LIFO-related inventory valuation expense; gross profit in 2007 included LIFO- related inventory valuation benefits of $0.3 million. As a result of these factors, gross profit margin was 45.0% in 2008, up 40 basis points (100 basis points equals 1.0 percent) from 44.6% in 2007. Operating expenses in 2008 were $933.1 million, as compared to $964.2 million in 2007. The $31.1 million, or 3.2%, improvement in operating expenses includes $28.8 million of contributions from RCI initiatives, $10.9 million of lower franchisee termination costs, $5.0 million of lower performance-based incentive compensation and $4.3 million of lower stock- based incentive compensation. Operating expenses in 2008 also benefited from a $5.4 million adjustment of a pre-acquisition contingency acquired with the Business Solutions acquisition in 2006. These declines in operating expenses were partially offset by $10.3 million of currency translation, $5.0 million of higher restructuring costs and $2.4 million of increased spending to further expand the company’s presence in emerging growth markets and lower-cost regions. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of $6.4 million of gains from the sale of facilities. As a percentage of net sales, operating expenses in 2008 improved 120 basis points to 32.7%, as compared to 33.9% in 2007. Operating income from Financial Services was $37.3 million on revenue of $81.4 million in 2008, as compared with $22.4 million of operating income on revenue of $63.0 million in 2007. The $14.9 million increase in year-over-year operating income primarily reflects the impact of lower market discount rates in 2008. Consolidated operating earnings in 2008 were $388.8 million, an increase of $64.0 million, or 19.7%, from the $324.8 million achieved in 2007. The $64.0 million increase in year-over-year operating earnings includes $0.8 million of unfavorable currency translation. Interest expense of $33.8 million in 2008 declined $12.3 million from $46.1 million in 2007 primarily due to declining interest rates on our floating rate debt and lower average debt levels. Other income (expense) – net was income of $2.8 million in 2008, as compared to income of $5.5 million in 2007. Other income (expense) – net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) - net. Snap-on’s effective income tax rate on earnings before equity earnings and minority interests was 32.9% in 2008 and 32.5% in 2007. See Note 8 to the Consolidated Financial Statements for information on income taxes. On March 5, 2008, Snap-on acquired a 60% interest in Zhejiang Wanda Tools Co., Ltd. (“Wanda Snap-on”), a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. 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. For segment reporting purposes, the results of operations and assets of Wanda Snap-on are included in the Commercial & Industrial Group. The net sales and operating earnings impact of Wanda Snap-on were not material to Snap-on’s fourth quarter or full-year 2008 Consolidated Financial Statements. On June 29, 2007, Snap-on sold its Sun Electric Systems (“SES”) business based in the Netherlands for a nominal cash purchase price. The sale of the SES business is reflected in the accompanying Consolidated Statements of Earnings as “Discontinued operations, net of tax.” Snap-on recorded an after-tax loss of $8.0 million, or $0.14 per diluted share, in its 2007 results of operations related to the sale and results of operations of SES. For segment reporting purposes, the results of operations of SES were previously included in the Diagnostics & Information Group. See Note 16 to the Consolidated Financial Statements for information on SES. 26 SNAP-ON INCORPORATED


  • Page 27

    Net earnings and net earnings from continuing operations in 2008 were $236.7 million, or $4.07 per diluted share. Net earnings from continuing operations in 2007 were $189.2 million, or $3.23 per diluted share; net earnings in 2007 were $181.2 million, or $3.09 per diluted share. Exit and Disposal Activities See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities. Segment Results Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on Credit LLC (“SOC”), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. (“CIT”), and Snap-on’s wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations. Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools, and Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. 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, deferred income taxes, pension assets and certain other assets. Intersegment amounts are eliminated to arrive at consolidated financial results. Commercial & Industrial Group (Amounts in millions) 2008 2007 Change External net sales $ 1,260.5 89.4% $ 1,208.6 89.5% $ 51.9 4.3% Intersegment net sales 148.8 10.6% 142.0 10.5% 6.8 4.8% Segment net sales 1,409.3 100.0% 1,350.6 100.0% 58.7 4.3% Cost of goods sold (878.9) -62.4% (867.1) -64.2% (11.8) -1.4% Gross profit 530.4 37.6% 483.5 35.8% 46.9 9.7% Operating expenses (363.1) -25.7% (352.0) -26.1% (11.1) -3.2% Segment operating earnings $ 167.3 11.9% $ 131.5 9.7% $ 35.8 27.2% Segment net sales of $1,409.3 million in 2008 increased $58.7 million, or 4.3%, from 2007 levels. Excluding $37.0 million of currency translation, sales increased $21.7 million, or 1.6%, year over year primarily due to higher sales of tools, kits and tool storage products to industrial customers, increased sales of power tools and imaging alignment systems, and continued strong sales growth in emerging markets. Segment gross profit of $530.4 million in 2008 increased $46.9 million, or 9.7%, over 2007 levels. The $46.9 million increase in gross profit includes contributions from higher sales and pricing, $17.4 million of lower restructuring costs, $15.1 million of savings from RCI initiatives, and $10.7 million of currency translation. These increases in gross profit were partially offset by $9.9 million of higher production and material costs. As a percentage of net sales, gross profit of 37.6% improved 180 basis points over 35.8% in 2007. Operating expenses of $363.1 million increased $11.1 million from 2007 levels primarily due to $10.0 million of currency translation, $3.4 million of inflationary cost increases, and higher volume-related and other expenses, including $2.4 million of costs to further expand the company’s sales and manufacturing presence in emerging growth markets and lower cost regions. These increases in operating expenses were partially offset by $10.1 million of savings from RCI initiatives. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of 2008 ANNUAL REPORT 27


  • Page 28

    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) $5.4 million of gains on the sale of facilities in Europe. As a result of these factors, segment operating earnings of $167.3 million in 2008 increased $35.8 million, or 27.2%, from 2007 levels and, as a percentage of net sales, improved from 9.7% in 2007 to 11.9% in 2008. The $35.8 million increase in year-over-year operating earnings includes $0.7 million of favorable currency translation. Snap-on Tools Group (Amounts in millions) 2008 2007 Change Segment net sales $ 1,104.0 100.0% $ 1,107.7 100.0% $ (3.7) -0.3% Cost of goods sold (636.5) -57.7% (618.2) -55.8% (18.3) -3.0% Gross profit 467.5 42.3% 489.5 44.2% (22.0) -4.5% Operating expenses (349.8) -31.6% (364.4) -32.9% 14.6 4.0% Segment operating earnings $ 117.7 10.7% $ 125.1 11.3% $ (7.4) -5.9% Segment net sales of $1,104.0 million in 2008 decreased $3.7 million, or 0.3%, from 2007 levels. Excluding $1.2 million of favorable currency translation, 2008 sales declined $4.9 million, or 0.4%, from 2007 levels, as continued higher sales in the company’s international franchise operations were more than offset by lower U.S. franchise sales. Sales to U.S. franchisees declined 3.2% year over year primarily due to a more challenging economic environment for sales of higher-priced products and hand tools, partially offset by increased sales of power tools and diagnostics products. At year end 2008, van count in the United States was up slightly compared to both September 27, 2008, and December 29, 2007, levels. Sales in the company’s international franchise operations increased 6.6% year over year primarily due to strong growth in the United Kingdom, Japan and Australia. Segment gross profit of $467.5 million in 2008 declined $22.0 million, or 4.5%, from 2007 levels. The $22.0 million gross profit decline primarily reflects the impacts of lower U.S. sales, including a shift in product mix to higher sales of lower- margin products, and $13.7 million of increased production and material costs. In addition, gross profit in 2008 included $4.7 million of LIFO-related inventory valuation expense; gross profit in 2007 included $0.3 million of LIFO-related inventory valuation benefits. These declines in gross profit were partially offset by contributions from higher pricing, $6.3 million of benefits from RCI initiatives, and $3.1 million of lower warranty expense. Operating expenses of $349.8 million in 2008 decreased $14.6 million, or 4.0%, from prior-year levels largely due to $10.9 million of lower franchisee termination costs and $6.7 million of benefits from RCI initiatives. These decreases to operating expenses were partially offset by $4.1 million of higher restructuring costs. As a result of these factors, segment operating earnings of $117.7 million in 2008 declined $7.4 million from $125.1 million in 2007 and, as a percentage of net sales, declined from 11.3% in 2007 to 10.7% in 2008. The $7.4 million decline in year-over-year operating earnings includes $0.8 million of unfavorable currency translation. 28 SNAP-ON INCORPORATED


  • Page 29

    Diagnostics & Information Group (Amounts in millions) 2008 2007 Change External net sales $ 488.8 77.9% $ 524.9 80.7% $ (36.1) -6.9% Intersegment net sales 139.0 22.1% 125.7 19.3% 13.3 10.6% Segment net sales 627.8 100.0% 650.6 100.0% (22.8) -3.5% Cost of goods sold (341.1) -54.3% (357.0) -54.9% 15.9 4.5% Gross profit 286.7 45.7% 293.6 45.1% (6.9) -2.4% Operating expenses (173.8) -27.7% (194.1) -29.8% 20.3 10.5% Segment operating earnings $ 112.9 18.0% $ 99.5 15.3% $ 13.4 13.5% Segment net sales of $627.8 million in 2008 declined $22.8 million, or 3.5%, from 2007 levels, including $1.6 million from currency translation. Higher sales of diagnostics and Mitchell1 information products were more than offset by approximately $40 million of lower OEM program sales and by lower sales at Business Solutions, including expected lower sales from the planned exit of certain non-core product lines. The year-over-year decline in OEM program sales is primarily a consequence of the 2007 rollout of a major essential tool program in North America that was not repeated and the impact of the wind down of a facilitation program in Europe. Segment gross profit of $286.7 million in 2008 decreased $6.9 million, or 2.4%, from 2007 levels as the impacts of lower sales, $3.0 million of higher software development and other costs, $0.9 million of increased restructuring costs, and $0.8 million of currency translation were partially offset by gross profit contributions from a more favorable product mix and $2.0 million of benefits from RCI initiatives. Operating expenses of $173.8 million in 2008 declined $20.3 million from 2007 levels as $13.3 million of savings from RCI initiatives, lower volume-related expenses, and $0.4 million of currency translation were partially offset by $0.9 million of higher restructuring costs. In addition, operating expenses in 2008 benefited from a $5.4 million adjustment of a pre-acquisition contingency acquired with the Business Solutions acquisition in 2006. As a result of these factors, segment operating earnings of $112.9 million in 2008 increased $13.4 million, or 13.5%, from $99.5 million in 2007 and, as a percentage of net sales, improved from 15.3% in 2007 to 18.0% in 2008. The $13.4 million increase in year-over-year operating earnings was reduced by $0.4 million of unfavorable currency translation. Financial Services (Amounts in millions) 2008 2007 Change Financial services revenue $ 81.4 100.0% $ 63.0 100.0% $ 18.4 29.2% Financial services expenses (44.1) -54.2% (40.6) -64.4% (3.5) -8.6% Segment operating income $ 37.3 45.8% $ 22.4 35.6% $ 14.9 66.5% Segment operating income in 2008 was $37.3 million on $81.4 million of revenue, as compared with $22.4 million of operating income on $63.0 million of revenue in 2007. The $14.9 million increase in year-over-year operating income primarily reflects the impact of lower market discount rates in 2008. Originations of $532.8 million in 2008 declined 1.3% from originations of $539.6 million in 2007. 2008 ANNUAL REPORT 29


  • Page 30

    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Corporate Snap-on’s general corporate expenses totaled $46.4 million in 2008, as compared to $53.7 million incurred in 2007. The $7.3 million decline in year-over-year corporate expenses primarily reflects lower performance-based and stock-based incentive compensation in 2008. Fourth Quarter Results of operations for the fiscal fourth quarters ended January 3, 2009 (fiscal 2008), and December 29, 2007 (fiscal 2007), are as follows: Three Months Ended (Amounts in millions) January 3, 2009 December 29, 2007 Change Net sales $ 667.8 100.0% $ 742.9 100.0% $ (75.1) -10.1% Cost of goods sold (367.8) -55.1% (409.5) -55.1% 41.7 10.2% Gross profit 300.0 44.9% 333.4 44.9% (33.4) -10.0% Financial services revenue 19.7 100.0% 19.0 100.0% 0.7 3.7% Financial services expenses (10.8) -54.8% (11.0) -57.9% 0.2 1.8% Operating income from financial services 8.9 45.2% 8.0 42.1% 0.9 11.3% Operating expenses (211.4) -31.7% (245.1) -33.0% 33.7 13.7% Operating earnings 97.5 14.2% 96.3 12.6% 1.2 1.2% Interest expense (8.7) -1.3% (11.5) -1.5% 2.8 24.3% Other income (expense) - net (0.5) -0.1% (0.4) -0.1% (0.1) -25.0% Earnings before income taxes, equity earnings and minority interests 88.3 12.8% 84.4 11.0% 3.9 4.6% Income tax expense (28.2) -4.1% (26.3) -3.4% (1.9) -7.2% Earnings before equity earnings and minority interests 60.1 8.7% 58.1 7.6% 2.0 3.4% Equity earnings, net of tax and minority interests (1.5) -0.2% (0.8) -0.1% (0.7) -87.5% Net earnings $ 58.6 8.5% $ 57.3 7.5% $ 1.3 2.3% Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue. Snap-on’s 2008 fiscal year contained 53 weeks of operating results, with the extra week occurring in the fourth quarter; Snap-on’s 2007 fiscal year contained 52 weeks of operating results. The impact of the additional week was not material to Snap-on’s fourth quarter or full year 2008 net sales or operating earnings. Net sales in the fourth quarter of 2008 of $667.8 million declined $75.1 million, or 10.1%, from 2007 levels, reflecting lower levels of consumer and business spending as a result of worsening economic conditions and continued tight credit conditions. The year-over-year decline in fourth quarter sales also includes $42.2 million of currency translation, largely from the recent strengthening of the dollar. Snap-on has significant international operations and is subject to certain risks inherent with foreign operations, including currency translation fluctuations. Excluding the $42.2 million of unfavorable currency translation, organic sales in the fourth quarter of 2008 declined 4.4% from 2007 levels. 30 SNAP-ON INCORPORATED


  • Page 31

    Sales in the Commercial & Industrial Group of $326.8 million declined $42.5 million, or 11.5%, from 2007 levels, including $24.4 million of unfavorable currency translation. Sales in the Snap-on Tools Group of $252.4 million declined $20.8 million, or 7.6%, from 2007 levels, including $12.2 million of unfavorable currency translation. In the Diagnostics & Information Group, sales of $152.9 million declined $16.6 million, or 9.8%, from 2007 levels, including $7.1 million of unfavorable currency translation. Gross profit in the fourth quarter of 2008 was $300.0 million, as compared to $333.4 million in 2007. The $33.4 million gross profit decline primarily includes the impacts of lower sales, $16.7 million of currency translation, and $9.5 million of higher production, material and freight costs. These declines in gross profit were partially offset by contributions from higher pricing, $5.1 million of lower restructuring costs, and $4.9 million of savings from RCI initiatives. In addition, fourth quarter 2008 gross profit included $0.3 million of LIFO-related inventory valuation expense; gross profit in the fourth quarter of 2007 included $6.0 million of LIFO-related inventory valuation benefits. As a result of these factors, gross profit margin of 44.9% in 2008 was equal to 2007 levels. Operating expenses in the fourth quarter of 2008 were $211.4 million, as compared to $245.1 million in 2007. The $33.7 million improvement in operating expenses primarily includes $12.6 million of savings from RCI initiatives, $10.9 million of currency translation, $5.0 million of lower performance-based incentive compensation, $4.3 million of lower stock-based incentive compensation, and lower volume-related expenses. Operating expenses in 2008 were further reduced by a $5.4 million adjustment of a pre-acquisition contingency acquired with the Business Solutions acquisition in 2006. These reductions in operating expenses were partially offset by $2.0 million of higher restructuring costs. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of a $4.0 million gain from the sale of a facility in Europe. As a percentage of net sales, operating expenses in the fourth quarter of 2008 improved 130 basis points to 31.7%, as compared to 33.0% in 2007. Operating income from Financial Services was $8.9 million on revenue of $19.7 million in the fourth quarter of 2008, as compared with $8.0 million of operating income on revenue of $19.0 million in 2007. Contributions from higher revenues in 2008, primarily as a result of lower market discount rates, were partially offset by a 12.8% decline in originations. Consolidated operating earnings in the fourth quarter of 2008 were $97.5 million, an increase of $1.2 million, or 1.2%, from the $96.3 million achieved in the fourth quarter of 2007. The $1.2 million increase in year-over-year operating earnings includes $6.4 million of unfavorable currency translation. Interest expense of $8.7 million in the fourth quarter of 2008 was down $2.8 million from prior year primarily due to declining interest rates on our floating rate debt and lower average debt levels. Other income (expense) – net was expense of $0.5 million in the fourth quarter of 2008, as compared to income of $0.4 million in 2007. Other income (expense) – net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net. Snap-on’s effective income tax rate on earnings before equity earnings and minority interests was 31.9% in the fourth quarter of 2008 and 31.2% in the fourth quarter of 2007. See Note 8 to the Consolidated Financial Statements for information on income taxes. Net earnings in the fourth quarter of 2008 were $58.6 million, or $1.01 per diluted share, as compared with net earnings of $57.3 million, or $0.98 per diluted share, in 2007. 2008 ANNUAL REPORT 31


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Commercial & Industrial Group Three Months Ended (Amounts in millions) January 3, 2009 December 29, 2007 Change External net sales $ 295.1 90.3% $ 333.3 90.3% $ (38.2) -11.5% Intersegment net sales 31.7 9.7% 36.0 9.7% (4.3) -11.9% Segment net sales 326.8 100.0% 369.3 100.0% (42.5) -11.5% Cost of goods sold (203.2) -62.2% (236.8) -64.1% 33.6 14.2% Gross profit 123.6 37.8% 132.5 35.9% (8.9) -6.7% Operating expenses (84.5) -25.8% (94.3) -25.6% 9.8 10.4% Segment operating earnings $ 39.1 12.0% $ 38.2 10.3% $ 0.9 2.4% Segment net sales of $326.8 million in the fourth quarter of 2008 declined $42.5 million, or 11.5%, from 2007 levels. Excluding $24.4 million of unfavorable currency translation, sales declined $18.1 million, or 4.9%, year over year primarily due to continued lower sales of professional tools in Europe and lower overall equipment sales worldwide, despite strong double-digit increases in sales of imaging aligner units. These year-over-year sales declines were partially offset by continued higher sales of tools, kits and tool storage products to industrial customers and by increased sales of power tools. Segment gross profit of $123.6 million in the fourth quarter of 2008 declined $8.9 million, or 6.7%, from 2007 levels. The $8.9 million gross profit decline includes the impacts of lower sales, $8.9 million of currency translation and $4.8 million of higher production and material costs. These decreases to gross profit were partially offset by contributions from higher pricing, $6.3 million of lower restructuring costs and $4.2 million of savings from RCI initiatives. As a percentage of net sales, gross profit of 37.8% in the fourth quarter of 2008 improved 190 basis points over 35.9% in 2007. Operating expenses of $84.5 million in the fourth quarter of 2008 improved $9.8 million from 2007 levels primarily due to $5.8 million of currency translation, $5.6 million of savings from RCI initiatives, lower volume-related and other expenses, and $1.0 million of lower restructuring costs. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of a $4.0 million gain from the sale of a facility in Europe. As a result of these factors, segment operating earnings of $39.1 million in the fourth quarter of 2008 increased $0.9 million from 2007 levels and, as a percentage of net sales, improved from 10.3% in 2007 to 12.0% in 2008. The $0.9 million increase in year-over-year operating earnings includes $3.1 million of unfavorable currency translation. Snap-on Tools Group Three Months Ended (Amounts in millions) January 3, 2009 December 29, 2007 Change Segment net sales $ 252.4 100.0% $ 273.2 100.0% $ (20.8) -7.6% Cost of goods sold (147.3) -58.4% (148.1) -54.2% 0.8 0.5% Gross profit 105.1 41.6% 125.1 45.8% (20.0) -16.0% Operating expenses (85.3) -33.8% (88.6) -32.4% 3.3 3.7% Segment operating earnings $ 19.8 7.8% $ 36.5 13.4% $ (16.7) -45.8% Segment net sales of $252.4 million in the fourth quarter of 2008 declined $20.8 million, or 7.6%, from 2007 levels. Excluding $12.2 million of unfavorable currency translation, sales declined 3.1% year over year reflecting a more challenging sales environment, particularly for sales of higher-priced products and hand tools. Sales in the company’s U.S. franchise operations declined 5.0% year over year despite a slight increase in the number of vans in the quarter, while organic sales in the company’s international franchise operations were up slightly. 32 SNAP-ON INCORPORATED


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    Segment gross profit of $105.1 million in the fourth quarter of 2008 declined $20.0 million, or 16.0%, from 2007 levels. The $20.0 million gross profit decline primarily reflects the impacts of lower sales, $6.3 million of higher year-over-year LIFO-related inventory valuation expense ($0.3 million of LIFO-related expense in 2008, as compared to $6.0 million of LIFO-related benefits in 2007), $5.7 million of currency translation, and $4.7 million of higher production and material costs. These decreases to gross profit were partially offset by contributions from higher pricing. Operating expenses of $85.3 million in the fourth quarter of 2008 improved $3.3 million from 2007 levels primarily due to $4.7 million of savings from RCI initiatives, $3.0 million of currency translation, and lower volume-related expenses, partially offset by $2.8 million of higher restructuring costs. As a result of these factors, segment operating earnings of $19.8 million in the fourth quarter of 2008 declined $16.7 million from 2007 levels and, as a percentage of net sales, declined from 13.4% in 2007 to 7.8% in 2008. The $16.7 million decline in year-over-year operating earnings includes $2.7 million of unfavorable currency translation. Diagnostics & Information Group Three Months Ended (Amounts in millions) January 3, 2009 December 29, 2007 Change External net sales $ 120.3 78.7% $ 136.4 80.5% $ (16.1) -11.8% Intersegment net sales 32.6 21.3% 33.1 19.5% (0.5) -1.5% Segment net sales 152.9 100.0% 169.5 100.0% (16.6) -9.8% Cost of goods sold (81.5) -53.3% (93.7) -55.3% 12.2 13.0% Gross profit 71.4 46.7% 75.8 44.7% (4.4) -5.8% Operating expenses (37.1) -24.3% (48.4) -28.5% 11.3 23.3% Segment operating earnings $ 34.3 22.4% $ 27.4 16.2% $ 6.9 25.2% Segment net sales of $152.9 million in the fourth quarter of 2008 declined $16.6 million, or 9.8%, from 2007 levels primarily due to lower OEM program sales in Europe, $7.1 million of currency translation, and lower sales at Business Solutions, including expected lower sales from the planned exit of certain non-core product lines. These sales declines were partially offset by higher sales of diagnostics products in North America and increased sales of Mitchell1 information products. Excluding currency translation, organic sales declined 5.6% year over year. Segment gross profit of $71.4 million in the fourth quarter of 2008 declined $4.4 million, or 5.8%, from 2007 levels. The $4.4 million gross profit decline primarily reflects the impacts of lower sales, $2.1 million of currency translation, $1.4 million of increased software costs and $0.3 million of higher restructuring costs, partially offset by $0.7 million of savings from RCI initiatives. Operating expenses of $37.1 million in the fourth quarter of 2008 improved $11.3 million from 2007 levels primarily due to a $5.4 million adjustment of a pre-acquisition contingency acquired with the Business Solutions acquisition in 2006, $2.3 million of savings from RCI initiatives, $2.1 million of currency translation, and lower volume- related expenses. As a result of these factors, segment operating earnings of $34.3 million in the fourth quarter of 2008 increased $6.9 million from 2007 levels and, as a percentage of net sales improved from 16.2% in 2007 to 22.4% in 2008. The $6.9 million year-over-year increase in operating earnings was not impacted by currency translation. Financial Services Three Months Ended (Amounts in millions) January 3, 2009 December 29, 2007 Change Financial services revenue $ 19.7 100.0% $ 19.0 100.0% $ 0.7 3.7% Financial services expenses (10.8) -54.8% (11.0) -57.9% 0.2 1.8% Segment operating income $ 8.9 45.2% $ 8.0 42.1% $ 0.9 11.3% Segment operating income in the fourth quarter of 2008 was $8.9 million on $19.7 million of revenue, as compared with $8.0 million of operating income on revenue of $19.0 million in 2007. Origination volume in 2008 was down 12.8% from 2007 levels, but lower market discount rates enabled the year-over-year improvement in operating income. Originations totaled $121.5 million in 2008, as compared to $139.4 million in 2007. 2008 ANNUAL REPORT 33


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Corporate Snap-on’s general corporate expenses of $4.6 million in the fourth quarter of 2008 declined $9.2 million from $13.8 million in the fourth quarter of 2007. The $9.2 million expense decline primarily reflects $5.0 million of lower performance-based incentive compensation and $4.3 million of lower stock-based incentive compensation in 2008. Fiscal 2007 vs. Fiscal 2006 Results of operations for the fiscal years ended December 29, 2007 (fiscal 2007), and December 30, 2006 (fiscal 2006), are as follows: (Amounts in millions) 2007 2006 Change Net sales $ 2,841.2 100.0% $ 2,455.1 100.0% $ 386.1 15.7% Cost of goods sold (1,574.6) -55.4% (1,375.3) -56.0% (199.3) -14.5% Gross profit 1,266.6 44.6% 1,079.8 44.0% 186.8 17.3% Financial services revenue 63.0 100.0% 49.0 100.0% 14.0 28.6% Financial services expenses (40.6) -64.4% (36.0) -73.5% (4.6) -12.8% Operating income from financial services 22.4 35.6% 13.0 26.5% 9.4 72.3% Operating expenses: Selling, general and administrative (964.2) -33.9% (892.0) -36.3% (72.2) -8.1% Litigation settlement – – (38.0) -1.6% 38.0 NM Total operating expenses (964.2) -33.9% (930.0) -37.9% (34.2) -3.7% Operating earnings 324.8 11.2% 162.8 6.5% 162.0 99.5% Interest expense (46.1) -1.6% (20.6) -0.8% (25.5) -123.8% Other income (expense) - net 5.5 0.2% 5.3 0.2% 0.2 3.8% Earnings before income taxes, equity earnings and minority interests 284.2 9.8% 147.5 5.9% 136.7 92.7% Income tax expense (92.5) -3.2% (45.9) -1.8% (46.6) NM Earnings before equity earnings and minority interests 191.7 6.6% 101.6 4.1% 90.1 88.7% Equity earnings, net of tax and minority interests (2.5) -0.1% (3.7) -0.2% 1.2 32.4% Net earnings from continuing operations 189.2 6.5% 97.9 3.9% 91.3 93.3% Discontinued operations, net of tax (8.0) -0.3% 2.2 0.1% (10.2) NM Net earnings $ 181.2 6.2% $ 100.1 4.0% $ 81.1 81.0% NM: Not meaningful Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue. Net sales in 2007 increased $386.1 million, or 15.7%, from 2006 levels, including $84.0 million from currency translation. Sales in the Commercial & Industrial Group increased $158.6 million, or 13.3%, year over year, primarily due to higher sales of professional tools and equipment in Europe, increased industrial sales, and continued strong sales growth in emerging markets. Sales in the Snap-on Tools Group increased $82.7 million, or 8.1%, from prior-year levels, primarily driven by a 6.3% increase in North American sales and continued strong growth in international sales. In the Diagnostics & Information Group, sales were up $144.4 million, or 28.5%, from 2006 levels, primarily due to sales from the November 28, 2006, acquisition of Business Solutions, partially offset by lower sales due to the wind down of an OEM facilitation program in Europe, and by lower sales as a result of outsourcing certain products previously manufactured and sold to the Snap-on Tools Group. 34 SNAP-ON INCORPORATED


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    Gross profit in 2007 was $1,266.6 million, as compared to $1,079.8 million in 2006. The $186.8 million improvement in 2007 gross profit primarily reflects benefits from the higher sales, $40.6 million of savings from ongoing RCI initiatives, and $30.9 million of currency translation. These increases were partially offset by $22.5 million of increased production and material costs and $6.6 million of higher year-over-year restructuring costs. As a percentage of net sales, gross profit improved from 44.0% in 2006 to 44.6% in 2007. Operating expenses in 2007 were $964.2 million, as compared to $930.0 million in 2006. The $34.2 million increase in operating expenses includes $62.1 million of higher year-over-year operating expenses for Business Solutions (twelve months of operating expense in 2007 versus approximately five weeks of post-acquisition operating expense in 2006), $22.2 million of unfavorable currency translation, higher volume-related expenses, and increased spending for expansion in emerging markets. These increases in year-over-year operating expenses were largely offset by the absence, in 2007, of a $38.0 million franchisee litigation settlement charge recorded in 2006, higher benefits of $11.5 million from ongoing RCI initiatives, $6.4 million of gains from the sale of facilities and $2.0 million of lower restructuring costs. As a percentage of net sales, operating expenses of 33.9% were significantly improved from 2006 levels. See Note 15 to the Consolidated Financial Statements for further information on the franchisee litigation settlement. Interest expense of $46.1 million in 2007 was up from $20.6 million in 2006 primarily due to higher debt levels to finance the Business Solutions acquisition. Other income (expense) – net was income of $5.5 million in 2007 as compared to income of $5.3 million in 2006. Other income (expense) – net includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) – net. Snap-on’s effective income tax rate on earnings before equity earnings and minority interests was 32.5% in 2007, as compared with 31.1% in the prior year. See Note 8 to the Consolidated Financial Statements for information on income taxes. Net earnings from continuing operations in 2007 were $189.2 million, or $3.23 per diluted share. Net earnings from continuing operations in 2006 were $97.9 million, or $1.65 per diluted share, including a $23.4 million after-tax charge ($0.40 per diluted share) related to the resolution of the franchisee litigation settlement. Net earnings in 2007 were $181.2 million, or $3.09 per diluted share, as compared to net earnings of $100.1 million, or $1.69 per diluted share, in 2006. Results of operations for 2007 include a full year of operating results for Business Solutions; results of operations for 2006 include approximately five weeks of post-acquisition operating results for Business Solutions. Exit and Disposal Activities See Note 7 to the Consolidated Financial Statements for information on Snap-on’s exit and disposal activities. Segment Results Commercial & Industrial Group (Amounts in millions) 2007 2006 Change External net sales $ 1,208.6 89.5% $ 1,048.6 88.0% $ 160.0 15.3% Intersegment net sales 142.0 10.5% 143.4 12.0% (1.4) -1.0% Segment net sales 1,350.6 100.0% 1,192.0 100.0% 158.6 13.3% Cost of goods sold (867.1) -64.2% (756.3) -63.4% (110.8) -14.7% Gross profit 483.5 35.8% 435.7 36.6% 47.8 11.0% Operating expenses (352.0) -26.1% (329.5) -27.7% (22.5) -6.8% Segment operating earnings $ 131.5 9.7% $ 106.2 8.9% $ 25.3 23.8% Segment net sales in 2007 increased $158.6 million, or 13.3%, from 2006 levels due to $101.4 million of higher sales and $57.2 million of currency translation. The $101.4 million sales increase primarily reflects higher sales of professional tools and equipment in Europe, increased industrial sales and continued strong sales growth in emerging markets. 2008 ANNUAL REPORT 35


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Segment gross profit of $483.5 million in 2007 was up $47.8 million over 2006 levels primarily due to higher sales, $24.6 million of savings from ongoing RCI initiatives, and $20.7 million of currency translation. These increases were partially offset by $14.4 million of increased production and material costs and $8.4 million of higher restructuring costs. Operating expenses of $352.0 million in 2007 were up $22.5 million from 2006 levels, but improved 160 basis points as a percentage of segment sales. The increase in year-over-year operating expenses primarily includes $15.2 million of currency translation, higher volume-related expenses, increased investment spending to further expand the company’s sales and manufacturing presence in emerging growth markets and lower-cost regions, and $3.1 million of higher restructuring costs. These increases in operating expenses were partially offset by $5.4 million of gains on the sale of facilities in Europe and $3.1 million of savings from ongoing RCI initiatives. As a result of these factors, segment operating earnings in 2007 increased $25.3 million from 2006 levels. As a percentage of segment net sales, including the impact of $11.5 million of higher restructuring costs in 2007, operating earnings for the Commercial & Industrial Group improved from 8.9% in 2006 to 9.7% in 2007. Snap-on Tools Group (Amounts in millions) 2007 2006 Change Segment net sales $ 1,107.7 100.0% $ 1,025.0 100.0% $ 82.7 8.1% Cost of goods sold (618.2) -55.8% (577.3) -56.3% (40.9) -7.1% Gross profit 489.5 44.2% 447.7 43.7% 41.8 9.3% Operating expenses: Selling, general and administrative (364.4) -32.9% (372.1) -36.3% 7.7 2.1% Litigation settlement – – (38.0) -3.7% 38.0 NM Total operating expenses (364.4) -32.9% (410.1) -40.0% 45.7 11.1% Segment operating earnings $ 125.1 11.3% $ 37.6 3.7% $ 87.5 232.7% NM: Not meaningful Segment net sales in 2007 increased $82.7 million, or 8.1%, from 2006 levels primarily driven by a 6.3% increase in North American franchise sales, including higher sales from a new mid-tier product offering and the re-launch of the company’s in- house warehouse distribution program, as well as the impacts of lower levels of franchisee turnover and product returns. Sales in the company’s international franchise operations increased 15.3% year over year primarily due to continued strong growth in the United Kingdom and Australia. Currency translation contributed $18.0 million of the segment’s year-over-year sales increase. Segment gross profit of $489.5 million in 2007 was up $41.8 million from 2006 levels primarily due to the higher sales and lower costs, including $15.9 million of benefits from ongoing RCI initiatives and $7.1 million of currency translation. These improvements to gross profit were partially offset by $7.0 million of higher production and material costs. Operating expenses of $364.4 million in 2007 were down $45.7 million from prior-year levels primarily due to the absence of the $38.0 million franchisee litigation settlement charge recorded in 2006, lower spending of $4.4 million in 2007 related to the company’s strategic supply chain and franchise system initiatives, $3.3 million of lower bad debt expense, and $3.2 million of lower restructuring costs. These decreases in operating expenses were partially offset by $4.2 million of currency translation and higher volume-related expenses. As a result of these factors, operating earnings in 2007 for the Snap-on Tools Group increased $87.5 million from 2006 levels and, as a percentage of segment net sales, improved from 3.7% in 2006 to 11.3% in 2007. 36 SNAP-ON INCORPORATED


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    Diagnostics & Information Group (Amounts in millions) 2007 2006 Change External net sales $ 524.9 80.7% $ 381.5 75.4% $ 143.4 37.6% Intersegment net sales 125.7 19.3% 124.7 24.6% 1.0 0.8% Segment net sales 650.6 100.0% 506.2 100.0% 144.4 28.5% Cost of goods sold (357.0) -54.9% (309.8) -61.2% (47.2) -15.2% Gross profit 293.6 45.1% 196.4 38.8% 97.2 49.5% Operating expenses (194.1) -29.8% ( 136.6) -27.0% (57.5) -42.1% Segment operating earnings $ 99.5 15.3% $ 59.8 11.8% $ 39.7 66.4% Segment net sales in 2007 of $650.6 million increased $144.4 million, or 28.5%, from 2006 levels primarily due to $179.0 million of higher sales in 2007 from Business Solutions (twelve months of sales in 2007 versus approximately five weeks of post-acquisition sales in 2006) and higher sales of diagnostics and information products. Currency translation contributed $11.8 million of the year-over-year sales increase. These increases were partially offset by approximately $35 million of lower sales due to the wind down of an OEM facilitation program in Europe, and by lower sales from the outsourcing of certain non-strategic, low-margin diagnostics equipment products previously manufactured and sold to the Snap-on Tools Group. Segment gross profit of $293.6 million in 2007 was up $97.2 million from 2006 levels primarily due to the higher sales and a more favorable product mix. As a percentage of segment net sales, gross profit margin of 45.1% in 2007 improved significantly from 38.8% in 2006. Operating expenses of $194.1 million were up $57.5 million from 2006 levels primarily due to $62.1 million of higher operating expenses for Business Solutions (twelve months of operating expense in 2007 versus approximately five weeks of post-acquisition operating expense in 2006), partially offset by $7.3 million of savings from ongoing RCI initiatives. As a result of these factors, operating earnings for the Diagnostics & Information Group in 2007 increased $39.7 million from 2006 levels and, as a percentage of segment net sales, improved from 11.8% in 2006 to 15.3% in 2007. Financial Services (Amounts in millions) 2007 2006 Change Financial services revenue $ 63.0 100.0% $ 49.0 100.0% $ 14.0 28.6% Financial services expenses (40.6) -64.4% (36.0) -73.5% (4.6) -12.8% Segment operating income $ 22.4 35.6% $ 13.0 26.5% $ 9.4 72.3% Financial services operating income in 2007 was $22.4 million on $63.0 million of revenue, as compared with $13.0 million of operating income on $49.0 million of revenue in 2006. The increase in operating income primarily reflects the impact of higher net yields and lower borrowing costs. Originations of $539.6 million in 2007 were essentially flat with prior-year levels. 2008 ANNUAL REPORT 37


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Corporate Snap-on’s general corporate expenses of $53.7 million in 2007 were essentially flat with the $53.8 million incurred in 2006. Liquidity and Capital Resources Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. Snap-on believes that its cash from operations, coupled with its sources of borrowings, are sufficient to fund its anticipated requirements for working capital, capital expenditures, restructuring activities, acquisitions, common stock repurchases and dividend payments. Due to Snap-on’s credit rating over the years, external funds have been available at a reasonable cost. As of the close of business on February 13, 2009, Snap-on’s long-term debt and commercial paper was rated A3 and P-2 by Moody’s Investors Service and A- and A-2 by Standard & Poor’s. As of the date of this Form 10-K, the credit and financial markets are in a period of substantial instability and uncertainty that is affecting the availability of credit to borrowers. Snap-on believes that its current credit arrangements are sound and that the strength of its balance sheet affords the company the financial flexibility to respond to both internal growth opportunities and those available through acquisitions. In light of the current state of the credit and financial markets, however, the company cannot provide any assurances of the availability of future financing or the terms on which it might be available. The following discussion focuses on information included in the accompanying Consolidated Balance Sheets. As of January 3, 2009, working capital (current assets less current liabilities) of $593.2 million increased $45.0 million from $548.2 million as of December 29, 2007, including $22.8 million of higher levels of “Cash and cash equivalents.” The following represents the company’s working capital position as of January 3, 2009, and December 29, 2007. January 3, December 29, (Amounts in millions) 2009 2007 Cash and cash equivalents $ 115.8 $ 93.0 Accounts receivable – net of allowances 522.1 586.9 Inventories - net 359.2 322.4 Other current assets 143.6 185.1 Total current assets 1,140.7 1,187.4 Accounts payable (126.0) (171.6) Notes payable and current maturities of long-term debt (12.0) (15.9) Other current liabilities (409.5) (451.7) Total current liabilities (547.5) (639.2) Total working capital $ 593.2 $ 548.2 Accounts receivable at the end of 2008 was $522.1 million, down $64.8 million from year-end 2007 levels. The $64.8 million decline includes $38.6 million of currency translation and $26.2 million of lower receivables, primarily due to lower year-over-year fourth quarter sales. Days sales outstanding at year-end 2008 was 64 days, as compared to 73 days at year-end 2007. Inventories of $359.2 million at year-end 2008 were up $36.8 million from year-end 2007 levels, including $55.7 million of higher inventories partially offset by $18.9 million of currency translation. The $55.7 million inventory increase primarily reflects the impacts of lower than expected sales and higher levels of inventory to support targeted growth initiatives in certain existing and emerging markets. The year-over-year inventory increase also reflects the impact of higher inventory costs in 2008 as a result of inflationary and commodity cost increases. Inventory turns (full year cost of goods sold divided by the average of the beginning and ending inventory balances for the year) were 4.6 turns at year-end 2008, as compared to 4.9 turns at year-end 2007. Inventories accounted for using the first-in, first-out (“FIFO”) method as of January 3, 2009, and December 29, 2007, approximated 64% and 65%, respectively, of total inventories. All other 38 SNAP-ON INCORPORATED


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    inventories are accounted for using the LIFO cost method. The company’s LIFO reserve increased from $75.0 million at December 29, 2007, to $83.3 million at January 3, 2009. Accounts payable at January 3, 2009, was $126.0 million, down $45.6 million from year-end 2007 levels primarily due to lower production levels, the timing of payments and $6.3 million of unfavorable currency translation. Notes payable and long-term debt as of January 3, 2009, was $515.4 million. As of December 29, 2007, notes payable and long-term debt was $517.9 million. Notes payable and current maturities of long-term debt of $12.0 million at January 3, 2009, included $10.6 million of notes payable and $1.4 million of current maturities of long-term debt. No commercial paper was outstanding at January 3, 2009, or December 29, 2007. Long-term debt of $503.4 million as of January 3, 2009, included $150 million of unsecured floating rate notes that mature on January 12, 2010, $200 million of unsecured 6.25% notes that mature in 2011, $150 million of unsecured 5.50% notes that mature in 2017, and $3.4 million of other long-term debt. The weighted-average interest rate on the $150 million of unsecured floating rate notes was 3.82% in 2008 and the interest rate on these notes as of January 3, 2009, was 4.88%. The company has begun consideration of alternatives for addressing the debt maturities that will occur over the next several years. Average commercial paper and notes payable outstanding were $68.1 million in 2008 and $124.9 million in 2007. The weighted-average interest rate on these instruments was 4.33% in 2008 and 5.59% in 2007. As of January 3, 2009, the weighted-average interest rate on outstanding notes payable was 8.32%, as compared to 8.78% at December 29, 2007. As of January 3, 2009, Snap-on had a five-year, $500 million multi-currency revolving credit facility that terminates on August 10, 2012. As of January 3, 2009, 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, (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 January 3, 2009, the company’s ratio of total debt to the sum of total debt plus shareholders’ equity was 0.30, which is in compliance with the covenants of this revolving credit facility. As of January 3, 2009, Snap-on also had $20 million of unused available debt capacity under committed bank lines of credit. The committed bank lines consist of two $10 million lines of credit that expire on July 28, 2009, and August 30, 2009, respectively. As of January 3, 2009, Snap-on had $520 million of unused available debt capacity under the terms of its revolving credit facility and committed bank lines of credit. Although the credit and financial markets are currently in a state of substantial instability and uncertainty, Snap-on believes that it has sufficient available committed and uncommitted lines of credit and liquidity facilities to cover its expected funding needs on both a short-term and long-term basis. Snap-on manages its aggregate short-term borrowings so as not to exceed its availability under its revolving credit facilities and committed lines of credit. While the instability of the credit and financial markets has affected the market for commercial paper issuances and other short-term debt, Snap-on currently believes that it could access those markets for short-term liquidity if the need were to arise. Snap-on regularly monitors the credit and financial markets and may take advantage of what it believes are favorable market conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include the funding of its investments in capital expenditures and restructuring activities, payments of dividends and interest, and funding for share repurchases, if any. Snap-on also expects to make contributions of $8.2 million to its foreign pension plans and $1.3 million to its domestic pension plans in 2009. Depending on market and other conditions, Snap-on may elect to make discretionary cash contributions to its domestic pension plans in 2009. Snap-on’s long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs. See Note 9 to the Consolidated Financial Statements for further information on Snap-on’s debt and credit facilities. Since 1999, CIT has been the exclusive purchaser of the credit and installment financing contracts originated by SOC in the United States. Snap-on has been monitoring its relationship with CIT carefully, particularly in view of the current instability in the credit markets. If CIT were to no longer purchase the credit and installment financing contracts originated by SOC, Snap-on believes it has, and/or would have access to, alternative means to finance these contracts, including the use of its existing credit facilities. 2008 ANNUAL REPORT 39


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) The SOC joint venture agreement between Snap-on and CIT automatically renews on an annual basis unless either Snap-on or CIT provides a six month advance notice of their intent to not renew the agreement. This advance notice must be given during the first six months of the calendar year. The joint venture agreement also provides for a nine month transition period in the event the joint venture agreement is not renewed. The following discussion focuses on information included in the accompanying Consolidated Statements of Cash Flow. Cash flow provided from operating activities was $215.0 million in 2008, $231.1 million in 2007, and $203.4 million in 2006. Depreciation expense was $47.9 million in 2008, $53.5 million in 2007 and $48.5 million in 2006. The lower depreciation expense in 2008 primarily reflects the impact of favorable currency translation partially offset by higher depreciation as a result of increased capital spending in recent years. Capital expenditures were $73.9 million in 2008, $61.9 million in 2007 and $50.5 million in 2006. The increase in 2008 capital expenditures over 2007 levels included continued higher spending to accelerate the expansion of the company’s manufacturing capabilities in lower-cost regions and emerging markets, as well as increased spending to construct a new headquarters and development facility for Snap-on Business Solutions, the company’s automotive parts and service information business, which is expected to be completed in the fourth quarter of 2009. Capital expenditures in all three years include higher levels of spending to support the company’s strategic supply chain and other growth initiatives, including the installation of new production equipment and machine tooling to enhance manufacturing and distribution operations, as well as provide ongoing replacements of manufacturing and distribution equipment. Capital spending over the last three years also included spending for the replacement and enhancement of the company’s existing global enterprise resource planning (ERP) management information systems, which will continue over a period of several years. Snap-on believes that its cash generated from operations, as well as the funds available from its credit facilities, will be sufficient to fund the company’s capital expenditure requirements in 2009. Amortization expense was $24.1 million in 2008, $22.2 million in 2007 and $3.4 million in 2006. The increase in amortization expense over 2006 levels is primarily due to the amortization of intangibles from the November 2006 acquisition of Business Solutions. See Note 6 to the Consolidated Financial Statements for information on acquired intangible assets. On March 5, 2008, Snap-on acquired a 60% interest in Wanda Snap-on, a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. 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. The Wanda Snap-on joint venture agreement granted a redeemable minority interest right to the minority shareholder that could require Snap-on to acquire the minority interest at a purchase price of either 64.9 million Chinese yuan (approximately $9.5 million at year-end 2008 exchange rates) or 75.7 million Chinese yuan (approximately $11.1 million at year-end 2008 exchange rates) if certain financial metrics (as defined in the joint venture agreement) are reached during the five-year period subsequent to the acquisition date. On January 12, 2007, Snap-on sold $300 million in floating and fixed rate notes consisting of $150 million of floating rate notes and $150 million of fixed rate notes. Snap-on used the proceeds from the sales of these notes, net of $1.5 million of transaction costs, to repay commercial paper obligations issued to finance the November 2006 acquisition of Snap-on Business Solutions. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and dealer stock purchase plans, stock options, and other corporate purposes, as well as to repurchase shares when the company believes market conditions are favorable. In 2008, Snap-on repurchased 1,230,000 shares of common stock for $69.8 million under its previously announced share repurchase programs. The cash used to repurchase shares of common stock was partially offset by $41.7 million of proceeds from stock purchase plans and stock option exercises and $5.7 million of related excess tax benefits. As of January 3, 2009, Snap-on had remaining availability to repurchase up to an additional $117.2 million in common stock pursuant to Board authorizations. The purchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions. Snap-on repurchased 1,860,000 shares of common stock for $94.4 million in 2007 and 2,616,618 shares of common stock for $109.8 million in 2006. Snap-on believes that its cash generated from operations, as well as the funds available from its credit facilities, will be sufficient to fund the company’s share repurchases, if any, in 2009. 40 SNAP-ON INCORPORATED


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    Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2008, 2007 and 2006 totaled $69.7 million, $64.8 million and $63.6 million, respectively. On November 1, 2007, the Board increased the quarterly cash dividend by 11.1% to $0.30 per share ($1.20 per share per year). 2008 2007 2006 Cash dividends paid per common share $ 1.20 $ 1.11 $ 1.08 Cash dividends paid as a percent of prior-year retained earnings 5.4% 5.5% 5.6% Snap-on believes that its cash generated from operations, as well as the funds available from its credit facilities, will be sufficient to pay dividends in 2009. Off-Balance Sheet Arrangements Except as set forth below in the section labeled “Contractual Obligations and Commitments” and Note 15 to the Consolidated Financial Statements, the company had no off-balance sheet arrangements as of January 3, 2009. Contractual Obligations and Commitments A summary of Snap-on’s future contractual obligations and commitments as of January 3, 2009, are as follows: 2014 and (Amounts in millions) Total 2009 2010-2011 2012-2013 thereafter Contractual obligations: Long-term debt $ 504.8 $ 1.4 $ 353.2 $ 0.1 $ 150.1 Interest on fixed rate debt 99.1 20.7 36.8 16.5 25.1 Operating leases 92.2 24.4 29.2 17.0 21.6 Capital leases 28.2 1.8 3.6 3.6 19.2 Purchase obligations 13.5 13.3 0.2 – – Other 0.7 0.7 – – – Total $ 738.5 $ 62.3 $ 423.0 $ 37.2 $ 216.0 The company has excluded payments related to its pension and postretirement benefit plans from the contractual obligation table above; see Notes 11 and 12 to the Consolidated Financial Statements for information on the company's benefit plans and payments. The contractual obligation table above does not include income tax liabilities recorded in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 48 "Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109;" see Note 8 to the Consolidated Financial Statements for information on income taxes. Environmental Matters Snap-on is subject to various federal, state and local government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Snap-on’s policy is to comply with these requirements and the company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with its business. Some risk of environmental damage is, however, inherent in some of Snap-on’s operations and products, as it is with other companies engaged in similar businesses. Snap-on is and has been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous or toxic by one or more regulatory agencies. The company believes that, as a general matter, its handling, manufacture, use and disposal of these substances are in accordance with environmental laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could bring into question the company’s handling, manufacture, use or disposal of these substances. 2008 ANNUAL REPORT 41


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    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Consolidated Joint Venture SOC, a consolidated, 50%-owned joint venture between Snap-on and CIT, provides a broad range of financial services to Snap-on’s U.S. franchisee and customer network and to Snap-on’s industrial and other customers. Snap-on and CIT have identical voting and participation rights and responsibilities in SOC. See Note 1 to the Consolidated Financial Statements for further information on SOC. Snap-on receives royalty and management fee income from SOC based on the volume of financings originated by SOC. Snap-on also shares ratably with CIT in any residual net profit or loss of the joint venture after operating expenses, including royalty and management fees, interest costs and credit loss provisions. Snap-on provides extended-term financing internationally through its wholly owned finance subsidiaries. SOC sells substantially all of its originated contracts on a limited recourse basis to CIT, net of certain fees, and SOC continues to service these contracts for an estimated servicing fee. SOC originated contracts totaling $424.2 million in 2008, $422.7 million in 2007 and $426.8 million in 2006. CIT and Snap-on have agreed to lend funds to support SOC’s working capital requirements on a 50/50 basis. As of January 3, 2009, and December 29, 2007, no amounts were loaned to SOC by either Snap-on or CIT pursuant to this agreement. Financial information regarding SOC loan originations is as follows: 2008 2007 2006 Originations (in millions): Extended-credit receivables $ 337.4 $ 348.1 $ 356.2 Equipment leases 24.6 24.6 28.8 Franchisee financing 62.2 50.0 41.8 Total $ 424.2 $ 422.7 $ 426.8 The SOC joint venture agreement between Snap-on and CIT automatically renews on an annual basis unless either Snap-on or CIT provides a six month advance notice of their intent to not renew the agreement. This advance notice must be given during the first six months of the calendar year. The joint venture agreement also provides for a nine month transition period in the event the joint venture agreement is not renewed. New Accounting Standards See Note 1 to the Consolidated Financial Statements for information on new accounting standards. Critical Accounting Policies and Estimates The consolidated financial statements and related notes contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates. The company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. 42 SNAP-ON INCORPORATED


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    Snap-on considers the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company’s consolidated financial statements and the uncertainties that could impact the company’s financial position, results of operations and cash flows. Revenue Recognition: Snap-on recognizes revenue from the sale of tools, diagnostics and equipment solutions when contract terms are met, collectibility is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. For sales contingent upon customer acceptance or product installation, revenue recognition is deferred until such obligations are fulfilled. Estimated product returns are recorded as a reduction in reported revenues at the time of sale based upon historical product return experience and gross profit margin adjusted for known trends. Provisions for customer volume rebates, discounts and allowances are also recorded as a reduction of reported revenues at the time of sale based on historical experience and known trends. Revenue related to maintenance and subscription agreements is recognized over the term of the agreement. Snap-on also recognizes revenue related to multiple element arrangements, including sales of software and software- related services. When a sales arrangement contains multiple elements, such as hardware and software products and/or services, Snap-on uses vendor specific objective evidence (“VSOE”) of fair value to allocate revenue to each element based on its relative fair value and, when necessary, uses the residual method to assign value to the delivered elements when VSOE only exists for the undelivered elements. Snap-on limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services. The amount assigned to future delivery of products or services is recognized when the product is delivered and/or when the services are performed. In instances where the product and/or services are performed over an extended period, as is the case with subscription agreements or the providing of ongoing support, revenue is generally recognized on a straight-line basis over the term of the agreement, which generally ranges from 12 to 60 months. Financial Services Revenue: Snap-on also generates revenue from various financing programs that include (i) loans to franchisees; (ii) loans to franchisees’ customers; and (iii) loans to Snap-on’s industrial and other customers for the purchase of tools and equipment on an extended-term payment plan. These financing programs are offered through SOC, a consolidated 50%-owned joint venture with CIT, and Snap-on’s wholly owned international finance subsidiaries. Financial services revenue consists of SOC’s sales of originated contracts to CIT and service fee income, as well as installment contract revenue and franchisee loan receivable revenue derived from SOC and Snap-on’s wholly owned international finance operations. The decision to finance through Snap-on or another financing entity is solely at the election of the customer. When assessing customers for potential financing, Snap-on considers various factors regarding ability to pay including financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. Contracts originated by SOC and subsequently sold to CIT are also subject to the underwriting approval of CIT. Financing revenue from SOC is recognized primarily from the sale of originated contracts to CIT. SOC continues to service these contracts based on an estimated servicing fee. Servicing fees are paid to SOC by CIT and such revenue is recognized over the contractual term of the loan, with a portion of the servicing fee recognized at the time of origination. Financing revenue from originated loans that are retained is recognized over the life of the contract, with interest computed on a daily basis. Snap-on’s wholly owned international finance subsidiaries own the loans originated through their financing programs. Revenue from interest income is recognized over the life of the contract, with interest computed on a daily basis. Franchise fee revenue, including nominal, non-refundable initial and ongoing monthly fees (primarily for sales and business training and marketing and product promotion programs), is recognized as the fees are earned. Internally Developed Software: Costs incurred in the development of software that will ultimately be sold are capitalized from the time technological feasibility has been attained and ceases when the related product is ready for general release. During 2008, 2007 and 2006, the company capitalized $9.7 million, $10.6 million and $5.0 million, respectively, of such costs. Amortization of capitalized software development costs was $8.2 million in 2008, $4.9 million in 2007, and $2.5 million in 2006. Unamortized capitalized software development costs were $25.5 million at January 3, 2009, and $24.0 million at December 29, 2007. 2008 ANNUAL REPORT 43


  • Page 44

    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Impairment of Goodwill and Other Indefinite-lived Intangible Assets: Goodwill and indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the company in the second quarter of each fiscal year. Snap-on evaluates the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. Estimated cash flows and related goodwill are grouped at the reporting unit level. A reporting unit is an operating segment, or under certain circumstances, a component of an operating segment that constitutes a business. When estimated future discounted cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed to measure and recognize the amount of the impairment loss, if any. Impairment losses, which are limited to the carrying value of goodwill, represent the excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill. In determining the estimated future cash flows, Snap-on considers current and projected future levels of income, as well as business trends, prospects and market and economic conditions. Impairment tests involve the use of judgmental estimates related to the fair market value of the business operations with which goodwill and other indefinite-lived intangible assets are associated, taking into consideration both historical operating performance and anticipated financial position and future earnings, discounted by the company’s weighted average cost of capital. Snap-on cannot predict the occurrence of certain events that might adversely affect the carrying value of goodwill and indefinite-lived intangible assets. Should the operations of the businesses with which goodwill or indefinite-lived intangible assets are associated incur significant declines in profitability and cash flow in future years due to significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers, and/or changes in technology or markets, some or all of the recorded goodwill or intangibles could be subject to impairment. See Note 6 to the Consolidated Financial Statements for further information on goodwill and other intangible assets. Impairment of Long-lived and Amortized Intangible Assets: Snap-on performs impairment evaluations of its long-lived assets, including property, plant and equipment and intangible assets with finite lives, whenever business conditions or events indicate that those assets may be impaired. When the estimated future undiscounted cash flows to be generated by the assets are less than the carrying value of the long-lived assets, the assets are written down to fair market value and a charge is recorded to current operations. Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulators, unanticipated competition, loss of key customers and/or changes in technology or markets, could require a provision for impairment in a future period. Allowance for Doubtful Accounts: Snap-on evaluates the collectibility of receivables based on a combination of various financial and qualitative factors that may affect customers’ ability to pay. These factors may include customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. Snap-on does not believe that accounts receivable represent significant concentrations of credit risk because of its diversified portfolio of individual customers and geographical areas. Snap-on regularly reviews the accounts receivable allowance estimation process and adjusts the allowances as appropriate. In circumstances where the company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Additional reserves are established based upon the company’s perception of the quality of the current receivables, including the length of time the receivables are past due, past experience of collectibility and underlying economic conditions. If the financial condition of the company’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional reserves would be required. Excess and Obsolete Inventory: Snap-on records allowances for excess and obsolete inventory based on historical and estimated future demand and market conditions. Allowances for raw materials are largely based on an analysis of raw material age and actual physical inspection of raw material for fitness for use. As part of evaluating the adequacy of allowances for work-in-progress and finished goods, management reviews individual product stock-keeping units (SKUs) by product category and product life cycle. Cost adjustments for each product category/product life-cycle state are generally established and maintained based on a combination of historical experience, forecasted sales and promotions, technological obsolescence, inventory age and other actual known conditions and circumstances. Should actual product marketability and raw material fitness for use be affected by conditions that are different from management estimates, further adjustments to inventory allowances may be required. 44 SNAP-ON INCORPORATED


  • Page 45

    Warranty: Snap-on’s policy is to record a liability for the expected cost of warranty-related claims at the time of sale. The amount of warranty liability accrued reflects management’s best estimate of the expected future cost of honoring the company’s obligations under its warranty plans. Snap-on calculates its accrual 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. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods. See Note 15 to the Consolidated Financial Statements for further information on warranty. Stock-based Compensation: Snap-on recognizes the cost of employee services in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). That cost, based on the estimated number of awards that are expected to vest, is recognized on a straight-line basis over the period during which the employee is required to provide the service in exchange for the award. No compensation cost is recognized for awards for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments is estimated using the Black-Scholes valuation model. The Black-Scholes valuation model requires the input of subjective assumptions, including the expected life of the stock- based award and stock price volatility. The assumptions used are management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different from that depicted in the financial statements. See Note 13 to the Consolidated Financial Statements for further information on stock-based compensation. Pension Benefits: The pension benefit obligation and related pension expense are calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87, “Employer’s Accounting for Pensions,” and are impacted by certain actuarial assumptions. Changes in these assumptions are primarily influenced by factors outside of Snap-on’s control and can have a significant effect on the amounts reported in the financial statements. Snap-on believes that the two most critical assumptions are (i) the expected return on plan assets; and (ii) the assumed discount rate. Pension expense increases as the expected rate of return on plan assets decreases. Lowering the expected rate of return assumption for Snap-on’s domestic pension plan assets by 0.5% would have increased Snap-on’s 2008 domestic pension expense by approximately $3.6 million. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its U.S. plan assets. The objective of Snap-on’s discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The methodology for selecting the discount rate as of year-end 2008 was to match the plan’s cash flows to that of a theoretical bond portfolio yield curve that provides the equivalent yields on zero-coupon bonds with an Aa rating or better for each maturity. The selection of the 6.3% weighted-average discount rate for Snap-on’s domestic pension plans represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on’s domestic discount rate assumption by 0.5% would have increased Snap-on’s 2008 domestic pension expense and projected benefit obligation by approximately $0.8 million and $40.3 million, respectively. At year-end 2008, Snap-on’s domestic projected benefit obligation comprised approximately 85% of Snap-on’s worldwide projected benefit obligation. Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants. Prior service costs resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of affected active participants or over the remaining life expectancy of affected retired participants. See Note 11 to the Consolidated Financial Statements for further information on pension benefits. Postretirement Benefits: Snap-on’s postretirement benefits obligation and related expense are calculated in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and are impacted by certain actuarial assumptions, including health care trend rates. An increase of one percentage point in health care costs would increase the accumulated postretirement benefit obligation by $1.5 million and would increase the annual service and interest cost by $0.1 million. A corresponding decrease of one percentage point would decrease the accumulated postretirement benefit by $1.4 million and decrease the annual service and interest cost by $0.1 million. See Note 12 to the Consolidated Financial Statements for further information on postretirement plans. 2008 ANNUAL REPORT 45


  • Page 46

    Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Income Taxes: Snap-on records deferred income tax assets and liabilities for differences between the book basis and tax basis of the related net assets. Snap-on records a valuation allowance, when appropriate, to reduce its deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. While the company has considered future taxable income and ongoing prudent and feasible tax strategies in assessing the need for the valuation allowance, if these estimates and assumptions change in the future, the company may be required to adjust its valuation allowance. This could result in a charge to, or an increase in, income in the period such determination is made. In addition, the company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. The company records accruals for the estimated outcomes of these audits and the accruals may change in the future due to new developments in each matter. See Note 8 to the Consolidated Financial Statements for further information on income taxes. Outlook The challenges posed by the global economy increased significantly during the fourth quarter, furthering the impact on Snap-on’s sales of higher priced products, such as tool storage and vehicle repair equipment. Additional slowdowns in the economies of Europe, particularly Southern Europe, negatively impacted volume at the company’s European-based tools business. Furthermore, the general economic difficulties are now spreading across more industries and to additional geographies, creating more widespread pressure on business activity. In the near term, Snap-on anticipates no change in this environment and, as a result, expects sales and credit originations in the first quarter of 2009 to be down year over year. Additional headwinds in 2009 now include approximately $3.0 million per quarter of higher year-over-year pension expense due to declines in pension asset values. Assuming foreign currency exchange rates remain at recent levels, the company also anticipates approximately $8.0 million of unfavorable foreign exchange impact on first quarter operating earnings. Snap-on believes that its business models are sound and that it continues to maintain and expand its strong brand positions. When coupled with its innovation processes, Snap-on believes that these strengths have enabled the advancement of its market position in 2008. The company expects to benefit from those strengths in 2009 and to improve its strategic position going forward. Snap-on also expects further benefits in 2009 from its RCI, sourcing and other cost reduction initiatives that will help to limit the impact of any volume decline. Snap-on does not, as a general practice, furnish quarterly sales or earnings projections. However, in light of these factors and conditions, the company believes that first quarter 2009 sales and earnings will be lower than reported first quarter 2008 amounts. Snap-on is responding to the global macroeconomic challenges by deepening and accelerating its RCI and cost reduction initiatives. Snap-on recorded $6.7 million of restructuring costs in the fourth quarter of 2008, bringing full-year 2008 restructuring costs to $14.7 million; Snap-on expects to incur approximately $12 million to $16 million of restructuring costs in full year 2009. Snap-on is also continuing and accelerating a number of its planned growth investments, including further expansion of its manufacturing capacity in China and in Eastern Europe. As a result, capital expenditures in 2009 are expected to be in a range of $75 million to $80 million. Snap-on views these investments as potentially enabling near- term growth. For full year 2009, Snap-on anticipates that its effective income tax rate on earnings before equity earnings and minority interests will approximate 34%. In 2009, Snap-on will continue to aggressively manage the balance between investing and capturing growth opportunities with the need for cost reduction actions beyond those already implemented; the current economic uncertainty makes it extremely difficult to presently predict this balance as the company continually adjusts to the challenging business environment. 46 SNAP-ON INCORPORATED


  • Page 47

    Item 7A: Quantitative and Qualitative Disclosures About Market Risk Market, Credit and Economic Risks Market risk is the potential economic loss that may result from adverse changes in the fair value of financial instruments. Snap-on is exposed to market risk from changes in both foreign currency exchange rates and interest rates. Snap-on monitors its exposure to these risks and attempts to manage the underlying economic exposures through the use of financial instruments such as interest rate swap, foreign exchange and treasury lock agreements. Snap-on does not use derivative instruments for speculative or trading purposes. Snap-on’s broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on its operating earnings as a whole. Snap-on’s management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. 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 movement of funds. Foreign exchange risk exists to the extent that Snap-on has payment obligations or receipts denominated in currencies other than the functional currency. To manage these exposures, Snap-on identifies naturally offsetting positions and then generally purchases hedging instruments to protect the residual net exposures. See Note 10 to the Consolidated Financial Statements for information on foreign currency risk management. Interest Rate Risk Management Snap-on’s interest rate risk management policies are designed to reduce the potential volatility of earnings that could arise from changes in interest rates. Through the use of interest rate swaps, Snap-on aims to stabilize funding costs by managing the exposure created by the differing maturities and interest rate structures of Snap-on’s assets and liabilities. Snap-on also enters into treasury lock agreements to manage the risk associated with changing benchmark interest rates on its extended contract installment loans that are sold to CIT. See Note 10 to the Consolidated Financial Statements for information on interest rate risk management. Snap-on utilizes a Value-at-Risk (“VAR”) model to determine the potential one-day loss in the fair value of its interest rate and foreign exchange-sensitive financial instruments from adverse changes in market factors. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. Snap-on’s computations are based on the inter-relationships among movements in various currencies and interest rates (variance/co-variance technique). These inter-relationships were determined by observing interest rate and foreign currency market changes over the preceding quarter. The estimated maximum potential one-day loss in fair value, calculated using the VAR model, at January 3, 2009, was $1.2 million on interest rate-sensitive financial instruments and $1.9 million on foreign currency-sensitive financial instruments. The VAR model is a risk management tool and does not purport to represent actual losses in fair value that will be incurred by Snap-on, nor does it consider the potential effect of favorable changes in market factors. 2008 ANNUAL REPORT 47


  • Page 48

    Credit Risk Credit risk is the possibility of loss from a customer’s failure to make payments according to contract terms. Prior to granting credit, each customer is evaluated, taking into consideration the borrower’s financial condition, collateral, debt- servicing ability, past payment experience, credit bureau information, and other financial and qualitative factors that may affect the borrower’s ability to repay. Specific credit reviews and standard industry credit scoring models are used in performing this evaluation. Loans that have been granted are typically monitored through an asset-quality-review process that closely monitors past due accounts and initiates collection actions when appropriate. In addition to its direct credit risk exposure, Snap-on also has credit risk exposure for certain SOC-originated contracts for franchisee van loans with recourse to Snap-on. At January 3, 2009, $15.4 million of loans originated by SOC have a recourse provision to Snap-on if the loans become more than 90 days past due. For additional information on SOC, refer to the section entitled “Consolidated Joint Venture” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and to Note 1 to the Consolidated Financial Statements. Counterparty Risk Snap-on is exposed to credit losses in the event of non-performance by the counterparties to various financial agreements, including its interest rate swap, foreign exchange and treasury lock agreements. 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. Economic Risk Economic risk is the possibility of loss resulting from economic instability in certain areas of the world. Snap-on continually monitors its exposure in these markets. As a result of the above market, credit and economic risks, net income and revenues in any particular period may not be representative of full-year results and may vary significantly from year to year. Inflation has not had a significant impact on the company. Commodity Risk The company is a purchaser of certain commodities such as steel, natural gas and electricity. The company is also a purchaser of components and parts that are integrated into the company’s end products, as well as the purchaser of certain finished goods, all of which may contain various commodities including steel, aluminum and others. Snap-on’s supply of raw materials and purchased components are generally and readily available from numerous suppliers. The principal raw material used in the manufacture of our products is steel, which we purchase in competitive, price- sensitive markets. To meet Snap-on’s high quality standards, our steel needs range from specialized alloys, which are available only from a limited group of approved suppliers, to commodity types of alloys. These raw materials have historically exhibited price and demand cyclicality. Some of these materials have been, and in the future may be, in short supply. As some steel alloys require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. Additionally, unexpected price increases could result in higher prices to our customers or an erosion of the margins on our products. We believe our ability to sell our products is also dependent on the number of vehicles on the road, the number of miles driven and the general aging of vehicles. These factors affect the frequency, type and amount of service and repair performed on vehicles by technicians, and therefore affect the demand for the number of technicians, the prosperity of the technicians and, subsequently, the demand the technicians have for our tools, other products and services, and the value they place on those products and services. To the extent that gasoline prices increase, consumers may turn to other, non-gasoline based, methods of transportation, including more frequent use of public transportation. A decrease in the use of gasoline consuming vehicles may lead to fewer repairs and less demand for our products. 48 SNAP-ON INCORPORATED


  • Page 49

    To the extent that commodity prices increase and the company does not have firm pricing agreements with its suppliers, the company may experience margin declines to the extent that it is not able to increase the selling prices of its products. Item 8: Financial Statements and Supplementary Data The financial statements and schedules are listed on page 53 and are incorporated by reference in this Item 8. Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. Item 9A: Controls and Procedures Evaluation of Disclosure Controls and Procedures Snap-on maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that material information relating to the company and its consolidated subsidiaries is timely communicated to the officers who certify Snap-on’s financial reports and to other members of senior management and the Board, as appropriate. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), the company’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the Exchange Act) as of January 3, 2009. Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of January 3, 2009, to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control There has not been any change in the company’s internal control over financial reporting during the quarter ended January 3, 2009, that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on this assessment, the company’s management believes that, as of January 3, 2009, our internal control over financial reporting was effective. The company’s internal control over financial reporting as of January 3, 2009, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report, which is included herein. Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error or fraud. Because of inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. 2008 ANNUAL REPORT 49


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    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Snap-on Incorporated: We have audited the internal control over financial reporting of Snap-on Incorporated and subsidiaries (the “Company”) as of January 3, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2009, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 3, 2009, of the Company and our report dated February 18, 2009, expressed an unqualified opinion on those financial statements. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Milwaukee, Wisconsin February 18, 2009 50 SNAP-ON INCORPORATED

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