SNAP-ON INCORPORATED
Management Overview
We believe our 2021 operating results demonstrate the continued momentum of our
operations and confirms the resilience of our markets and our considerable
capabilities to overcome the challenges of the COVID environment. Throughout the
turbulence, we maintained and further developed our ongoing advantages in our
products, brands and people. At the same time, we leveraged existing
proficiencies to focus on expanding our professional customer base, not only in
automotive repair, but in adjacent markets, additional geographies and other
areas, including critical industries, where the cost and penalties for failure
can be high. Snap-on's value proposition of making work easier for serious
professionals is an ongoing strength as we move forward along our runways for
coherent growth:
•Enhancing the franchise network, where we continued to focus on helping our
franchisees extend their reach through innovative selling processes and
productivity initiatives that break the traditional time and space barriers
inherent in a mobile van;
•Expanding with repair shop owners and managers, where we continued to make
progress in connecting with customers and translating the resulting insights
into innovation that solves specific challenges in the repair facility;
•Further extending to critical industries, where we continued to grow our lines
of products customized for specific industries, including through further
integration of acquisitions; and
•Building in emerging markets, where we continued to maintain manufacturing
capacity, as well as refine product lines and distribution capabilities.
Our strategic priorities and plans for 2022 involve continuing to build on our
Snap-on Value Creation Processes - our suite of strategic principles and
processes we employ every day designed to create value, and employed in the
areas of safety, quality, customer connection, innovation and rapid continuous
improvement ("Rapid Continuous Improvement" or "RCI"). We expect to continue to
deploy these processes in our existing operations as well as into our recently
acquired businesses.
Snap-on's RCI initiatives employ a structured set of tools and processes across
multiple businesses and geographies intended to eliminate waste and improve
operations. Savings from Snap-on's RCI initiatives reflect benefits from a wide
variety of ongoing efficiency, productivity and process improvements, including
savings generated from product design cost reductions, improved manufacturing
line set-up and change-over practices, lower-cost sourcing initiatives and
facility consolidations. Unless individually significant, it is not practicable
to disclose each RCI activity that generated savings and/or segregate RCI
savings embedded in sales volume increases.
Our global financial services operations continue to serve a significant
strategic role in offering financing options to our franchisees, to their
customers, and to customers in other parts of our business. We expect that our
global financial services business, which includes both Snap-on Credit LLC
("SOC") in the United States and our other international finance subsidiaries,
will continue to be a meaningful contributor to our operating earnings going
forward.
Snap-on has significant international operations and is subject to risks
inherent with foreign operations, including foreign currency translation
fluctuations.
Recent Acquisitions
On August 1, 2021 , Snap-on acquired AutoCrib EMEA GmbH ("AutoCrib Germany"), for
a cash purchase price of $4.4 million (or $4.2 million , net of cash acquired).
AutoCrib Germany, based in Hamburg, Germany , distributes asset and tool control
solutions for a variety of aerospace, automotive, military, natural resources
and general industry operations. The acquisition of AutoCrib Germany, a former
independent distributor, enhanced and expanded Snap-on's capabilities in
providing solutions for the company's existing tool control offerings.
On July 1, 2021 , Snap-on exchanged its 35% equity interest in Deville S.A. ,
valued at $21.8 million , for 100% ownership of Secateurs Pradines ("Pradines"),
a wholly owned subsidiary of Deville S.A. with a fair value of $20.7 million (or
$16.2 million , net of cash acquired), and cash of $1.1 million . Pradines,
located in Bauge-en-Anjou , France , designs and manufactures horticultural hand
tools for professionals and individuals. Pradines has been the primary supplier
of pruning products to Snapon and the acquisition allows the company to improve
and expand its pruning tool offering.
26 SNAP-ON INCORPORATED
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On February 26, 2021 , Snap-on acquired Dealer-FX Group, Inc. ("Dealer-FX") for a
cash purchase price of $200.1 million (or $200.0 million , net of cash acquired).
Dealer-FX, based in Markham, Ontario , is a leading developer, marketer and
provider of service-operations software solutions for automotive original
equipment manufacturer ("OEM") customers and their dealers. Dealer-FX
specializes in software as a service (SaaS) management systems, communications
platforms, extensive data integrations, and offers a digitalized solution that
increases productivity and enhances the vehicle owners' experience. The
acquisition of Dealer-FX complemented and expanded Snap-on's existing OEM and
dealership business that provides electronic parts catalogs, essential tool and
diagnostic programs, and custom analytics to OEMs and dealerships.
On September 28, 2020 , Snap-on acquired substantially all of the assets of
AutoCrib, Inc. ("AutoCrib") for a cash purchase price of $35.4 million .
AutoCrib, based in Tustin, California , designs, manufactures and markets asset
and tool control solutions. The acquisition of AutoCrib complemented and
expanded Snap-on's existing tool control offering to customers in a variety of
industrial applications, including aerospace, automotive, military, natural
resources and general industry.
On January 31, 2020 , Snap-on acquired substantially all of the assets related to
the TreadReader product line from Sigmavision Limited ("Sigmavision") for a cash
purchase price of $5.9 million . Sigmavision designs and manufactures handheld
devices and drive-over ramps that provide tire information for use in the
automotive industry. The acquisition of the TreadReader product line enhanced
and expanded Snap-on's existing capabilities in serving vehicle repair
facilities and expanded the company's presence with repair shop owners and
managers.
For segment reporting purposes, the results of operations and assets of
Dealer-FX and Sigmavision have been included in the Repair Systems & Information
Group since the respective acquisition dates, and the results of operations and
assets of AutoCrib Germany, Pradines, and AutoCrib have been included in the
Commercial & Industrial Group since the respective acquisition dates.
Pro forma financial information has not been presented for any of these
acquisitions as the net effects, individually and collectively, were neither
significant nor material to Snap-on's results of operations or financial
position.
Fiscal Year
Snap-on's fiscal year ends on the Saturday that is on or nearest to December 31 .
Unless otherwise indicated, references in this document to "fiscal 2021" or
"2021" refer to the fiscal year ended January 1, 2022 ; references to "fiscal
2020" or "2020" refer to the fiscal year ended January 2, 2021 ; and references
to "fiscal 2019" or "2019" refer to the fiscal year ended December 28, 2019 .
References in this document to 2021, 2020 and 2019 year end refer to January 1,
2022 , January 2, 2021 , and December 28, 2019 , respectively.
Snap-on's 2021 and 2019 fiscal years each contained 52 weeks of operating
results. Snap-on's 2020 fiscal year contained 53 weeks of operating results with
the extra week occurring in the fourth quarter. The impact of the additional
week of operations in fiscal 2020 was not material to Snap-on's full year or
fourth quarter total revenues or net earnings.
Fiscal 2020 as Compared to Fiscal 2019
A discussion regarding our financial condition and results of operations for fiscal 2020 compared to fiscal 2019 can be found under "Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on the Form 10-K for the fiscal year endedJanuary 2, 2021 , which was filed with theSEC onFebruary 11, 2021 , and is available on theSEC's website at www.sec.gov as well as in the "Investors" section of our corporate website at www.snapon.com.
2021 ANNUAL REPORT 27
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-GAAP Measures References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "organic sales" refer to sales from continuing operations calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP"), adjusted to exclude acquisition-related sales and the impact of foreign currency translation. Management evaluates the company's sales performance based on organic sales growth, which primarily reflects growth from the company's existing businesses as a result of increased output, expanded customer base, geographic expansion, new product development and pricing changes, and excludes sales contributions from acquired operations the company did not own as of the comparable prior-year reporting period. Organic sales also exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends. Management believes that the non-GAAP financial measure of organic sales is meaningful to investors as it provides them with useful information to aid in identifying underlying growth trends in the company's businesses and facilitates comparisons of its sales performance with prior periods. Effect of COVID-19 Our markets and our operations possess and, indeed, have demonstrated considerable resilience against the effects of the pandemic. During 2021, the impact on sales and the need for remediating costs associated with the pandemic have lessened, particularly from the heavily-impacted second quarter of 2020. The company sustained the accommodation of its operations to the virus environment, continuing without significant disruption to serve its franchisees and other professional customers as they performed their essential work, while taking what it believes to be appropriate measures to ensure the health and safety of its people. Throughout the pandemic, Snap-on has generally maintained its workforce and manufacturing capacity, as well as its investments in brand building and product development. As the global supply chain inefficiencies and associated cost increases caused by the COVID-19 pandemic have developed, the company has taken steps to ensure access to raw materials, components and purchased finished goods, and to provide for counterbalancing price and efficiency offsets. See also Part I, Item 1A: Risk Factors - Risk related to COVID-19 and Other Infectious Diseases. Summary of Consolidated Performance Consolidated net sales of$4,252.0 million in 2021 increased$659.5 million , or 18.4%, from 2020 levels, reflecting a$550.5 million , or 15.1%, organic gain,$62.6 million of acquisition-related sales and$46.4 million of favorable foreign currency translation. Operating earnings before financial services of$851.5 million in 2021 increased$219.6 million , or 34.8%, compared to$631.9 million in 2020, which included$12.5 million of exit and disposal ("restructuring") charges. As a percentage of net sales, operating earnings before financial services of 20.0% compared to 17.6% last year. Operating earnings of$1,123.5 million in 2021 increased$243.0 million , or 27.6%, compared to$880.5 million last year, which included$12.5 million of charges for restructuring actions. As a percentage of revenues, operating earnings of 24.4%, compared to 22.3% last year. Net earnings attributable to Snap-on in 2021 of$820.5 million , or$14.92 per diluted share, increased$193.5 million , or$3.48 per diluted share, from 2020 levels. Net earnings attributable to Snap-on in 2020 were$627.0 million , or$11.44 per diluted share and included a$10.3 million , or$0.19 per diluted share, after-tax charge related to the restructuring actions.
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Summary of Segment PerformanceThe Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments (collectively, "critical industries"), primarily through direct and distributor channels. Segment net sales of$1,406.3 million in 2021 increased$171.7 million , or 13.9%, from 2020 levels, reflecting a$131.9 million , or 10.5%, organic sales increase,$22.5 million of acquisition-related sales and$17.3 million of favorable currency translation. The organic gain reflects higher activity in all of the segment's operations and includes mid single-digit increases in sales to customers in critical industries. Operating earnings of$209.9 million in 2021, including$3.8 million of unfavorable foreign currency effects, increased$56.2 million , or 36.6%, compared to$153.7 million in 2020, which included$6.4 million of restructuring charges.The Commercial & Industrial Group intends to continue building on the following strategic priorities in 2022: •Continuing to invest in emerging market growth initiatives; •Expanding our business with existing customers and reaching new customers in critical industries and other market segments; •Broadening our product offering designed particularly for critical industry segments; •Increasing our customer-connection-driven understanding of work across multiple industries; •Investing in innovation that, guided by that understanding of work, delivers an ongoing stream of productivity-enhancing custom engineered solutions; and •Continuing to reduce structural and operating costs, as well as improve efficiencies, through RCI initiatives.The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company's worldwide mobile tool distribution channel. Segment net sales of$1,938.6 million in 2021 increased$294.7 million , or 17.9%, from 2020 levels, reflecting a$274.4 million , or 16.5%, organic sales gain and$20.3 million of favorable foreign currency translation. The organic increase reflects double-digit gains in both theU.S. and international operations. Operating earnings of$411.1 million in 2021, including$17.0 million of favorable foreign currency effects, increased$143.4 million , or 53.6%, compared to$267.7 million in 2020.
In 2022, the
•Continuing to improve franchisee satisfaction, productivity, profitability and commercial health; •Developing new programs and products to expand market coverage, reaching new technician customers and increasing penetration with existing customers; •Increasing investment in new product innovation and development; and •Increasing customer service levels and productivity in back office support functions, manufacturing and the supply chain through RCI initiatives and investment. By focusing on these areas, we believe that Snap-on, as well as its franchisees, will have the opportunity to serve more customers, more effectively, more profitably and with improved satisfaction.The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealership service and repair shops ("OEM dealerships") through direct and distributor channels. Segment net sales of$1,503.1 million in 2021 increased$264.9 million , or 21.4% from 2020 levels, reflecting a$211.3 million , or 16.9%, organic sales increase,$40.1 million of acquisition-related sales and$13.5 million of favorable foreign currency translation. The organic gain reflects an increase of more than 25% in sales of undercar equipment, as well as double-digit gains in both sales of diagnostic and repair information products to independent repair shop owners and managers and in activity focused on OEM dealerships. Operating earnings of$348.6 million in 2021, including$1.6 million of unfavorable foreign currency effects, increased$50.6 million , or 17.0%, from$298.0 million in 2020, which included$5.5 million of restructuring charges.
2021 ANNUAL REPORT 29
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
•Expanding the product offering with new products and services, thereby providing more to sell to repair shop owners and managers; •Continuing software and hardware upgrades to further improve functionality, performance and efficiency; •Leveraging integration of software solutions; •Continuing productivity advancements through RCI initiatives and leveraging of resources; and •Increasing penetration in geographic markets, including emerging markets. Financial Services generates revenue from various financing programs and is a strategic partner of the company's mobile franchise van channel. Financial services revenue was$349.7 million in both 2021 and 2020. Originations of$1,073.2 million in 2021 increased$36.6 million , or 3.5%, from 2020 levels. Operating earnings from financial services in 2021 of$272.0 million , including$2.3 million of favorable foreign currency effects, increased$23.4 million , or 9.4%, compared to$248.6 million last year. Financial Services intends to focus on the following strategic priorities in 2022: •Delivering financial products and services that attract and sustain profitable franchisees and support Snapon's strategies for expanding market coverage and penetration; •Improving productivity levels and ensuring high quality in all financial products and processes through the use of RCI initiatives; and •Maintaining healthy portfolio performance levels.
Cash Flows
Net cash provided by operating activities of
Net cash used by investing activities of$290.4 million in 2021 included additions to finance receivables of$878.1 million , partially offset by collections of$854.2 million , as well as a total of$199.7 million for the acquisitions of Dealer-FX, AutoCrib Germany and Pradines. Net cash used by investing activities of$187.8 million in 2020 included additions to finance receivables of$835.0 million , partially offset by collections of$750.3 million , as well as a total of$41.5 million for the acquisitions of Sigmavision and AutoCrib, and a$0.2 million working capital adjustment for the 2019 Cognitran acquisition. Capital expenditures in 2021 and 2020 totaled$70.1 million and$65.6 million , respectively. Capital expenditures in both years included continued investments related to the company's execution of its strategic growth initiatives and Value Creation Processes around safety, quality, customer connection, innovation and RCI. Net cash used by financing activities of$818.8 million in 2021 included$431.3 million for the repurchase of 1,943,900 shares of Snap-on's common stock,$275.8 million for dividend payments to shareholders and theSeptember 2021 repayment of$250.0 million of 6.125% unsecured notes upon maturity (the "2021 Notes"). These amounts were partially offset by$162.4 million of proceeds from stock purchase and option plan exercises and net proceeds from notes payable and other short-term borrowings of$3.3 million . Net cash used by financing activities of$84.3 million in 2020 included$243.3 million for dividend payments to shareholders,$187.2 million for repayments of notes payable and other short-term borrowings and$174.3 million for the repurchase of 1,109,000 shares of Snap-on's common stock. These amounts were partially offset by Snap-on's sale, onApril 27, 2020 , of$500 million of unsecured 3.10% notes that mature onMay 1, 2050 (the "2050 Notes"), at a discount, from which Snap-on received$489.9 million of net proceeds, reflecting$4.4 million of transaction costs, and$55.8 million of proceeds from stock purchase and option plan exercises. 30SNAP-ON INCORPORATED
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Results of Operations 2021 vs. 2020 Results of operations for 2021 and 2020 are as follows: (Amounts in millions) 2021 2020 Change Net sales$ 4,252.0 100.0 %$ 3,592.5 100.0 %$ 659.5 18.4 % Cost of goods sold (2,141.2) (50.4) % (1,844.0) (51.3) % (297.2) (16.1) % Gross profit 2,110.8 49.6 % 1,748.5 48.7 % 362.3 20.7 % Operating expenses (1,259.3) (29.6) % (1,116.6) (31.1) % (142.7) (12.8) % Operating earnings before financial services 851.5 20.0 % 631.9 17.6 % 219.6 34.8 % Financial services revenue 349.7 100.0 % 349.7 100.0 % - - Financial services expenses (77.7) (22.2) % (101.1) (28.9) % 23.4 23.1 % Operating earnings from financial services 272.0 77.8 % 248.6 71.1 % 23.4 9.4 % Operating earnings 1,123.5 24.4 % 880.5 22.3 % 243.0 27.6 % Interest expense (53.1) (1.2) % (54.0) (1.3) % 0.9 1.7 % Other income (expense) - net 16.5 0.4 % 8.7 0.2 % 7.8 89.7 % Earnings before income taxes and equity earnings 1,086.9 23.6 % 835.2 21.2 % 251.7 30.1 % Income tax expense (247.0) (5.3) % (189.1) (4.8) % (57.9) (30.6) % Earnings before equity earnings 839.9 18.3 % 646.1 16.4 % 193.8 30.0 % Equity earnings, net of tax 1.5 - 0.3 - 1.2 NM Net earnings 841.4 18.3 % 646.4 16.4 % 195.0 30.2 % Net earnings attributable to noncontrolling interests (20.9) (0.5) % (19.4) (0.5) % (1.5) (7.7) % Net earnings attributable to Snap-on Inc.$ 820.5 17.8 %$ 627.0 15.9 %$ 193.5 30.9 % NM: Not meaningful Percentage Disclosure: All income statement line item percentages below "Operating earnings from financial services" are calculated as a percentage of the sum of Net sales and Financial services revenue. Net sales of$4,252.0 million in 2021 increased$659.5 million , or 18.4%, from 2020 levels, reflecting a$550.5 million , or 15.1%, organic gain,$62.6 million of acquisition-related sales and$46.4 million of favorable foreign currency translation. Gross profit of$2,110.8 million in 2021 increased$362.3 million , or 20.7%, compared to$1,748.5 million last year. Gross margin (gross profit as a percentage of net sales) of 49.6% in 2021 improved 90 basis points (100 basis points ("bps") equals 1.0 percent) from last year primarily due to higher sales volumes, pricing actions, benefits from the company's RCI initiatives and 20 basis points from lower costs related to$7.1 million of restructuring charges recorded last year, partially offset by higher material and other costs. Operating expenses of$1,259.3 million in 2021 compared to$1,116.6 million in 2020. Operating expenses as a percentage of net sales of 29.6% in 2021 improved 150 bps from last year primarily due to higher sales volumes and 10 bps from lower costs related to$5.4 million of restructuring actions recorded in 2020. These items were partially offset by costs associated with higher stock-based expenses and 50 bps of unfavorable acquisition effects. Operating earnings before financial services of$851.5 million in 2021 increased$219.6 million , or 34.8%, compared to$631.9 million in 2020, which included$12.5 million of charges for restructuring actions. As a percentage of net sales, operating earnings before financial services of 20.0% improved 240 bps from 17.6% last year, which included 30 bps of costs from restructuring actions. 2021 ANNUAL REPORT 31
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financial services revenue of$349.7 million in 2021 was unchanged from 2020. Financial services operating earnings of$272.0 million in 2021 compared to$248.6 million last year. Operating earnings of$1,123.5 million in 2021 increased$243.0 million , or 27.6%, compared to$880.5 million last year, which included$12.5 million of charges for restructuring actions. As a percentage of revenues, operating earnings of 24.4% improved 210 bps from 22.3% last year, which included 30 bps of costs from restructuring actions. Interest expense in 2021 decreased$0.9 million from last year. See Note 10 to the Consolidated Financial Statements for information on Snap-on's debt and credit facilities. Other income (expense) - net includes net gains and losses associated with hedging and currency exchange rate transactions, non-service components of net periodic benefit costs, and interest income. See Note 18 to the Consolidated Financial Statements for information on other income (expense) - net. The effective income tax rate on earnings attributable to Snap-on in both 2021 and 2020 was 23.2%. The 2020 effective tax rate included a 10 bps increase related to restructuring actions. See Note 9 to the Consolidated Financial Statements for information on income taxes. Net earnings attributable to Snap-on in 2021 of$820.5 million , or$14.92 per diluted share, increased$193.5 million , or$3.48 per diluted share, from 2020 levels. Net earnings attributable to Snap-on in 2020 were$627.0 million , or$11.44 per diluted share, which included a$10.3 million , or$0.19 per diluted share, after-tax charge related to the restructuring actions. Exit and Disposal Activities Snap-on did not record any costs for exit and disposal activities in 2021. Snap-on recorded costs for exit and disposal activities outside ofthe United States of$12.5 million in 2020. See Note 8 to the Consolidated Financial Statements for information on Snap-on's exit and disposal activities. Segment Results Snap-on's business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on's reportable business segments are: (i) theCommercial & Industrial Group ; (ii) theSnap-on Tools Group ; (iii) theRepair Systems & Information Group ; and (iv) Financial Services.The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government, power generation, transportation and technical education market segments, primarily through direct and distributor channels.The Snap-on Tools Group consists of business operations primarily serving vehicle service and repair technicians through the company's worldwide mobile tool distribution channel.The Repair Systems & Information Group consists of business operations serving other professional vehicle repair customers worldwide, primarily owners and managers of independent repair shops and OEM dealerships, through direct and distributor channels. Financial Services consists of the business operations of Snap-on's finance subsidiaries. Snap-on evaluates the performance of its operating segments based on segment revenues, including both external and intersegment net sales, and segment operating earnings. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment's operations. Corporate assets consist of cash and cash equivalents (excluding cash held at Financial Services), deferred income taxes and certain other assets. All significant intersegment amounts are eliminated to arrive at Snap-on's consolidated financial results. 32 SNAP-ON INCORPORATED --------------------------------------------------------------------------------Commercial & Industrial Group (Amounts in millions) 2021 2020 Change External net sales$ 1,095.6 77.9 %$ 951.4 77.1 %$ 144.2 15.2 % Intersegment net sales 310.7 22.1 % 283.2 22.9 % 27.5 9.7 % Segment net sales 1,406.3 100.0 % 1,234.6 100.0 % 171.7 13.9 % Cost of goods sold (868.9) (61.8) % (781.2) (63.3) % (87.7) (11.2) % Gross profit 537.4 38.2 % 453.4 36.7 % 84.0 18.5 % Operating expenses (327.5) (23.3) % (299.7)
(24.3) % (27.8) (9.3) %
Segment operating earnings
Segment net sales of$1,406.3 million in 2021 increased$171.7 million , or 13.9%, from 2020 levels, reflecting a$131.9 million , or 10.5%, organic sales increase,$22.5 million of acquisition-related sales and$17.3 million of favorable currency translation. The organic gain reflects higher activity in all of the segment's operations and includes mid single-digit increases in sales to customers in critical industries. Segment gross margin in 2021 of 38.2% improved 150 bps from last year, primarily due to benefits from higher sales volumes and 60 bps from lower costs related to$6.4 million of restructuring actions recorded in 2020, partially offset by 40 bps of unfavorable foreign currency effects. Segment operating expenses as a percentage of net sales in 2021 of 23.3% improved 100 bps as compared to 2020 primarily reflecting the higher sales. As a result of these factors, segment operating earnings of$209.9 million in 2021, including$3.8 million of unfavorable foreign currency effects, increased$56.2 million , or 36.6%, compared to$153.7 million in 2020, which included$6.4 million of restructuring charges. Operating margin (segment operating earnings as a percentage of segment net sales) for theCommercial & Industrial Group of 14.9% in 2021 compared to 12.4% last year.Snap-on Tools Group (Amounts in millions) 2021 2020 Change Segment net sales$ 1,938.6 100.0 %$ 1,643.9 100.0 %$ 294.7 17.9 % Cost of goods sold (1,055.0) (54.4) % (932.1) (56.7) % (122.9) (13.2) % Gross profit 883.6 45.6 % 711.8 43.3 % 171.8 24.1 % Operating expenses (472.5) (24.4) % (444.1) (27.0) % (28.4) (6.4) % Segment operating earnings$ 411.1 21.2 %$ 267.7
16.3 %
Segment net sales of$1,938.6 million in 2021 increased$294.7 million , or 17.9%, from 2020 levels, reflecting a$274.4 million , or 16.5%, organic sales gain and$20.3 million of favorable foreign currency translation. The organic increase is due to double-digit gains in both theU.S. and international operations. Segment gross margin in 2021 of 45.6% improved 230 bps from last year primarily due to higher sales volumes, pricing actions, benefits from RCI initiatives, and 70 bps of favorable foreign currency effects, partially offset by higher material and other costs. Segment operating expenses as a percentage of net sales in 2021 of 24.4% improved 260 bps from last year primarily reflecting the higher sales, partially offset by higher stock-based expenses related to the company's franchisee stock purchase plan. As a result of these factors, segment operating earnings of$411.1 million in 2021, including$17.0 million of favorable foreign currency effects, increased$143.4 million , or 53.6%, compared to$267.7 million in 2020. Operating margin for the SnaponTools Group of 21.2% in 2021 compared to 16.3% last year.
2021 ANNUAL REPORT 33
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Repair Systems & Information Group (Amounts in millions) 2021 2020 Change External net sales$ 1,217.8 81.0 %$ 997.2 80.5 %$ 220.6 22.1 % Intersegment net sales 285.3 19.0 % 241.0 19.5 % 44.3 18.4 % Segment net sales 1,503.1 100.0 % 1,238.2 100.0 % 264.9 21.4 % Cost of goods sold (813.3) (54.1) % (654.9) (52.9) % (158.4) (24.2) % Gross profit 689.8 45.9 % 583.3 47.1 % 106.5 18.3 % Operating expenses (341.2) (22.7) % (285.3)
(23.0) % (55.9) (19.6) %
Segment operating earnings
Segment net sales of$1,503.1 million in 2021 increased$264.9 million , or 21.4%, from 2020 levels, reflecting a$211.3 million , or 16.9%, organic sales increase,$40.1 million of acquisition-related sales and$13.5 million of favorable foreign currency translation. The organic gain is comprised of an increase of more than 25% in sales of undercar equipment, as well as double-digit gains both in sales of diagnostic and repair information products to independent repair shop owners and managers and in activity focused on OEM dealerships. Segment gross margin in 2021 of 45.9% declined 120 bps from last year primarily due to the impact of higher sales in lower gross margin businesses, increased material and other costs, and 20 bps of unfavorable foreign currency effects. These declines were partially offset by 60 bps of benefits from acquisitions. Segment operating expenses as a percentage of net sales in 2021 of 22.7% improved 30 bps from last year primarily due to the higher sales volumes and 30 bps from lower costs related to$4.8 million of restructuring actions recorded in 2020, partially offset by 150 bps of unfavorable acquisition effects. As a result of these factors, segment operating earnings of$348.6 million in 2021, including$1.6 million of unfavorable foreign currency effects, increased$50.6 million , or 17.0%, from$298.0 million in 2020, which included$5.5 million of restructuring charges. Operating margin for theRepair Systems & Information Group of 23.2% in 2021 compared to 24.1% last year. Financial Services (Amounts in millions) 2021 2020 Change Financial services revenue$ 349.7 100.0 %$ 349.7 100.0 % $ - -
Financial services expenses (77.7) (22.2) % (101.1) (28.9) % 23.4 23.1 %
Segment operating earnings
Financial services revenue is generally dependent on the size of the average financial services portfolio during the period, as well as on the average yield on receivables in the period. Financial services revenue of$349.7 million in 2021 was unchanged from 2020, as the size of the average financial services portfolio and the average yields on receivables were largely the same in both years. In both 2021 and 2020, the average yield on finance receivables was 17.7% and the average yield on contract receivables was 8.5%. Originations of$1,073.2 million in 2021 increased$36.6 million , or 3.5%, from 2020 levels. Financial services expenses primarily include personnel-related and other general and administrative costs, as well as expenses for credit losses. These expenses are generally more dependent on changes in the financial services portfolio than they are on the revenue of the segment. Financial services expenses in 2021 decreased$23.4 million from last year primarily due to lower provisions for credit losses as compared to those recorded in 2020, which included a$2.6 million charge related to higher credit reserves resulting from the economic uncertainty associated with the COVID-19 pandemic. As a percentage of the average financial services portfolio, financial services expenses were 3.5% and 4.6% in 2021 and 2020, respectively. As a result of these factors, segment operating earnings of$272.0 million in 2021, including$2.3 million of favorable foreign currency effects, increased$23.4 million , or 9.4%, from 2020 levels. See Note 1 and Note 4 to the Consolidated Financial Statements for further information on financial services.
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Corporate
Snap-on's general corporate expenses in 2021 of$118.1 million compared to$87.5 million last year. The year-over-year increase primarily reflects higher stock-based and performance-based compensation, including costs associated with the company's employee stock purchase plan, and increased brand-building expenses. Quarterly Data (Amounts in millions, except per First Second Third Fourth share data) Quarter Quarter Quarter Quarter Total 2021 Net sales$ 1,024.6 $ 1,081.4 $ 1,037.7 $ 1,108.3 $ 4,252.0 Gross profit 513.6 543.1 520.7 533.4 2,110.8 Financial services revenue 88.6 86.9 87.3 86.9 349.7 Financial services expenses (23.3) (18.0) (16.7) (19.7) (77.7) Net earnings 197.6 213.2 201.5 229.1 841.4 Net earnings attributable to Snap-on Incorporated 192.6 208.0 196.2 223.7 820.5 Earnings per share - basic* 3.55 3.85 3.65 4.18 15.22 Earnings per share - diluted* 3.50 3.76 3.57 4.10 14.92 Cash dividends paid per share 1.23 1.23 1.23 1.42 5.11 First Second Third Fourth Quarter Quarter Quarter Quarter Total 2020 Net sales$ 852.2 $ 724.3 $ 941.6 $ 1,074.4 $ 3,592.5 Gross profit 421.6 341.2 469.5 516.2 1,748.5 Financial services revenue 85.9 84.6 85.8 93.4 349.7 Financial services expenses (29.0) (27.0) (20.2) (24.9) (101.1) Net earnings 142.0 105.9 184.7 213.8 646.4 Net earnings attributable to Snap-on Incorporated 137.2 101.2 179.7 208.9 627.0 Earnings per share - basic* 2.52 1.86 3.31 3.85 11.55 Earnings per share - diluted* 2.49 1.85 3.28 3.82 11.44 Cash dividends paid per share 1.08 1.08 1.08 1.23 4.47
* Amounts may not total to annual earnings per share because each quarter and year are
calculated separately based on basic and diluted weighted-average common shares outstanding
during each respective period.
2021 ANNUAL REPORT 35
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Fourth Quarter
Results of operations for the fourth quarters of 2021 and 2020 are as follows:
Fourth Quarter
(Amounts in millions) 2021 2020 Change
Net sales $ 1,108.3 100.0 % $ 1,074.4 100.0 % $ 33.9 3.2 %
Cost of goods sold (574.9) (51.9) % (558.2) (52.0) % (16.7) (3.0) %
Gross profit 533.4 48.1 % 516.2 48.0 % 17.2 3.3 %
Operating expenses (301.2) (27.1) % (300.0) (27.9) % (1.2) (0.4) %
Operating earnings before financial
services 232.2 21.0 % 216.2 20.1 % 16.0 7.4 %
Financial services revenue 86.9 100.0 % 93.4 100.0 % (6.5) (7.0) %
Financial services expenses (19.7) (22.7) % (24.9) (26.7) % 5.2 20.9 %
Operating earnings from financial
services 67.2 77.3 % 68.5 73.3 % (1.3) (1.9) %
Operating earnings 299.4 25.1 % 284.7 24.4 % 14.7 5.2 %
Interest expense (11.3) (0.9) % (15.4) (1.3) % 4.1 26.6 %
Other income (expense) - net 5.1 0.3 % 2.4 0.2 % 2.7 NM
Earnings before income taxes and equity
earnings 293.2 24.5 % 271.7 23.3 % 21.5 7.9 %
Income tax expense (64.1) (5.3) % (58.2) (5.0) % (5.9) (10.1) %
Earnings before equity earnings 229.1 19.2 % 213.5 18.3 % 15.6 7.3 %
Equity earnings, net of tax - - 0.3 - (0.3) NM
Net earnings 229.1 19.2 % 213.8 18.3 % 15.3 7.2 %
Net earnings attributable to
noncontrolling interests (5.4) (0.5) % (4.9) (0.4) % (0.5) (10.2) %
Net earnings attributable to Snap-on Inc. $ 223.7 18.7 % $ 208.9 17.9 % $ 14.8 7.1 %
NM: Not meaningful
Percentage Disclosure: All income statement line item percentages below "Operating earnings
from financial services" are calculated as a percentage of the sum of Net sales and
Financial services revenue.
Net sales of $1,108.3 million in the fourth quarter of 2021 increased $33.9
million , or 3.2%, from 2020 levels, reflecting a $24.7 million , or 2.3%, organic
gain and $12.2 million of acquisition-related sales, partially offset by
$3.0 million of unfavorable foreign currency translation.
Gross profit of $533.4 million in the fourth quarter of 2021 increased $17.2
million , or 3.3%, compared to $516.2 million last year. Gross margin of 48.1% in
the quarter improved 10 bps from the fourth quarter of 2020 primarily due to
higher sales volumes, pricing actions, 30 bps of favorable foreign currency
effects, and benefits from the company's RCI initiatives, which offset higher
material and other costs.
Operating expenses of $301.2 million in the fourth quarter of 2021 compared to
$300.0 million last year. Operating expenses as a percentage of net sales of
27.1% in the quarter improved 80 bps from last year primarily due to higher
sales volumes and 10 bps from lower costs related to $1.0 million of
restructuring actions recorded in the fourth quarter of 2020. These items were
partially offset by 40 bps of unfavorable acquisition effects.
Operating earnings before financial services of $232.2 million in the fourth
quarter of 2021 increased $16.0 million , or 7.4%, compared to $216.2 million in
the fourth quarter of 2020, which included $1.0 million of charges for
restructuring actions. As a percentage of net sales, operating earnings before
financial services of 21.0%, improved 90 bps from 20.1% last year.
Financial services revenue of $86.9 million in the fourth quarter of 2021
compared to $93.4 million last year. Financial services operating earnings of
$67.2 million in the period compared to $68.5 million in 2020.
36 SNAP-ON INCORPORATED
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Operating earnings of $299.4 million in the fourth quarter of 2021, increased
$14.7 million , or 5.2%, compared to $284.7 million last year, which included
$1.0 million of charges for restructuring actions. As a percentage of revenues,
operating earnings of 25.1% in the quarter compared to 24.4% last year.
Interest expense in the fourth quarter of 2021 decreased $4.1 million from last
year primarily as a result of lower year-over-year outstanding debt levels. See
Note 10 to the Consolidated Financial Statements for information on Snap-on's
debt and credit facilities.
Other income (expense) - net includes net gains and losses associated with
hedging and currency exchange rate transactions, non-service components of net
periodic benefit costs, and interest income. See Note 18 to the Consolidated
Financial Statements for information on other income (expense) - net.
Snap-on's fourth quarter 2021 effective income tax rate on earnings attributable
to Snap-on was 22.3%. The 2020 effective income tax rate was 21.8%, which
included a 10 bps increase related to the restructuring actions. See Note 9 to
the Consolidated Financial Statements for information on income taxes.
Net earnings attributable to Snap-on in the fourth quarter of 2021 of $223.7
million , or $4.10 per diluted share, increased $14.8 million , or $0.28 per
diluted share, from 2020 levels. Net earnings attributable to Snap-on in the
fourth quarter of 2020 were $208.9 million , or $3.82 per diluted share, which
included a $1.0 million , or $0.02 per diluted share, after-tax charge related to
the restructuring actions.
Exit and Disposal Activities
Snap-on did not record any exit and disposal costs for the three months ended
January 1, 2022 . Snap-on recorded costs for exit and disposal activities in
Europe of $1.0 million in the three months ended January 2, 2021 . See Note 8 to
the Consolidated Financial Statements for information on Snap-on's exit and
disposal activities.
Segment Results
Commercial & Industrial Group
Fourth Quarter
(Amounts in millions) 2021 2020 Change
External net sales $ 278.1 77.5 % $ 284.2 78.0 % $ (6.1) (2.1) %
Intersegment net sales 80.6 22.5 % 80.2 22.0 % 0.4 0.5 %
Segment net sales 358.7 100.0 % 364.4 100.0 % (5.7) (1.6) %
Cost of goods sold (227.8) (63.5) % (226.6) (62.2) % (1.2) (0.5) %
Gross profit 130.9 36.5 % 137.8 37.8 % (6.9) (5.0) %
Operating expenses (80.8) (22.5) % (81.6)
(22.4) % 0.8 1.0 %
Segment operating earnings
Segment net sales of$358.7 million in the fourth quarter of 2021 decreased$5.7 million , or 1.6%, from 2020 levels, including a$1.6 million , or 0.4%, organic sales decline and$4.1 million of unfavorable foreign currency translation. The organic decrease primarily reflects a low single-digit decline in sales to customers in critical industries, including lower sales to the military. Segment gross margin in the fourth quarter of 2021 of 36.5% declined 130 bps primarily due to higher material and other costs and 10 bps of unfavorable foreign currency effects, partially offset by benefits from the segment's RCI initiatives. Segment operating expenses as a percentage of net sales of 22.5% in the fourth quarter of 2021 compared to 22.4% last year. As a result of these factors, segment operating earnings of$50.1 million in the fourth quarter of 2021, including$1.2 million of unfavorable foreign currency effects, decreased$6.1 million from 2020 levels. Operating margin for theCommercial & Industrial Group of 14.0% in the quarter compared to 15.4% last year. 2021 ANNUAL REPORT 37
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Snap-on Tools Group Fourth Quarter (Amounts in millions) 2021 2020 Change Segment net sales$ 504.8 100.0 %$ 494.9 100.0 %$ 9.9 2.0 % Cost of goods sold (283.3) (56.1) % (282.8) (57.1) % (0.5) (0.2) % Gross profit 221.5 43.9 % 212.1 42.9 % 9.4 4.4 % Operating expenses (111.0) (22.0) % (118.5)
(24.0) % 7.5 6.3 %
Segment operating earnings
Segment net sales of$504.8 million in the fourth quarter of 2021 increased$9.9 million , or 2.0%, from 2020 levels, reflecting a$7.9 million , or 1.6%, organic sales increase and$2.0 million of favorable foreign currency translation. The organic increase is due to a low single-digit gain in theU.S. franchise business, partially offset by a low single-digit decline in the segment's international operations. Segment gross margin in the fourth quarter of 43.9% improved 100 bps from last year primarily due to higher sales volumes, pricing actions, and 60 bps of favorable foreign currency effects, which offset higher material and other costs. Segment operating expenses as a percentage of net sales of 22.0% in the fourth quarter improved 200 bps from last year primarily reflecting the higher sales, as well as benefits from ongoing cost containment efforts. As a result of these factors, segment operating earnings of$110.5 million in the fourth quarter of 2021, including$3.6 million of favorable foreign currency effects, increased$16.9 million , or 18.1%, from 2020 levels. Operating margin for the SnaponTools Group of 21.9% in the quarter compared to 18.9% last year.Repair Systems & Information Group Fourth Quarter (Amounts in millions) 2021 2020 Change External net sales$ 325.4 82.9 %$ 295.3 81.8 %$ 30.1 10.2 % Intersegment net sales 67.1 17.1 % 65.8 18.2 % 1.3 2.0 % Segment net sales 392.5 100.0 % 361.1 100.0 % 31.4 8.7 % Cost of goods sold (211.5) (53.9) % (194.8) (53.9) % (16.7) (8.6) % Gross profit 181.0 46.1 % 166.3 46.1 % 14.7 8.8 % Operating expenses (83.8) (21.3) % (76.3)
(21.2) % (7.5) (9.8) %
Segment operating earnings
Segment net sales of$392.5 million in the fourth quarter of 2021 increased$31.4 million , or 8.7%, from 2020 levels, reflecting a$19.7 million , or 5.5%, organic sales increase and$12.2 million of acquisition-related sales, partially offset by$0.5 million of unfavorable foreign currency translation. The organic gain is comprised of a double-digit increase in sales of undercar equipment and a mid single-digit gain in sales of diagnostic and repair information products to independent repair shop owners and managers, partially offset by a low single-digit decrease in sales to OEM dealerships. Segment gross margin in the fourth quarter of 46.1% was unchanged from last year. Benefits from pricing actions and 60 bps from acquisitions were offset by increased material and other costs. Segment operating expenses as a percentage of net sales in the fourth quarter of 21.3%, increased 10 bps from last year primarily due to 150 bps of unfavorable acquisition effects in 2021, partially offset by the impact of higher sales volumes and 30 bps from lower costs related to$1.0 million of restructuring actions recorded in the fourth quarter of 2020. As a result of these factors, segment operating earnings of$97.2 million in the fourth quarter of 2021, including$0.3 million of favorable foreign currency effects, increased$7.2 million , or 8.0%, from$90.0 million in 2020, which included$1.0 million of restructuring charges. Operating margin for theRepair Systems & Information Group of 24.8% in the quarter compared to 24.9% last year. 38SNAP-ON INCORPORATED --------------------------------------------------------------------------------
Financial Services
Fourth Quarter
(Amounts in millions) 2021 2020 Change
Financial services revenue $ 86.9 100.0 % $ 93.4 100.0 % $ (6.5) (7.0) %
Financial services expenses (19.7) (22.7) % (24.9) (26.7) % 5.2 20.9 %
Segment operating earnings $ 67.2 77.3 % $ 68.5 73.3 % $ (1.3) (1.9) %
Financial services revenue of $86.9 million in the fourth quarter of 2021
decreased $6.5 million , or 7.0%, from $93.4 million last year, primarily as a
result of an additional week of interest income from the 53-week 2020 fiscal
year. In the fourth quarters of both 2021 and 2020, the average yield on finance
receivables was 17.7% and the average yield on contract receivables was 8.5%.
Originations of $256.3 million in the fourth quarter of 2021 decreased
$16.1 million , or 5.9%, from 2020 levels.
Financial services expenses in the fourth quarter of 2021 decreased $5.2 million
from last year primarily due to lower provisions for credit losses as compared
to those recorded in the fourth quarter of 2020. As a percentage of the average
financial services portfolio, financial services expenses were 0.9% and 1.1% for
the fourth quarters of 2021 and 2020, respectively.
As a result of these factors, segment operating earnings of $67.2 million in the
fourth quarter of 2021, including $0.2 million of favorable foreign currency
effects, decreased $1.3 million , or 1.9%, from 2020 levels.
See Note 1 and Note 4 to the Consolidated Financial Statements for further
information on financial services.
Corporate
Snap-on's fourth quarter 2021 general corporate expenses of
Non-GAAP Supplemental Data
The following non-GAAP supplemental data is presented for informational purposes to provide readers with insight into the information used by management for assessing the operating performance of Snap-on's non-financial services ("Operations") and "Financial Services" businesses.
The supplemental Operations data reflects the results of operations and financial position of Snap-on's tools, diagnostics, equipment products, software, and other non-financial services operations with Financial Services presented on the equity method. The supplemental Financial Services data reflects the results of operations and financial position of Snap-on'sU.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings and cash generated from Operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Income taxes are charged to Financial Services on the basis of the specific tax attributes generated by theU.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses were eliminated to arrive at the Consolidated Financial Statements. 2021 ANNUAL REPORT 39
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-GAAP Supplemental Consolidating Data - Supplemental Statements of Earnings information for 2021, 2020 and 2019 is as follows:
Operations* Financial Services
(Amounts in millions) 2021 2020 2019 2021 2020 2019
Net sales $ 4,252.0 $ 3,592.5 $ 3,730.0 $ - $ - $ -
Cost of goods sold (2,141.2) (1,844.0) (1,886.0) - - -
Gross profit 2,110.8 1,748.5 1,844.0 - - -
Operating expenses (1,259.3) (1,116.6) (1,127.6) - - -
Operating earnings before financial
services 851.5 631.9 716.4 - - -
Financial services revenue - - - 349.7 349.7 337.7
Financial services expenses - - - (77.7) (101.1) (91.8)
Operating earnings from financial
services - - - 272.0 248.6 245.9
Operating earnings 851.5 631.9 716.4 272.0 248.6 245.9
Interest expense (53.0) (53.8) (48.8) (0.1) (0.2) (0.2)
Intersegment interest income (expense) -
net 57.1 68.5 70.5 (57.1) (68.5) (70.5)
Other income (expense) - net 16.4 8.5 8.9 0.1 0.2 (0.1)
Earnings before income taxes and equity
earnings 872.0 655.1 747.0 214.9 180.1 175.1
Income tax expense (193.3) (142.7) (166.6) (53.7) (46.4) (45.2)
Earnings before equity earnings 678.7 512.4 580.4 161.2 133.7 129.9
Financial services - net earnings
attributable to Snap-on 161.2 133.7 129.9 - - -
Equity earnings, net of tax 1.5 0.3 0.9 - - -
Net earnings 841.4 646.4 711.2 161.2 133.7 129.9
Net earnings attributable to
noncontrolling interests (20.9) (19.4) (17.7) - - -
Net earnings attributable to Snap-on $ 820.5 $
627.0
* Snap-on with Financial Services presented on the equity method.
40
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Non-GAAP Supplemental Consolidating Data - Supplemental Balance Sheet Information as of 2021 and 2020 year end is as follows:
Operations* Financial Services
(Amounts in millions) 2021 2020 2021 2020
ASSETS
Current assets:
Cash and cash equivalents $ 779.9 $ 923.2 $ 0.1 $ 0.2
Intersegment receivables 12.5 14.6 - 0.2Trade and other accounts receivable - net 681.7 639.7
0.6 1.0
Finance receivables - net - - 542.3 530.2
Contract receivables - net 6.4 7.0 104.0 105.5
Inventories - net 803.8 746.5 - -
Prepaid expenses and other assets 136.8 131.1 7.4 7.8
Total current assets 2,421.1 2,462.1 654.4 644.9
Property and equipment - net 516.5 524.4 1.7 1.8
Operating lease right-of-use assets 50.0 49.7 1.9 2.2
Investment in Financial Services 350.6 349.8 - -
Deferred income tax assets 26.5 27.6 23.0 22.7
Intersegment long-term notes receivable 570.1 316.9 - -
Long-term finance receivables - net - - 1,114.0 1,136.3
Long-term contract receivables - net 9.7 12.4 368.5 362.3
Goodwill 1,116.5 982.4 - -
Other intangibles - net 301.7 260.8 - -
Other assets 188.6 103.9 0.1 0.1
Total assets $ 5,551.3 $ 5,090.0 $ 2,163.6 $ 2,170.3 * Snap-on with Financial Services presented on the equity method.
2021 ANNUAL REPORT 41
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Non-GAAP Supplemental Consolidating Data - Supplemental Balance Sheet Information (continued):
Operations* Financial Services
(Amounts in millions) 2021 2020 2021 2020
LIABILITIES AND EQUITY
Current liabilities:
Notes payable and current maturities of
long-term debt $ 17.4 $ 18.5 $ - $ 250.0
Accounts payable 276.6 222.3 1.0 0.6
Intersegment payables - - 12.5 14.8
Accrued benefits 67.4 59.7 - -
Accrued compensation 110.9 87.2 3.9 2.7
Franchisee deposits 80.7 78.4 - -
Other accrued liabilities 407.1 418.8 26.8 35.9
Total current liabilities 960.1 884.9 44.2 304.0
Long-term debt and intersegment long-term debt - - 1,753.0 1,499.0
Deferred income tax liabilities 122.7 70.4 - -
Retiree health care benefits 31.1 34.5 - -
Pension liabilities 104.9 127.1 - -
Operating lease liabilities 32.5 31.6 1.7 2.4
Other long-term liabilities 96.2 94.9 14.1 15.1
Total liabilities 1,347.5 1,243.4 1,813.0 1,820.5
Total shareholders' equity attributable to
Snap-on 4,181.9 3,824.9 350.6 349.8
Noncontrolling interests 21.9 21.7 - -
Total equity 4,203.8 3,846.6 350.6 349.8
Total liabilities and equity $ 5,551.3 $ 5,090.0 $ 2,163.6 $ 2,170.3 * Snap-on with Financial Services presented on the equity method.
42
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Liquidity and Capital Resources
Snap-on's growth has historically been funded by a combination of cash provided by operating activities and debt financing. Snap-on believes that its cash from operations and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for scheduled debt repayments, payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise. Due to Snap-on's credit rating over the years, external funds have been available at an acceptable cost. As ofFebruary 4, 2022 , Snap-on's long-term debt and commercial paper were rated, respectively, A2 and P-1 by Moody's Investors Service; A- and A-2 byStandard & Poor's ; and A and F1 by Fitch Ratings. Snap-on believes that its current credit arrangements are sound and that the strength of its balance sheet affords the company the financial flexibility, including through access to financial markets for potential new financing, to respond to both internal growth opportunities and those available through acquisitions. However, Snap-on cannot provide any assurance that financing will be available in the future on acceptable terms, or that its debt ratings will not decrease.
The following discussion focuses on information included in the accompanying Consolidated Balance Sheets.
As of 2021 year end, working capital (current assets less current liabilities) of$2,071.2 million increased$153.1 million from$1,918.1 million as of 2020 year end primarily as a result of other net changes in working capital discussed below. The following represents the company's working capital position as of 2021 and 2020 year end: (Amounts in millions) 2021 2020 Cash and cash equivalents$ 780.0 $ 923.4 Trade and other accounts receivable - net 682.3 640.7 Finance receivables - net 542.3 530.2 Contract receivables - net 110.4 112.5 Inventories - net 803.8 746.5 Prepaid expenses and other assets 134.6
129.7
Total current assets 3,053.4
3,083.0
Notes payable and current maturities of long-term debt (17.4) (268.5) Accounts payable (277.6) (222.9) Other current liabilities (687.2) (673.5) Total current liabilities (982.2) (1,164.9) Working capital$ 2,071.2 $ 1,918.1 Cash and cash equivalents of$780.0 million as of 2021 year end decreased$143.4 million from 2020 year-end levels primarily due to: (i) the funding of$878.1 million of new finance receivables; (ii) the repurchase of 1,943,900 shares of the company's common stock for$431.3 million ; (iii) dividend payments to shareholders of$275.8 million ; (iv) the repayment of$250.0 million of the 2021 Notes; (v) the funding of$199.7 million for acquisitions; and (vi) the funding of$70.1 million for capital expenditures. These decreases in cash and cash equivalents were partially offset by: (i)$966.6 million of cash generated from operations; (ii)$854.2 million of cash from collections of finance receivables; (iii)$162.4 million of cash proceeds from stock purchase and option plan exercises; and (iv)$3.3 million of net proceeds from notes payable and other short-term borrowings. Of the$780.0 million of cash and cash equivalents as of 2021 year end,$293.1 million was held outside ofthe United States . Snap-on maintains non-U.S. funds in its foreign operations to: (i) provide adequate working capital; (ii) satisfy various regulatory requirements; and/or (iii) take advantage of business expansion opportunities as they arise. Although the Tax Cuts and Jobs Act ("Tax Act") generally eliminatedU.S. federal taxation of dividends from foreign subsidiaries, such dividends may still be subject to state income taxation and foreign withholding taxes. Snap-on periodically evaluates its cash held outsidethe United States and may pursue opportunities to repatriate certain foreign cash amounts to the extent that it can be accomplished in a tax efficient manner. 2021 ANNUAL REPORT 43
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Trade and other accounts receivable - net of$682.3 million as of 2021 year end increased$41.6 million from 2020 year-end levels primarily due to higher sales and$9.7 million from acquisitions, partially offset by$12.5 million of foreign currency translation. Days sales outstanding (trade and other accounts receivable - net as of the respective period end, divided by the respective trailing 12 months sales, times 360 days) was 58 days and 64 days at the respective 2021 and 2020 year ends. The current portions of net finance and contract receivables of$652.7 million as of 2021 year end compared to$642.7 million at 2020 year end. The long-term portions of net finance and contract receivables of$1,492.2 million as of 2021 year end compared to$1,511.0 million at 2020 year end. The combined$8.8 million decrease in net current and long-term finance and contract receivables compared to 2020 year-end levels is primarily due to$36.6 million of higher originations more than offset by collections and other reductions as well as$2.6 million of unfavorable foreign currency translation. Inventories - net of$803.8 million as of 2021 year end increased$57.3 million from 2020 year-end levels primarily to support higher customer demand, new product innovations and$2.8 million from acquisitions, partially offset by$16.1 million of foreign currency translation. As of 2021 and 2020 year end, inventory turns (trailing 12 months of cost of goods sold, divided by the average of the beginning and ending inventory balance for the trailing 12 months) were 2.8 turns and 2.4 turns, respectively. Inventories accounted for using the first-in, first-out ("FIFO") method as of 2021 and 2020 year end approximated 60% and 57% of total inventories, respectively. All other inventories are accounted for using the last-in, first-out ("LIFO") method. The company's LIFO reserve was$87.2 million and$84.0 million at 2021 and 2020 year end, respectively. As of 2021 year end, notes payable and current maturities of long-term debt consisted of$17.4 million of other notes. Notes payable of$268.5 million as of 2020 year end consisted of$250.0 million of the 2021 Notes and$18.5 million of other notes. Average notes payable outstanding, including commercial paper borrowings in 2020 and short-term credit facility borrowings in both years, were$16.7 million and$68.4 million in 2021 and 2020, respectively. The 2021 weighted-average interest rate on such borrowings of 8.39% compared with 2.98% in 2020. There were no commercial paper borrowings during 2021. Average commercial paper borrowings were$41.0 million in 2020 with a weighted-average interest rate of 1.53%. No commercial paper was outstanding as of year-end 2021 or 2020. There were no amounts borrowed under the short-term credit facility during 2021. Average short-term credit facility borrowings were$13.9 million in 2020 with a weighted-average interest rate of 1.7%. No amounts were outstanding under the short-term credit facility as of year-end 2021 or 2020. At 2021 year end, the weighted-average interest rate on outstanding notes payable of 8.39% compared with 8.87% in 2020. The 2021 year-end rate decreased primarily due to lower rates on local borrowings in emerging markets. Accounts payable of$277.6 million as of 2021 year end increased$54.7 million from 2020 year-end levels, primarily due to the timing of payments and$3.4 million from acquisitions, partially offset by$3.4 million of foreign currency translation. Other accrued liabilities of$424.3 million as of 2021 year end decreased$21.2 million from 2020 year-end levels primarily due to lower tax accruals and$7.1 million of foreign currency translation, partially offset by$3.7 million from acquisitions. Long-term debt of$1,182.9 million as of 2021 year end consisted of: (i)$300.0 million of unsecured 3.25% notes that mature onMarch 1, 2027 (the "2027 Notes"); (ii)$400.0 million of unsecured 4.10% notes that mature onMarch 1, 2048 ("the 2048 Notes"); and (iii)$500.0 million of 3.10% notes that mature onMay 1, 2050 (the "2050 Notes"), partially offset by$17.1 million from the net effects of debt amortization costs. Snap-on has an$800 million multi-currency revolving credit facility that terminates onSeptember 16, 2024 (the "Credit Facility"); no amounts were outstanding under the Credit Facility as ofJanuary 1, 2022 . Borrowings under the Credit Facility bear interest at varying rates based on either: (i) Snap-on's then-current, long-term debt ratings; or (ii) Snap-on's then-current ratio of consolidated debt net of certain cash adjustments ("Consolidated Net Debt") to earnings before interest, taxes, depreciation, amortization and certain other adjustments for the preceding four fiscal quarters then ended (the "Consolidated Net Debt to EBITDA Ratio"). The Credit Facility's financial covenant requires that Snap-on maintain, as of each fiscal quarter end, either (i) a ratio not greater than 0.60 to 1.00 of Consolidated Net Debt to the sum of Consolidated Net Debt plus total equity and less accumulated other comprehensive income or loss (the "Leverage Ratio"); or (ii) a Consolidated Net Debt to EBITDA Ratio not greater than 3.50 to 1.00. Snap-on may, up to two times during any five-year period during the term of the Credit Facility (including any extensions thereof), elect to increase the maximum Leverage Ratio to 0.65 to 1.00 and/or increase the maximum Consolidated Net Debt to EBITDA Ratio to 4.00 to 1.00 for four consecutive fiscal quarters in connection with certain material acquisitions (as defined in the related credit agreement). As ofJanuary 1, 2022 , the company's actual ratios of 0.09 and 0.37 respectively, were both within the permitted ranges set forth in this financial covenant. Snap-on generally issues commercial paper to fund its financing needs on a short-term basis and uses the Credit Facility as back-up liquidity to support such commercial paper issuances. 44SNAP-ON INCORPORATED -------------------------------------------------------------------------------- Snap-on's Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2021 year end, Snap-on was in compliance with all covenants of its Credit Facility and other debt agreements. Snap-on believes it has sufficient available cash and access to both committed and uncommitted credit facilities to cover its expected funding needs on both a short-term and long-term basis. Snap-on manages its aggregate short-term borrowings so as not to exceed its availability under the Credit Facility. Snap-on believes that it can access short-term debt markets, predominantly through commercial paper issuances and existing lines of credit, to fund its short-term requirements and to ensure near-term liquidity. Snap-on regularly monitors the credit and financial markets and, if it believes conditions are favorable, it may take advantage of such conditions to issue long-term debt to further improve its liquidity and capital resources. Near-term liquidity requirements for Snap-on include payments of interest and dividends, funding to support new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise. Snap-on intends to make contributions of$9.4 million to its foreign pension plans and$9.5 million to its domestic pension plans in 2022, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2022. Snap-on's long-term financing strategy is to maintain continuous access to the debt markets to accommodate its liquidity needs, including the potential use of commercial paper, additional fixed-term debt and/or securitizations. The following discussion focuses on information included in the accompanying Consolidated Statements of Cash Flows.
Operating Activities
Net cash provided by operating activities of
Depreciation expense was$75.6 million in 2021 and$73.3 million in 2020. Amortization expense was$29.2 million in 2021 and$23.4 million in 2020. See Note 7 to the Consolidated Financial Statements for information on goodwill and other intangible assets. Investing Activities Net cash used by investing activities of$290.4 million in 2021 included additions to finance receivables of$878.1 million , partially offset by collections of$854.2 million . Net cash used by investing activities of$187.8 million in 2020 included additions to finance receivables of$835.0 million , partially offset by collections of$750.3 million . Finance receivables are comprised of extended-term installment payment contracts to both technicians and independent shop owners (i.e., franchisees' customers) to enable them to purchase tools, diagnostics, and equipment products on an extended-term payment plan, generally with payment terms of approximately four years. Net cash used by investing activities in 2021 also included a total of$199.7 million for the acquisitions of Dealer-FX, AutoCrib Germany and Pradines. Net cash used by investing activities in 2020 included a total of$41.5 million for the acquisitions of Sigmavision and AutoCrib and a$0.2 million working capital adjustment for the 2019 Cognitran acquisition. See Note 3 to the Consolidated Financial Statements for information about acquisitions. Capital expenditures in 2021 and 2020 totaled$70.1 million and$65.6 million , respectively. Capital expenditures in both years included continued investments related to the company's execution of its strategic Value Creation Processes. The company also invested in: (i) new product, efficiency, safety and cost reduction initiatives that are intended to expand and improve its manufacturing and distribution capabilities worldwide; (ii) new production and machine tooling to enhance manufacturing operations, as well as ongoing replacements of manufacturing and distribution equipment, particularly inthe United States ; and (iii) the ongoing enhancement of the company's global enterprise resource planning (ERP) management information systems. Snap-on believes that its cash generated from operations, as well as its available cash on hand and funds available from its credit facilities will be sufficient to fund the company's capital expenditure requirements in 2022.
2021 ANNUAL REPORT 45
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Financing Activities
Net cash used by financing activities of$818.8 million in 2021 included the$250.0 million repayment of the 2021 Notes at maturity and net proceeds from notes payable and other short-term borrowings of$3.3 million . Net cash used by financing activities of$84.3 million in 2020 included Snap-on's sale, onApril 27, 2020 , of$500 million of the 2050 Notes at a discount, from which Snap-on received$489.9 million of net proceeds, reflecting$4.4 million of transaction costs, partially offset by repayments of notes payable and other short-term borrowings of$187.2 million . Proceeds from stock purchase and option plan exercises totaled$162.4 million in 2021 and$55.8 million in 2020. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and franchisee stock purchase plans, as well as stock options, and for other corporate purposes. In 2021, Snap-on repurchased 1,943,900 shares of its common stock for$431.3 million under its previously announced share repurchase programs. As of 2021 year end, Snap-on had remaining availability to repurchase up to an additional$454.9 million in common stock pursuant to its Board's authorizations. The purchase of Snap-on common stock is at the company's discretion, subject to prevailing financial and market conditions. Snap-on repurchased 1,109,000 shares of its common stock for$174.3 million in 2020. Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities, will be sufficient to fund the company's additional share repurchases, if any. Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. Cash dividends paid in 2021 and 2020 totaled$275.8 million and$243.3 million , respectively. OnNovember 4, 2021 , the company announced that its Board increased the quarterly cash dividend by 15.4% to$1.42 per share ($5.68 per share annualized). Quarterly dividends in 2021 were$1.42 per share in the fourth quarter and$1.23 per share in the first three quarters ($5.11 per share for the year). Quarterly dividends in 2020 were$1.23 per share in the fourth quarter and$1.08 per share in the first three quarters ($4.47 per share for the year). 2021 2020 Cash dividends paid per common share $
5.11
5.3 % 5.1 %
Snap-on believes that its cash generated from operations, available cash on hand, and funds available from its credit facilities, will be sufficient to pay dividends in 2022.
Contractual Obligations and Commitments
Snap-on's contractual obligations for long-term debt and operating and finance leases are reflected in the Consolidated Balance Sheets; see Note 10 and Note 17 to the Consolidated Financial Statements for information on the company's long-term debt and leases. Snap-on also enters into contracts for future purchases in the normal course of business. As of year-end 2021, the company had$147.5 million in purchase commitments to be paid in 2022 and$17.3 million to be paid thereafter. Snap-on intends to make contributions of$9.4 million to its foreign pension plans and$9.5 million to its domestic pension plans in 2022, as required by law. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2022; see Note 12 and Note 13 to the Consolidated Financial Statements for information on the company's benefit plans and payments. Due to the uncertainty of the timing of settlements with taxing authorities, Snap-on is unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits totaling$8.9 million for its remaining uncertain tax liabilities. See Note 9 to the Consolidated Financial Statements for information on income taxes.
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Environmental Matters
Snap-on is subject to various federal, state and local government requirements regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. Snap-on's policy is to comply with these requirements and the company believes that, as a general matter, its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage, and of resulting financial liability, in connection with its business. Some risk of environmental damage is, however, inherent in some of Snap-on's operations and products, as it is with other companies engaged in similar businesses. Snap-on is and has been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous or toxic by one or more regulatory agencies. Snap-on believes that, as a general matter, its handling, manufacture, use and disposal of these substances are in accordance with environmental laws and regulations. It is possible, however, that future knowledge or other developments, such as improved capability to detect substances in the environment or increasingly strict environmental laws and standards and enforcement policies, could affect the company's handling, manufacture, use or disposal of these substances. In recent years there has been increased public awareness, concern and focus on environmental and sustainability issues, including matters related to global climate change. The current focus on these matters is expected to result in additional and/or more restrictive regulations, requirements and/or industry or third-party standards to reduce or mitigate global warming and other environmental or sustainability risks, though the timing is uncertain. Snap-on is monitoring developments in this area.
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 inthe United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates. In addition to the company's significant accounting policies described in Note 1 to the Consolidated Financial Statements, Snap-on considers the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company's consolidated financial statements and the uncertainties that could impact the company's financial position, results of operations and cash flows. Allowance for Credit Losses on Finance Receivables: The allowance for credit losses on finance receivables is maintained at a level management believes is adequate to cover expected losses in Snap-on's finance receivables portfolio as of the reporting date. The allowance represents management's estimate of the expected losses in the company's finance receivables portfolio based on ongoing assessments and evaluations of credit losses over the expected contractual life of the receivables portfolio considering collectability, historical loss experience, current conditions and future market changes. Determination of the proper level of allowance requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowance takes into consideration numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current and future economic conditions and credit risk characteristics. Some of these factors are influenced by items such as the customers' financial condition, past payment experience, credit bureau and proprietary Snap-on credit model information, as well as the value of the underlying collateral. Changes in economic conditions and assumptions, including the resulting credit quality metrics relative to the performance of the finance receivables portfolio, create uncertainty and could result in changes to both the allowance for credit losses and provision for credit losses.
2021 ANNUAL REPORT 47
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Management utilizes established policies and procedures in an effort to ensure the estimates and assumptions are well controlled, reviewed and consistently applied. As ofJanuary 1, 2022 , the ratio of the allowance for credit losses to finance receivables was 3.90%. As ofJanuary 2, 2021 , the allowance ratio was 4.38%. While management believes it exercises prudent judgment and applies reasonable assumptions in establishing its estimates for allowances for finance receivables, there can be no assurance that changes in economic conditions or other factors would not adversely impact the financial health of our customers and result in changes to the estimates used in the allowance calculation. For reference, a 100 bps increase in the allowance ratios for finance receivables as ofJanuary 1, 2022 , would have increased Snap-on's 2021 provision for credit losses and related allowance for credit losses by approximately$17.2 million .
For additional information on Snap-on's allowances for credit losses, see Note 1 and Note 4 to the Consolidated Financial Statements.
Impairment ofGoodwill :Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the company in the second quarter of each year using information available as of April month end. Snap-on evaluates the recoverability of goodwill by estimating the future discounted cash flows of the businesses to which the goodwill relates. Estimated cash flows and related goodwill are grouped at the reporting unit level. The company has determined that its reporting units for testing goodwill impairment are its operating segments or components of an operating segment that constitute a business for which discrete financial information is available and for which segment management regularly reviews the operating results. Within its four reportable operating segments, the company has identified 11 reporting units. Snap-on evaluates the recoverability of goodwill by utilizing an income approach that estimates the fair value of the future discounted cash flows of the reporting units to which the goodwill relates. The future projections, which are based on both past performance and the projections and assumptions used in the company's operating plans, are subject to change as a result of changing economic and competitive conditions. This approach reflects management's internal outlook at the reporting units, which management believes provides the best determination of value due to management's insight and experience with the reporting units. Significant estimates used by management in the discounted cash flows methodology include estimates of future cash flows based on expected growth rates, price increases, working capital levels, expected benefits from RCI initiatives, and a weighted-average cost of capital that reflects the specific risk profile of the reporting unit being tested. The company's methodologies for valuing goodwill are applied consistently on a year-over-year basis; the assumptions used in performing the second quarter 2021 impairment calculations were evaluated in light of then-current market and business conditions. Snap-on continues to believe that the future discounted cash flow valuation model provides the most reasonable and meaningful fair value estimate based upon the reporting units' projections of future operating results and cash flows and replicates how market participants would value the company's reporting units in an orderly transaction. In the event the fair value of a reporting unit is less than the carrying value, including goodwill, the company would then record an impairment charge based on the excess of a reporting units carrying amount over its fair value. Inherent in fair value determinations are significant judgments and estimates, including material assumptions about future revenue, profitability and cash flows, the company's operational plans and its interpretation of current economic indicators. Should the operations of the businesses with which goodwill is associated incur significant declines in profitability and cash flow due to significant and long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, significant changes in key personnel or litigation, a significant and sustained decrease in share price and/or other events, including effects from the sale or disposal of a reporting unit, some or all of the recorded goodwill could be subject to impairment and could result in a material adverse effect on Snap-on's financial position or results of operations.
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Snap-on completed its annual impairment testing of goodwill in the second quarter of 2021, which did not result in any impairment. As of 2021 year end, the company has no accumulated impairment losses. Although the company consistently uses the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain by nature and can vary from actual results. In performing its annual impairment testing the company performed a sensitivity analysis on the material assumptions used in the discounted cash flow valuation models for each of its 11 reporting units. Based on the company's second quarter 2021 impairment testing, and assuming a hypothetical 10% decrease in the estimated fair values of each of its 11 reporting units, the hypothetical fair value of each of the company's 11 reporting units would have been greater than its carrying value. See Note 7 to the Consolidated Financial Statements for further information about goodwill. Pension Benefits: The pension benefit obligation and related pension expense are calculated in accordance with GAAP and are impacted by certain actuarial assumptions. Changes in these assumptions are primarily influenced by factors outside of Snap-on's control, such as changes in economic conditions, and can have a significant effect on the amounts reported in the financial statements. Snap-on believes that the two most critical assumptions are (i) the expected return on plan assets; and (ii) the assumed discount rate. Snap-on's domestic pension plans have a long-term investment horizon and a total return strategy that emphasizes a capital growth objective. In 2021, the long-term investment performance objective for Snap-on's domestic plans' assets was to achieve net of expense returns that met or exceeded the 6.75% domestic expected return on plan assets assumption. Snap-on uses a three-year, market-related value asset method of amortizing the difference between actual and expected returns on its domestic plans' assets. As of 2021 year end, Snap-on's domestic pension plans' assets comprised approximately 86% of the company's worldwide pension plan assets. Based on forward-looking capital market expectations, Snap-on selected an expected return on plan assets assumption for itsU.S. pension plans of 6.50%, a decrease of 25 bps from 2021, to be used in determining pension expense for 2022. In estimating the domestic expected return on plan assets, Snap-on utilizes a nominal returns forecasting method. For each asset class, future returns are estimated by identifying the premium of riskier asset classes over lower risk alternatives. The methodology constructs expected returns using a "building block" approach to the individual components of total return. These forecasts are stated in both nominal and real (after inflation) terms. This process first considers the long-term historical return premium based on the longest set of data available for each asset class. These premiums, calculated using the geometric mean, are then adjusted based on current relative valuation levels, macro-economic conditions, and the expected alpha related to active investment management. The asset return assumption is also adjusted by an implicit expense load for estimated administrative and investment-related expenses. Since asset allocation is a key determinant of expected investment returns, the current and expected mix of plan assets are also considered when setting the assumption.
Pension expense increases as the expected rate of return on plan assets
decreases. Lowering the expected rate of return assumption for Snap-on's
domestic pension plans' assets by 50 bps would have increased Snap-on's 2021
domestic pension expense by approximately
The objective of Snap-on's discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, the company takes into account the timing and amount of benefits that would be available under the plans. The domestic discount rate as of 2021 and 2020 year end was selected based on a cash flow matching methodology developed by the company's outside actuaries and which incorporates a review of current economic conditions. This methodology matches the plans' yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody's Investors Service orStandard & Poor's credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans' projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate. 2021 ANNUAL REPORT 49
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Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
The selection of the 2.9% weighted-average discount rate for Snap-on's domestic pension plans as of 2021 year end (compared to 2.7% as of 2020 year end) represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on's domestic discount rate assumption by 50 bps would have increased Snap-on's 2021 domestic pension expense and projected benefit obligation by approximately$4.0 million and$77.0 million , respectively. As of 2021 year end, Snap-on's domestic projected benefit obligation comprised approximately 82% of Snap-on's worldwide projected benefit obligation. The weighted-average discount rate for Snap-on's foreign pension plans of 2.0% (compared to 1.7% as of 2020 year end) represents the single rate that produces the same present value of cash flows as the estimated benefit plan payments. Lowering Snap-on's foreign discount rate assumption by 50 bps would have increased Snap-on's 2021 foreign pension expense and projected benefit obligation by approximately$2.4 million and$27.8 million , respectively. Actuarial gains and losses in excess of 10 percent of the greater of the projected benefit obligation or market-related value of assets are amortized on a straight-line basis over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. Prior service costs and credits resulting from plan amendments are amortized in equal annual amounts over the average remaining service period of active participants or over the average remaining life expectancy for plans with primarily inactive participants. To determine the 2022 net periodic benefit cost, Snap-on is using weighted-average discount rates for its domestic and foreign pension plans of 2.9% and 2.0%, respectively, and an expected return on plan assets for its domestic pension plans of 6.50%. The expected returns on plan assets for foreign pension plans ranged from 1.3% to 5.6% as of 2021 year end. Due to the net change in these two key assumptions, in addition to the overall benefit plan status, Snap-on expects to have pension income in 2022. Other factors, such as changes in plan demographics and discretionary contributions, may further increase or decrease pension income in 2022. See Note 12 to the Consolidated Financial Statements for further information on pension plans.
Outlook
COVID-19, its subsequent variants, as well as related supply chain inefficiencies, continue to impact economic activity worldwide in 2022. Snap-on is accommodating to the virus-related turbulence and is capitalizing on opportunities in this mixed environment. The company believes that our markets and our operations possess and, indeed, have demonstrated considerable resilience against the impact of the virus and that there will be ongoing advancement even in the midst of the pandemic. The trajectory, however, may be uncertain due to the evolving nature and duration of the situation. Snap-on expects to make continued progress in 2022 along its defined runways for coherent growth, leveraging capabilities already demonstrated in the automotive repair arena and developing and expanding its professional customer base, not only in automotive repair, but in adjacent markets, additional geographies and other areas, including extending in critical industries, where the cost and penalties for failure can be high. In pursuit of these initiatives, it is projected that capital expenditures in 2022 will be in a range of$90 million to$100 million . Snap-on continues to respond to global macroeconomic challenges through its RCI process and other cost reduction initiatives.
Snap-on currently anticipates that its full year 2022 effective income tax rate will be in the range of 23% to 24%.
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