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 2013 year end, the 2011 Plan had 2,851,663 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 $38.5 million in 2013, $32.1 million in 2012 and $20.3 million in 2011. Cash received from stock purchase and option plan exercises was $29.2 million in 2013, $46.8 million in 2012 and $25.7 million in 2011. The tax benefit realized from the exercise of share-based payment arrangements was $18.3 million in 2013, $15.4 million in 2012 and $2.0 million in 2011.
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 2013, 2012 and 2011, using the Black-Scholes valuation model:
| 2013 | 2012 | 2011 | ||||||||||
|
Expected term of option (in years) |
4.29 | 5.36 | 5.89 | |||||||||
|
Expected volatility factor |
33.79% | 36.93% | 34.22% | |||||||||
|
Expected dividend yield |
2.67% | 2.72% | 2.72% | |||||||||
|
Risk-free interest rate |
0.79% | 0.82% | 2.31% | |||||||||
A summary of stock option activity during 2013 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 |
2,161 | $ | 50.48 | |||||||||||
|
Granted |
641 | 79.07 | ||||||||||||
|
Exercised |
(360) | 47.65 | ||||||||||||
|
Forfeited or expired |
(13) | 69.24 | ||||||||||||
|
|
|
|||||||||||||
|
Outstanding at end of year |
2,429 | 58.35 | 7.0 | $ | 121.2 | |||||||||
|
|
|
|||||||||||||
|
Exercisable at end of year |
1,206 | 46.81 | 5.5 | 74.1 | ||||||||||
| * |
Weighted-average |
The weighted-average grant date fair value of options granted was $17.36 in 2013, $15.46 in 2012 and $15.74 in 2011. The intrinsic value of options exercised was $14.1 million in 2013, $23.0 million in 2012 and $8.8 million in 2011. The fair value of stock options vested was $7.9 million in 2013, $5.8 million in 2012 and $4.6 million in 2011.
As of 2013 year end there was $11.7 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 1.5 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 2013, 2012 and 2011 was $77.33, $60.00 and $55.97, respectively. Vested performance share units approximated 148,000 shares as of 2013 year end, 213,000 shares as of 2012 year end and 54,208 shares as of 2011 year end. Performance share units of 213,459 shares were paid out in 2013 and 53,990 shares were paid out in 2012; no performance share units were paid out in 2011. 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 2013 performance, 84,413 RSUs granted in 2013 were earned; assuming continued employment, these RSUs will vest at the end of fiscal 2015. 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; these RSUs vested as of fiscal 2013 year end and were paid out shortly thereafter. As a result of employee retirements, a total of 1,614 of the RSUs earned in 2012 and 2011 vested pursuant to the terms of the related award agreements and the underlying shares were paid out in the third quarter of 2013.
The changes to the company’s non-vested performance awards in 2013 are as follows:
| Shares (in thousands) |
Fair Value Price per Share* |
|||||||||
|
Non-vested performance awards at beginning of year |
509 | $ | 59.36 | |||||||
|
Granted |
180 | 77.33 | ||||||||
|
Vested |
(306) | 58.94 | ||||||||
|
Cancellations |
(2) | 69.23 | ||||||||
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|
|
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Non-vested performance awards at end of year |
381 | 68.13 | ||||||||
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|
|
|||||||||
| * |
Weighted-average |
As of 2013 year end there was approximately $12.9 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 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. 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.
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 cash-settled SARs) or grant date (for stock-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 cash-settled SARs granted during 2013, 2012 and 2011 using the Black-Scholes valuation model:
| 2013 | 2012 | 2011 | ||||||||||
|
Expected term of cash-settled SARs (in years) |
3.28 | 4.49 | 4.67 | |||||||||
|
Expected volatility factor |
24.54% | 36.44% | 38.45% | |||||||||
|
Expected dividend yield |
2.57% | 2.69% | 2.72% | |||||||||
|
Risk-free interest rate |
0.79% | 0.72% | 0.83% | |||||||||
The total intrinsic value of cash-settled SARs exercised was $4.4 million in 2013, $5.4 million in 2012 and $2.6 million in 2011. The total fair value of SARs vested during 2013, 2012 and 2011 was $5.7 million, $3.5 million and $1.5 million, respectively.
Changes to the company’s non-vested cash-settled SARs in 2013 are as follows:
| Cash-settled SARs (in thousands) |
Fair Value Price per Share* |
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|
Non-vested SARs at beginning of year |
238 | $ | 24.26 | |||||
|
Granted |
4 | 29.27 | ||||||
|
Vested |
(113) | 49.99 | ||||||
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Cancellations |
(3) | – | ||||||
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|
|
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Non-vested SARs at end of year |
126 | 43.72 | ||||||
|
|
|
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| * |
Weighted-average |
As of 2013 year end there was $5.5 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 0.8 years.
The following weighted-average assumptions were used in calculating the fair value of stock-settled SARs granted during 2013 using the Black-Scholes valuation model:
| 2013 | ||||
|
Expected term of stock-settled SARs (in years) |
4.24 | |||
|
Expected volatility factor |
33.92% | |||
|
Expected dividend yield |
2.67% | |||
|
Risk-free interest rate |
0.91% | |||
Changes to the company’s stock-settled SARs in 2013 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 |
– | $ | – | |||||||||||
|
Granted |
122 | 79.29 | ||||||||||||
|
Exercised |
– | – | ||||||||||||
|
Forfeited or expired |
– | – | ||||||||||||
|
|
|
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|
Outstanding at end of year |
122 | 79.29 | 9.1 | $ | 3.5 | |||||||||
|
|
|
|||||||||||||
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Exercisable at end of year |
– | – | – | – | ||||||||||
| * |
Weighted-average |
The weighted-average grant date fair value of stock-settled SARs granted during 2013 was $17.47. As of 2013 year end there was $1.5 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 2.1 years.
Restricted Stock Awards – Non-employee Directors
The company awarded non-employee directors with 13,437 shares of restricted stock in 2013 and non-performance-based RSUs in 2012 and 2011 of 17,811 shares and 17,964 shares, respectively. The fair value of the restricted stock awards is expensed over the one year vesting period at the fair value on the date of grant. All restrictions for the restricted stock 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 any reason other than death or disability, the shares of restricted stock would be forfeited, unless otherwise determined by the Board. The fair value of the RSUs granted prior to fiscal 2013 was expensed in full on the date of grant at the grant date fair value. All restrictions on the RSUs will lapse upon the recipient’s termination of service as a director or in the event of a change in control. At the time of grant, directors had the opportunity to elect to defer receipt of all or part of these RSUs upon the lapsing of restriction provisions.
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. In addition, directors may elect to defer receipt of all or part of their RSUs into the Directors’ Fee Plan upon the lapsing of restriction provisions. For 2013, 2012 and 2011, total issuances under the Directors’ Fee Plan totaled 2,313 shares, 11,025 shares and 4,819 shares, respectively, of which 1,021 shares, 9,278 shares and 2,608 shares were deferred in 2013, 2012 and 2011, respectively. As of 2013 year end, shares reserved for issuance to directors under this plan totaled 160,549 shares.
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 2013, 2012 and 2011, issuances under this plan totaled 93,442 shares, 33,596 shares and 89,699 shares, respectively. As of 2013 year end, shares reserved for issuance under this plan totaled 921,624 shares and Snap-on held participant contributions of approximately $2.2 million. Participants are able to withdraw from the plan and receive all contributions made during the plan year. Compensation expense for plan participants was $2.6 million in 2013, $0.5 million in 2012 and $1.0 million in 2011.
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 2013, 2012 and 2011, issuances under this plan totaled 105,406 shares, 48,819 shares and 78,154 shares, respectively. As of 2013 year end, shares reserved for issuance under this plan totaled 304,839 shares and Snap-on held participant contributions of approximately $2.8 million. Participants are able to withdraw from the plan and receive all contributions made during the plan year. Expense for plan participants was $3.3 million in 2013, and $0.7 million in both 2012 and 2011.