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Stock-based Compensation and Other Stock Plans | 9 Months Ended
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Oct. 01, 2022
Share-Based Payment Arrangement [Abstract] |
Stock-based Compensation and Other Stock Plans | 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 share units (“PSUs”), stock appreciation rights (“SARs”) and restricted stock awards (which may be designated as “restricted stock units” or “RSUs”). As of October 1, 2022, the 2011 Plan had 3,116,000 shares available for future grants. The company uses treasury stock to deliver shares under the 2011 Plan. Net stock-based compensation expense was $8.1 million and $25.6 million for the respective three and nine month periods ended October 1, 2022, and $9.5 million and $33.3 million for the respective three and nine month periods ended October 2, 2021. Cash received from stock purchase and option plan exercises during the respective three and nine month periods ended October 1, 2022, totaled $12.2 million and $41.4 million. Cash received from stock purchase and option plan exercises during the respective three and nine month periods ended October 2, 2021, totaled $3.6 million and $158.4 million. The tax benefit realized from both the exercise and vesting of share-based payment arrangements was $3.3 million and $7.2 million for the respective three and nine month periods ended October 1, 2022, and $2.2 million and $16.1 million for the respective three and nine month periods ended October 2, 2021. 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 expected annual dividend as a percentage of the market value of our common stock as of the date of grant. 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 nine month periods ended October 1, 2022, and October 2, 2021, using the Black-Scholes valuation model:
|  |  | Nine Months Ended
|  |  |  |  | October 1, 2022 |  | October 2, 2021
Expected term of option (in years) |  |  |  |  | 5.14 |  | 5.33
Expected volatility factor |  |  |  |  | 22.61% |  | 21.80%
Expected dividend yield |  |  |  |  | 2.68% |  | 2.59%
Risk-free interest rate |  |  |  |  | 2.00% |  | 0.67%
A summary of stock option activity as of and for the nine months ended October 1, 2022, is presented below:
| Shares (in thousands) |  | Exercise Price Per Share* |  | Remaining Contractual Term* (in years) |  | Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2022 | 2,432 |  |  | $ | 151.32 |  |  |  |  |
Granted | 289 |  |  | 211.41 |  |  |  |  |
Exercised | (232) |  |  | 122.21 |  |  |  |  |
Forfeited or expired | (16) |  |  | 183.40 |  |  |  |  |
Outstanding at October 1, 2022 | 2,473 |  |  | 160.86 |  |  | 5.6 |  | $ | 103.1 |
Exercisable at October 1, 2022 | 1,840 |  |  | 150.18 |  |  | 4.6 |  | 94.2 |
* | Weighted-average |
The weighted-average grant date fair value of options granted during the nine months ended October 1, 2022, and October 2, 2021, was $34.35 and $26.19, respectively. The intrinsic value of options exercised was $13.1 million and $23.3 million during the respective three and nine month periods ended October 1, 2022, and $8.6 million and $67.5 million during the respective three and nine month periods ended October 2, 2021. The fair value of stock options vested was $10.5 million and $12.5 million during the respective nine month periods ended October 1, 2022, and October 2, 2021. As of October 1, 2022, there was $12.6 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 1.6 years. Performance Share Units and Restricted Stock Units: PSUs 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 PSUs 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. Time-based RSUs are earned and expensed using the fair value of the award over the contractual term of three years. Vesting of the time-based RSUs is dependent upon continued employment over the three-year cliff vesting period. The fair value of PSUs and RSUs 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 awards granted during the nine months ended October 1, 2022, and October 2, 2021, was $206.58 and $184.69, respectively. PSUs related to 46,217 shares were paid out during the nine months ended October 1, 2022. There were no PSUs paid out during the nine months ended October 2, 2021. 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”). Changes to the company’s non-vested PSUs and RSUs during the nine months ended October 1, 2022, are as follows:
| Shares (in thousands) |  | Fair Value Price per Share*
Non-vested PSUs and RSUs at January 1, 2022 | 215 |  |  | $ | 180.29 |
Granted | 111 |  |  | 206.58 |
Vested | — |  |  | — |
Cancellations and other | (6) |  |  | 192.40 |
Non-vested PSUs and RSUs at October 1, 2022 | 320 |  |  | 189.21 |
* | Weighted-average |
As of October 1, 2022, there was $28.6 million of unrecognized compensation cost related to non-vested PSUs and RSUs that are expected to be recognized as a charge to earnings over a weighted-average period of 1.3 years. Stock Appreciation Rights: 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 expected annual dividend as a percentage of the market value of our common stock as of the date of grant (for stock-settled SARs) or reporting date (for cash-settled SARs). 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 months ended October 1, 2022, and October 2, 2021, using the Black-Scholes valuation model:
| Nine Months Ended
| October 1, 2022 |  | October 2, 2021
Expected term of stock-settled SARs (in years) | 4.02 |  | 3.94
Expected volatility factor | 23.09% |  | 22.50%
Expected dividend yield | 2.68% |  | 2.59%
Risk-free interest rate | 1.96% |  | 0.19%
A summary of stock-settled SARs as of and for the nine months ended October 1, 2022, 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 1, 2022 | 397 |  |  | $ | 160.09 |  |  |  |  |
Granted | 75 |  |  | 211.67 |  |  |  |  |
Exercised | (16) |  |  | 146.18 |  |  |  |  |
Forfeited or expired | (49) |  |  | 164.83 |  |  |  |  |
Outstanding at October 1, 2022 | 407 |  |  | 169.54 |  |  | 6.5 |  | $ | 13.7 |
Exercisable at October 1, 2022 | 260 |  |  | 155.68 |  |  | 5.2 |  | 11.9 |
* | Weighted-average |
The weighted-average grant date fair value of stock-settled SARs granted during the nine months ended October 1, 2022, and October 2, 2021, was $32.63 and $24.05, respectively. The intrinsic value of stock-settled SARs exercised was $0.5 million and $1.2 million during the respective three and nine month periods ended October 1, 2022, and $0.1 million and $3.1 million during the respective three and nine month periods ended October 2, 2021. The fair value of stock-settled SARs vested was $2.0 million and $2.1 million during the respective nine month periods ended October 1, 2022, and October 2, 2021. As of October 1, 2022, there was $2.8 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 1.7 years. The following weighted-average assumptions were used in calculating the fair value of cash-settled SARs granted during the nine months ended October 1, 2022, and October 2, 2021, using the Black-Scholes valuation model:
| Nine Months Ended
| October 1, 2022 |  | October 2, 2021
Expected term of cash-settled SARs (in years) | 3.37 |  | 3.34
Expected volatility factor | 23.78% |  | 22.49%
Expected dividend yield | 2.82% |  | 2.35%
Risk-free interest rate | 4.25% |  | 0.49%
The intrinsic value of cash-settled SARs exercised was zero and $0.6 million during the respective three and nine month periods ended October 1, 2022, and zero and $0.6 million during the respective three and nine month periods ended October 2, 2021. The fair value of cash-settled SARs vested was $0.1 million for both the nine month periods ended October 1, 2022, and October 2, 2021. Changes to the company’s non-vested cash-settled SARs during the nine months ended October 1, 2022, are as follows:
| Cash-settled SARs (in thousands) |  | Fair Value Price per Share*
Non-vested cash-settled SARs at January 1, 2022 | 2 |  |  | $ | 47.13 |
Granted | 1 |  |  | 31.48 |
Vested | (1) |  |  | 45.78 |
Non-vested cash-settled SARs at October 1, 2022 | 2 |  |  | 36.45 |
* | Weighted-average |
As of October 1, 2022, 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 1.7 years. Restricted Stock Awards – Non-employee Directors: The company awarded 6,525 shares and 6,858 shares of restricted stock to non-employee directors for the respective nine month periods ended October 1, 2022, and October 2, 2021. 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 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. The company records compensation expense when Snap-on’s period-end stock price is greater than the plan purchase price. For the nine month periods ended October 1, 2022, and October 2, 2021, issuances under this plan totaled 18,452 shares and 82,286 shares, respectively. As of October 1, 2022, shares reserved for issuance under this plan totaled 578,823 shares and Snap-on held participant contributions of approximately $1.6 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 compensation expense related to the plan for both the three and nine month periods ended October 1, 2022, and recognized compensation expense of zero and $9.6 million for the respective three and nine month periods ended October 2, 2021. 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. The company records mark-to-market expense when Snap-on’s period-end stock price is greater than the plan purchase price. For the nine month periods ended October 1, 2022, and October 2, 2021, issuances under this plan totaled 44,937 shares and 143,388 shares, respectively. As of October 1, 2022, shares reserved for issuance under this plan totaled 225,225 shares and Snap-on held participant contributions of approximately $3.7 million. Participants are able to withdraw from the plan at any time prior to the ending date and generally receive back all contributions made during the plan year. The company did not recognize any mark-to-market expense related to the plan for both the three and nine month periods ended October 1, 2022, and recognized mark-to-market expense of zero and $16.7 million for the respective three and nine month periods ended October 2, 2021.

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