Snap-on Inc (SNA) FY 2023 MD&A

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management Overview

We believe our 2023 operating performance demonstrates the continuing momentum of our business, confirms the special resilience of our markets, and reflects the considerable capability of our combined operations and our experienced team to overcome the uncertainties of the current environment. Throughout the variability, we maintained and further extended our ongoing advantages in our products, in our brands and in our 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 2024 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 (“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 November 20, 2023, Snap-on acquired certain assets of SAVTEQ, Inc. (“SAVTEQ”), for a cash purchase price of $3.0 million. SAVTEQ, based in Lexington, Kentucky, provides precise non-contact measuring capabilities that Snap-on intends to leverage in its product offerings.

On November 1, 2023, Snap-on acquired Mountz, Inc. (“Mountz”) for a cash purchase price of $39.6 million. Mountz, based in San Jose, California, is a leading developer, manufacturer and marketer of high-precision torque tools, including measurement, calibration and documentation products. The acquisition of Mountz complements and expands Snap-on’s torque offerings to customers in a variety of critical industries including aerospace, transportation and advanced manufacturing.

For segment reporting purposes, the results of operations and assets of SAVTEQ have been included in the Repair Systems & Information Group and those of Mountz have been included in the Commercial & Industrial Group since the respective acquisition dates.

Pro forma financial information has not been presented for 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 2023” or “2023” refer to the fiscal year ended December 30, 2023; references to “fiscal 2022” or “2022” refer to the fiscal year ended December 31, 2022; and references to “fiscal 2021” or “2021” refer to the fiscal year ended January 1, 2022. References in this document to 2023, 2022 and 2021 year end refer to December 30, 2023, December 31, 2022, and January 1, 2022, respectively. Snap-on’s 2023, 2022 and 2021 fiscal years each contained 52 weeks of operating results.

Fiscal 2022 as Compared to Fiscal 2021

A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 can be found under “Part II, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on the Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on February 9, 2023, and is available on the SEC’s website at www.sec.gov as well as in the “Investors” section of our website at www.snapon.com.

Non-GAAP Measures

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “organic sales” refer to sales from continuing operations calculated in accordance with 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.

Summary of Consolidated Performance

Consolidated net sales of $4,730.2 million in 2023 represented an increase of $237.4 million, or 5.3%, from 2022 levels, reflecting a $250.7 million, or 5.6%, organic gain and $5.5 million of acquisition-related sales, partially offset by $18.8 million of unfavorable foreign currency translation.

Operating earnings before financial services of $1,039.9 million in 2023 compared to $941.2 million in 2022, an increase of $98.7 million or 10.5%. As a percentage of net sales, operating earnings before financial services were 22.0% compared to 20.9% last year.

Operating earnings of $1,310.4 million in 2023 compared to $1,207.2 million in 2022, an increase of $103.2 million or 8.5%. As a percentage of revenues (net sales plus financial services revenue), operating earnings were 25.7% compared to 24.9% last year.

Net earnings attributable to Snap-on of $1,011.1 million, or $18.76 per diluted share, in 2023 compared to $911.7 million, or $16.82 per diluted share, in 2022, an increase of $99.4 million or $1.94 per diluted share.

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

Summary of Segment Performance

The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government and military, power generation, transportation and technical education market segments (collectively, “critical industries”), primarily through direct and distributor channels. Segment net sales of $1,458.3 million in 2023 represented an increase of $59.1 million, or 4.2%, from 2022 levels, reflecting a $69.7 million, or 5.0%, organic gain and $5.5 million of acquisition-related sales, partially offset by $16.1 million of unfavorable currency translation. The organic increase primarily reflects a double-digit gain in sales to customers in critical industries. Operating earnings of $226.1 million in 2023, including $9.0 million of unfavorable foreign currency effects, compared to $197.6 million in 2022, an increase of $28.5 million or 14.4%.

The Commercial & Industrial Group intends to focus on the following strategic priorities in 2024:

•Expanding our business with existing customers and reaching new customers in critical industries and other market segments;

•Continuing to invest in emerging market growth initiatives;

•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 multinational mobile tool distribution channel. Segment net sales of $2,088.8 million in 2023 represented an increase of $16.8 million, or 0.8%, from 2022 levels, reflecting a $25.0 million, or 1.2%, organic sales gain, partially offset by $8.2 million of unfavorable foreign currency translation. The organic increase is primarily due to a mid single-digit gain in the segment’s international operations, while activity in the U.S. operations was essentially flat. Operating earnings of $493.8 million in 2023, including $12.5 million of unfavorable foreign currency effects, compared to $458.7 million in 2022, an increase of $35.1 million or 7.7%.

The Snap-on Tools Group intends to focus on the following strategic priorities in 2024:

•Enhancing franchisee sales productivity, profitability, commercial health, and satisfaction;

•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

•Improving customer service levels and productivity in back office support functions, manufacturing and the supply chain through RCI initiatives and capacity investment.

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 $1,781.2 million in 2023 represented an increase of $114.3 million, or 6.9%, from 2022 levels, reflecting a $111.7 million, or 6.7%, organic sales increase and $2.6 million of favorable foreign currency translation. The organic gain primarily reflects double-digit increases in sales of undercar equipment and high single-digit gains in activity with OEM dealerships. Operating earnings of $433.2 million in 2023, including $1.3 million of favorable foreign currency effects, compared to $393.3 million in 2022, an increase of $39.9 million or 10.1%.

The Repair Systems & Information Group intends to focus on the following strategic priorities in 2024:

•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 geographic penetration, including in 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 of $378.1 million in 2023 compared to $349.7 million in 2022. Originations of $1,235.5 million in 2023 represented an increase of $82.4 million, or 7.1%, from 2022 levels. Operating earnings from financial services of $270.5 million in 2023 compared to $266.0 million last year.

Financial Services intends to focus on the following strategic priorities in 2024:

•Delivering financial products and services that attract and sustain profitable franchisees and support Snap‑on’s strategies for expanding market coverage and penetration;

•Improving productivity levels and ensuring high quality in all financial products and processes through the use of RCI initiatives; and

•Maintaining healthy portfolio performance levels.

Cash Flows

Net cash provided by operating activities of $1,154.2 million in 2023 compared to $675.2 million in 2022. The $479.0 million increase is primarily due to a $352.9 million change in net operating assets and liabilities, and a $100.7 million increase in net earnings.

Net cash used by investing activities of $331.8 million in 2023 included additions to finance receivables of $1,029.0 million, which were partially offset by collections of $833.5 million, as well as a use of cash of $42.6 million for the acquisitions of Mountz and SAVTEQ. Net cash used by investing activities of $206.2 million in 2022 included additions to finance receivables of $955.8 million, partially offset by collections of $826.9 million, as well as $0.5 million of cash provided by acquisitions. Capital expenditures in 2023 and 2022 totaled $95.0 million and $84.2 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 $572.9 million in 2023 included $355.6 million for dividend payments to shareholders, $294.7 million for the repurchase of 1,126,000 shares of Snap-on’s common stock, and net repayments of other short-term borrowings of $1.7 million. These amounts were partially offset by $113.6 million of proceeds from stock purchase plan and stock option exercises. Net cash used by financing activities of $485.0 million in 2022 included $313.1 million for dividend payments to shareholders and $198.1 million for the repurchase of 899,000 shares of Snap-on’s common stock. These amounts were partially offset by $55.0 million of proceeds from stock purchase plan and stock option exercises and net proceeds from other short-term borrowings of $1.6 million.

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

Results of Operations

2023 vs. 2022

Results of operations for 2023 and 2022 are as follows:

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 $4,730.2 million in 2023 represented an increase of $237.4 million, or 5.3%, from 2022 levels, reflecting a $250.7 million, or 5.6%, organic gain and $5.5 million of acquisition-related sales, partially offset by $18.8 million of unfavorable foreign currency translation.

Gross profit of $2,349.1 million in 2023 compared to $2,181.1 million last year, an increase of $168.0 million or 7.7%. Gross margin (gross profit as a percentage of net sales) improved 120 basis points (100 basis points (“bps”) equals 1.0 percent) from 2022 primarily due to increased sales volumes and pricing actions, lower material and other costs, and benefits from the company’s RCI initiatives. These improvements were partially offset by 30 bps of unfavorable foreign currency effects.

Operating expenses of $1,309.2 million in 2023 compared to $1,239.9 million last year. Operating expenses as a percentage of net sales rose 10 bps from last year, primarily reflecting increased personnel and other costs, partially offset by benefits from higher sales volumes.

Operating earnings before financial services of $1,039.9 million in 2023 compared to $941.2 million in 2022, an increase of $98.7 million or 10.5%. As a percentage of net sales, operating earnings before financial services were 22.0% compared to 20.9% last year.

Financial services revenue of $378.1 million in 2023 compared to $349.7 million last year. Financial services operating earnings of $270.5 million in 2023 compared to $266.0 million in 2022.

Operating earnings of $1,310.4 million in 2023 compared to $1,207.2 million in 2022, an increase of $103.2 million or 8.5%. As a percentage of revenues, operating earnings were 25.7% compared to 24.9% last year.

Interest expense in 2023 increased $2.8 million compared to last year. See Note 9 to the Consolidated Financial Statements for additional information on debt and credit facilities.

Other income (expense) – net primarily 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 17 to the Consolidated Financial Statements for additional information on Other income (expense) – net.

The effective income tax rate on earnings attributable to Snap-on was 22.5% in 2023 and 22.8% in 2022. See Note 8 to the Consolidated Financial Statements for additional information on income taxes.

Net earnings attributable to Snap-on of $1,011.1 million, or $18.76 per diluted share, in 2023 compared to $911.7 million, or $16.82 per diluted share, in 2022, an increase of $99.4 million or $1.94 per diluted share.

Segment Results

Snap-on’s business segments are based on the organization structure used by management for making operating and investment decisions and for assessing performance. Snap-on’s reportable business segments are: (i) the Commercial & Industrial Group; (ii) the Snap-on Tools Group; (iii) the Repair Systems & Information Group; and (iv) Financial Services. The Commercial & Industrial Group consists of business operations serving a broad range of industrial and commercial customers worldwide, including customers in the aerospace, natural resources, government and military, 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 multinational 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 and segment operating earnings. The Snap-on Tools Group segment revenues include external net sales, while the Commercial & Industrial Group and the Repair Systems & Information Group segment revenues include both external and intersegment net sales. Snap-on accounts for intersegment net 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. Intersegment amounts are eliminated to arrive at Snap-on’s consolidated financial results.

Commercial & Industrial Group

Segment net sales of $1,458.3 million in 2023 represented an increase of $59.1 million, or 4.2%, from 2022 levels, reflecting a $69.7 million, or 5.0%, organic gain and $5.5 million of acquisition-related sales, partially offset by $16.1 million of unfavorable currency translation. The organic increase primarily reflects a double-digit gain in sales to customers in critical industries.

Segment gross margin in 2023 improved 200 bps from last year, primarily due to increased sales volumes in the higher-gross-margin critical industry sector, pricing actions, and benefits from the segment’s RCI initiatives. These improvements were partially offset by 40 bps of unfavorable foreign currency effects.

Segment operating expenses as a percentage of net sales in 2023 rose 60 bps as compared to 2022 primarily reflecting increased sales in higher-expense businesses, as well as increased personnel and other costs.

As a result of these factors, segment operating earnings of $226.1 million in 2023, including $9.0 million of unfavorable foreign currency effects, compared to $197.6 million in 2022, an increase of $28.5 million or 14.4%. Operating margin (segment operating earnings as a percentage of segment net sales) for the Commercial & Industrial Group of 15.5% in 2023 compared to 14.1% last year.

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

Snap-on Tools Group

Segment net sales of $2,088.8 million in 2023 represented an increase of $16.8 million, or 0.8%, from 2022 levels, reflecting a $25.0 million, or 1.2%, organic sales gain, partially offset by $8.2 million of unfavorable foreign currency translation. The organic increase is primarily due to a mid single-digit gain in the segment’s international operations, while activity in the U.S. operations was essentially flat.

Segment gross margin in 2023 improved 210 bps from last year, primarily reflecting increased sales of higher-gross-margin products, benefits from sales volumes and pricing actions, and lower material and other costs. These improvements were partially offset by 50 bps of unfavorable foreign currency effects.

Segment operating expenses as a percentage of net sales in 2023 rose 60 bps from last year primarily due to increased personnel and other costs.

As a result of these factors, segment operating earnings of $493.8 million in 2023, including $12.5 million of unfavorable foreign currency effects, compared to $458.7 million in 2022, an increase of $35.1 million or 7.7%. Operating margin for the Snap‑on Tools Group of 23.6% in 2023 compared to 22.1% last year.

Repair Systems & Information Group

Segment net sales of $1,781.2 million in 2023 represented an increase of $114.3 million, or 6.9%, from 2022 levels, reflecting a $111.7 million, or 6.7%, organic sales increase and $2.6 million of favorable foreign currency translation. The organic gain primarily reflects double-digit increases in sales of undercar equipment and high single-digit gains in activity with OEM dealerships.

Segment gross margin in 2023 improved 90 bps from last year primarily due to lower material and other costs, increased sales volumes and pricing actions, and savings from RCI initiatives.

Segment operating expenses as a percentage of net sales in 2023 rose 20 bps from 2022, primarily reflecting increased personnel and other costs, partially offset by benefits from sales volume leverage.

As a result of these factors, segment operating earnings of $433.2 million in 2023, including $1.3 million of favorable foreign currency effects, compared to $393.3 million in 2022, an increase of $39.9 million or 10.1%. Operating margin for the Repair Systems & Information Group of 24.3% in 2023 compared to 23.6% last year.

Financial Services

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. Financial services revenue of $378.1 million in 2023 increased $28.4 million, or 8.1%, from 2022. In 2023 and 2022, the respective average yields on finance receivables were 17.7% and 17.6%. In 2023 and 2022, the average yields on contract receivables were 8.8% and 8.5%, respectively. Originations of $1,235.5 million in 2023 represented an increase of $82.4 million, or 7.1%, from 2022 levels.

Financial services expenses primarily include personnel-related and other general and administrative costs, as well as provisions for credit losses. These expenses are generally more dependent on changes in the size of the financial services portfolio than they are on the revenue of the segment. Financial services expenses in 2023 increased primarily due to higher provisions for credit losses as compared to those recorded in 2022. The increase in provisions reflects both the growth of the portfolio, as well as a return to more typical pre-pandemic rates of provision. As a percentage of the average financial services portfolio, financial services expenses were 4.5% in 2023 and 3.7% in 2022.

As a result of these factors, segment operating earnings in 2023, including $0.6 million of unfavorable foreign currency effects, increased $4.5 million, or 1.7%, from 2022 levels.

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

Corporate

Snap-on’s general corporate expenses in 2023 of $113.2 million compared to $108.4 million recorded in 2022. The year-over-year increase primarily reflects higher stock-based and performance-based compensation expense.

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

Quarterly Data

Fourth Quarter

Results of operations for the fourth quarters of 2023 and 2022 are as follows:

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 $1,196.6 million in the fourth quarter of 2023 represented an increase of $40.7 million, or 3.5%, from 2022 levels, reflecting a $26.1 million, or 2.2%, organic gain, $5.5 million of acquisition-related sales, and $9.1 million of favorable foreign currency translation.

Gross profit of $577.6 million in the fourth quarter of 2023 compared to $560.7 million last year, an increase of $16.9 million or 3.0%. Gross margin in the quarter declined 20 bps from the fourth quarter of 2022 primarily due to 20 bps of unfavorable foreign currency effects. Benefits from lower material and other costs, and savings from the company’s RCI initiatives, were offset by increased sales in lower-gross-margin businesses.

Operating expenses of $319.7 million in the fourth quarter of 2023 compared to $312.7 million in 2022. Operating expenses as a percentage of net sales improved 30 bps from last year, primarily reflecting lower corporate expenses and benefits from higher sales volumes, partially offset by increased personnel and other costs.

Operating earnings before financial services of $257.9 million in the fourth quarter of 2023 compared to $248.0 million in 2022, an increase of $9.9 million or 4.0%. As a percentage of net sales, operating earnings before financial services were 21.6% compared to 21.5% last year.

Financial services revenue of $97.2 million in the fourth quarter of 2023 compared to $88.3 million last year. Financial services operating earnings of $67.9 million in the period compared to $63.9 million in 2022.

Operating earnings of $325.8 million in the fourth quarter of 2023 compared to $311.9 million in 2022, an increase of $13.9 million or 4.5%. As a percentage of revenues, operating earnings were 25.2% in the quarter compared to 25.1% last year.

Interest expense in the fourth quarter of 2023 increased $0.5 million compared to last year. See Note 9 to the Consolidated Financial Statements for additional information on debt and credit facilities.

Other income (expense) – net primarily 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 17 to the Consolidated Financial Statements for additional information on Other income (expense) – net.

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

The effective income tax rate on earnings attributable to Snap-on in the fourth quarter was 21.4% in 2023 and 22.0% in 2022. See Note 8 to the Consolidated Financial Statements for additional information on income taxes.

Net earnings attributable to Snap-on of $255.3 million, or $4.75 per diluted share, in the fourth quarter of 2023 compared to $238.9 million, or $4.42 per diluted share, in 2022, an increase of $16.4 million or $0.33 per diluted share.

Segment Results

Commercial & Industrial Group

Segment net sales of $363.9 million in the fourth quarter of 2023 represented an increase of $20.7 million, or 6.0%, from 2022 levels, reflecting an $11.6 million, or 3.3%, organic gain, $5.5 million of acquisition-related sales, and $3.6 million of favorable foreign currency translation. The organic increase is primarily due to a double-digit gain in sales to customers in critical industries, partially offset by a double-digit decline in sales of power tools.

Segment gross margin in the fourth quarter improved 150 bps from last year, primarily reflecting increased sales volumes in the higher-gross-margin critical industry sector, pricing actions, savings from the segment’s RCI initiatives, and 30 bps of benefits from acquisitions. These improvements were partially offset by 60 bps of unfavorable foreign currency effects.

Segment operating expenses as a percentage of net sales in the fourth quarter rose 60 bps as compared to 2022 primarily due to a 30 bps impact from acquisitions and increased personnel and other costs.

As a result of these factors, segment operating earnings of $54.1 million in the fourth quarter of 2023, including $1.4 million of unfavorable foreign currency effects, compared to $47.9 million in 2022, an increase of $6.2 million or 12.9%. Operating margin for the Commercial & Industrial Group of 14.9% in the quarter compared to 14.0% last year.

Snap-on Tools Group

Segment net sales of $513.3 million in the fourth quarter of 2023 represented a decrease of $29.4 million, or 5.4%, from 2022 levels, reflecting a $31.0 million, or 5.7%, organic sales decline, partially offset by $1.6 million of favorable foreign currency translation. The organic decrease is due to a high single-digit decline in the U.S. operations, partially offset by a mid single-digit gain in the segment’s international operations.

Segment gross margin in the fourth quarter improved 200 bps from last year, primarily reflecting decreased sales of lower-gross-margin products.

Segment operating expenses as a percentage of net sales in the fourth quarter rose 180 bps as compared to 2022 primarily due to the lower sales volumes.

As a result of these factors, segment operating earnings of $111.0 million in the fourth quarter of 2023, including $0.1 million of unfavorable foreign currency effects, compared to $116.1 million in 2022, a decrease of $5.1 million, or 4.4%. Operating margin for the Snap‑on Tools Group of 21.6% in the quarter compared to 21.4% last year.

Repair Systems & Information Group

Segment net sales of $450.8 million in the fourth quarter of 2023 represented an increase of $12.9 million, or 2.9%, from 2022 levels, reflecting an $8.8 million, or 2.0%, organic sales increase and $4.1 million of favorable foreign currency translation. The organic gain includes a high single-digit increase in activity with OEM dealerships and a mid single-digit gain in sales of undercar equipment, partially offset by a high single-digit decline in sales of diagnostic and repair information products to independent repair shop owners and managers.

Segment gross margin in the fourth quarter was unchanged from last year with benefits from lower material and other costs and savings from RCI initiatives, offset by increased sales in lower-gross-margin businesses.

Segment operating expenses as a percentage of net sales in the fourth quarter rose 20 bps from 2022, primarily reflecting increased personnel and other costs.

As a result of these factors, segment operating earnings of $113.3 million in the fourth quarter of 2023, including $0.4 million of favorable foreign currency effects, compared to $110.6 million in 2022, an increase of $2.7 million or 2.4%. Operating margin for the Repair Systems & Information Group of 25.1% in the quarter compared to 25.3% last year.

Financial Services

Financial services revenue of $97.2 million in the fourth quarter of 2023 increased $8.9 million, or 10.1%, from last year. In the fourth quarters of 2023 and 2022, the respective average yields on finance receivables were 17.8% and 17.6%. In the fourth quarters of 2023 and 2022, the average yields on contract receivables were 8.9% and 8.6%, respectively. Originations of $303.1 million in the fourth quarter of 2023 represented an increase of $3.4 million, or 1.1%, from 2022 levels.

Financial services expenses in the fourth quarter of 2023 increased primarily due to higher provisions for credit losses as compared to those recorded in the fourth quarter of 2022. The increase in provisions reflects both the growth of the portfolio, as well as a return to more typical pre-pandemic rates of provision. As a percentage of the average financial services portfolio, financial services expenses were 1.2% in the fourth quarter of 2023 and 1.1% in 2022.

As a result of these factors, segment operating earnings in the fourth quarter of 2023 increased $4.0 million, or 6.3%, from 2022 levels.

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

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

Corporate

Snap-on’s fourth quarter 2023 general corporate expenses of $20.5 million compared to $26.6 million last year. The year-over-year decrease in corporate expenses primarily reflects the recovery of costs associated with a legal matter.

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’s U.S. and international financial services operations. The financing needs of Financial Services are met through intersegment borrowings and cash generated from Operations; Financial Services is charged interest expense on intersegment borrowings at market rates. Income taxes are charged to Financial Services on the basis of the specific tax attributes generated by the U.S. and international financial services businesses. Transactions between the Operations and Financial Services businesses are eliminated to arrive at the Consolidated Financial Statements.

Non-GAAP Supplemental Consolidating Data – Supplemental Statements of Earnings information for 2023 and 2022 is as follows:

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

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information as of 2023 and 2022 year end is as follows:

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

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

Non-GAAP Supplemental Consolidating Data – Supplemental Balance Sheet Information (continued):

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

Liquidity and Capital Resources

Snap-on’s growth has historically been funded by a combination of cash provided by operating activities and debt financing. Snap-on believes that its cash from operations and collections of finance receivables, coupled with its sources of borrowings and available cash on hand, are sufficient to fund its currently anticipated requirements for scheduled debt repayments, payments of interest and dividends, new receivables originated by our financial services businesses, capital expenditures, working capital, the funding of pension plans, and funding for share repurchases and acquisitions, if and as they arise.

Due to Snap-on’s credit rating over the years, external funds have been available at an acceptable cost. As of February 9, 2024, Snap-on’s long-term debt and commercial paper were rated, respectively: A2 and P-1 by Moody’s Investors Service; A- and A-2 by Standard & Poor’s; and A and F1 by Fitch Ratings. Snap-on believes that its current credit arrangements are sound and that the strength of its balance sheet affords the company the financial flexibility, including through access to financial markets for potential new financing, to respond to both internal growth opportunities and those available through acquisitions. However, 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 2023 year end, working capital (current assets less current liabilities) of $2,710.4 million represented an increase of $313.1 million from $2,397.3 million as of 2022 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 2023 and 2022 year end:

Cash and cash equivalents of $1,001.5 million as of 2023 year end represented an increase of $244.3 million from 2022 year-end levels primarily due to: (i) $1,154.2 million of cash generated from operations; (ii) $833.5 million of cash from collections of finance receivables; and (iii) $113.6 million of cash proceeds from stock purchase plan and stock option exercises. These increases in cash and cash equivalents were partially offset by: (i) the funding of $1,029.0 million of new finance receivables; (ii) dividend payments to shareholders of $355.6 million; (iii) the repurchase of 1,126,000 shares of the company’s common stock for $294.7 million; (iv) the funding of $95.0 million for capital expenditures; (v) the funding of $42.6 million for acquisitions; and (vi) net repayments of other short-term borrowings of $1.7 million.

Of the $1,001.5 million of cash and cash equivalents as of 2023 year end, $394.9 million was held outside of the United States. Snap-on maintains non-U.S. funds in its foreign operations to: (i) provide adequate working capital; (ii) satisfy various regulatory requirements; and/or (iii) take advantage of business expansion opportunities as they arise. Although the Tax Cuts and Jobs Act (“Tax Act”) generally eliminated U.S. federal taxation 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 outside the United States and may pursue opportunities to repatriate certain foreign cash amounts to the extent that it can be accomplished in a tax efficient manner.

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

Trade and other accounts receivable – net of $791.3 million as of 2023 year end represented an increase of $29.6 million from 2022 year-end levels primarily due to higher sales, $9.3 million of foreign currency translation and $4.1 million from acquisitions. 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 60 days and 61 days at the respective 2023 and 2022 year ends.

The current portions of net finance and contract receivables of $714.9 million as of 2023 year end compared to $672.1 million at 2022 year end. The long-term portions of net finance and contract receivables of $1,692.1 million as of 2023 year end compared to $1,554.6 million at 2022 year end. The combined $180.3 million increase in net current and long-term finance and contract receivables compared to 2022 year-end levels is primarily due to an increase in net receivable originations and $9.1 million of foreign currency translation.

Inventories – net of $1,005.9 million as of 2023 year end decreased $27.2 million from 2022 year-end levels primarily due to $47.8 million of inventory reductions as a result of easing supply chain disruptions, partially offset by $16.6 million of foreign currency translation and $4.0 million related to acquisitions. As of 2023 and 2022 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 2.3 turns and 2.5 turns, respectively. Inventories accounted for using the first-in, first-out (“FIFO”) method as of 2023 and 2022 year end approximated 59% and 61% of total inventories, respectively. All other inventories are accounted for using the last-in, first-out (“LIFO”) method. The company’s LIFO reserve was $115.9 million and $108.6 million at 2023 and 2022 year end, respectively.

Notes payable of $15.6 million as of 2023 year end compared to $17.2 million as of 2022 year end. Average notes payable outstanding were $17.5 million and $18.6 million in 2023 and 2022, respectively. The 2023 weighted-average interest rate on such borrowings of 11.0% compared with 9.9% in 2022. At 2023 year end, the weighted-average rate on outstanding notes payable of 11.1% compared with 10.9% in 2022.

Accounts payable of $238.0 million as of 2023 year end represented a decrease of $49.0 million from 2022 year-end levels, primarily due to the timing of payments, partially offset by $3.0 million of foreign currency translation and $1.6 million related to acquisitions.

Other accrued liabilities of $447.4 million as of 2023 year end represented an increase of $11.0 million from 2022 year-end levels, primarily due to higher income tax and other tax accruals, $3.7 million of foreign currency translation and $0.8 million related to acquisitions.

Long-term debt of $1,184.6 million as of 2023 year end consisted of: (i) $300.0 million of unsecured 3.25% notes that mature on March 1, 2027 (the “2027 Notes”); (ii) $400.0 million of unsecured 4.10% notes that mature on March 1, 2048 (“the 2048 Notes”); and (iii) $500.0 million of 3.10% notes that mature on May 1, 2050 (the “2050 Notes”), partially offset by $15.4 million of unamortized debt issuance costs and issuance discounts.

On September 12, 2023, Snap-on entered into a $900 million multicurrency revolving credit facility that terminates on September 12, 2028 (the “Credit Facility”), which amended and restated in its entirety Snap-on’s previous $800 million multicurrency revolving credit facility that was set to terminate on September 16, 2024. The Credit Facility contains an accordion feature that, subject to certain customary conditions, may allow the maximum commitment to be increased by up to $450 million with the approval of the lenders providing additional commitments. No amounts were borrowed or outstanding under either Credit Facility during the years ended and as of December 30, 2023 or December 31, 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 of December 30, 2023, the company’s actual ratios of 0.05 and 0.18 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. There was no commercial paper issued or outstanding during the years ended and as of December 30, 2023 or December 31, 2022.

Snap-on’s Credit Facility and other debt agreements also contain certain usual and customary borrowing, affirmative, negative and maintenance covenants. As of 2023 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 $6.0 million to its foreign pension plans and $3.7 million to its domestic pension plans in 2024, as required by law. Depending on market and other conditions, Snap-on may make discretionary cash contributions to its pension plans in 2024.

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 $1,154.2 million in 2023 increased $479.0 million from $675.2 million in 2022. The $479.0 million increase is primarily due to a $352.9 million change in net operating assets and liabilities, and a $100.7 million increase in net earnings.

Depreciation expense was $72.2 million in 2023 and $71.5 million in 2022. Amortization expense was $27.1 million in 2023 and $28.7 million in 2022. See Note 6 and Note 7 to the Consolidated Financial Statements for information on property and equipment and goodwill and other intangible assets.

Investing Activities

Net cash used by investing activities of $331.8 million in 2023 included additions to finance receivables of $1,029.0 million, partially offset by collections of $833.5 million. Net cash used by investing activities of $206.2 million in 2022 included additions to finance receivables of $955.8 million, partially offset by collections of $826.9 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, with average payment terms of approximately four years.

Net cash used by investing activities in 2023 also included $42.6 million for the acquisitions of Mountz and SAVTEQ. Net cash used by investing activities in 2022 included $0.5 million of cash provided by acquisitions. See Note 3 to the Consolidated Financial Statements for information about acquisitions.

Capital expenditures in 2023 and 2022 totaled $95.0 million and $84.2 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 in the 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 2024.

Financing Activities

Net cash used by financing activities of $572.9 million in 2023 included net repayments of other short-term borrowings of $1.7 million. Net cash used by financing activities of $485.0 million in 2022 included net proceeds from other short-term borrowings of $1.6 million.

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

Proceeds from stock purchase plan and stock option exercises totaled $113.6 million in 2023 and $55.0 million in 2022. In 2023, Snap-on repurchased 1,126,000 shares of its common stock for $294.7 million under its previously announced share repurchase programs. As of 2023 year end, Snap-on had remaining availability to repurchase up to an additional $282.9 million in common stock pursuant to its Board’s authorizations. Snap-on repurchased 899,000 shares of its common stock for $198.1 million in 2022. The repurchase of Snap-on common stock to offset dilution related to equity plan issuances or for other corporate purposes is at the company’s discretion, subject to prevailing financial and market conditions. 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 2023 and 2022 totaled $355.6 million and $313.1 million, respectively. On November 2, 2023, the company announced that its Board increased the quarterly cash dividend by 14.8% to $1.86 per share ($7.44 per share annualized). Quarterly dividends in 2023 were $1.86 per share in the fourth quarter and $1.62 per share in the first three quarters ($6.72 per share for the year). Quarterly dividends in 2022 were $1.62 per share in the fourth quarter and $1.42 per share in the first three quarters ($5.88 per share for the year).

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 2024.

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 9 and Note 16 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 2023, the company had $138.0 million in purchase commitments to be paid in 2024 and $11.4 million to be paid thereafter.

Snap-on intends to make contributions of $6.0 million to its foreign pension plans and $3.7 million to its domestic pension plans in 2024, as required by law. Depending on market and other conditions, Snap-on may make additional discretionary cash contributions to its pension plans in 2024; see Note 11 and Note 12 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 $7.5 million for its remaining uncertain tax liabilities. See Note 8 to the Consolidated Financial Statements for information on income taxes.

Environmental Matters

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

Snap-on is and has been engaged in the handling, manufacture, use and disposal of many substances classified as hazardous or toxic by one or more regulatory agencies. 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 climate change. The current focus on these matters is expected to result in additional and/or more restrictive regulations, and industry or third-party requirements and standards to reduce or mitigate climate change as well as other environmental or sustainability risks. The timing of certain of these regulations and requirements has yet to be determined. 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 in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are generally based on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources, as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates.

In addition to the company’s significant accounting policies described in Note 1 to the Consolidated Financial Statements, Snap-on considers the following policies and estimates to be the most critical in understanding the judgments that are involved in the preparation of the company’s consolidated financial statements and the uncertainties that could impact the company’s financial position, results of operations and cash flows.

Allowance for Credit Losses on Finance Receivables: The allowance for credit losses on finance receivables is maintained at a level management believes is adequate to cover expected losses in Snap-on’s finance receivables portfolio as of the reporting date. The allowance represents management’s estimate of the expected losses in the company’s finance receivables portfolio based on ongoing assessments and evaluations of credit losses over the remaining 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.

Management utilizes established policies and procedures in an effort to ensure the estimates and assumptions are well controlled, reviewed and consistently applied. As of December 30, 2023, the ratio of the allowance for credit losses to finance receivables was 3.48%. As of December 31, 2022, the allowance ratio was 3.39%. While management believes it exercises prudent judgment and applies reasonable assumptions in establishing its estimates for allowances for finance receivables, there can be no assurance that changes in economic conditions or other factors would not adversely impact the financial health of our customers and result in changes to the estimates used in the allowance calculation. For reference, a 100 bps increase in the allowance ratios for finance receivables as of December 30, 2023, would have increased Snap-on’s 2023 provision for credit losses and related allowance for credit losses by approximately $19.4 million.

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

Impairment of Goodwill: Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Annual impairment tests are performed by the company in the second quarter of each year using information available as of April month end.

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

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 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 2023 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 and unanticipated changes in circumstances, such as declines in profitability and cash flow due to long-term deterioration in macroeconomic, industry and market conditions, the loss of key customers, changes in technology or markets, changes in key personnel or litigation, a sustained decrease in share price and/or other events, some or all of the recorded goodwill could be subject to impairment and could result in a material adverse effect on Snap-on’s financial position or results of operations.

Snap-on completed its annual impairment testing of goodwill in the second quarter of 2023, the results of which did not result in any impairment. As of 2023 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 2023 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 additional 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 2023, the long-term investment performance objective for Snap-on’s domestic plans’ assets was to achieve net of expense returns that met or exceeded the 7.5% 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 2023 year end, Snap-on’s domestic pension plans’ assets comprised approximately 86% of the company’s worldwide pension plan assets.

Based on forward-looking capital market expectations, Snap-on selected an expected return on plan assets assumption for its U.S. pension plans of 7.5%, the same rate used in 2023, to be used in determining pension expense for 2024. 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 2023 domestic pension expense by approximately $6.2 million.

The objective of Snap-on’s discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. The domestic discount rate as of 2023 and 2022 year end was selected based on a cash flow matching methodology developed by the company’s outside actuaries that incorporates a review of current economic conditions. This methodology matches the plans’ yearly projected cash flows for benefits and service costs to those of hypothetical bond portfolios using high-quality, AA rated or better, corporate bonds from either Moody’s Investors Service or Standard & Poor’s credit rating agencies available at the measurement date. This technique calculates bond portfolios that produce adequate cash flows to pay the plans’ projected yearly benefits and then selects the portfolio with the highest yield and uses that yield as the recommended discount rate.

The selection of the 5.5% weighted-average discount rate for Snap-on’s domestic pension plans as of 2023 year end (compared to 5.5% as of 2022 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 2023 domestic pension expense and projected benefit obligation by approximately $1.5 million and $48.1 million, respectively. As of 2023 year end, Snap-on’s domestic projected benefit obligation comprised approximately 84% of Snap-on’s worldwide projected benefit obligation. The weighted-average discount rate for Snap-on’s foreign pension plans of 4.3% (compared to 4.8% as of 2022 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 2023 foreign pension expense and projected benefit obligation by approximately $0.9 million and $13.5 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.

Pension income in 2023 was $19.0 million and Snap-on expects to have pension income of approximately $8.0 million in 2024, primarily reflecting higher amortization of pension actuarial losses. The projected 2024 pension income is based on benefit plan status, weighted average discount rates, expected returns on plan assets, and other factors. To determine the 2024 net periodic benefit cost, Snap-on is using weighted-average discount rates for its domestic and foreign pension plans of 5.5% and 4.3%, respectively, and an expected return on plan assets for its domestic pension plans of 7.5%. The expected returns on plan assets for foreign pension plans ranged from 2.2% to 6.7% as of 2023 year end. See Note 11 to the Consolidated Financial Statements for additional information on pension plans.

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

Outlook

We believe that our markets and our operations possess and have demonstrated continuing and considerable resilience against the uncertainties of the current environment. In 2024, Snap-on expects to make ongoing progress 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 2024 will be in a range of $100 million to $110 million.

Snap-on currently anticipates that its full-year 2024 effective income tax rate will be in the range of 22% to 23%.