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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 2/21/06  Snap on Inc                       10-K       12/31/05   11:197                                    897069

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML  1,247K 
 2: EX-10.A     Amended and Restated Incentive Stock Program        HTML     55K 
 3: EX-10.B     Incentive Stock and Awards Plan                     HTML     64K 
 4: EX-10.F     Directors' 1993 Fee Plan                            HTML     37K 
 5: EX-12       Computation of Ratio                                HTML     16K 
 6: EX-21       Subsidiaries                                        HTML      6K 
 7: EX-23       Consent                                             HTML      5K 
 8: EX-31.1     Certification                                       HTML      9K 
 9: EX-31.2     Certification                                       HTML      9K 
10: EX-32.1     Certification                                       HTML      6K 
11: EX-32.2     Certification                                       HTML      6K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2005, or

Commission File Number 1-7724

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  |X|  No  |   |

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  |   |  No  |X|

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one) Large accelerated filer  |X|  Accelerated filer  |   |  Non-accelerated filer  |   |

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

The aggregate market value of voting and non-voting common equity held by non-affiliates computed by reference to the price at which common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter (July 2, 2005) was: $1,977,034,416

The number of shares of Common Stock ($1.00 par value) of the registrant outstanding as of February 15, 2006, was 58,301,841 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Report on Form 10-K incorporates by reference certain information that will be set forth in Snap-on’s Proxy Statement, which is expected to first be mailed to shareholders on or around March 13, 2006, prepared for the Annual Meeting of Shareholders scheduled for April 27, 2006.

TABLE OF CONTENTS

2

PART I

Safe Harbor

Statements in this document that are not historical facts, including statements (i) that include the words “expects,” “plans,” “targets,” “estimates,” “believes,” “anticipates,” or similar words that reference Snap-on Incorporated (“Snap-on” or “the company”) or its management; (ii) specifically identified as forward-looking; or (iii) describing Snap-on’s or management’s future outlook, plans, estimates, objectives or goals, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Snap-on cautions the reader that any forward-looking statements included in this document that are based upon assumptions and estimates were developed by management in good faith and are subject to risks, uncertainties or other factors that could cause (and in some cases have caused) actual results to differ materially from those described in any such statement. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results or regarded as a representation by the company or its management that the projected results will be achieved. For those forward-looking statements, Snap-on cautions the reader that numerous important factors, such as those listed below, as well as those factors discussed in this Annual Report on Form 10-K and in Snap-on’s Form 8-K filing dated July 27, 2005, could affect the company’s actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Snap-on.

These risks and uncertainties include, without limitation, uncertainties related to estimates, statements, assumptions and projections generally, and the timing and progress with which Snap-on can attain savings from cost reduction actions, including its ability to implement reductions in workforce, achieve improvements in the company’s manufacturing footprint and greater efficiencies in its supply chain, and enhance machine maintenance, plant productivity and manufacturing line set-up and change-over practices, any or all of which could result in production inefficiencies, higher cost and lost revenues. These risks also include uncertainties related to Snap-on’s capability to implement future strategies with respect to its existing businesses, refine its brand and franchise strategies, retain and attract franchisees, further enhance service and value to franchisees and thereby enhance their sales and profitability, introduce successful new products, as well as its ability to withstand disruption arising from natural disasters, planned facility closures or other labor interruptions, litigation challenges and external negative factors including significant changes in the current competitive environment, inflation, interest rates and other monetary and market fluctuations; and the impact of legal proceedings, energy and raw material supply and pricing (including steel and gasoline), the amount, rate and growth of Snap-on’s general and administrative expenses (e.g. health care and/or pension costs), and terrorist disruptions on business. Snap-on disclaims any responsibility to update any forward-looking statement provided in this document.

In addition, investors should be aware that generally accepted accounting principles prescribe when a company should reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results, therefore, may appear to be volatile in certain accounting periods.

Item 1: Business

Snap-on was incorporated under the laws of the state of Wisconsin in 1920 and reincorporated under the laws of the state of Delaware in 1930. Snap-on is a leading global innovator, manufacturer and marketer of high-quality tool, diagnostic, service and equipment solutions for professional tool and equipment users under various brands and trade names. Product lines include a broad range of hand and power tools, tool storage, saws and cutting tools, pruning tools, vehicle service diagnostics equipment, vehicle service equipment, including wheel service, safety testing and collision repair equipment, vehicle service information, business management systems, equipment repair services, and other tool and equipment solutions. Snap-on also derives income from various financing programs to facilitate the sales of its products. Snap-on’s customers include automotive technicians, vehicle service centers, manufacturers, industrial tool and equipment users, and those involved in commercial applications such as construction, electrical and agriculture.

Snap-on markets its products and brands through multiple distribution sales channels in more than 125 countries. Snap-on’s largest geographic markets include the United States, Australia, Canada, China, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden and the United Kingdom. The originator of the mobile dealer van tool distribution channel in the automotive repair segment, Snap-on also reaches its customers through company direct, distributor and Internet channels.

3

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 Snap-on Dealer Group; (ii) the Commercial and Industrial Group; (iii) the Diagnostics and Information Group; and (iv) Financial Services. The Snap-on Dealer Group consists of Snap-on’s business operations serving the worldwide franchised dealer van channel (“franchisees” and/or “dealers”). The Commercial and 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-franchised distribution channels. The Diagnostics and Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, 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 dealer operations. See Note 17 to the Consolidated Financial Statements for further discussion of segments.

Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings, exclusive of financing activities and income taxes. Segment revenues are defined as total revenues, including both external customer revenue and intersegment revenue. Segment operating earnings are defined as segment revenues less cost of goods sold and operating expenses, including restructuring costs. 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. Intersegment amounts are eliminated to arrive at consolidated financial results.

Snap-on realigned its business segments during the first quarter of fiscal 2005. The primary changes included the transfer of Snap-on’s technical representative (“tech rep”) support organization from the Snap-on Dealer Group to the Diagnostics and Information Group and the segregation of Snap-on’s general corporate expenses from the operating earnings of the business segments. Prior to fiscal 2005, shared services and general corporate expenses and corporate assets were allocated to the business segments based on segment revenues. Beginning in fiscal 2005, the business segments are charged only for those shared services utilized by the business segment based on an estimate of the value of services provided; general corporate expenses and corporate assets are not allocated to the business segments. Corporate assets consist principally of those assets that are centrally managed including cash and cash equivalents, short-term investments, pension assets and income taxes, as well as corporate real estate and related assets. Prior-year financial data by segment has been restated to reflect these reportable business segment realignments.

Information Available on the Company’s Website

Additional information regarding Snap-on and its products is available on the company’s website at www.snapon.com. Snap-on is not including the information contained on its website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. Snap-on’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy Statements on Form 14a, Current Reports on Form 8-K, and any amendments to those reports, are made available to the public at no charge, other than an investor’s own internet access charges, through the Investor Information section of the company’s website at www.snapon.com/investor. Snap-on makes such material available on its website as soon as reasonably practical after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Copies of any materials the company files with the SEC can also be obtained free of charge through the SEC’s website at www.sec.gov, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, or by calling the SEC’s Public Reference Room at 1-800-732-0330. In addition, the company’s (i) charters for the Audit, Corporate Governance and Nominating, and Organization and Executive Compensation committees of the Board of Directors, (ii) Corporate Governance Guidelines, and (iii) Code of Business Conduct and Ethics are available on Snap-on’s website. These documents are also available in print upon written request directed to the Corporate Secretary, 2801 80^th Street, Kenosha, Wisconsin 53143.

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Products and Services

Snap-on offers a broad line of products and complementary services that are grouped into two product categories, tools and equipment, described below. Further product line information is not presented as it is not practicable to do so. The following table shows the consolidated net sales of these product categories for the last three years:

The tools product category includes hand tools, power tools and tool storage products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets, saws and cutting tools, pruning tools, torque measuring instruments and other similar products. Power tools include pneumatic (air), cordless (battery) and corded (electric) tools such as impact wrenches, ratchets, chisels, drills, sanders, polishers and similar products. Tool storage units include tool chests, roll cabinets and other similar products. The majority of products are manufactured by Snap-on, and in completing the product line, other items are purchased from external manufacturers.

The equipment product category includes solutions for the diagnosis and service of automotive and industrial equipment. Products include engine analyzers, air conditioning service equipment, brake service equipment, fluid exchange equipment, wheel balancing and alignment equipment, transmission troubleshooting equipment, safety testing equipment, battery chargers, lifts and hoists, diagnostics equipment, and service and collision repair equipment. Also included are service and repair information products, diagnostic services, business management systems, point-of-sale systems, integrated systems for vehicle service shops, equipment repair services and purchasing facilitation services. Snap-on supports the sale of its diagnostics and vehicle service shop equipment by offering training programs for its customers, primarily focusing on the technologies and the application of specific products developed and marketed by Snap-on.

Tools and equipment are marketed under a number of brand names and trademarks, many of which are well known in the vehicle service and industrial markets served. Some of the major trade names and trademarks and the products and services with which they are associated include the following:

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Snap-on also derives income from financing its products through SOC and through Snap-on’s wholly owned finance subsidiaries. Snap-on utilizes various financing programs to facilitate the sales of its products.

Snap-on established SOC in January 1999 with Newcourt Financial USA Inc., now CIT. SOC provides financial services to Snap-on’s U.S. dealer and customer network and to Snap-on’s industrial and other customers. Beginning in 2004, Snap-on began consolidating SOC on a prospective basis as a result of the January 4, 2004, adoption of the Financial Accounting Standards Board’s Interpretation No. 46R, “Consolidation of Variable Interest Entities (an interpretation of ARB No. 51).” See Notes 2 and 7 to the Consolidated Financial Statements for further discussion of SOC.

SOC originates loans primarily in three ways. First, extended-term contracts are offered to technicians and shop owners to enable them to purchase tools and equipment on an extended-term payment plan, generally with an average term of 33 months. Second, lease financing is offered to shop owners and managers, both independent and national chains, who purchase equipment items. The duration of lease contracts is often two to five years. Third, financing options are also available to dealers to meet a number of financing needs, including van and truck leases, working capital loans, and loans to enable new dealers to fund the purchase of the franchise. The duration of these contracts can be up to 10 years. The above contracts are generally secured by the underlying tools or equipment financed and other dealer assets.

The majority of finance income is derived from the vehicle service industry in North America. Internationally, Snap-on continues to provide financing directly to its dealer and customer networks through its wholly owned finance subsidiaries.

Sales and Distribution

Snap-on markets and distributes its products and related services principally to professional tool and equipment users around the world. The two largest market sectors are the vehicle service and repair sector and the industrial sector.

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Vehicle Service and Repair Sector

The vehicle service and repair sector has three main customer groups: professional technicians who purchase tools and equipment for themselves; vehicle service and repair shop owners and managers — including independent shops, national chains and automotive dealerships — who purchase equipment for use by multiple technicians within a service or repair facility; and vehicle manufacturers.

Snap-on provides innovative tool and equipment solutions, as well as technical sales support and training, to meet technicians’ evolving needs. Snap-on’s franchised dealer van distribution system offers technicians the convenience of purchasing quality tools with minimal disruption of their work routine. Snap-on also provides owners and managers of shops, where technicians work, with tools, diagnostics equipment, repair and service information, and shop management products. Snap-on provides vehicle manufacturers with products and services including tools, consulting services and facilitation services. Snap-on’s facilitation services include product procurement, distribution and administrative support to customers for their dealership equipment programs.

Major challenges for Snap-on and the vehicle service and repair sector include the increasing rate of technological change within motor vehicles and the resulting impact on the businesses of both our suppliers and customers that is necessitated by such change. Snap-on believes it is a meaningful participant in the market sector for vehicle service and repair.

Industrial Sector

Snap-on markets its products to a wide variety of industrial customers including industrial maintenance and repair operations; manufacturing and assembly facilities; government facilities; schools; and original equipment manufacturers that require instrumentation or service tools and equipment for their products.

Major challenges in the industrial sector include a highly competitive, cost-conscious environment, and a trend toward customers making all of their tool purchases through one integrated supplier. Snap-on believes it is a meaningful participant in the market sector for industrial tools and equipment.

Distribution Channels

Snap-on serves customers primarily through three channels of distribution: the mobile dealer van channel, including the company’s tech rep organization, company direct sales and distributors. The following discussion represents Snap-on’s general approach for each channel, and is not intended to be all-inclusive.

Dealers and Tech Reps

In the United States, the majority of sales to the vehicle service and repair sector are conducted through Snap-on’s dealers and its tech rep organization. Snap-on’s dealers primarily serve vehicle service technicians and vehicle service shop owners, generally providing weekly contact at the customer’s place of business. Dealers’ sales are concentrated in hand and power tools, tool storage units and small diagnostic and shop equipment, which can easily be transported in a van and demonstrated during a brief sales call. Dealers purchase Snap-on’s products at a discount from suggested retail prices and resell them at prices established by the dealer. Although some dealers have sales areas defined by other methods, most U.S. dealers are provided a list of places of business that serves as the basis of the dealer’s sales route.

Since 1991, new U.S. dealers, and a majority of the pre-1991 U.S. dealers, have been enrolled as franchisees of Snap-on. In 2001 Snap-on began offering a trial franchise option to potential U.S. dealers that do not meet the franchise qualification requirements.  Trial franchisees typically have less upfront investment and are provided an initial base level of consigned inventory from Snap-on to assist them in gaining experience and building equity toward the future purchase of a standard franchise.  Snap-on also provides certain franchisees the opportunity to add vans to their franchise or to add a limited number of franchises. Snap-on charges nominal initial and ongoing monthly license fees. Through SOC, financing is available to franchised dealers, which includes van and truck leases, working capital loans, and loans to enable new dealers to fund the purchase of the franchise. At 2005 year end, 3,498 U.S. dealers (approximately 95%) were enrolled as franchisees, or employed by franchisees, as compared with 3,726 U.S. dealers (approximately 95%) at year-end 2004.

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Snap-on has replicated its U.S. dealer van method of distribution in certain other countries, including Australia, Canada, Germany, Japan, the Netherlands, South Africa and the United Kingdom. In many of these markets, as in the United States, purchase decisions are generally made or influenced by professional vehicle service technicians and shop owners. Snap-on markets products in certain other countries through its subsidiary, Snap-on Tools International, LLC, which sells to foreign distributors under license or contract with Snap-on. Internationally, Snap-on offers financing to its franchised dealer and customer networks through its wholly owned finance subsidiaries.

Snap-on supports its dealers with a field organization of regional offices, sales managers, service centers and distribution centers. Snap-on also provides sales and business training, and marketing and product promotion programs, as well as customer and dealer financing programs through SOC and its wholly owned international finance operations, all of which are designed to strengthen dealer sales. In the United States and Canada, the National Franchise Advisory Council and the Snap-on Tools Canadian Franchise Advisory Council, both of which are composed of dealers that are elected by dealers, assist Snap-on in identifying and implementing enhancements to the franchise program.

In the United States, dealers are supported by the tech rep sales force. Tech reps are specialists who demonstrate and sell higher-price-point diagnostics and shop equipment, as well as vehicle service shop management information systems. Tech reps work independently and with dealers to identify and generate sales leads among vehicle service shop owners and managers. Tech reps are Snap-on employees who are compensated primarily on the basis of commission; a dealer receives a brokerage fee from certain sales made by the tech reps to the dealer’s customers. Most products sold through the dealer and tech rep organization are sold under the Snap-on, Blue-Point, Sun and ShopKey brand names.

Company Direct Sales

In the United States, a significant proportion of shop equipment sales under the Sun, John Bean, Wheeltronic, White and Blackhawk brands and information products under the Mitchell1 brand are made by a direct sales force that has responsibility for national accounts. As the vehicle service and repair sector consolidates (with more business conducted by national chains, automotive dealerships and franchised service centers), the company believes these larger organizations can be serviced most effectively by sales people who can demonstrate and sell the full line of equipment and diagnostic products and services. Snap-on also sells these products and services directly to vehicle manufacturers. John Bean, White and Blackhawk brands are sold directly to end customers primarily through sales leads generated from dealers and tech reps.

Snap-on brand tools and equipment are marketed to industrial and governmental customers in the United States through both industrial sales representatives, who are employees, and independent industrial distributors. In most markets outside the United States, industrial sales are conducted through independent distributors. The sales representatives focus on industrial customers whose main purchase criteria are quality and service. At the end of 2005, Snap-on had industrial sales representatives in the United States, Australia, Canada, Japan, Mexico, Puerto Rico and some European countries, with the United States representing the majority of Snap-on’s total industrial sales.

Distributors

Sales of certain tools and equipment are made through independent vehicle service and industrial distributors who purchase the items from Snap-on and resell them to the end users. Hand tools under the Bahco, Fish and Hook (design), Belzer, Pradines and Lindstrom brands and trade names, for example, are sold through distributors in Europe, North and South America, Asia and certain other parts of the world. Wheel service and other vehicle service equipment are sold through distributors primarily under brands including Hofmann and Kansas Jack. Hand tools under the Irimo, Palmera and Acesa brands and power tools under the Sioux brand, are differentiated from those products sold through the dealer, tech rep and direct sales channels. Sun-branded equipment is marketed through distributors in South America and Asia, and through both a direct sales force and distributors in Europe.

8

E-commerce

Snap-on’s e-commerce development initiatives allow Snap-on to combine the capabilities of the Internet with Snap-on’s existing brand sales and distribution strengths to reach new and under-served customer segments. Snap-on offers current and prospective customers online, around-the-clock access to purchase Snap-on and Blue-Point products through its public Internet website at www.snapon.com. The site features an online catalog containing nearly 14,000 products, including Snap-on hand tools, power tools, tool storage units and diagnostic equipment available to consumers and professionals in the United States, the United Kingdom, Canada and Australia. At the end of 2005, Snap-on had more than 314,000 registered users, including approximately 30,000 industrial accounts. E-commerce and certain other system enhancement initiatives, which are currently under development, are designed to improve productivity and further leverage the one-on-one relationships and service Snap-on has with its current and prospective customers. Through business-to-business and business-to-consumer capabilities, Snap-on and its dealers are enhancing communications with customers on a real-time, 24-hour, 7-day a week basis.

Competition

Snap-on competes on the basis of its product quality and performance, product line breadth and depth, service, brand awareness and imagery, and technological innovation. While no single company competes with Snap-on across all of its product lines and distribution channels, various companies compete in one or more product categories and/or distribution channels.

Snap-on believes that it is a leading manufacturer and distributor of professional tools and equipment, offering the broadest line of these products to the vehicle service industry. The major competitors selling to professional technicians in the automotive service and repair sector through the mobile van channel include MAC Tools (The Stanley Works), Matco (Danaher Corporation), and Cornwell. Snap-on also competes with companies that sell tools and equipment to automotive technicians through non-mobile van distributors including department stores (such as Sears, Roebuck and Co.), home centers (such as Home Depot, Inc. and Lowes Companies, Inc.), auto supply outlets (such as AutoZone, Inc. and The Pep Boys), and tool supply warehouses (such as Stampede and ICN). Within the power tools category, Snap-on’s major competitors include Ingersoll-Rand, Black & Decker Corporation, Bosch, Makita Corporation, Chicago Pneumatic (Atlas Copco), and Milwaukee Electric (TechTronic Industries Co. Ltd.). In the industrial sector, major competitors include Armstrong (Danaher Corporation), Proto (The Stanley Works), Irwin (Newell Rubbermaid), Cooper Industries, and Westward (W.W. Grainger). The major competitors selling diagnostics and shop equipment to shop owners and managers in the vehicle service and repair sector include Corghi S.p.A., Fluke and Hennessy (Danaher Corporation), Robinair (SPX Corporation), OTC, Hunter Engineering, and Rotary Lift and Chief Automotive (Dover Corporation).

Research and Engineering

Research and engineering expenses totaled $50.0 million, $58.2 million and $57.0 million in 2005, 2004 and 2003.

Raw Materials and Purchased Product

Snap-on’s supply of raw materials and purchased components are generally and readily available from numerous suppliers. During 2004 and 2005, Snap-on experienced higher pricing related to certain grades and alloys of steel. While Snap-on believes that steel prices will continue to remain high for 2006, the company does not anticipate experiencing any significant pricing or availability issues with regards to 2006 steel purchases.

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Patents, Trademarks and Other Intellectual Property

Snap-on vigorously pursues and relies on patent protection to protect its intellectual property and its position in its markets. As of December 31, 2005, Snap-on and its subsidiaries held over 800 active and pending patents in the United States and over 1,700 active and pending patents outside of the United States. Sales relating to any single patent did not represent a material portion of Snap-on’s revenues in 2005, 2004 or 2003.

Examples of products that have features or designs that benefit from patent protection include wheel alignment systems, wheel balancers, sealed ratchets, electronic torque instruments, ratcheting screwdrivers, emissions-sensing devices, diagnostic equipment and air conditioning equipment.

Much of the technology used in the manufacture of vehicle service tools and equipment is in the public domain. Snap-on relies primarily on trade secret protection to protect proprietary processes used in manufacturing. Methods and processes are patented when appropriate. Copyright protection is also utilized when appropriate.

Trademarks used by Snap-on are of continuing importance to Snap-on in the marketplace. Trademarks have been registered in the United States and more than 100 other countries, and additional applications for trademark registrations are pending. Snap-on vigorously polices proper use of its trademarks. Snap-on’s right to manufacture and sell certain products is dependent upon licenses from others; however, these products under license do not represent a material portion of Snap-on’s sales.

Domain names have become a valuable corporate asset for companies around the world, including Snap-on. Domain names often contain a trademark or service mark or even a corporate name and are often considered intellectual property. The recognition and value of the Snap-on name, trademark, and domain name are core strengths of the company. Snap-on has undertaken an initiative to centralize the administration of all domestic and international domain names, including all registrations and renewals. Snap-on also monitors new developments in top-level domains and country-code domains in order to preserve Snap-on’s right to relevant domain names.

Snap-on is selectively and strategically licensing the Snap-on brand to carefully selected manufacturing and distribution companies, including apparel, work boots and a variety of other goods, in order to build equity and market presence for the company’s strongest brand.

Environment

Snap-on is subject to various environmental laws, ordinances, regulations, and other requirements of government authorities in the United States and other nations. At Snap-on, these environmental liabilities are managed through the Snap-on Environmental, Hygiene, and Safety Management System (“EH & SMS”), which is applied worldwide. The system is based upon continual improvement and is certified to ISO 14001:1996 and OHSAS 18001:1999, verified through Det Norske Veritas (DNV) Certification, Inc.

Snap-on believes that it complies with applicable environmental control requirements in its operations. Expenditures on environmental matters through EH & SMS have not had, and Snap-on does not for the foreseeable future expect them to have, a material effect upon Snap-on’s capital expenditures, earnings or competitive position.

Employees

At the end of January 2006, Snap-on employed approximately 11,400 people compared to approximately 11,600 people at the end of January 2005. The year-over-year reduction primarily reflects the impact of restructuring-related and management realignment actions at various Snap-on facilities.

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Approximately 3,200 employees, or 28% of Snap-on’s worldwide workforce, are represented by unions and/or covered under collective bargaining agreements. Of these, approximately 1,240 are covered under various European national union agreements that are renewed on an annual basis. Approximately 610 employees are covered under agreements expiring in 2006, including approximately 280 covered under various European national union agreements. In recent years, Snap-on has not experienced any significant work slow-downs, stoppages or other labor disruptions.

The number of covered union employees whose contracts expire within the next five years is approximately 610 in 2006; 1,220 in 2007; 1,040 in 2008; 270 in 2009; and zero in 2010.

There can be no assurance that future contracts with Snap-on’s unions will be renegotiated upon terms acceptable to Snap-on.

Working Capital

As most of Snap-on’s business is not seasonal and its inventory needs are relatively constant, no unusual working capital needs arise during the year. Snap-on does not have a significant backlog of orders at December 31, 2005.

Snap-on’s financial condition and use of working capital are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Neither Snap-on nor any of its segments, except Financial Services, depend on any single customer, small group of customers or government for any material part of its revenues. As a result of SOC’s relationship with CIT, Snap-on’s Financial Services business segment depends on CIT for more than 10% of its revenues.

Item 1A: Risk Factors

In evaluating the company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect the company’s business, operating results and/or financial condition, as well as adversely affect the value of an investment in the company’s common stock. In addition to the following disclosures, please refer to the other information contained in this report, including the consolidated financial statements and the related notes.

The success of Snap-on’s mobile van tool distribution business depends on the success of its franchisees.

Approximately 42% of our 2005 net revenues were generated by the Snap-on Dealer Group, which consists of Snap-on’s business operations serving the worldwide franchised dealer van channel. Except in limited circumstances, each of our mobile tool vans is operated by a franchisee pursuant to a franchise agreement. Snap-on’s success is dependent on its relationships with franchisees, individually and collectively, as they are the primary sales and service link between the company and vehicle service and repair technicians, who are an important class of end users for Snap-on’s products and services. If our franchisees are not successful, or if we do not maintain an effective relationship with our franchisees, the delivery of products, the collection of receivables and/or our relationship with end users could be adversely affected and thereby negatively impact our financial results.

In addition, if we are unable to maintain effective relationships with franchisees, the company or the franchisees may choose to terminate the relationship, which may result in (i) open routes in which end-use customers are not provided reliable service; (ii) litigation resulting from termination; and/or (iii) reduced collections or increased write-offs of franchisee receivables owed to Snap-on. As Snap-on has nearly 5,000 franchisees worldwide and most of these franchise relationships are governed by contract, it is not uncommon for litigation to result from the termination of these relationships.

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The steps taken to restructure operations, rationalize operating footprint, lower operating expenses, and achieve greater efficiencies in the supply chain could disrupt business.

In 2006, we expect to take additional steps to drive further efficiencies and reduce costs, some of which could be disruptive to our business. These steps include strategic actions to increase the sustainable success, sales and profitability for Snap-on and its operating segments. These actions, collectively across our operating groups, are focused on the following:

Specific initiatives in each of these areas are underway. Snap-on believes that by executing on these focus areas, along with a continued commitment to new innovative products and rapid continuous improvement to drive lower costs, the company and its franchisees will realize stronger growth and profitability. Failure to succeed in the implementation of any or all of these actions could result in our being unable to achieve our financial goals and could be disruptive to the business.

In addition, reductions to headcount and other cost cutting measures may result in the loss of technical expertise that could adversely affect our research and development efforts and ability to meet product development schedules. Efforts to reduce components of expense could result in the recording of charges for inventory and technology-related write-offs, workforce reduction costs or other charges relating to the consolidation of facilities. If we were to incur a substantial charge to further these efforts, our earnings (or loss) per share would be adversely affected in such period. If we are unable to effectively manage our cost reduction and restructuring efforts, our business, results of operations and financial condition could be harmed.

Information technology infrastructure is critical to supporting business objectives.

We depend heavily on information technology infrastructure to achieve our business objectives. If a problem occurs that impairs this infrastructure, the resulting disruption could impede our ability to record or process orders, manufacture and ship in a timely manner, or otherwise carry on business in the normal course. Any such events could cause us to lose customers or revenue and could require us to incur significant expense to remediate.

In association with initiatives to better integrate business units, rationalize operating footprint and improve responsiveness to franchisees and customers, Snap-on is replacing and enhancing its existing global Enterprise Resource Planning (“ERP”) management information system. The integration, implementation and deployment of new information technology processes and a common information infrastructure is expected to cover a period of several years. We could experience disruptions in our business as we implement the system enhancements, including the possibility that the new system may not perform as expected, which could have an adverse effect on our business.

The recognition of impairment charges on goodwill would adversely impact future financial position and results of operations.  

We are required to perform impairment tests on our goodwill balance annually or at any time when events occur, which could impact the value of our business segments. Our determination of whether impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes could require a provision for impairment in a future period that could substantially affect our reported earnings and reduce our consolidated net worth and shareholders’ equity.

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Business interruptions for franchisees could adversely impact operating results.

Franchisees have historically experienced business interruptions due to adverse weather conditions or other extraordinary events, such as hurricanes in the southern United States and wild fires in California. To the extent our franchisees experience future similar events, our operating results may be adversely impacted.

Exposure to credit risks of customers and resellers may make it difficult to collect receivables and could adversely affect operating results and financial condition.

Industry and economic conditions have the potential to weaken the financial position of some of our customers. If circumstances surrounding our customers’ financial capabilities were to deteriorate, such write-downs or write-offs would negatively affect our operating results for the period in which they occur and, if large, could have a material adverse effect on our operating results and financial condition.

Failure to maintain effective distribution of products and services could adversely impact revenue, gross margin and profitability.

We use a variety of distribution methods to sell our products and services. Successfully managing the interaction of our distribution efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.

Risks associated with the disruption of manufacturing operations could adversely affect profitability or competitive position.

We manufacture a significant portion of the products we sell. Any prolonged disruption in the operations of our existing manufacturing facilities, whether due to technical or labor difficulties, lack of raw material or component availability, destruction of or damage to any facility (including natural disasters, use and storage of hazardous materials or other events), or other reasons, could have a material adverse effect on our business, financial condition and results of operations.

The ability to provide financing alternatives to end-user customers and franchisees could adversely impact operating results.

An integral component of Snap-on’s business and profitability is its ability to provide financing alternatives to end-user customers and franchisees. Domestic financing operations are managed through a joint venture with CIT. Historically, CIT has been the exclusive purchaser of the credit and installment financing arranged by SOC. Deterioration of the relationship between the joint venture partners, or if the joint venture should be unexpectedly dissolved, could have an adverse impact on Snap-on’s results of operations and ability to provide financing to end-user customers and franchisees in the United States. In addition, adverse fluctuations in interest rates and/or the ability to provide competitive financing programs to end-user customers and franchisees could negatively affect the level of credit originations and the relationships with franchisees and end-user customers, all of which could have an adverse impact on Snap-on’s revenue and profitability. Further, because of the company’s reliance on the franchised dealer network to generate credit originations, a decline in the number of dealers and/or the amount of end-user customers being serviced by dealers could have an adverse impact on the volume of credit originations and Snap-on’s results of operations.

The global tool and equipment industry is competitive.

We face strong competition in all of our market segments. Price competition in our various industries is intense and pricing pressures from competitors and customers are increasing. In general, as a manufacturer and marketer of premium products and services, the expectations of Snap-on’s customers and its franchisees are high and increasing. Any inability to maintain customer satisfaction could diminish Snap-on’s premium image and its reputation with a resulting lessening of its ability to command premium pricing. We expect that the level of competition will remain high in the future, which could limit our ability to maintain or increase market share or profitability.

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The inability to continue to introduce new products that respond to customer needs and achieve market acceptance could result in lower revenues and reduced profitability.

Sales from new products represent a significant portion of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete effectively unless we continue to enhance existing products or introduce new products to the marketplace in a timely manner. Product improvements and new product introductions require significant financial and other resources including significant planning, design, development, and testing at the technological, product, and manufacturing process levels. Our competitors’ new products may beat our products to market, be more effective with more features, be less expensive than our products, and/or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.

Raw material and energy price fluctuations and shortages (including steel and various fuel sources) could adversely affect the ability to obtain needed manufacturing materials and could adversely affect results of operations.

The principal raw material used in the manufacture of our products is steel, which we purchase in competitive, price-sensitive markets. To meet Snap-on’s high quality standards, our steel needs range from specialized alloys, which are available only from a limited group of approved suppliers, to commodity types of alloys. These raw materials have historically exhibited price and demand cyclicality. Some of these materials have been, and in the future may be, in short supply. As some steel alloys require specialized manufacturing procedures, we could experience inventory shortages if we were required to use an alternative manufacturer on short notice. Additionally, unexpected price increases could result in higher prices to our customers or an erosion of the margins on our products.

We believe our ability to sell our products is also dependent on the number of vehicles on the road, the number of miles driven and the general aging of vehicles. These factors affect the frequency, type and amount of service and repair performed on vehicles by technicians, and therefore affect the demand for the number of technicians, the prosperity of the technicians and, subsequently, the demand they have for our tools, other products and services, and the value they place on those products and services. To the extent that gasoline prices increase, consumers may turn to other, non-gasoline based, methods of transportation, including more frequent use of public transportation. A decrease in the use of gasoline consuming vehicles may lead to fewer repairs and less demand for our products.

Foreign operations are subject to currency exchange and political risks that could adversely affect results of operations.

Approximately 43% of our revenues in 2005 were generated outside of the United States. Future growth rates and success of our business depends in large part on continued growth in our non-U.S. operations, including growth in emerging markets. Numerous risks and uncertainties affect our non-U.S. operations. These risks and uncertainties include political, economic and social instability, including acts of war, civil disturbance or acts of terrorism, local labor conditions, changes in government policies and regulations, including imposition or increases in withholding and other taxes on remittances and other payments by international subsidiaries, and enforcement of contract and intellectual property rights. We are also affected by changes in foreign currency exchange rates, inflation rates and interest rates. Additionally, cash generated in non-U.S. jurisdictions may be difficult to transfer to the United States in a tax-efficient manner.

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Failure to adequately protect intellectual property could adversely affect business.

Intellectual property rights are an important and integral component of our business. We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing agreements and third-party nondisclosure and assignment agreements. Adverse determinations in a judicial or administrative proceeding could prevent us from manufacturing and selling our products or prevent us from stopping others from manufacturing and selling competing products. Failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition.

Compliance with new regulatory and accounting requirements could adversely impact future financial position and results of operations.

Compliance with future regulatory and accounting requirements, including changes related to the accounting for employee stock option issuances as compensation expense, will have an adverse impact on our operating results. Changes as a result of proposed legislation to reform the funding and reporting of pension plan benefits, as well as changes in market conditions that impact the assumptions used to measure pension liabilities under these plans, could adversely affect our operating results, financial position and cash flows.

As a result of compliance with the Sarbanes-Oxley Act of 2002, as well as changes to listing standards adopted by the New York Stock Exchange, and the attestation and accounting changes required by the SEC, we are required to implement additional internal controls, improve our existing internal controls, and comprehensively document and test our internal controls. In recent years we have experienced higher costs from additional outside accounting, legal and advisory services to comply with these requirements. Should Snap-on experience a significant deterioration in its internal control environment at a financially significant Snap-on facility or business, the impact of such could adversely affect our financial position and results of operations.

The inability to successfully defend claims from taxing authorities could adversely affect operating results and financial position.

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those taxing jurisdictions. Due to the subjectivity of tax laws between those jurisdictions, as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.

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Failure to attract and retain qualified personnel could lead to a loss of revenue or profitability.

Snap-on’s success depends, in part, on the efforts and abilities of its senior management team and other key employees. Their skills, experience and industry contacts significantly benefit our operations and administration. The failure to attract and retain members of our senior management team and other key employees could have a negative effect on our operating results.

Risks associated with acquisition activities could have an adverse impact on results of operations and financial position.

Acquisitions involve risks and uncertainties that can include:

Future acquisitions could cause us to incur additional debt, earnings dilution, contingent liabilities, increased interest expense, and amortization expenses related to intangible assets. Impairment losses on goodwill and intangible assets with an indefinite life, or restructuring charges, could also occur as a result of acquisitions.

Item 1B: Unresolved Staff Comments

None.

Item 2: Properties

Snap-on maintains leased and owned manufacturing, warehouse, distribution and office facilities throughout the world. Snap-on believes that its facilities currently in use are suitable and have adequate capacity to meet its present and foreseeable future demand. Snap-on’s facilities in the United States occupy approximately 3.8 million square feet, of which 70% is owned, including its corporate and general office facility located in Kenosha, Wisconsin. Snap-on’s facilities outside the United States also occupy approximately 3.8 million square feet, of which approximately 66% is owned. Certain Snap-on facilities are leased through operating lease agreements. See Note 16 to the Consolidated Financial Statements for further discussion of operating leases. Snap-on management continually monitors the company’s capacity needs and makes adjustments as dictated by market and other conditions.

The company phased out production at its Mt. Carmel, Illinois, and Kenosha, Wisconsin, manufacturing facilities during March 2004. The Mt. Carmel facility, the company’s former corporate office located in Pleasant Prairie, Wisconsin, and several former sales offices and branch facilities are currently for sale.

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The following table provides information about each of Snap-on’s principal manufacturing locations and distribution centers (exceeding 50,000 square feet) as of December 31, 2005:

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Item 3: Legal Proceedings

On July 23, 2004, Snap-on reached an agreement with the U.S. Department of Justice to resolve the government audit, previously discussed in the company’s 2004 Annual Report on Form 10-K, relating to two contracts with the U.S. General Services Administration (“GSA”). Snap-on agreed to settle the claims over the interpretation and application of the price reduction and billing provisions of these two contracts for sales from March 1996 through the July 23, 2004, settlement date for $10.0 million. Snap-on remitted the $10.0 million cash settlement to the U.S. Department of Justice on August 5, 2004.

On February 8, 2005, the GSA requested information from Snap-on to evaluate possible administrative action against the company. On May 24, 2005, Snap-on and the GSA discussed Snap-on’s pricing and contract compliance practices. On August 5, 2005, the GSA notified the company that it would take no administrative action against Snap-on in connection with the Federal Supply Schedule contracts referred to above. The company considers the matter closed.

Snap-on is also involved in various legal matters that are being litigated and/or settled in the ordinary course of business. In certain matters, former dealers, purportedly on behalf of current and former franchised dealers, are seeking adjudication of certain claims as a class within an arbitration proceeding. As an initial step, certain claimants have successfully asserted in arbitration the right to further proceedings to determine whether class certification in arbitration would be appropriate. Snap-on will continue to vigorously assert defenses in these matters, including its belief that class certification is not appropriate. Snap-on has taken steps in court to maintain its right to challenge adverse results of the arbitral proceedings. Depending upon future developments and circumstances in these matters, Snap-on will continue to pursue all available strategies from dispositive class motions to settlement. It is not possible to predict the outcome of these legal matters due, in part, to the uncertainty inherent in legal proceedings, including the absence of precedents and clear procedures regarding class proceedings in arbitration.

Snap-on held over 2,500 active or pending patents as of year-end 2005, and Snap-on vigorously prosecutes its claims and defends its patents in the ordinary course of business.

Item 4: Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year ended December 31, 2005.

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PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

At December 31, 2005, Snap-on had 61,162,393 shares of common stock outstanding. This consists of 57,958,085 shares considered outstanding for purposes of computing earnings per share and an additional 3,204,308 shares held in the Grantor Stock Trust, which are considered outstanding for voting purposes but not for purposes of computing earnings per share.

Snap-on’s stock is listed on the New York Stock Exchange under the ticker symbol “SNA.” As of February 15, 2006, there were 9,290 registered holders of Snap-on common stock.

Snap-on’s common stock high and low prices, as of the close of business, for the last two fiscal years by quarter were as follows:

Snap-on has paid consecutive quarterly cash dividends, without interruption or reduction, since 1939. The company has declared a quarterly dividend of $0.25 per share in each of the last three years. Cash dividends paid in 2005, 2004 and 2003 totaled $57.8 million, $57.7 million and $58.2 million. On February 1, 2006, Snap-on announced that its Board of Directors approved a $0.02 per share, or 8%, increase in the quarterly dividend to $0.27 per share. Snap-on’s Board of Directors monitors and evaluates the company’s dividend practice quarterly and the Board may elect to increase, decrease or not pay a dividend on Snap-on common stock based upon the company’s financial condition, results of operations, cash requirements and future prospects of Snap-on and other factors deemed relevant by the Board.

See Note 14 to the Consolidated Financial Statements for further discussion on securities authorized for issuance under equity compensation plans.

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The following chart discloses information regarding the shares of Snap-on’s common stock repurchased by the company during the fourth quarter of fiscal 2005, all of which were purchased pursuant to Board of Directors’ authorizations that the company has publicly announced. Snap-on has undertaken stock repurchases from time to time to offset dilution created by shares issued for employee and dealer stock purchase plans, stock options, and other corporate purposes, as well as to repurchase shares when the company believes market conditions are favorable. The repurchase of Snap-on common stock is at the company’s discretion, subject to prevailing financial and market conditions.

During 2005, the company repurchased 912,100 shares of common stock.

See Note 18 to the Consolidated Financial Statements for the additional Quarterly Financial Information required by Item 5.

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Item 6: Selected Financial Data

The selected financial data presented below has been derived from, and should be read in conjunction with, the respective historical consolidated financial statements of the company, including the notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Beginning in 2004, in conjunction with the consolidation of SOC, financial services revenue consists of SOC’s sales of originated contracts and service fee income, as well as installment contract revenue and dealer loan receivable revenue derived from SOC and Snap-on’s wholly owned international finance operations. As Snap-on consolidated SOC on a prospective basis, previously issued financial statements have not been restated. See Notes 2 and 7 to the Consolidated Financial Statements for further discussion of the consolidation of SOC.

2002 results include a $2.8 million pretax gain ($2.8 million after tax or $0.05 per diluted share) for the cumulative effect of a change in accounting principle for goodwill. Snap-on ceased amortizing goodwill and certain other intangible assets in 2002 in accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Pretax goodwill amortization totaled $13.9 million and $14.5 million in 2001 and 2000.

2001 results include a $4.1 million pretax loss ($2.5 million after tax or $0.04 per diluted share) for the cumulative effect of a change in accounting principle for derivatives.

2000 results include a $41.3 million pretax gain ($25.4 million after tax or $0.43 per diluted share) for the cumulative effect of a change in accounting principle for pensions.

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

Management Overview

In November 2004, Mr. Jack D. Michaels was elected Chairman, President and Chief Executive Officer of Snap-on, after having previously served as a member of Snap-on’s Board of Directors since 1998. Shortly thereafter, Snap-on announced near-term priorities to improve operating efficiencies, respond to customer needs and market changes more quickly, address performance issues in its commercial and industrial businesses, and generally accelerate the pace of change towards achieving long-term profitable growth.

During 2005, measurable progress in each of these areas was realized. Significant improvement was made in “first-time fill rates” — an important element of manufacturing effectiveness and in tracking service to customers and franchisees. As of year-end 2005, fill rates in the Snap-on Dealer Group improved 19%. Prior-year fill rates had been adversely impacted by the disruption caused from the closure of two U.S. hand tool plants in 2004.

Initiatives to improve organizational alignment and working capital, reduce complexity and lower costs were launched early in 2005. These efforts, coupled with the introduction of Rapid Continuous Improvement (“RCI”), resulted in a 120 basis-point increase in operating earnings margin for the year, largely from the improvement achieved in the Commercial and Industrial Group and a 3.6% increase in sales per associate year over year, despite the lower sales volume in 2005. Operating earnings margin as a percent of revenue increased to 7.1% in 2005, as compared to 5.9% in 2004, despite a slight decline in total revenue from prior-year levels. Additionally, RCI is now becoming a part of the Snap-on culture and is helping ensure that progress continues towards further improving manufacturing efficiencies and reducing costs.

While this progress is encouraging, the company believes more must be done to improve Snap-on’s operating performance. Our strategic priorities and plans for 2006 continue to build on the improvement initiatives already underway in the Commercial and Industrial and the Diagnostics and Information Groups, while expanded efforts are being launched to strengthen the operating and financial performance of the Snap-on Dealer Group. These priorities and plans are aimed at enabling us to continue the progress made in achieving our long-term goals of profitably growing sales, further lowering costs, and maintaining strong cash flow.

Significant progress has been made in improving the operating performance of the Commercial and Industrial Group. Snap-on rationalized brands and the Group’s operating footprint, moved toward lower-cost sourcing and manufacturing, and created an integrated pan-European marketing presence. Investments have also been made to support advanced technology products, such as Snap-on’s next-generation tire and wheel service equipment introduced in the last two years, and to establish an operating presence in emerging growth markets such as China, India and Eastern Europe. As a result, Snap-on is seeing improved levels of customer service, market penetration and profitability.

While year-over-year segment revenue grew slightly (from $1.11 billion in 2004 to $1.13 billion in 2005), operating earnings grew to $69.6 million from $23.5 million in 2004. Snap-on’s 2006 plans for the Commercial and Industrial Group builds on this success and on the following strategic priorities:

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In the Diagnostics and Information Group, significant accomplishments have been made during the past three years as a result of our strategic focus on creating an integrated “instrumentation with information” business.

For 2005, the Diagnostics and Information Group’s segment revenue declined to $432.7 million from $487.0 million in 2004, reflecting the comparison against the successful global launch of new, Snap-on brand diagnostics products in the prior year, as well as the impact of lower Original Equipment Manufacturer (“OEM”) facilitation sales year over year. Notwithstanding the lower sales, operating margin improved to 10.8% in 2005 as compared to 9.7% in the prior year.

Strategic priorities for the Diagnostics and Information Group in 2006 will continue to emphasize process improvements and new products, such as the recent launch of the new Mitchell1™ customer service programs. Snap-on also expects to leverage its market-leading capabilities to capitalize on the growing need for products and services related to advanced diagnostics, vehicle interface and data-stream communications.

In the Snap-on Dealer Group, total revenue declined to $994.5 million in 2005 from $1.0 billion in the prior year, largely due to a decrease in the average number of U.S. franchise dealer vans in operation compared with the prior year. Despite the year-over-year revenue decline, operating earnings were $82.2 million in 2005 compared with $80.4 million in 2004.

During 2005, considerable effort was made in the Snap-on Dealer Group to evaluate and analyze marketplace data, the existing franchise business and its growth potential. These efforts reaffirmed the growth opportunities available to Snap-on, as well as the competitive strengths of the company – namely, the Snap-on brand, the company’s mobile van tool distribution system, which is the preferred distribution system for the automotive service industry, and the substantial breadth and experience of Snap-on’s franchisees.

To fully capitalize on these strengths, the Snap-on Dealer Group also concluded that more investment would enhance the company’s responsiveness to its franchisees and customers, and identify better ways to assist franchisees in strengthening their businesses. Accordingly, Snap-on’s 2006 strategic priorities to increase sales and profitability for the Snap-on Dealer Group are focused on the following:

Specific initiatives in each of these areas are underway. Snap-on believes that by executing on these focus areas, along with a continued commitment to new innovative products and RCI to drive lower costs, the company and its franchisees will realize stronger growth and profitability.

In 2005, Snap-on also continued its emphasis on improving cash flow. Cash on hand at the end of 2005 increased to $170.4 million from $150.0 million at year-end 2004. In 2005, net cash provided by operating activities increased to $221.1 million from $146.8 million in 2004. The company used cash flow to, in part, pay dividends totaling $57.8 million and to repurchase 912,100 shares of Snap-on common stock for $32.1 million. Snap-on also retired $100 million of 6.625%, 10-year notes with available cash during the fourth quarter of 2005 upon their maturity, and invested $40.1 million in capital expenditures to largely improve manufacturing efficiency and flexibility.

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Over the last several years, the company has also been focused on improving cash flow and asset utilization by making more effective use of its investment in certain working capital items. In 2005, Snap-on made considerable progress in its efforts to further reduce inventory levels and days sales outstanding from the improvements attained in 2004. As of year-end 2005, inventory decreased $58.7 million from prior year, including $19.2 million from currency translation, and days sales outstanding improved to 74 days from 81 days at year-end 2004.

Results of Operations

Fiscal 2005 vs. Fiscal 2004

Highlights of Snap-on’s results of operations for the fiscal years ended December 31, 2005 (fiscal 2005), and January 1, 2005 (fiscal 2004), are as follows:

Total revenue in 2005 decreased $45.0 million, or 1.9%, from prior-year levels due to lower financial services revenue of $24.5 million and lower net sales of $20.5 million. The $20.5 million decrease in net sales includes $33.1 million of lower sales partially offset by $12.6 million of favorable currency translation. The $33.1 million net sales decline principally reflects the impact of lower sales in the company’s North American franchise operations along with lower sales in the OEM facilitation and worldwide equipment businesses, partially offset by increased sales of tools for industrial and commercial applications, including growth in emerging markets, and higher international dealer sales.

Gross profit (defined as net sales less cost of goods sold) was $1,019.9 million, or 44.2% of net sales, in 2005, as compared to $1,009.3 million, or 43.3% in 2004. The $10.6 million, or 90 basis points (100 basis points equals 1.0 percent), improvement in year-over-year gross profit primarily reflects benefits from higher selling prices and lower costs, including benefits from efficiency and productivity initiatives of $15.4 million, higher “last-in, first-out” (“LIFO”) inventory benefits of $5.6 million, $3.2 million of favorable currency translation, and $2.5 million of lower pension, postretirement and insurance expenses due, in part, to favorable demographic changes in the company’s U.S. hourly pension plans, including a decline in the number of participants. These year-over-year improvements in gross profit were partially offset by the impact of the lower sales volume, higher production costs in U.S. manufacturing facilities to improve order-fill rates, and $22.3 million of higher steel costs. Restructuring costs included in “Cost of goods sold” on the accompanying Consolidated Statements of Earnings totaled $3.0 million in 2005, as compared to $16.0 million in 2004.

Operating expenses in 2005 decreased $39.6 million, or 100 basis points as a percentage of total revenue, from prior-year levels. The decline in year-over-year operating expenses primarily reflects benefits of $41.4 million from efficiency and cost reduction initiatives, $12.7 million of lower bad debt expense and dealer termination costs, as well as the absence, in 2005, of both the $3.6 million charge for the U.S. General Services Administration (“GSA”) settlement and the $3.3 million of severance costs related to the November 2004 resignation of the company’s former chairman, president and chief executive officer (“former officer”). These decreases in year-over-year operating expenses were partially offset by $6.9 million of higher pension, postretirement and insurance expenses, primarily due to demographic and actuarial assumption changes in the company’s U.S. salaried pension plans, $5.0 million of higher freight costs, largely due to fuel surcharges and more frequent shipments to dealers, $4.0 million of unfavorable currency translation, and $3.0 million of costs to terminate a supplier relationship. Restructuring costs included in “Operating expenses” on the accompanying Consolidated Statements of Earnings totaled $16.3 million in 2005, as compared to $5.7 million in 2004.

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Interest expense of $21.7 million in 2005 was lower than the $23.0 million incurred in 2004 primarily due to benefits from lower average debt levels, including the fourth-quarter 2005 repayment of $100 million of unsecured 6.625% notes on October 3, 2005, partially offset by the impact of higher year-over-year interest rates.

Other income (expense) – net was income of $1.7 million in 2005, as compared to income of $1.1 million in 2004. This line item includes the impact of all non-operating items such as interest income, minority interest, hedging and currency exchange rate transaction gains and losses, and other miscellaneous non-operating items. Benefits from higher year-over-year interest income and foreign exchange gains in 2005, as compared with foreign exchange losses in 2004, were partially offset by an increase in minority interest expense. Minority interest expense was $3.6 million in 2005, as compared to $2.0 million in 2004.

Snap-on’s effective tax rate of 37.2% for 2005 included $3.3 million of additional U.S. income tax expense related to the repatriation of accumulated foreign earnings under the American Jobs Creation Act of 2004 (the “AJCA”). Under the provisions of the AJCA, Snap-on repatriated approximately $93 million of qualifying dividends during the second half of 2005. Snap-on’s effective tax rate of 32.1% in 2004 benefited from the conclusion of prior-year tax matters. See Note 9 to the Consolidated Financial Statements for further discussion of income taxes.

Exit or Disposal Activities

For a discussion of Snap-on’s exit and disposal activities, see Note 8 to the Consolidated Financial Statements.

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 Snap-on Dealer Group; (ii) the Commercial and Industrial Group; (iii) the Diagnostics and Information Group; and (iv) Financial Services. The Snap-on Dealer Group consists of Snap-on’s business operations serving the worldwide franchised dealer van channel. The Commercial and 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-franchised distribution channels. The Diagnostics and Information Group consists of the business operations providing diagnostics equipment, vehicle service information, business management systems, 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 dealer operations. See Note 7 to the Consolidated Financial Statements for further discussion of SOC.

Snap-on evaluates the performance of its operating segments based on segment revenues and operating earnings, exclusive of financing activities and income taxes. Segment revenues are defined as total revenues, including both external customer revenue and intersegment revenue. Segment operating earnings are defined as segment revenues less cost of goods sold and operating expenses, including restructuring costs. 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. Intersegment amounts are eliminated to arrive at consolidated financial results.

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Due to changes in Snap-on’s management organization structure, Snap-on realigned its business segments during the first quarter of fiscal 2005. The primary changes included the transfer of Snap-on’s technical representative (“tech rep”) support organization from the Snap-on Dealer Group to the Diagnostics and Information Group and the segregation of Snap-on’s general corporate expenses from the operating earnings of the business segments. Prior to fiscal 2005, shared services and general corporate expenses and corporate assets were allocated to the business segments based on segment revenues. Beginning in fiscal 2005, the business segments are charged only for those shared services utilized by the business segment based on an estimate of the value of services provided; general corporate expenses and corporate assets are not allocated to the business segments. Corporate assets consist principally of those assets that are centrally managed including cash and cash equivalents, short-term investments, pension assets and income taxes, as well as corporate real estate and related assets. Prior-year financial data by segment has been restated to reflect these reportable business segment realignments.

Snap-on Dealer Group

Total segment revenue in 2005 decreased $26.1 million, or 2.6%, from prior-year levels. The year-over-year decrease reflects $30.8 million of lower sales, primarily due to a lower average number of U.S. dealer vans in operation in 2005, partially offset by higher sales in international markets and $4.7 million of favorable currency translation. The number of U.S. dealer vans in operation at December 31, 2005, was down 5.8% from year-end 2004 levels.

Segment gross profit in 2005 decreased $1.6 million, but increased 100 basis points as a percentage of total segment revenue, from prior-year levels. The year-over-year decrease reflects the impact of the lower sales volume, higher production costs in U.S. manufacturing facilities to improve order-fill rates and $9.8 million of higher steel costs. These declines in gross profit were partially offset by benefits from higher selling prices, an improved mix of higher-margin diagnostics products, and lower depreciation, largely due to the absence of depreciation related to two U.S. hand-tool facility closures in 2004. Gross profit in 2005 also benefited from $5.6 million of higher year-over-year LIFO benefits, $8.5 million in lower restructuring costs, $2.5 million of favorable currency translation and $2.2 million of lower pension, postretirement and insurance costs. Operating expenses for the Snap-on Dealer Group decreased $3.4 million year over year, but increased 60 basis points as a percentage of total segment revenue. The year-over-year decrease primarily includes benefits from efficiency and cost reduction initiatives of $9.1 million, lower bad debt expense and dealer termination costs of $4.4 million, and the operating expense impact from lower sales. These decreases in operating expenses were partially offset by $4.8 million in higher restructuring costs related to 2005 severance actions, $3.0 million of costs incurred in the first quarter of 2005 to terminate a supplier relationship, $4.3 million of higher freight costs and $1.9 million of unfavorable currency translation. As a result of these factors, segment operating earnings in 2005 increased $1.8 million, or 40 basis points as a percentage of total segment revenue, over prior-year levels.

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Commercial and Industrial Group

Total segment revenue in 2005 increased $19.0 million, or 1.7%, over prior-year levels. The year-over-year increase includes $11.1 million from higher sales and $7.9 million of favorable currency translation. The $11.1 million year-over-year sales increase primarily reflects higher sales and pricing of tools for industrial and commercial applications, including significant growth in emerging markets, and higher sales as a result of the launch of new power tool products. These year-over-year increases in sales were partially offset by lower equipment sales due primarily to a continued soft European market, the impact from certain discontinued products, and a decline in equipment servicing revenues.

Segment gross profit in 2005 increased $19.5 million, or 110 basis points as a percentage of total segment revenue, over prior-year levels. Benefits from higher sales and pricing, as well as lower costs, including benefits from efficiency and productivity initiatives of $12.5 million and lower year-over-year restructuring costs of $3.9 million, were partially offset by $12.5 million of higher steel costs. Operating expenses for the Commercial and Industrial Group decreased $26.6 million or 300 basis points as a percentage of total segment revenue. The improvement in year-over-year operating expenses includes benefits from efficiency and cost reduction initiatives of $20.0 million, lower bad debt expense of $7.4 million, and the absence of the $3.6 million GSA settlement charge incurred in 2004. These reductions in year-over-year operating expenses were partially offset by $2.2 million of increased freight costs, $2.1 million of unfavorable currency translation and $1.2 million of lower gains on sales of facilities. As a result of these factors, segment operating earnings in 2005 increased $46.1 million over prior-year levels.

Diagnostics and Information Group

Total segment revenue in 2005 decreased $54.3 million, or 11.1%, from prior-year levels, including $54.8 million of lower sales partially offset by $0.5 million of favorable currency translation. The $54.8 million sales decline primarily reflects the comparison against the 2004 successful launch of new, Snap-on brand diagnostics products, lower sales in the OEM facilitation business and state emission program updates that were not repeated in 2005.

Segment gross profit in 2005 decreased $7.3 million, but increased 320 basis points as a percentage of total segment revenue, from prior year. The impact of lower sales and $1.3 million of higher freight costs was partially offset by benefits from lower costs, including benefits from efficiency and productivity initiatives of $4.8 million. Operating expenses for the Diagnostics and Information Group decreased $6.9 million, but increased 210 basis points as a percentage of total segment revenue. Benefits from continuous improvement actions of $6.9 million and lower bad debt expense of $2.5 million were partially offset by $2.7 million of higher year-over-year restructuring costs. As a result, segment operating earnings in 2005 decreased $0.4 million, but increased 110 basis points as a percentage of total segment revenue, from prior-year levels.

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Financial Services

Segment revenues and operating earnings were $53.6 million and $15.7 million in 2005, down $24.5 million and $18.4 million from prior-year levels, primarily due to the impact of higher year-over-year interest rates in Snap-on’s domestic financing business, as well as an 11.4% decline in credit originations.

Corporate

Snap-on’s general corporate expenses totaled $46.4 million in 2005, up from $43.0 million in 2004. Savings realized from cost reduction initiatives, as well as the absence, in 2005, of $3.3 million of severance costs related to the resignation of a former officer, were more than offset by higher pension and postretirement costs of $8.8 million primarily due to demographic and actuarial assumption changes in the company’s U.S. salaried pension plans, higher mark-to-market adjustments and other adjustments on stock-based incentive and deferred compensation plans of $2.5 million, and higher year-over-year restructuring costs of $1.3 million. In addition, Snap-on’s North-American based Enterprise Resource Planning (“ERP”) system became fully depreciated mid-year 2004, resulting in lower depreciation expense year over year.

Fourth Quarter

Highlights of Snap-on’s results of operations for the quarters ended December 31, 2005, and January 1, 2005, are as follows:

Total revenue in the fourth quarter of 2005 decreased $36.4 million, or 6.0%, from prior-year levels due to lower net sales of $28.4 million and lower financial services revenue of $8.0 million. The $28.4 million decrease in net sales includes $14.4 million of unfavorable currency translation and $14.0 million of lower sales. The $14.0 million net sales decline principally reflects the impact of lower sales in the company’s North American dealer operations, along with lower sales in the OEM facilitation and worldwide equipment businesses and lower diagnostics products sales. These year-over-year sales declines were partially offset by higher sales of hand tools for industrial and commercial applications and growth in emerging markets. Financial services revenue in 2005 declined $8.0 million from 2004 levels, primarily reflecting the impact of higher interest rates in Snap-on’s domestic financing business, as well as the impact of lower credit originations.

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Gross profit decreased $17.5 million, or 80 basis points, from prior-year levels, primarily reflecting the impact of lower sales, higher production costs in U.S. manufacturing facilities to improve order-fill rates, $6.1 million of unfavorable currency translation and $3.9 million of higher steel costs. These declines in gross profit were partially offset by benefits from higher pricing, as well as efficiency and productivity initiatives of $4.5 million and $3.6 million of higher year-over-year LIFO benefits.

Operating expenses in the fourth quarter of 2005 decreased $31.1 million, or 280 basis points as a percentage of total revenue, from the fourth quarter of 2004. The year-over-year improvement in operating expenses primarily reflects benefits of $12.3 million from efficiency and cost reduction initiatives, $6.8 million of lower bad debt expense and dealer termination costs, $4.8 million of favorable currency translation, lower restructuring costs of $1.4 million and the absence, in 2005, of $3.3 million of severance costs related to the resignation of a former officer. These improvements in operating expenses were partially offset by higher pension, postretirement and insurance expenses of $3.1 million, higher freight costs of $1.4 million, and lower year-over-year gains on the sales of facilities of $1.1 million.

Interest expense of $4.6 million in the fourth quarter of 2005 was down slightly from the $5.6 million incurred in the fourth quarter of 2004, primarily due to the repayment of $100 million of unsecured notes on October 3, 2005, partially offset by the impact of higher year-over-year interest rates.

Other income (expense) – net was income of $3.9 million for the fourth quarter of 2005, as compared to income of $4.7 million in the comparable prior-year period, primarily due to higher minority interest expense in 2005, partially offset by favorable year-over-year foreign exchange transaction gains and other miscellaneous non-operating items.

Snap-on’s effective tax rate of 36.1% in the fourth quarter of 2005 included $0.5 million of additional U.S. income tax expense as the actual amount of foreign dividends repatriated under the AJCA during 2005 was approximately $18 million higher than earlier estimates. Snap-on’s effective tax rate for the fourth quarter of 2004 was 35.3%. See Note 9 to the Consolidated Financial Statements for further discussion of income taxes.

Snap-on Dealer Group

Total segment revenue in the fourth quarter of 2005 decreased $14.4 million, or 5.8%, from prior-year levels, including lower sales of $12.1 million and unfavorable currency translation of $2.3 million. Sales in the North American franchise businesses were down 4.9% year over year, primarily due to a lower average number of U.S. dealer vans in operation. Sales in the international franchise businesses decreased 9.5% year over year, largely due to unfavorable currency translation.

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Segment gross profit for the fourth quarter of 2005 decreased $10.0 million, or 150 basis points as a percentage of total segment revenue, from prior-year levels. The year-over-year decrease reflects the impact of the lower sales volume, higher production costs in U.S. manufacturing facilities to improve order-fill rates and $1.4 million of higher steel costs. These declines in gross profit were partially offset by benefits from higher selling prices and $3.6 million of higher year-over-year LIFO benefits. Operating expenses for the Snap-on Dealer Group decreased $7.9 million or 110 basis points as a percentage of total segment revenue. The $7.9 million decrease primarily reflects benefits of $4.4 million from efficiency and cost reduction initiatives, $1.8 million of lower bad debt expense and dealer termination costs and lower expenses from the lower sales. These decreases in operating expenses were partially offset by $1.7 million of higher freight expense, largely due to fuel surcharges and more frequent shipments to dealers. As a result of these factors, segment operating earnings in the fourth quarter of 2005 decreased $2.1 million, or 40 basis points as a percentage of total segment revenue, as compared to the fourth quarter of 2004.

Commercial and Industrial Group

Total segment revenue in the fourth quarter of 2005 decreased $11.1 million, or 3.8%, from prior-year levels, of which $10.6 million was due to unfavorable currency translation. Increased sales of hand tools for commercial and industrial applications worldwide were offset by a decline in vehicle service equipment sales.

Segment gross profit for the fourth quarter of 2005 decreased $0.9 million from prior year, but increased 110 basis points as a percentage of total segment revenue. The year-over-year decrease in segment gross profit primarily reflects $4.5 million of unfavorable currency translation, $2.5 million of higher steel costs and $1.9 million of other inflationary price increases. These declines in gross margin were partially offset by benefits of $3.6 million from product cost reduction and facilities rationalization and consolidation initiatives, higher pricing, and $0.9 million of lower year-over-year restructuring costs. Operating expenses for the Commercial and Industrial Group decreased $11.3 million or 280 basis points as a percentage of total segment revenue. The improvement in year-over-year operating expenses primarily includes $4.0 million of lower bad debt expense, $3.4 million of benefits from efficiency and productivity initiatives, $3.1 million of favorable currency translation and $1.6 million of lower restructuring costs. These improvements in year-over-year operating expenses were partially offset by $1.5 million of lower gains on sales of facilities in 2005 and by continued investment spending to support Snap-on’s growth strategy in Asia and other emerging markets. As a result of these factors, segment operating earnings in the fourth quarter of 2005 increased $10.4 million as compared to the fourth quarter of 2004.

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Diagnostics and Information Group

Total segment revenue in the fourth quarter of 2005 decreased $24.2 million, or 19.4%, from prior-year levels, including $22.6 million of lower sales and $1.6 million of unfavorable currency translation. The $22.6 million sales decline primarily reflects the comparison against the third-quarter 2004 successful launch of new, Snap-on brand diagnostics products, as well as the impact of lower OEM facilitation sales year over year.

Segment gross profit for the fourth quarter of 2005 decreased $6.6 million, but increased 320 basis points as a percentage of total segment revenue, from the same period last year, largely due to the lower sales and unfavorable currency translation of $0.8 million, partially offset by benefits from efficiency and productivity initiatives of $2.6 million. Operating expenses for the Diagnostics and Information Group decreased $6.3 million, but increased 110 basis points as a percentage of total segment revenue, primarily due to $2.9 million of lower bad debt expense, $1.7 million of benefits from efficiency and productivity initiatives and $0.8 million of favorable currency translation. As a result of these factors, segment operating earnings in the fourth quarter of 2005 decreased $0.3 million, but increased 210 basis points as a percentage of total segment revenue, as compared to the fourth quarter of 2004.

Financial Services

Segment revenues and operating earnings were $10.2 million and $2.8 million in the fourth quarter of 2005, down $8.0 million and $3.4 million from prior-year levels, primarily due to the impact of higher year-over-year interest rates in Snap-on’s domestic financing business, as well as an 11.9% decline in credit originations.

Corporate

Snap-on’s general corporate expenses totaled $14.8 million in the fourth quarter of 2005, down $1.0 million from $15.8 million in the fourth quarter of 2004. Savings realized from cost reduction initiatives, as well as the absence, in 2005, of $3.3 million of severance costs related to the resignation of a former officer, were more than offset by higher pension and postretirement costs of $3.6 million and higher year-over-year restructuring costs of $0.7 million.

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Fiscal 2004 vs. Fiscal 2003

The Financial Accounting Standards Board (“FASB”) issued interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities (an interpretation of ARB No. 51)” in December 2003, which became effective for Snap-on at the beginning of its 2004 fiscal year. FIN No. 46R provides consolidation guidance regarding the identification of variable interest entities for which control is achieved through means other than through voting rights.

Based on the company’s analysis of FIN No. 46R, the company concluded that Snap-on would consolidate SOC as of January 4, 2004, the beginning of Snap-on’s 2004 fiscal year. Snap-on previously accounted for SOC, a 50%-owned joint venture, using the equity method. As Snap-on consolidated SOC on a prospective basis, previously issued financial statements have not been restated. As a result of the consolidation of SOC in fiscal 2004, Snap-on began reporting the results of its finance operations as a new business segment, “Financial Services.” The impact of the consolidation of SOC on Snap-on’s consolidated balance sheet was not significant. See Notes 2, 7 and 17 to the Consolidated Financial Statements for further discussion of SOC and Snap-on’s business segments.

Highlights of Snap-on’s results of operations for the fiscal years ended January 1, 2005 (fiscal 2004), and January 3, 2004 (fiscal 2003), are as follows: