Note 3 - Stock-based Compensation

6 Months Ended

Sep. 23, 2023

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 23, 2023, 0.6 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 2024 and fiscal year 2023 were $0.6 million and $0.5 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 or cumulative adjusted EBITDA 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 following table summarizes the non-vested restricted stock units outstanding as of September 23, 2023 (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 23, 2023
October 2018	October 2018 – September 2027	6	$	20.81	Time Vested
June 2021	June 2021 – March 2024	10	$	53.17	136% 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
January 2022	January 2022 – March 2024	1	$	90.92	136% of target level
January 2022	January 2022 – March 2024	1	$	90.92	Time Vested
January 2022	January 2022 – January 2025	1	$	90.41	Time Vested
March 2022	March 2022 – March 2025	1	$	76.31	Time Vested
May 2022	May 2022 – March 2025	11	$	63.17	64% of target level
May 2022	May 2022 – March 2025	12	$	63.17	Time Vested
August 2022	August 2022 – August 2025	1	$	78.04	Time Vested
December 2022	December 2022 – December 2025	1	$	81.26	Time Vested
December 2022	December 2022 – December 2025	1	$	67.48	Time Vested
May 2023	May 2023 – March 2026	10	$	89.70	150% of target level
May 2023	May 2023 – March 2026	11	$	89.70	Time Vested
May 2023	May 2023 – May 2026	19	$	89.70	Time Vested
August 2023	August 2023 – August 2024	6	$	90.56	Time Vested
September 2023	September 2023 – September 2024	4	$	109.55	Time Vested

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $1.5 million and $1.2 million in the first six months of fiscal year 2024 and fiscal year 2023, respectively. As of September 23, 2023, unearned compensation, to be recognized over the grants’ respective service periods, totaled $5.2 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 2024 and fiscal year 2023:

	Second Quarter Ended						Six Months Ended
	September 23,			September 24,			September 23,			September 24,
	2023			2022			2023			2022
Risk-Free Interest Rate		4.38	%		3.40	%		3.82	%		2.65	%
Volatility Factor		36.87	%		36.49	%		37.04	%		37.62	%
Expected Term (in Years)		6.27			5.47			6.22			4.58
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 2024, the Company granted options for 7,000 shares of common stock in the aggregate to Company employees that vest over three years, an option for 10,000 shares of common stock to a Company employee that vests over five years and an option for 10,000 shares of common stock to a Company director that vests over five years.

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 Company director that vests over five years.

The expense related to all stock option awards was $0.6 million in the first six months of fiscal year 2024 and $0.7 million in the first six months of fiscal year 2023.

The following table summarizes the Company’s options as of and for the first six months ended September 23, 2023 (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 25, 2023		217		$	56.25
Granted		27		$	93.28
Exercised		(4	)	$	24.30
Forfeited		(2	)	$	63.17
Outstanding as of September 23, 2023		238		$	60.89		6	$	8,130
Exercisable as of September 23, 2023		60		$	55.34		7	$	2,348

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 2024 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 23, 2023. 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 23, 2023 was $2.3 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 2024 was $0.3 million and during the first six months of fiscal year 2023 was $0.2 million. Cash received from the exercise of options in the first six months of fiscal year 2024 and fiscal year 2023 was $0.1 million and less than $0.1 million, respectively.