Note 3 - Stock-based Compensation

6 Months Ended

Sep. 24, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

NOTE 3 – STOCK-BASED COMPENSATION

In September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective. The 2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”). Shares available for grant under the 2021 Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 Plan provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At September 24, 2022, 0.7 million shares of common stock were available for future grant under the 2021 Plan.

The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation and stock option activity during the first six months of fiscal year 2023 and fiscal year 2022 were $0.5 million and $1.7 million, respectively.

Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share targets over the eligible period.

Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

The Company achieved 82% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 28, 2020 and as a result, issued 16 thousand shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2023. The following table summarizes the non-vested restricted stock units outstanding as of September 24, 2022 (in thousands, except per unit data):

		Total	Grant Date		Estimated
		Number	Fair		Level of
Date	Measurement	of Units	Value		Achievement at
Granted	Period	Outstanding	Per Unit		September 24, 2022
October 2018	October 2018 – September 2027	7	$	20.81	Time Vested
April 2020	April 2020 – March 2023	2	$	26.25	Time Vested
July 2020	July 2020 – July 2023	26	$	27.08	Time Vested
September 2020	September 2020 – July 2023	4	$	28.54	Time Vested
September 2020	September 2020 – July 2023	5	$	29.76	Time Vested
September 2020	September 2020 – September 2023	3	$	29.76	Time Vested
January 2021	January 2021 – January 2024	2	$	34.62	Time Vested
May 2021	May 2021 – May 2024	1	$	54.21	Time Vested
June 2021	June 2021 – March 2024	10	$	53.17	150% of target level
June 2021	June 2021 – March 2024	11	$	53.17	Time Vested
September 2021	September 2021 – September 2024	4	$	67.76	Time Vested
December 2021	December 2021 – December 2024	1	$	90.41	Time Vested
January 2022	January 2022 – March 2024	2	$	90.92	Time Vested
March 2022	March 2022 – March 2025	2	$	76.31	Time Vested
May 2022	May 2022-March 2025	12	$	63.17	100% of target level
May 2022	May 2022-March 2025	11	$	63.17	Time Vested
August 2022	August 2022-August 2025	1	$	78.04	Time Vested
September 2022	September 2022-September 2023	5	$	73.80	Time Vested

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $1.2 million and $0.9 million in the first six months of fiscal year 2023 and fiscal year 2022, respectively. As of September 24, 2022, unearned compensation, to be recognized over the grants’ respective service periods, totaled $3.1 million.

Stock Options: The Company grants stock options to employees and directors with an exercise price equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant.

We calculate the fair value of the stock options granted using the Black-Scholes model. The following weighted-average assumptions were used to value options granted during the first six months of fiscal year 2023 and fiscal year 2022:

	Second Quarter Ended						Six Months Ended
	September 24,			September 25,			September 24,			September 25,
	2022			2021			2022			2021
Risk-Free Interest Rate		3.40	%		0.99	%		2.65	%		1.00	%
Volatility Factor		36.49	%		30.23	%		37.62	%		29.95	%
Expected Term (in Years)		5.47			6.40			4.58			6.38
Annual Dividend Rate		0.00	%		0.00	%		0.00	%		0.00	%

We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on safe harbor rules, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur.

During the first six months of fiscal year 2023, the Company granted options for 46,000 shares of common stock in the aggregate to Company employees that vest over three years and an option for 10,000 shares of common stock to a Board of Directors member that vests over five years.

During the first six months of fiscal year 2022, the Company granted options for 25,000 shares of common stock in the aggregate to Company employees that vest over three to five years, an option for 2,000 shares of common stock each to five employees (10,000 shares in the aggregate) that vests over three years and options for 90,000 shares of common stock in the aggregate to Company employees that vest over five years.

The expense related to all stock option awards was $0.7 million in the first six months of fiscal year 2023 and $0.2 million in the first six months of fiscal year 2022.

The following table summarizes the Company’s options as of and for the first six months ended September 24, 2022 (in thousands, except price per option data and years):

				Weighted		Weighted
				Average		Average
	Number			Exercise		Remaining		Aggregate
	Of			Price Per		Contractual		Intrinsic
	Options			Option		Term (in years)		Value
Outstanding as of March 26, 2022		165		$	53.27
Granted		56		$	62.46
Exercised		(4	)	$	6.19
Forfeited		-		$	-
Outstanding as of September 24, 2022		217		$	56.25		7	$	2,546
Exercisable as of September 24, 2022		26		$	55.87		9	$	315

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal year 2023 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on September 24, 2022. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

Total unrecognized compensation cost related to non-vested stock options as of September 24, 2022 was $2.4 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised during the first six months of fiscal year 2023 and fiscal year 2022 was $0.2 million and $4.5 million, respectively. Cash received from the exercise of options in the first six months of fiscal year 2023 and fiscal year 2022 was less than $0.1 million and $1.0 million, respectively.