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 in accordance with their terms. As of 2018 year end, the 2011 Plan had 2,654,112 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 $27.2 million in 2018, $30.3 million in 2017 and $31.0 million in 2016. Cash received from stock purchase and option plan exercises was $55.5 million in 2018, $46.2 million in 2017 and $41.8 million in 2016. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $14.8 million in 2018, $20.9 million in 2017 and $24.8 million in 2016.

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 2018, 2017 and 2016, using the Black-Scholes valuation model:



	2018		2017		2016
Expected term of option (in years)	5.35		5.15		5.05
Expected volatility factor	20.08	%	22.01	%	22.17	%
Expected dividend yield	1.68	%	1.63	%	1.77	%
Risk-free interest rate	2.71	%	1.78	%	1.04	%

A summary of stock option activity during 2018 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	3,198		$	115.30
Granted	515		161.18
Exercised	(537	)	84.00
Forfeited or expired	(46	)	159.33
Outstanding at end of year	3,130		127.57		6.3	$	75.3
Exercisable at end of year	2,047		110.48		5.1	74.1



* Weighted-average

The weighted-average grant date fair value of options granted was $30.21 in 2018, $31.13 in 2017 and $22.99 in 2016. The intrinsic value of options exercised was $43.8 million in 2018, $33.3 million in 2017 and $35.2 million in 2016. The fair value of stock options vested was $16.0 million in 2018, $14.0 million in 2017 and $12.7 million in 2016.

As of 2018 year end, there was $18.0 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 1.4 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 2018, 2017 and 2016 was $161.18, $168.70 and $138.83, respectively. Vested PSUs totaled 32,154 shares as of 2018 year end, 50,316 shares as of 2017 year end and 61,149 shares as of 2016 year end. PSUs related to 50,182 shares, 60,980 shares and 94,186 shares were paid out in 2018, 2017 and 2016, respectively. Earned PSUs vest and 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 2018 performance, 33,170 RSUs granted in 2018 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2020. 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; these RSUs vested as of fiscal 2018 year end and were paid out shortly thereafter.

Changes to the company’s non-vested performance awards in 2018 are as follows:



	Shares (in thousands)		Fair Value Price per Share*
Non-vested performance awards at beginning of year	132		$	149.93
Granted	87		161.18
Vested	(74	)	138.11
Cancellations and other	(25	)	156.63
Non-vested performance awards at end of year	120		164.00



* Weighted-average

As of 2018 year end, there was $10.6 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 1.8 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 2018, 2017 and 2016, using the Black-Scholes valuation model:



	2018		2017		2016
Expected term of stock-settled SARs (in years)	3.58		3.99		4.03
Expected volatility factor	20.08	%	19.39	%	20.09	%
Expected dividend yield	1.63	%	1.46	%	1.66	%
Risk-free interest rate	2.40	%	1.55	%	1.11	%

Changes to the company’s stock-settled SARs in 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 beginning of year	360	$	138.63
Granted	89	161.18
Exercised	(24)	105.55
Forfeited or expired	(53)	129.40
Outstanding at end of year	372	147.41		7.4	$	2.6
Exercisable at end of year	191	135.42		6.3	2.4



* Weighted-average

The weighted-average grant date fair value of stock-settled SARs granted was $24.71 in 2018, $24.13 in 2017 and $19.47 in 2016. The intrinsic value of stock-settled SARs exercised was $1.8 million in 2018, $0.9 million in 2017 and $1.9 million in 2016. The fair value of stock-settled SARs vested was $2.2 million in 2018 and $2.1 million in both 2017 and 2016.

As of 2018 year end there was $2.5 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 1.4 years.

The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during 2018, 2017 and 2016, using the Black-Scholes valuation model:



	2018		2017		2016
Expected term of cash-settled SARs (in years)	2.76		3.09		3.11
Expected volatility factor	21.96	%	19.93	%	19.53	%
Expected dividend yield	1.75	%	1.59	%	1.56	%
Risk-free interest rate	2.50	%	1.98	%	1.47	%

The intrinsic value of cash-settled SARs exercised was $3.4 million in 2018, $1.6 million in 2017 and $3.3 million in 2016. The fair value of cash-settled SARs vested during 2018 was zero and $0.2 million during both 2017 and 2016.

Changes to the company’s non-vested cash-settled SARs in 2018 are as follows:



	Cash-settled SARs (in thousands)	Fair Value Price per Share*
Non-vested cash-settled SARs at beginning of year	5	$	35.41
Granted	1	14.98
Vested	(3)	15.61
Non-vested cash-settled SARs at end of year	3	14.89



* Weighted-average

As of 2018 year end 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 1.1 years.

Restricted Stock Awards – Non-employee Directors

The company awarded 6,975 shares, 6,966 shares and 7,145 shares of restricted stock to non-employee directors in 2018, 2017 and 2016, 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.

Directors’ Fee Plan

Under the Directors’ 1993 Fee Plan, as amended, non-employee directors may elect to receive 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 2018, 2017 and 2016, issuances under the Directors’ Fee Plan totaled 1,727 shares, 1,800 shares and 2,579 shares, respectively, of which 1,315 shares, 1,312 shares and 2,019 shares, respectively, were deferred. As of 2018 year end, shares reserved for issuance to directors under this plan totaled 176,724 shares.

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 2018, 2017 and 2016, issuances under this plan totaled 22,794 shares, 26,963 shares and 27,156 shares, respectively. As of 2018 year end, shares reserved for issuance under this plan totaled 730,806 shares and Snap-on held participant contributions of approximately $2.8 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. Compensation expense for plan participants was $0.3 million in 2018, $0.1 million in 2017 and zero in 2016.

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 2018, 2017 and 2016, issuances under this plan totaled 46,704 shares, 47,314 shares and 42,867 shares, respectively. As of 2018 year end, shares reserved for issuance under this plan totaled 519,451 shares and Snap-on held participant contributions of approximately $4.9 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 recognized mark-to-market expense of $0.6 million in 2018, and $0.2 million in 2017, and a mark-to-market benefit of $0.2 million in 2016.