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STOCK-BASED COMPENSATION

3 Months Ended

Jun. 25, 2022

Share-Based Payment Arrangement [Abstract]

STOCK-BASED COMPENSATION

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 June 25, 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 quarter of fiscal year 2023 and 2022 were $0.5 million and $1.1 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 June 25, 2022 (in thousands, except per unit data):

Date		Measurement		Total Number of Units		Grant Date Fair Value				Estimated Level of Achievement at
Granted		Period		Outstanding		Per Unit				June 25, 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			115% 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
September 2021		September 2021 – September 2022		7		$	66.09			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

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $0.4 million in each of the first quarters of fiscal year 2023 and fiscal year 2022. As of June 25, 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 quarter of fiscal year 2023 and fiscal year 2022:

		First Quarter Ended
		June 25,				June 26,
		2022				2021

Risk-Free Interest Rate			2.32	%			1.06	%
Volatility Factor			38.11	%			28.81	%
Expected Term (in Years)			3.32				6.30
Annual Dividend Rate			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 quarter of fiscal year 2023, the Company granted an option for 34,000 shares of common stock in the aggregate to Company employees that vests over three years.

During the first quarter of fiscal year 2022, the Company granted an option for 10,000 shares of common stock each to two employees (20,000 shares in the aggregate) that vests over five years.

The expense related to all stock option awards was $0.4 million in the first quarter of fiscal year 2023 and less than $0.1 million in the first quarter of fiscal year 2022.

The following table summarizes the Company’s options as of and for the first quarter ended June 25, 2022 (in thousands, except price per option data and years):

						Weighted				Weighted
						Average				Average
						Exercise				Remaining
		Number Of				Price Per				Contractual Term				Aggregate Intrinsic
		Options				Option				(in years)				Value
Outstanding as of March 26, 2022			165			$	53.27
Granted			39			$	58.19
Exercised			(4	)		$	6.19
Forfeited			-			$	-
Outstanding as of June 25, 2022			200			$	54.89				7			$	1,828
Exercisable as of June 25, 2022			4			$	26.27				7			$	141

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 first 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 June 25, 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 June 25, 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 quarter of fiscal year 2023 and fiscal year 2022 was $0.2 million and $2.3 million, respectively. Cash received from the exercise of options in the first quarter of fiscal year 2023 and fiscal year 2022 was less than $0.1 million and $0.6 million, respectively.