Note 12: 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 will continue until exercised, vested, forfeited or expired. As of March 29, 2014, the 2011 Plan had 1,834,434 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 $8.6 million and $9.5 million for the three month periods ended March 29, 2014, and March 30, 2013, respectively. Cash received from option exercises during the three month periods ended March 29, 2014, and March 30, 2013, was $12.8 million and $7.4 million, respectively. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $12.0 million and $8.1 million for the three month periods ended March 29, 2014, and March 30, 2013, respectively.

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 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 three month periods ended March 29, 2014, and March 30, 2013, using the Black-Scholes valuation model:


	Three Months Ended
	March 29, 2014			March 30, 2013
Expected term of option (in years)		4.52			4.29
Expected volatility factor		26.76	%		33.81	%
Expected dividend yield		2.40	%		2.67	%
Risk-free interest rate		1.30	%		0.79	%

A summary of stock option activity as of and for the three month period ended March 29, 2014, is presented below:


	Shares (in thousands)			Exercise Price Per Share*		Remaining Contractual Term* (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at December 28, 2013		2,429		$	58.35
Granted		643			109.43
Exercised		(229	)		55.75
Forfeited or expired		(4	)		80.84

Outstanding at March 29, 2014		2,839			70.11		7.5	$	119.5

Exercisable at March 29, 2014		1,567			52.92		6.2		92.9

*	Weighted-average

The weighted-average grant date fair value of options granted during the three month periods ended March 29, 2014, and March 30, 2013, was $20.19 and $17.36, respectively. The intrinsic value of options exercised during the three month periods ended March 29, 2014, and March 30, 2013, was $12.4 million and $4.5 million, respectively. The fair value of stock options vested was $9.5 million and $7.8 million during the three month periods ended March 29, 2014, and March 30, 2013, respectively.

As of March 29, 2014, there was $22.1 million of unrecognized compensation cost related to non-vested stock option compensation arrangements that is expected to be recognized as a charge to earnings over a weighted-average period of 2.2 years.

Performance Awards

Performance awards, which are granted as performance share units 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 a certain level, the recipient may earn additional shares of stock, not to exceed 100% of the number of performance awards initially granted.

The performance share units 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. The weighted-average grant date fair value of performance awards granted during the three month periods ended March 29, 2014, and March 30, 2013, was $107.30 and $77.31, respectively. Performance share units of 146,313 shares and 213,459 shares were paid out during the three month periods ended March 29, 2014, and March 30, 2013, respectively. Earned performance share units 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 2013 performance, 84,413 RSUs granted in 2013 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2015. Based on the company’s 2012 performance, 95,047 RSUs granted in 2012 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2014. Based on the company’s 2011 performance, 159,970 RSUs granted in 2011 were earned; these RSUs vested as of fiscal 2013 year end and were paid out in the first quarter of 2014.

The changes to the company’s non-vested performance awards during the three month period ended March 29, 2014, are as follows:


	Shares (in thousands)			Fair Value Price per Share*
Non-vested performance awards at December 28, 2013		381		$	68.13
Granted		125			107.30
Vested		—			—
Cancellations and other		(2	)		58.94

Non-vested performance awards at March 29, 2014		504			77.81

*	Weighted-average

As of March 29, 2014, there was $22.8 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 2.1 years.

Stock Appreciation Rights (“SARs”)

The company also issues cash-settled and stock-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.

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 value over the grant price is paid in cash and not in common stock.

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.

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 fair value of stock-settled SARs is estimated on the date of grant using the Black-Scholes valuation model. The company uses historical data regarding SARs exercise 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 reporting date (for cash-settled SARs) or grant date (for stock-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 cash-settled SARs granted during the three month periods ended March 29, 2014, and March 30, 2013, using the Black-Scholes valuation model:


	Three Months Ended
	March 29,			March 30,
	2014			2013
Expected term of cash-settled SARs (in years)		4.35			4.11
Expected volatility factor		25.19	%		31.11	%
Expected dividend yield		2.40	%		2.67	%
Risk-free interest rate		1.74	%		0.77	%

The total intrinsic value of cash-settled SARs exercised during the three month periods ended March 29, 2014, and March 30, 2013, was $3.3 million and $1.1 million, respectively. The total fair value of cash-settled SARs vested during the three month periods ended March 29, 2014, and March 30, 2013, was $3.8 million and $3.0 million, respectively.

Changes to the company’s non-vested cash-settled SARs during the three month period ended March 29, 2014, are as follows:


	Cash-settled SARs (in thousands)			Fair Value Price per Share*
Non-vested SARs at December 28, 2013		126		$	43.72
Granted		4			20.83
Vested		(79	)		48.16
Cancellations		(2	)		—

Non-vested SARs at March 29, 2014		49			44.36

*	Weighted-average

As of March 29, 2014, there was $2.2 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 1.1 years.

The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during the three month periods ended March 29, 2014, and March 30, 2013, using the Black-Scholes valuation model:


	Three Months Ended
	March 29,			March 30,
	2014			2013
Expected term of stock-settled SARs (in years)		4.50			4.25
Expected volatility factor		25.66	%		34.09	%
Expected dividend yield		2.40	%		2.67	%
Risk-free interest rate		1.51	%		0.92	%

Changes to the company’s stock-settled SARs during the three month period ended March 29, 2014, 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 28, 2013		122		$	79.29
Granted		114			109.44
Exercised		(2	)		79.04
Forfeited or expired		(8	)		79.04

Outstanding at March 29, 2014		226			94.57		9.4	$	4.0

Exercisable at March 29, 2014		31			79.04		8.9		1.0

*	Weighted-average

The weighted-average grant date fair value of stock-settled SARs granted during the three month periods ended March 29, 2014, and March 30, 2013, was $19.58 and $17.55, respectively. The intrinsic value of stock-settled SARs exercised during the three month periods ended March 29, 2014, and March 30, 2013, was $0.1 million and zero, respectively. The fair value of stock-settled SARs vested was $0.6 million and zero during the three month periods ended March 29, 2014, and March 30, 2013, respectively.

As of March 29, 2014, there was $3.5 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 2.5 years.

Restricted Stock Awards – Non-employee Directors

The company awarded 9,896 shares and 13,437 shares of restricted stock to non-employee directors in the first quarters of 2014 and 2013, respectively. The fair value of the restricted stock awards is expensed over the one year vesting period based on the fair value on the date of grant. All restrictions for the restricted stock will 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.

Employee Stock Purchase Plan

Substantially all Snap-on employees in the United States and Canada are eligible to participate in an employee stock purchase plan. The purchase price of the company’s common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For both the three month periods ended March 29, 2014 and March 30, 2013, there were no issuances under this plan. As of March 29, 2014, there were 921,624 shares reserved for issuance under this plan and Snap-on held participant contributions of approximately $4.7 million. Participants are able to withdraw from the plan and receive back all contributions made during the plan year. Compensation expense for plan participants was $0.5 million and $1.0 million in for the three month periods ended March 29, 2014 and March 30, 2013, respectively.

Franchisee Stock Purchase Plan

All franchisees in the United States and Canada are eligible to participate in a franchisee stock purchase plan. The purchase price of the company’s common stock to participants is the lesser of the mean of the high and low price of the stock on the beginning date (May 15) or ending date (the following May 14) of each plan year. For both the three month periods ended March 29, 2014 and March 30, 2013, there were no issuances under this plan. As of March 29, 2014, there were 304,839 shares reserved for issuance under this plan and Snap-on held participant contributions of approximately $3.9 million. Participants are able to withdraw from the plan and receive back all contributions made during the plan year. Expense for plan participants was $0.3 million and $0.6 million in for the three month periods ended March 29, 2014 and March 30, 2013, respectively.