Note 12: Stock-based Compensation and Other Stock Plans

The 2011 Incentive Stock and Awards Plan, as amended and restated as of April 30, 2015 (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 October 1, 2016, the 2011 Plan had 4,100,874 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 $7.3 million and $21.5 million for the respective three and nine month periods ended October 1, 2016, and $6.7 million and $29.8 million for the respective three and nine month periods ended October 3, 2015. Cash received from stock purchase and option plan exercises during the three and nine month periods ended October 1, 2016, totaled $4.0 million and $32.4 million, respectively. Cash received from stock purchase and option plan exercises during the three and nine month periods ended October 3, 2015, totaled $3.2 million and $39.7 million, respectively. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $1.8 million and $14.9 million for the respective three and nine month periods ended October 1, 2016, and $1.1 million and $20.4 million for the respective three and nine month periods ended October 3, 2015.

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 month period ended October 1, 2016, and the three and nine month periods ended October 3, 2015, using the Black-Scholes valuation model; there were no stock options granted during the three month period ended October 1, 2016:


	Three Months Ended		Nine Months Ended
	October 1, 2016	October 3, 2015	October 1, 2016	October 3, 2015
Expected term of option (in years)	N/A	3.64	5.05	4.76
Expected volatility factor	N/A	19.20%	22.17%	24.13%
Expected dividend yield	N/A	1.75%	1.77%	2.04%
Risk-free interest rate	N/A	0.99%	1.04%	1.38%

A summary of stock option activity as of and for the nine month period ended October 1, 2016, is presented below:


	Shares (in thousands)		Exercise Price Per Share*		Remaining Contractual Term* (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at January 2, 2016		2,811	$	88.62
Granted		644		138.04
Exercised		(283)		75.81
Forfeited or expired		(27)		133.02

Outstanding at October 1, 2016		3,145		99.50		6.7	$	165.0

Exercisable at October 1, 2016		1,910		76.09		5.4		144.9

* Weighted-average

The weighted-average grant date fair value of options granted during the nine month periods ended October 1, 2016, and October 3, 2015, was $22.99 and $25.64, respectively. The intrinsic value of options exercised was $4.8 million and $22.2 million during the respective three and nine month periods ended October 1, 2016, and $5.5 million and $35.7 million during the respective three and nine month periods ended October 3, 2015. The fair value of stock options vested was $12.7 million and $9.9 million during the respective nine month periods ended October 1, 2016, and October 3, 2015.

As of October 1, 2016, there was $20.1 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 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 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 month periods ended October 1, 2016, and October 3, 2015, was $138.80 and $139.05, respectively. Performance share units related to 94,186 shares and 130,764 shares were paid out during the respective nine month periods ended October 1, 2016, and October 3, 2015. 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 2015 performance, 64,327 RSUs granted in 2015 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2017. Based on the company’s 2014 performance, 78,585 RSUs granted in 2014 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2016. Based on the company’s 2013 performance, 81,453 RSUs granted in 2013 were earned; these RSUs vested as of fiscal 2015 year end and were paid out shortly thereafter.

Changes to the company’s non-vested performance awards during the nine month period ended October 1, 2016, are as follows:


	Shares (in thousands)		Fair Value Price per Share*
Non-vested performance awards at January 2, 2016		265	$	124.16
Granted		100		138.80
Vested		–		–
Cancellations and other		(17)		112.60

Non-vested performance awards at October 1, 2016		348		128.96

* Weighted-average

As of October 1, 2016, there was $17.7 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 1.7 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 month period ended October 1, 2016, and the three and nine month periods ended October 3, 2015, using the Black-Scholes valuation model; there were no stock-settled SARs granted during the three month period ended October 1, 2016:


	Three Months Ended		Nine Months Ended
	October 1, 2016	October 3, 2015	October 1, 2016	October 3, 2015
Expected term of stock-settled SARs (in years)	N/A	4.01	4.03	4.72
Expected volatility factor	N/A	23.06%	20.09%	23.66%
Expected dividend yield	N/A	1.75%	1.66%	2.04%
Risk-free interest rate	N/A	1.52%	1.11%	1.50%

Changes to the company’s stock-settled SARs during the nine month period ended October 1, 2016, are as follows:


	Stock-settled SARs (in thousands)		Exercise Price Per Share*		Remaining Contractual Term* (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at January 2, 2016		269	$	113.70
Granted		101		138.05
Exercised		(12)		88.43
Forfeited or expired		(21)		103.18

Outstanding at October 1, 2016		337		122.59		8.1	$	9.9

Exercisable at October 1, 2016		139		104.17		7.2		6.6

* Weighted-average

The weighted-average grant date fair value of stock-settled SARs granted during the nine month periods ended October 1, 2016, and October 3, 2015, was $19.47 and $25.37, respectively. The intrinsic value of stock-settled SARs exercised was $0.1 million and $0.8 million during the respective three and nine month periods ended October 1, 2016, and $0.2 million and $0.9 million during the respective three and nine month periods ended October 3, 2015. The fair value of stock-settled SARs vested during the nine month periods ended October 1, 2016, and October 3, 2015, was $2.1 million and $1.4 million, respectively.

As of October 1, 2016, there was $2.9 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 month periods ended October 1, 2016, and October 3, 2015, using the Black-Scholes valuation model; no cash-settled SARs were granted during the three month periods ended October 1, 2016, or October 3, 2015:


	Nine Months Ended
	October 1, 2016	October 3, 2015
Expected term of cash-settled SARs (in years)	3.43	3.37
Expected volatility factor	19.03%	19.34%
Expected dividend yield	1.58%	1.76%
Risk-free interest rate	0.88%	0.85%

The intrinsic value of cash-settled SARs exercised was $0.1 million and $0.9 million during the respective three and nine month periods ended October 1, 2016, and $0.4 million and $10.4 million during the respective three and nine month periods ended October 3, 2015. The fair value of cash-settled SARs vested during the nine month periods ended October 1, 2016, and October 3, 2015, was $0.2 million and $3.8 million, respectively.

Changes to the company’s non-vested cash-settled SARs during the nine month period ended October 1, 2016, are as follows:


	Cash-settled SARs (in thousands)		Fair Value Price per Share*
Non-vested cash-settled SARs at January 2, 2016		7	$	51.71
Granted		4		24.87
Vested		(4)		44.28

Non-vested cash-settled SARs at October 1, 2016		7		25.93

* Weighted-average

As of October 1, 2016, there was $0.2 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 1.7 years.

Restricted Stock Awards – Non-employee Directors

The company awarded 7,145 shares and 8,640 shares of restricted stock to non-employee directors in the first nine months of 2016 and 2015, 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.

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 the nine months ended October 1, 2016, and October 3, 2015, issuances under this plan totaled 27,156 shares and 57,324 shares, respectively. As of October 1, 2016, shares reserved for issuance under this plan totaled 780,563 shares and Snap-on held participant contributions of approximately $1.4 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. No compensation costs were recognized for plan participants in the third quarters of 2016 and 2015. The company recognized compensation costs for plan participants of a $0.1 million benefit and $2.1 million of expense for the respective nine month periods ended October 1, 2016, and October 3, 2015.

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 the nine months ended October 1, 2016, and October 3, 2015, issuances under this plan totaled 42,867 shares and 74,001 shares, respectively. As of October 1, 2016, shares reserved for issuance under this plan totaled 613,469 shares and Snap-on held participant contributions of approximately $2.6 million. Participants are able to withdraw from the plan at any time prior to the ending date and receive back all contributions made during the plan year. The company did not recognize any mark-to-market costs for plan participants in the third quarters of 2016 and 2015. The company recognized mark-to-market costs for plan participants of a $0.4 million benefit and $2.2 million of expense for the respective nine month periods ended October 1, 2016, and October 3, 2015.