Stock-based Compensation and Other Stock Plans

The 2011 Incentive Stock and Awards Plan (the “2011 Plan”) provides for the grant of stock options, performance awards, stock appreciation rights (“SARs”) and restricted stock awards (which may be designated as “restricted stock units” or “RSUs”). No further grants are being made under its predecessor, the 2001 Incentive Stock and Awards Plan (the “2001 Plan”), although outstanding awards under the 2001 Plan continue in accordance with their terms. As of September 29, 2018, the 2011 Plan had 2,638,001 shares available for future grants. The company uses treasury stock to deliver shares under both the 2001 and 2011 Plans.

Net stock-based compensation expense was $8.0 million and $22.6 million for the respective three and nine months ended September 29, 2018, and $7.0 million and $21.4 million for the respective three and nine months ended September 30, 2017. Cash received from stock purchase and option plan exercises during the respective three and nine months ended September 29, 2018, totaled $25.8 million and $54.1 million. Cash received from stock purchase and option plan exercises during the respective three and nine months ended September 30, 2017, totaled $1.6 million and $36.2 million. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $4.5 million and $12.1 million for the respective three and nine months ended September 29, 2018, and $0.8 million and $12.9 million for the respective three and nine months ended September 30, 2017.

Stock Options

Stock options are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant and have a contractual term of ten years. Stock option grants vest ratably on the first, second and third anniversaries of the date of grant.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding stock option exercise and forfeiture behaviors for different participating groups to estimate the period of time that options granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the option. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve on the grant date for the expected term of the option.

The following weighted-average assumptions were used in calculating the fair value of stock options granted during the nine months ended September 29, 2018, and September 30, 2017, using the Black-Scholes valuation model; there were no stock options granted during the three months ended September 29, 2018, or September 30, 2017:



	Nine Months Ended
	September 29, 2018	September 30, 2017
Expected term of option (in years)	5.35	5.15
Expected volatility factor	20.08%	22.01%
Expected dividend yield	1.68%	1.63%
Risk-free interest rate	2.71%	1.78%

A summary of stock option activity as of and for the nine months ended September 29, 2018, is presented below:



	Shares (in thousands)		Exercise Price Per Share*		Remaining Contractual Term* (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 30, 2017	3,198		$	115.30
Granted	515		161.18
Exercised	(496	)	88.30
Forfeited or expired	(34	)	159.17
Outstanding at September 29, 2018	3,183		126.45		6.4	$	181.9
Exercisable at September 29, 2018	2,089		108.93		5.3	156.0




*	Weighted-average

The weighted-average grant date fair value of options granted during the nine months ended September 29, 2018, and September 30, 2017, was $30.21 and $31.13, respectively. The intrinsic value of options exercised was $18.1 million and $39.3 million during the respective three and nine months ended September 29, 2018, and $2.0 million and $23.4 million during the respective three and nine months ended September 30, 2017. The fair value of stock options vested was $16.0 million and $14.0 million during the respective nine months ended September 29, 2018, and September 30, 2017.

As of September 29, 2018, there was $22.1 million of unrecognized compensation cost related to non-vested stock options that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.

Performance Awards

Performance awards, which are granted as performance share units (“PSUs”) and performance-based RSUs, are earned and expensed using the fair value of the award over a contractual term of three years based on the company’s performance. Vesting of the performance awards is dependent upon performance relative to pre-defined goals for revenue growth and return on net assets for the applicable performance period. For performance achieved above specified levels, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance awards initially granted.

The PSUs have a three-year performance period based on the results of the consolidated financial metrics of the company. The performance-based RSUs have a one-year performance period based on the results of the consolidated financial metrics of the company followed by a two-year cliff vesting schedule, assuming continued employment.

The fair value of performance awards is calculated using the market value of a share of Snap-on’s common stock on the date of grant and assumed forfeitures based on recent historical experience; in recent years, forfeitures have not been significant. The weighted-average grant date fair value of performance awards granted during the nine months ended September 29, 2018, and September 30, 2017, was $161.18 and $168.70, respectively. PSUs related to 50,182 shares and 60,980 shares were paid out during the respective nine months ended September 29, 2018, and September 30, 2017. Earned PSUs are generally paid out following the conclusion of the applicable performance period upon approval by the Organization and Executive Compensation Committee of the company’s Board of Directors (the “Board”).

Based on the company’s 2017 performance, 13,648 RSUs granted in 2017 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2019. Based on the company’s 2016 performance, 45,502 RSUs granted in 2016 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2018. Based on the company’s 2015 performance, 64,327 RSUs granted in 2015 were earned; these RSUs vested as of fiscal 2017 year end and were paid out shortly thereafter.

Changes to the company’s non-vested performance awards during the nine months ended September 29, 2018, are as follows:



	Shares (in thousands)		Fair Value Price per Share*
Non-vested performance awards at December 30, 2017	132		$	149.93
Granted	87		161.18
Vested	—		—
Cancellations and other	(15	)	160.21
Non-vested performance awards at September 29, 2018	204		153.99




*	Weighted-average

As of September 29, 2018, there was $13.5 million of unrecognized compensation cost related to non-vested performance awards that is expected to be recognized as a charge to earnings over a weighted-average period of 1.9 years.

Stock Appreciation Rights (“SARs”)

The company also issues stock-settled and cash-settled SARs to certain key non-U.S. employees. SARs have a contractual term of ten years and vest ratably on the first, second and third anniversaries of the date of grant. SARs are granted with an exercise price equal to the market value of a share of Snap-on’s common stock on the date of grant.

Stock-settled SARs are accounted for as equity instruments and provide for the issuance of Snap-on common stock equal to the amount by which the company’s stock has appreciated over the exercise price. Stock-settled SARs have an effect on dilutive shares and shares outstanding as any appreciation of Snap-on’s common stock value over the exercise price will be settled in shares of common stock. Cash-settled SARs provide for the cash payment of the excess of the fair market value of Snap-on’s common stock price on the date of exercise over the grant price. Cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of Snap-on’s common stock over the grant price is paid in cash and not in common stock.

The fair value of stock-settled SARs is estimated on the date of grant using the Black-Scholes valuation model. The fair value of cash-settled SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on Snap-on’s period-end stock price. The company uses historical data regarding SARs exercise and forfeiture behaviors for different participating groups to estimate the expected term of the SARs granted based on the period of time that similar instruments granted are expected to be outstanding. Expected volatility is based on the historical volatility of the company’s stock for the length of time corresponding to the expected term of the SARs. The expected dividend yield is based on the company’s historical dividend payments. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the grant date (for stock-settled SARs) or reporting date (for cash-settled SARs) for the length of time corresponding to the expected term of the SARs.

The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during the nine months ended September 29, 2018, and September 30, 2017, using the Black-Scholes valuation model; there were no stock-settled SARs granted during the three months ended September 29, 2018, or September 30, 2017:



	Nine Months Ended
	September 29, 2018	September 30, 2017
Expected term of stock-settled SARs (in years)	3.58	3.99
Expected volatility factor	20.08%	19.39%
Expected dividend yield	1.63%	1.46%
Risk-free interest rate	2.40%	1.55%

Changes to the company’s stock-settled SARs during the nine months ended September 29, 2018, are as follows:



	Stock-settled SARs (in thousands)		Exercise Price Per Share*		Remaining Contractual Term* (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at December 30, 2017	360		$	138.63
Granted	89		161.18
Exercised	(24	)	105.55
Forfeited or expired	(53	)	129.40
Outstanding at September 29, 2018	372		147.41		7.6	$	13.5
Exercisable at September 29, 2018	191		135.42		6.6	9.2




*	Weighted-average

The weighted-average grant date fair value of stock-settled SARs granted during the nine months ended September 29, 2018, and September 30, 2017, was $24.71 and $24.13, respectively. The intrinsic value of stock-settled SARs exercised was $1.2 million and $1.8 million during the respective three and nine months ended September 29, 2018, and zero and $0.5 million during the respective three and nine months ended September 30, 2017. The fair value of stock-settled SARs vested was $2.2 million and $2.1 million during the respective nine months ended September 29, 2018, and September 30, 2017.

As of September 29, 2018, there was $3.0 million of unrecognized compensation cost related to non-vested stock-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 1.7 years.

The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the nine months ended September 29, 2018, and September 30, 2017, using the Black-Scholes valuation model; no cash-settled SARs were granted during the three months ended September 29, 2018, or September 30, 2017:



	Nine Months Ended
	September 29, 2018	September 30, 2017
Expected term of cash-settled SARs (in years)	3.01	3.38
Expected volatility factor	21.22%	19.58%
Expected dividend yield	1.70%	1.57%
Risk-free interest rate	2.88%	1.62%

The intrinsic value of cash-settled SARs exercised was $1.1 million and $3.2 million during the respective three and nine months ended September 29, 2018, and zero and $0.8 million during the respective three and nine months ended September 30, 2017. The fair value of cash-settled SARs vested was $0.1 million during both the nine months ended September 29, 2018, and September 30, 2017.

Changes to the company’s non-vested cash-settled SARs during the nine months ended September 29, 2018, are as follows:



	Cash-settled SARs (in thousands)		Fair Value Price per Share*
Non-vested cash-settled SARs at December 30, 2017	5		$	35.41
Granted	1		39.15
Vested	(3	)	42.69
Non-vested cash-settled SARs at September 29, 2018	3		40.19




*	Weighted-average

As of September 29, 2018, there was $0.1 million of unrecognized compensation cost related to non-vested cash-settled SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 1.4 years.

Restricted Stock Awards – Non-employee Directors

The company awarded 6,975 shares and 6,966 shares of restricted stock to non-employee directors in the first nine months of 2018 and 2017, respectively. The fair value of the restricted stock awards is expensed over a one-year vesting period based on the fair value on the date of grant. All restrictions for the restricted stock generally lapse upon the earlier of the first anniversary of the grant date, the recipient’s death or disability or in the event of a change in control, as defined in the 2011 Plan. If termination of the recipient’s service occurs prior to the first anniversary of the grant date for any reason other than death or disability, the shares of restricted stock would be forfeited, unless otherwise determined by the Board.