Note 7 - Stock-based Compensation

6 Months Ended

Apr. 02, 2022

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 April 2, 2022, there were 620,000 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 $374,000 and $324,000 for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and $480,000 and $400,000 for the six-month periods ended April 2, 2022 and April 3, 2021, respectively. As of April 2, 2022, there was $624,000 of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of 2.2 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 three- and six-month periods ended April 2, 2022 and April 3, 2021 was $15.45 and $12.33 per share, respectively, based on the following assumptions:

	Six Months Ended
	April 2,			April 3,
	2022			2021
Risk-free interest rate		1.92	%		0.56	%
Dividend yield		0.30	%		0.48	%
Expected volatility		48.92	%		51.47	%
Expected term (in years)		4.65			4.92

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		Aggregate
	Options			Weighted		Term - Weighted		Intrinsic
	Outstanding			Average		Average		Value
	(in thousands)			Exercise Price		(in years)		(in thousands)
Outstanding at October 2, 2021		428		$	27.73
Granted		36			38.54
Forfeited		(60	)		29.29
Exercised		(10	)		19.14			$	254
Outstanding at April 2, 2022		394			28.73		7.41		3,622
Vested and anticipated to vest in the future at April 2, 2022		379			28.58		7.35		3,533
Exercisable at April 2, 2022		224			28.08		6.36		2,139

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 $455,000 and $386,000 for the three-month periods ended April 2, 2022 and April 3, 2021, respectively, and $622,000 and $534,000 for the six-month periods ended April 2, 2022 and April 3, 2021, respectively.

As of April 2, 2022, there was $1.1 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of 1.67 years.

The following table summarizes RSU activity:

				Weighted
	Restricted			Average
	Stock Units			Grant Date
(Unit amounts in thousands)	Outstanding			Fair Value
Balance, October 2, 2021		129		$	24.73
Granted		24			38.54
Forfeited		(3	)		22.09
Released		(29	)		24.86
Balance, April 2, 2022		121			27.48