Note 13: 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 2012 year end, the 2011 Plan had 3,914,882 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 $32.1 million in 2012, $20.3 million in 2011 and $14.9 million in 2010. Cash received from stock purchase and option plan exercises was $46.8 million in 2012, $25.7 million in 2011 and $23.7 million in 2010. The tax benefit realized from the exercise of share-based payment arrangements was $15.4 million in 2012 and $2.0 million in both 2011 and 2010.

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 2012, 2011 and 2010, using the Black-Scholes valuation model:


	2012		2011		2010
Expected term of option (in years)		5.36		5.89		5.85
Expected volatility factor		36.93%		34.22%		33.98%
Expected dividend yield		2.72%		2.72%		2.76%
Risk-free interest rate		0.82%		2.31%		2.39%

A summary of stock option activity during 2012 is presented below:


	Shares (in thousands)		Exercise Price per Share*		Remaining Contractual Term* (in years)		Aggregate Intrinsic Value (in millions)
Outstanding at beginning of year		2,533	$	45.07
Granted		621		60.01
Exercised		(962)		42.23
Forfeited or expired		(31)		55.57

Outstanding at end of year		2,161		50.48		7.1	$	58.0

Exercisable at end of year		1,009		43.16		5.5		34.5

*	Weighted-average

The weighted-average grant date fair value of options granted was $15.46 in 2012, $15.74 in 2011 and $10.90 in 2010. The intrinsic value of options exercised was $23.0 million in 2012, $8.8 million in 2011 and $5.2 million in 2010. The fair value of stock options vested was $5.8 million in 2012 and $4.6 million in both 2011 and 2010.

As of 2012 year end there was $10.2 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 1.8 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.

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 2012, 2011 and 2010 was $60.00, $55.97 and $41.01, respectively. Vested performance share units approximated 213,000 shares as of 2012 year end and 54,208 shares as of 2011 year end; there were no vested performance share units as of 2010 year end. Performance share units of 53,990 shares were paid out in 2012; no performance share units were paid out in 2011 or 2010. 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 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; assuming continued employment, these RSUs will vest at the end of fiscal 2013. Based on the company’s 2010 performance, 169,921 RSUs granted in 2010 were earned; these RSUs vested as of fiscal 2012 year end and were paid out shortly thereafter. As a result of employee retirements, 2,706 of the RSUs earned in 2010 vested pursuant to the terms of the related award agreements and were paid out in the first quarter of 2011.

The changes to the company’s non-vested performance awards in 2012 are as follows:


	Shares (in thousands)		Fair Value Price per Share*
Non-vested performance awards at beginning of year		707	$	48.87
Granted		203		60.00
Vested		(379)		41.01
Cancellations and other		(22)		44.93

Non-vested performance awards at end of year		509		59.36

*	Weighted-average

As of 2012 year end there was approximately $14.1 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 1.6 years.

Stock Appreciation Rights (“SARs”)

The company also issues SARs to certain key non-U.S. employees. 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 and have a contractual term of ten years and vest ratably on the first, second and third anniversaries of the date of grant. 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. 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.

The fair value of 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 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 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 SARs granted during 2012, 2011 and 2010 using the Black-Scholes valuation model:


	2012		2011		2010
Expected term of SARs (in years)		4.49		4.67		5.54
Expected volatility factor		36.44%		38.45%		34.59%
Expected dividend yield		2.69%		2.72%		2.76%
Risk-free interest rate		0.72%		0.83%		2.39%

The total intrinsic value of SARs exercised was $5.4 million in 2012, $2.6 million in 2011 and $0.7 million in 2010. The total fair value of SARs vested during 2012, 2011 and 2010 was $3.5 million, $1.5 million and $2.3 million, respectively.

Changes to the company’s non-vested SARS in 2012 are as follows:


	SARs (in thousands)		Fair Value Price per Share*
Non-vested SARs at beginning of year		232	$	13.56
Granted		130		24.70
Vested		(109)		32.33
Cancellations		(15)		–

Non-vested SARs at end of year		238		24.26

*	Weighted-average

As of 2012 year end there was $5.8 million of unrecognized compensation cost related to non-vested SARs that is expected to be recognized as a charge to earnings over a weighted-average period of 1.5 years.

Restricted Stock Awards – Non-employee Directors

The company granted 17,811 and 17,964 non-performance-based RSUs to non-employee members of its Board in 2012 and 2011, respectively. The company uses the fair value at the date of grant to value RSUs granted to members of the Board. All restrictions will lapse upon the recipient’s termination of service as a director or in the event of a change in control.

Directors’ Fee Plan

Under the Directors’ 1993 Fee Plan, as amended, non-employee directors may elect up to 100% of their fees and retainer in shares of Snap-on’s common stock. Directors may elect to defer receipt of all or part of these shares. For 2012, 2011 and 2010, issuances under the Directors’ Fee Plan totaled 1,747 shares, 2,211 shares and 3,600 shares, respectively. Additionally, receipt of 9,278 shares, 2,608 shares and 4,780 shares was deferred in 2012, 2011 and 2010, respectively. As of 2012 year end, shares reserved for issuance to directors under this plan totaled 143,695 shares.

Employee Stock Purchase Plan

Employees of Snap-on are eligible to participate in an employee stock purchase plan. The employee purchase price of the common stock 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 2012, 2011 and 2010, issuances under this plan totaled 33,596 shares, 89,699 shares and 112,944 shares, respectively. As of 2012 year end, shares reserved for issuance to employees under this plan totaled 1,015,066 shares and Snap-on held employee contributions of approximately $2.3 million for the purchase of common stock by employees. Employees are able to withdraw from the plan and receive all contributions made during the plan year. Compensation expense for plan participants was $0.5 million in 2012, $1.0 million in 2011 and $1.8 million in 2010.

Franchisee Stock Purchase Plan

Franchisees are eligible to participate in a franchisee stock purchase plan. The franchisee purchase price of the common stock 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 2012, 2011 and 2010, issuances under this plan totaled 48,819 shares, 78,154 shares and 109,052 shares, respectively. As of 2012 year end, shares reserved for issuance to franchisees under this plan totaled 410,245 shares and Snap-on held franchisee contributions of approximately $2.2 million for the purchase of common stock by franchisees. Franchisees are able to withdraw from the plan and receive all contributions made during the plan year. Expense for plan participants was $0.7 million in both 2012 and 2011, and $1.6 million in 2010.