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 June 29, 2013, the 2011 Plan had 2,840,586 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 $10.0 million and $19.5 million for the respective three and six month periods ended June 29, 2013, and $7.4 million and $16.1 million for the respective three and six month periods ended June 30, 2012. Cash received from option exercises during the three and six month periods ended June 29, 2013, totaled $18.7 million and $26.1 million, respectively. Cash received from option exercises during the three and six month periods ended June 30, 2012, totaled $9.2 million and $22.5 million, respectively. The tax benefit realized from the exercise of share-based payment arrangements was $2.4 million and $10.5 million for the respective three and six month periods ended June 29, 2013, and $1.4 million and $5.0 million for the respective three and six month periods ended June 30, 2012.

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.

No stock options were granted during the three month period ended June 29, 2013. The following weighted-average assumptions were used in calculating the fair value of stock options granted during the three month period ended June 30, 2012, and the six month periods ended June 29, 2013, and June 30, 2012, using the Black-Scholes valuation model:


	Three Months Ended		Six Months Ended
	June 29, 2013	June 30, 2012	June 29, 2013	June 30, 2012
Expected term of option (in years)	N/A	5.29	4.29	5.37
Expected volatility factor	N/A	37.31%	33.81%	36.93%
Expected dividend yield	N/A	2.73%	2.67%	2.72%
Risk-free interest rate	N/A	0.78%	0.79%	0.82%

A summary of stock option activity as of and for the six month period ended June 29, 2013, is presented below:


	Shares (in thousands)		Exercise Price Per Share ⁽*⁾		Remaining Contractual Term ⁽⁾ (in years)*		Aggregate Intrinsic Value (in millions)
Outstanding at December 29, 2012		2,161	$	50.48
Granted		640		79.04
Exercised		(299)		47.28
Forfeited or expired		–		–

Outstanding at June 29, 2013		2,502		58.17		7.5	$	78.1

Exercisable at June 29, 2013		1,263		46.93		6.0		53.6

* Weighted-average

The weighted-average grant date fair value of options granted during the six month periods ended June 29, 2013, and June 30, 2012, was $17.36 and $15.46, respectively. The intrinsic value of options exercised was $6.5 million and $11.0 million during the respective three and six month periods ended June 29, 2013, and $2.0 million and $8.7 million during the respective three and six month periods ended June 30, 2012. The fair value of stock options vested was $7.8 million and $5.7 million during the respective six month periods ended June 29, 2013, and June 30, 2012.

As of June 29, 2013, there was $16.7 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.

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 six month periods ended June 29, 2013, and June 30, 2012, was $77.31 and $60.00, respectively. Performance share units of 213,459 shares and 53,990 shares were paid out during the respective six month periods ended June 29, 2013, and June 30, 2012. 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.

The changes to the company’s non-vested performance awards during the six month period ended June 29, 2013, are as follows:


	Shares (in thousands)		Fair Value Price per Share ⁽*⁾
Non-vested performance awards at December 29, 2012		509	$	59.36
Granted		172		77.31
Vested		–		–
Cancellations		–		–

Non-vested performance awards at June 29, 2013		681		63.89

* Weighted-average

As of June 29, 2013, there was $19.6 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 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.

In 2013, the company began issuing stock-settled SARs that 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. As stock-settled SARs vest, they will 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 the length of time corresponding to the expected term of the SARs.

No SARs were granted during the three month period ended June 29, 2013. The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the three month period ended June 30, 2012 and the six month periods ended June 29, 2013, and June 30, 2012, using the Black-Scholes valuation model:


	Three Months Ended				Six Months Ended
	June 29, 2013		June 30, 2012		June 29, 2013		June 30, 2012
Expected term of SARs (in years)		N/A		5.20		3.81		4.93
Expected volatility factor		N/A		37.22%		26.55%		37.57%
Expected dividend yield		N/A		2.73%		2.70%		2.73%
Risk-free interest rate		N/A		0.72%		0.66%		0.72%

The total intrinsic value of cash-settled SARs exercised was $1.6 million and $2.7 million during the three and six month periods ended June 29, 2013, respectively, and $0.7 million and $2.0 million during the three and six month periods ended June 30, 2012, respectively. The total fair value of cash-settled SARs vested during the six month periods ended June 29, 2013, and June 30, 2012, was $3.7 million and $2.4 million, respectively.

Changes to the company’s non-vested cash-settled SARs during the six month period ended June 29, 2013, are as follows:


	SARs (in thousands)		Fair Value Price per Share ⁽*⁾
Non-vested SARs at December 29, 2012		238	$	24.26
Granted		4		18.00
Vested		(113)		32.72
Cancellations		(3)		–

Non-vested SARs at June 29, 2013		126		27.47

* Weighted-average

As of June 29, 2013, there was $3.5 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 1.3 years.

The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during the six month period ended June 29, 2013, using the Black-Scholes valuation model:


	Six Months Ended June 29, 2013
Expected term of SARs (in years)		4.25
Expected volatility factor		34.09	%
Expected dividend yield		2.67	%
Risk-free interest rate		0.92	%

Changes to the company’s non-vested stock-settled SARs during the six month period ended June 29, 2013, are as follows:

SARs
(in thousands)

Exercise
Price Per
Share ⁽*⁾

Remaining
Contractual
Term ⁽*⁾
(in years)

Aggregate
Intrinsic
Value
(in millions)

Outstanding at December 29, 2012

–

Granted

119

79.04

Exercised

–

Forfeited or expired

–

Outstanding at June 29, 2013

119

79.04

9.6

1.2

Exercisable at June 29, 2013

–

* Weighted-average

The weighted-average grant date fair value of stock-settled SARs granted during the six month period ended June 29, 2013, was $17.55. As of June 29, 2013, there was $1.8 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 2.6 years.

Restricted Stock Awards – Non-employee Directors

The company awarded a total of 13,437 shares of restricted stock to non-employee directors in the first six months of 2013. All restrictions 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 reasons other than death or disability, the shares of restricted stock would be forfeited, unless otherwise determined by the Board.

Employee Stock Purchase Plan

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 six months ended June 29, 2013 and June 30, 2012, issuances under this plan totaled 93,442 shares and 33,596 shares, respectively. As of June 29, 2013, shares reserved for issuance under this plan totaled 921,624 shares and Snap-on held participant contributions of approximately $0.2 million. Participants are able to withdraw from the plan and receive all contributions made during the plan year. Compensation expense for plan participants was $1.4 million and $2.3 million for the three and six month periods ended June 29, 2013, respectively, and zero for both the three and six month periods ended June 30, 2012.

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 six months ended June 29, 2013 and June 30, 2012, issuances under this plan totaled 105,406 shares and 48,819 shares, respectively. As of June 29, 2013, shares reserved for issuance under this plan totaled 304,839 shares and Snap-on held participant contributions of approximately $0.4 million. Participants are able to withdraw from the plan and receive all contributions made during the plan year. Expense for plan participants was $1.8 million and $2.5 million for the three and six month periods ended June 29, 2013, respectively, and zero for both the three and six month periods ended June 30, 2012.