Note 7 - Stock-based Compensation

9 Months Ended

Jul. 03, 2021

Notes to Financial Statements

Share-based Payment Arrangement [Text Block]

(7) Stock-Based Compensation

Under our equity incentive plan, employees and directors may be granted stock options, restricted stock, restricted stock units and performance awards. Effective February 28, 2020, our shareholders approved an amendment to the 2015 Equity Incentive Plan of Insteel Industries, Inc. (the “2015 Plan”), which authorizes up to an additional 750,000 shares of our common stock for future grants under the plan and expires on February 17, 2025. As of July 3, 2021, there were 666,000 shares of our common stock available for future grants under the 2015 Plan, which is our only active equity incentive plan.

Stock option awards. Under our equity incentive plan, employees and directors may be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over three years and expire ten years from the date of the grant. Compensation expense associated with stock options was $89,000 and $13,000 for the three-month periods ended July 3, 2021 and June 27, 2020, respectively, and $489,000 and $476,000 for the nine-month periods ended July 3, 2021 and June 27, 2020, respectively. As of July 3, 2021, there was $331,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 1.54 years.

The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The estimated fair values of stock options granted during the nine-month periods ended July 3, 2021 and June 27, 2020 was $12.33 and $7.39 per share, respectively, based on the following assumptions:

	Nine Months Ended
	July 3,			June 27,
	2021			2020
Risk-free interest rate		0.56	%		1.43	%
Dividend yield		0.48	%		0.54	%
Expected volatility		51.47	%		40.89	%
Expected term (in years)		4.92			4.59

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield was calculated based on our annual dividend as of the option grant date. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on our common stock. The expected term for options was based on the results of a Monte Carlo simulation model, using the model’s estimated fair value as an input to the Black-Scholes-Merton model, and then solving for the expected term.

The following table summarizes stock option activity:

									Contractual  Term -		Aggregate
	Options			Exercise Price Per Share					Weighted		Intrinsic
	Outstanding						Weighted		Average		Value
	(in thousands)			Range			Average		(in years)		(in thousands)
Outstanding at October 3, 2020		482		$10.23	-	$41.85	$	24.90
Granted		42		29.43	-	29.43		29.43
Exercised		(48	)	10.23	-	26.75		18.62			$	606
Outstanding at July 3, 2021		476		16.45	-	41.85		25.94		6.44		4,864
Vested and anticipated to vest in the future at July 3, 2021		463						25.98		6.36		4,706
Exercisable at July 3, 2021		280						27.90		4.83		2,352

Stock option exercises include “net exercises” for which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes.

Restricted stock units. Restricted stock units (“RSUs”) granted under our equity incentive plans are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. The vesting period for RSUs is generally one year from the date of the grant for RSUs granted to directors and three years from the date of the grant for RSUs granted to employees. RSUs do not have voting rights. Compensation expense associated with RSUs was $151,000 and $137,000 for the three-month periods ended July 3, 2021 and June 27, 2020, respectively, and $685,000 and $801,000 for the nine-month periods ended July 3, 2021 and June 27, 2020, respectively.

As of July 3, 2021, there was $654,000 of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.60 years.

The following table summarizes RSU activity:

				Weighted
	Restricted			Average
	Stock Units			Grant Date
(Unit amounts in thousands)	Outstanding			Fair Value
Balance, October 3, 2020		122		$	23.07
Granted		30			29.43
Released		(28	)		25.22
Balance, July 3, 2021		124			24.12