Management Overview

In 2008 the world experienced a global economic slowdown and tightened credit environment. Despite the challenges of a deepening global recession, many of Snap-on's businesses experienced sales growth in 2008 and we continued investing in our strategic growth initiatives aimed at fortifying our business models, pursuing geographic and customer diversification, expanding our presence in emerging markets, and driving value creation processes, including innovation and rapid continuous improvement. We believe the continued advancement of these strategic initiatives will help create an environment to achieve long-term value for company shareholders, associates, franchisees and other distributor partners across our varied business segments and channels.

Net sales in 2008 of $2,853.3 million increased slightly from $2,841.2 million in 2007, while operating earnings of $388.8 million in 2008 increased 19.7% from $324.8 million in 2007. The significant increase in year-over-year operating earnings was primarily driven by contributions from our ongoing efficiency, productivity and cost reduction (collectively "Rapid Continuous Improvement" or "RCI") initiatives, as well as increased income from our financial services businesses. These benefits were partially offset by higher costs in 2008 as a result of price increases for steel, fuel and other commodities.

Economic challenges, however, increased significantly during the fourth quarter of 2008 as customers curtailed spending in response to the worsening global recession. As a result of the economic slowdown, Snap-on's sales in the fourth quarter of 2008 declined 10.1% from prior year levels. In response to these economic challenges, we accelerated certain RCI initiatives and are continuing - even accelerating - certain planned investments that include further expansion of our manufacturing capacity in China and in Eastern Europe, as we see these investments as potentially enabling near-term growth. In 2009 we intend to aggressively manage the balance between investing and capturing growth opportunities with the need for additional cost reduction actions beyond those already implemented. We also experienced considerable adverse effects from foreign currency exchange rate movements in the fourth quarter of 2008. Given our increasingly global footprint, foreign currency exchange rates could have a more pronounced effect on our sales and operating profit comparisons in 2009.

Our strategic priorities and plans for 2009 will continue to build on the improvement initiatives underway to achieve sustainable, profitable growth. Global market conditions, however, may affect the level and timing of resources deployed in pursuit of these initiatives in 2009.

In the Commercial & Industrial Group, higher sales, including growth in emerging markets, combined with expense control and savings from restructuring initiatives delivered improvements in operating performance. Segment net sales of $1,409.3 million in 2008 were up 4.3% over 2007 levels, and operating earnings of $167.3 million in 2008 were up 27.2% over 2007 levels. Benefits from continued sales growth and improved levels of customer service, along with savings from ongoing RCI and restructuring initiatives, including increased production and sourcing of materials from lower-cost regions, were major contributors to the year-over-year earnings improvement.

The Commercial & Industrial Group expects to continue to build on the following strategic priorities in 2009:

† Continue to invest in emerging market growth initiatives, including China, India and Eastern Europe;

† Increase market share in key industrial market segments by reaching new customers, expanding our business with existing customers, and continually expanding value-added content;

† Continue to invest in innovation that delivers productivity-enhancing solutions that utilize the latest technology;

† Continue to pursue key customer segments that offer long-term growth potential; and

† Continue to rationalize the operating footprint and reduce structural costs.

In the Snap-on Tools Group, progress continued on fundamental, strategic initiatives to strengthen the group and enhance franchisee profitability and satisfaction.

Segment net sales of $1,104.0 million in 2008 were down slightly from 2007 levels primarily due to a more challenging economic environment for sales of higher-priced products and hand tools. Supply chain improvements and an ongoing transition to a market-demand-based replenishment system in 2008 continued to improve complete and on-time delivery of a broad assortment of products. Operating earnings of $117.7 million in 2008 declined from $125.1 million in 2007, primarily due to increased commodity and inflation costs, higher restructuring costs, and increased "last-in, first-out" ("LIFO") related inventory valuation expense.

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

The Snap-on Tools Group expects to continue to build on the progress made in enhancing the franchise proposition and delivering customer productivity solutions, with specific initiatives in 2009 focused on the following:

†          Continue to improve franchisee profitability and satisfaction;

†          Continue to fill open territories in the United States;

†          Develop new programs to expand market coverage;

†          Continue to invest in new product innovation and development; and

†          Increase supply chain flexibility through investments in
manufacturing and RCI initiatives.

By executing in these areas, we believe that we, as well as our franchisees, will continue to serve more customers better and more profitably.

In the Diagnostics & Information Group, segment net sales of $627.8 million in 2008 declined 3.5% from 2007 levels, while operating earnings in 2008 increased 13.5% over 2007 levels to $112.9 million. This significant increase in operating earnings reflects increased sales of certain product lines, contributions from increased productivity and lower costs as a result of RCI initiatives across all businesses, and $5.4 million from the adjustment of a pre-acquisition contingency acquired with the Snap-on Business Solutions ("Business Solutions") acquisition in November 2006.

Sales of diagnostics products worldwide and Mitchell1™ information products continued to grow as a result of the development and launch of new products and the continued expansion of functionality and product integration. These sales increases were more than offset by lower original equipment manufacturer ("OEM") program sales and lower sales at Business Solutions. OEM sales in 2008 declined from 2007 levels primarily as a result of the rollout of a major essential tool program in North America in 2007 that was not repeated in 2008, and the impact of the wind down of a facilitation program in Europe. Despite a year-over-year sales decline, including the impact from the planned exit of certain non-core product lines, the 2006 acquisition of Business Solutions continues to provide a strong base for relationships with key OEM customers, strengthening our position as a provider of essential productivity solutions.

The Diagnostics & Information Group expects to focus on the following strategic priorities in 2009:

†          Continue hardware and software content upgrades;

†          Expand product range with new products and services;

†          Increase penetration of geographic markets;

†          Leverage integration of software solutions; and

†          Continue productivity advancements through RCI initiatives and
leveraging of resources.

Financial Services revenue increased 29.2% to $81.4 million in 2008, and operating income of $37.3 million was up 66.5% from prior year, primarily due to lower market discount rates in 2008. Originations in 2008 were essentially flat with prior-year levels.

Cash Flows

Cash flow from operations was $215.0 million in 2008, as compared to $231.1 million in 2007. Snap-on used available cash in 2008 to invest $73.9 million in capital expenditures, repurchase 1,230,000 shares of Snap-on common stock for $69.8 million and pay dividends totaling $69.7 million. Capital expenditures in 2008 of $73.9 million reflect higher levels of spending to support strategic supply chain and other growth initiatives, including the expansion of the company's manufacturing capabilities in lower-cost regions and emerging markets, as well as higher levels of efficiency and cost-reduction capital investments. Cash at year-end 2008 of $115.8 million was up from $93.0 million at year-end 2007. In 2007, the company used available cash to repurchase 1,860,000 shares of Snap-on common stock for $94.4 million, pay dividends totaling $64.8 million, invest $61.9 million in capital expenditures and pay down debt of $36.6 million.

Results of Operations

Fiscal 2008 vs. Fiscal 2007

Results of operations for the fiscal years ended January 3, 2009 (fiscal 2008), and December 29, 2007 (fiscal 2007), are as follows:

(Amounts in millions)                     2008                      2007                    Change
Net sales                        $ 2,853.3     100.0 %     $  2,841.2     100.0 %      $  12.1       0.4 %
Cost of goods sold                (1,568.7 )   -55.0 %       (1,574.6 )   -55.4 %          5.9       0.4 %
Gross profit                       1,284.6      45.0 %        1,266.6      44.6 %         18.0       1.4 %
Financial services revenue            81.4     100.0 %           63.0     100.0 %         18.4      29.2 %
Financial services expenses          (44.1 )   -54.2 %          (40.6 )   -64.4 %         (3.5 )    -8.6 %
Operating income from
financial services                    37.3      45.8 %           22.4      35.6 %         14.9      66.5 %
Operating expenses                  (933.1 )   -32.7 %         (964.2 )   -33.9 %         31.1       3.2 %
Operating earnings                   388.8      13.2 %          324.8      11.2 %         64.0      19.7 %
Interest expense                     (33.8 )    -1.1 %          (46.1 )    -1.6 %         12.3      26.7 %
Other income (expense) - net           2.8       0.1 %            5.5       0.2 %         (2.7 )   -49.1 %
Earnings before income taxes,
equity earnings and minority
interests                            357.8      12.2 %          284.2       9.8 %         73.6      25.9 %
Income tax expense                  (117.8 )    -4.0 %          (92.5 )    -3.2 %        (25.3 )   -27.4 %
Earnings before equity
earnings and minority
interests                            240.0       8.2 %          191.7       6.6 %         48.3      25.2 %
Equity earnings, net of tax
and minority interests                (3.3 )    -0.1 %           (2.5 )    -0.1 %         (0.8 )   -32.0 %
Net earnings from continuing
operations                           236.7       8.1 %          189.2       6.5 %         47.5      25.1 %
Discontinued operations, net
of tax                              -              -             (8.0 )    -0.3 %          8.0     100.0 %
Net earnings                     $   236.7       8.1 %     $    181.2       6.2 %      $  55.5      30.6 %

Percentage Disclosure: Cost of goods sold, Gross profit and Operating expenses percentages are calculated as a percentage of Net sales. Financial services expenses and Operating income from financial services percentages are calculated as a percentage of Financial services revenue. All other income statement line item percentages are calculated as a percentage of the sum of Net sales and Financial services revenue.

Snap-on's 2008 fiscal year contained 53 weeks of operating results; Snap-on's 2007 fiscal year contained 52 weeks of operating results. The impact of the additional week, which occurred in the fourth quarter, was not material to Snap-on's fourth quarter or full year 2008 net sales or operating earnings.

Net sales in 2008 of $2,853.3 million increased $12.1 million, or 0.4%, from 2007 levels. Excluding $35.5 million of currency translation, net sales in 2008 declined $23.4 million, or 0.8%, from 2007 levels. The year-over-year sales comparison was significantly impacted by weakened consumer and business demand in 2008, particularly in the fourth quarter, as customers curtailed spending - primarily for purchases of higher-priced products - in response to the worsening global recession.

Sales in the Commercial & Industrial Group of $1,409.3 million increased $58.7 million, or 4.3%, from 2007 levels; excluding $37.0 million of currency translation, organic sales (net sales, excluding currency translation effects), increased 1.6% from 2007 levels. Sales in the Snap-on Tools Group of $1,104.0 million declined $3.7 million, or 0.3%, from 2007 levels; excluding $1.2 million of favorable currency translation, organic sales declined $4.9 million, or 0.4%, from 2007 levels. In the Diagnostics & Information Group, sales of $627.8 million declined $22.8 million, or 3.5%, from 2007 levels; excluding $1.6 million of currency translation, organic sales declined $21.2 million, or 3.3%, from 2007 levels.

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

Gross profit in 2008 was $1,284.6 million, as compared to $1,266.6 million in 2007. The $18.0 million gross profit improvement was primarily driven by $23.4 million of savings from ongoing RCI initiatives, $16.6 million of lower restructuring costs and $9.8 million of currency translation, partially offset by $24.6 million of higher production, material and freight costs. Contributions from higher sales and pricing were more than offset by the mix impact of lower sales of higher-margin products. In addition, gross profit in 2008 included $4.7 million of LIFO-related inventory valuation expense; gross profit in 2007 included LIFO-related inventory valuation benefits of $0.3 million. As a result of these factors, gross profit margin was 45.0% in 2008, up 40 basis points (100 basis points equals 1.0 percent) from 44.6% in 2007.

Operating expenses in 2008 were $933.1 million, as compared to $964.2 million in 2007. The $31.1 million, or 3.2%, improvement in operating expenses includes $28.8 million of contributions from RCI initiatives, $10.9 million of lower franchisee termination costs, $5.0 million of lower performance-based incentive compensation and $4.3 million of lower stock-based incentive compensation. Operating expenses in 2008 also benefited from a $5.4 million adjustment of a pre-acquisition contingency acquired with the Business Solutions acquisition in 2006. These declines in operating expenses were partially offset by $10.3 million of currency translation, $5.0 million of higher restructuring costs and $2.4 million of increased spending to further expand the company's presence in emerging growth markets and lower-cost regions. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of $6.4 million of gains from the sale of facilities. As a percentage of net sales, operating expenses in 2008 improved 120 basis points to 32.7%, as compared to 33.9% in 2007.

Operating income from Financial Services was $37.3 million on revenue of $81.4 million in 2008, as compared with $22.4 million of operating income on revenue of $63.0 million in 2007. The $14.9 million increase in year-over-year operating income primarily reflects the impact of lower market discount rates in 2008.

Consolidated operating earnings in 2008 were $388.8 million, an increase of $64.0 million, or 19.7%, from the $324.8 million achieved in 2007. The $64.0 million increase in year-over-year operating earnings includes $0.8 million of unfavorable currency translation.

Interest expense of $33.8 million in 2008 declined $12.3 million from $46.1 million in 2007 primarily due to declining interest rates on our floating rate debt and lower average debt levels.

Other income (expense) - net was income of $2.8 million in 2008, as compared to income of $5.5 million in 2007. Other income (expense) - net primarily includes interest income and hedging and currency exchange rate transaction gains and losses. See Note 17 to the Consolidated Financial Statements for information on other income (expense) - net.

Snap-on's effective income tax rate on earnings before equity earnings and minority interests was 32.9% in 2008 and 32.5% in 2007. See Note 8 to the Consolidated Financial Statements for information on income taxes.

On March 5, 2008, Snap-on acquired a 60% interest in Zhejiang Wanda Tools Co., Ltd. ("Wanda Snap-on"), a tool manufacturer in China, for a cash purchase price of $15.4 million (or $14.1 million, net of cash acquired), including $1.2 million of transaction costs. The acquisition of Wanda Snap-on is part of the company's ongoing strategic initiatives to further expand its manufacturing presence in emerging growth markets and lower-cost regions. For segment reporting purposes, the results of operations and assets of Wanda Snap-on are included in the Commercial & Industrial Group. The net sales and operating earnings impact of Wanda Snap-on were not material to Snap-on's fourth quarter or full-year 2008 Consolidated Financial Statements.

On June 29, 2007, Snap-on sold its Sun Electric Systems ("SES") business based in the Netherlands for a nominal cash purchase price. The sale of the SES business is reflected in the accompanying Consolidated Statements of Earnings as "Discontinued operations, net of tax." Snap-on recorded an after-tax loss of $8.0 million, or $0.14 per diluted share, in its 2007 results of operations related to the sale and results of operations of SES. For segment reporting purposes, the results of operations of SES were previously included in the Diagnostics & Information Group. See Note 16 to the Consolidated Financial Statements for information on SES.

Net earnings and net earnings from continuing operations in 2008 were $236.7 million, or $4.07 per diluted share. Net earnings from continuing operations in 2007 were $189.2 million, or $3.23 per diluted share; net earnings in 2007 were $181.2 million, or $3.09 per diluted share.

Exit and Disposal Activities

See Note 7 to the Consolidated Financial Statements for information on Snap-on's exit and disposal activities.

Segment Results

Snap-on's business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on's reportable business segments include: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Diagnostics & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of the business operations providing tools and equipment products and equipment repair services to a broad range of industrial and commercial customers worldwide through direct, distributor and other non-franchise distribution channels. The Snap-on Tools Group consists of the business operations serving the worldwide franchise van channel. The Diagnostics & Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, electronic parts catalogs, and other solutions for vehicle service to customers in the worldwide vehicle service and repair marketplace. Financial Services consists of the business operations of Snap-on Credit LLC ("SOC"), a consolidated, 50%-owned joint venture between Snap-on and The CIT Group, Inc. ("CIT"), and Snap-on's wholly owned finance subsidiaries in those international markets where Snap-on has franchise operations.

Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings. For the Commercial & Industrial, Snap-on Tools, and Diagnostics & Information Groups, segment net sales include both external and intersegment net sales. Snap-on accounts for intersegment sales and transfers based primarily on standard costs with reasonable mark-ups established between the segments. Identifiable assets by segment are those assets used in the respective reportable segment's operations. Corporate assets consist of cash and cash equivalents, deferred income taxes, pension assets and certain other assets. Intersegment amounts are eliminated to arrive at consolidated financial results.

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

Commercial & Industrial Group



(Amounts in millions)                2008                   2007                Change
External net sales           $ 1,260.5    89.4%     $ 1,208.6    89.5%     $  51.9    4.3%
Intersegment net sales           148.8    10.6%         142.0    10.5%         6.8    4.8%
Segment net sales              1,409.3   100.0%       1,350.6   100.0%        58.7    4.3%

Segment net sales of $1,409.3 million in 2008 increased $58.7 million, or 4.3%, from 2007 levels. Excluding $37.0 million of currency translation, sales increased $21.7 million, or 1.6%, year over year primarily due to higher sales of tools, kits and tool storage products to industrial customers, increased sales of power tools and imaging alignment systems, and continued strong sales growth in emerging markets.

Segment gross profit of $530.4 million in 2008 increased $46.9 million, or 9.7%, over 2007 levels. The $46.9 million increase in gross profit includes contributions from higher sales and pricing, $17.4 million of lower restructuring costs, $15.1 million of savings from RCI initiatives, and $10.7 million of currency translation. These increases in gross profit were partially offset by $9.9 million of higher production and material costs. As a percentage of net sales, gross profit of 37.6% improved 180 basis points over 35.8% in 2007. Operating expenses of $363.1 million increased $11.1 million from 2007 levels primarily due to $10.0 million of currency translation, $3.4 million of inflationary cost increases, and higher volume-related and other expenses, including $2.4 million of costs to further expand the company's sales and manufacturing presence in emerging growth markets and lower cost regions. These increases in operating expenses were partially offset by $10.1 million of savings from RCI initiatives. The year-over-year operating expense comparison is also impacted by the inclusion, in 2007, of $5.4 million of gains on the sale of facilities in Europe. As a result of these factors, segment operating earnings of $167.3 million in 2008 increased $35.8 million, or 27.2%, from 2007 levels and, as a percentage of net sales, improved from 9.7% in 2007 to 11.9% in 2008. The $35.8 million increase in year-over-year operating earnings includes $0.7 million of favorable currency translation.

Snap-on Tools Group

(Amounts in millions) 2008 2007 Change Segment net sales $ 1,104.0 100.0% $ 1,107.7 100.0% $ (3.7 ) -0.3% Cost of goods sold (636.5 ) -57.7% (618.2 ) -55.8% (18.3 ) -3.0% Gross profit 467.5 42.3% 489.5 44.2% (22.0 ) -4.5% Operating expenses (349.8 ) -31.6% (364.4 ) -32.9% 14.6 4.0% Segment operating earnings $ 117.7 10.7% $ 125.1 11.3% $ (7.4 ) -5.9%

Segment net sales of $1,104.0 million in 2008 decreased $3.7 million, or 0.3%, from 2007 levels. Excluding $1.2 million of favorable currency translation, 2008 sales declined $4.9 million, or 0.4%, from 2007 levels, as continued higher sales in the company's international franchise operations were more than offset by lower U.S. franchise sales. Sales to U.S. franchisees declined 3.2% year over year primarily due to a more challenging economic environment for sales of higher-priced products and hand tools, partially offset by increased sales of power tools and diagnostics products. At year end 2008, van count in the United States was up slightly compared to both September 27, 2008, and December 29, 2007, levels. Sales in the company's international franchise operations increased 6.6% year over year primarily due to strong growth in the United Kingdom, Japan and Australia.

Segment gross profit of $467.5 million in 2008 declined $22.0 million, or 4.5%, from 2007 levels. The $22.0 million gross profit decline primarily reflects the impacts of lower U.S. sales, including a shift in product mix to higher sales of lower-margin products, and $13.7 million of increased production and material costs. In addition, gross profit in 2008 included $4.7 million of LIFO-related inventory valuation expense; gross profit in 2007 included $0.3 million of LIFO-related inventory valuation benefits. These declines in gross profit were partially offset by contributions from higher pricing, $6.3 million of benefits from RCI initiatives, and $3.1 million of lower warranty expense. Operating expenses of $349.8 million in 2008 decreased $14.6 million, or 4.0%, from prior-year levels largely due to $10.9 million of lower franchisee termination costs and $6.7 million of benefits from RCI initiatives. These decreases to operating expenses were partially offset by $4.1 million of higher restructuring costs. As a result of these factors, segment operating earnings of $117.7 million in 2008 declined $7.4 million from $125.1 million in 2007 and, as a percentage of net sales, declined from 11.3% in 2007 to 10.7% in 2008. The $7.4 million decline in year-over-year operating earnings includes $0.8 million of unfavorable currency translation.

Diagnostics & Information Group

(Amounts in millions) 2008 2007 Change External net sales $ 488.8 77.9% $ 524.9 80.7% $ (36.1 ) -6.9% Intersegment net sales 139.0 22.1% 125.7 19.3% 13.3 10.6% Segment net sales 627.8 100.0% 650.6 100.0% (22.8 ) -3.5% Cost of goods sold (341.1 ) -54.3% (357.0 ) -54.9% 15.9 4.5% Gross profit 286.7 45.7% 293.6 45.1% (6.9 ) -2.4% Operating expenses (173.8 ) -27.7% (194.1 ) -29.8% 20.3 10.5% Segment operating earnings $ 112.9 18.0% $ 99.5 15.3% $ 13.4 13.5%

Segment net sales of $627.8 million in 2008 declined $22.8 million, or 3.5%, from 2007 levels, including $1.6 million from currency translation. Higher sales of diagnostics and Mitchell1 information products were more than offset by approximately $40 million of lower OEM program sales and by lower sales at Business Solutions, including expected lower sales from the planned exit of certain non-core product lines. The year-over-year decline in OEM program sales is primarily a consequence of the 2007 rollout of a major essential tool program in North America that was not repeated and the impact of the wind down of a facilitation program in Europe.

Segment gross profit of $286.7 million in 2008 decreased $6.9 million, or 2.4%, from 2007 levels as the impacts of lower sales, $3.0 million of higher software development and other costs, $0.9 million of increased restructuring costs, and $0.8 million of currency translation were partially offset by gross profit contributions from a more favorable product mix and $2.0 million of benefits . . .