10-Q 1 transcat4016501-10q.htm QUARTERLY REPORT TRANSCAT, INC.
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________

FORM 10-Q

(Mark one)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended: December 25, 2021

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from __________ to __________

Commission File Number: 000-03905

TRANSCAT, INC.

(Exact name of registrant as specified in its charter)

Ohio

16-0874418

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

 

35 Vantage Point Drive, Rochester, New York 14624

(Address of principal executive offices) (Zip Code)

 

(585) 352-7777

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.50 par value

TRNS

Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

 

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of January 28, 2022 was 7,521,284.


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION  
Item 6. Exhibits 29
SIGNATURES 30


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)

(Unaudited)

Third Quarter Ended

Nine Months Ended

December 25,

December 26,

December 25,

December 26,

2021

2020

2021

2020

Service Revenue

$

30,237

$

24,776

$

87,338

$

72,297

Distribution Sales

20,665

19,286

61,741

52,276

Total Revenue

50,902

44,062

149,079

124,573

 

Cost of Service Revenue

21,254

17,861

59,891

51,413

Cost of Distribution Sales

16,012

14,956

47,421

41,012

Total Cost of Revenue

37,266

32,817

107,312

92,425

 

Gross Profit

13,636

11,245

41,767

32,148

 

Selling, Marketing and Warehouse Expenses

5,051

4,675

15,022

13,040

General and Administrative Expenses

6,224

4,051

17,117

12,547

Total Operating Expenses

11,275

8,726

32,139

25,587

 

Operating Income

2,361

2,519

9,628

6,561

 

Interest and Other Expense, net

136

219

581

779

 

Income Before Income Taxes

2,225

2,300

9,047

5,782

Provision for Income Taxes

596

539

715

1,199

 

Net Income

$

1,629

$

1,761

$

8,332

$

4,583

 

Basic Earnings Per Share

$

0.22

$

0.24

$

1.11

$

0.62

Average Shares Outstanding

7,519

7,437

7,487

7,415

 

Diluted Earnings Per Share

$

0.21

$

0.23

$

1.10

$

0.61

Average Shares Outstanding

7,653

7,580

7,599

7,532

See accompanying notes to consolidated financial statements.

1


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

(Unaudited)

(Unaudited)

Third Quarter Ended

Nine Months Ended

December 25,

December 26,

December 25,

December 26,

2021

2020

2021

2020

Net Income

$

1,629

$

1,761

$

8,332

$

4,583

 

Other Comprehensive (Loss) Income:

Currency Translation Adjustment

(233

)

251

(314

)

505

Other, net of tax effects

18

21

48

95

Total Other Comprehensive (Loss) Income

(215

)

272

(266

)

600

 

Comprehensive Income

$

1,414

$

2,033

$

8,066

$

5,183

See accompanying notes to consolidated financial statements.

2


Table of Contents

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

December 25,

(Audited)

March 27,

2021

2021

ASSETS

Current Assets:

Cash

$

2,779

$

560

Accounts Receivable, less allowance for doubtful accounts of $505 and $526 as of December 25, 2021, and March 27, 2021, respectively

34,702

33,950

Other Receivables

628

428

Inventory, net

13,868

11,636

Prepaid Expenses and Other Current Assets

5,572

2,354

Total Current Assets

57,549

48,928

Property and Equipment, net

23,781

22,203

Goodwill

59,133

43,272

Intangible Assets, net

11,503

7,513

Right to Use Assets, net

8,738

9,392

Other Assets

896

808

Total Assets

$

161,600

$

132,116

 

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Accounts Payable

$

12,965

$

12,276

Accrued Compensation and Other Liabilities

9,514

10,417

Income Taxes Payable

-

382

Current Portion of Long-Term Debt

2,140

2,067

Total Current Liabilities

24,619

25,142

Long-Term Debt

38,616

17,494

Deferred Tax Liabilities

4,912

3,201

Lease Liabilities

7,123

7,958

Other Liabilities

3,432

3,243

Total Liabilities

78,702

57,038

 

Shareholders' Equity:

Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,520,719 and 7,458,251 shares issued and outstanding as of December 25, 2021, and March 27, 2021, respectively

3,760

3,729

Capital in Excess of Par Value

23,452

19,287

Accumulated Other Comprehensive Loss

(717

)

(451

)

Retained Earnings

56,403

52,513

Total Shareholders' Equity

82,898

75,078

Total Liabilities and Shareholders' Equity

$

161,600

$

132,116

See accompanying notes to consolidated financial statements.

3


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

Nine Months Ended

December 25,

December 26,

2021

2020

Cash Flows from Operating Activities:

Net Income

$

8,332

$

4,583

Adjustments to Reconcile Net Income to Net Cash

Provided by Operating Activities:

Net Loss on Disposal of Property and Equipment

113

65

Deferred Income Taxes

5

75

Depreciation and Amortization

6,899

5,596

Provision for Accounts Receivable and Inventory Reserves

417

699

Stock-Based Compensation

1,681

875

Changes in Assets and Liabilities:

Accounts Receivable and Other Receivables

1,185

902

Inventory

(1,794

)

2,072

Prepaid Expenses and Other Assets

(3,280

)

(678

)

Accounts Payable

689

(2,103

)

Accrued Compensation and Other Liabilities

(1,470

)

3,391

Income Taxes Payable

(399

)

170

Net Cash Provided by Operating Activities

12,378

15,647

 

Cash Flows from Investing Activities:

Purchases of Property and Equipment

(5,861

)

(4,295

)

Proceeds from Sale of Property and Equipment

12

-

Business Acquisitions, net of cash acquired

(20,910

)

(3,447

)

Net Cash Used in Investing Activities

(26,759

)

(7,742

)

 

Cash Flows from Financing Activities:

Proceeds from (Repayments of) Revolving Credit Facility, net

22,760

(4,504

)

Repayments of Term Loan

(1,565

)

(1,477

)

Issuance of Common Stock

1,354

649

Repurchase of Common Stock

(5,649

)

(1,287

)

Net Cash Provided by (Used in) Financing Activities

16,900

(6,619

)

 

Effect of Exchange Rate Changes on Cash

(300

)

(751

)

 

Net Increase in Cash

2,219

535

Cash at Beginning of Period

560

499

Cash at End of Period

$

2,779

$

1,034

 

Supplemental Disclosure of Cash Flow Activity:

Cash paid during the period for:

Interest

$

531

$

679

Income Taxes, net

$

3,263

$

1,018

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

Common stock issued for NEXA acquisition

$

2,368

$

-

Assets acquired and liabilities assumed in business combinations:

Accrued contingent consideration related to NEXA acquisition

$

153

$

-

See accompanying notes to consolidated financial statements.

4


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Par Value Amounts)

(Unaudited)

Capital

Common Stock

In

Accumulated

Issued

Excess

Other

$0.50 Par Value

of Par

Comprehensive

Retained

Shares

Amount

Value

Income (Loss)

Earnings

Total

Balance as of March 28, 2020

7,381

$

3,691

$

17,929

$

(1,010

)

$

46,477

$

67,087

Issuance of Common Stock

28

14

369

-

-

383

Repurchase of Common Stock

(48

)

(24

)

(579

)

-

(684

)

(1,287

)

Stock-Based Compensation

50

25

287

-

-

312

Other Comprehensive Income

-

-

-

163

-

163

Net Income

-

-

-

-

798

798

Balance as of June 27, 2020

7,411

$

3,706

$

18,006

$

(847

)

$

46,591

$

67,456

 

Issuance of Common Stock

3

1

90

-

-

91

Stock-Based Compensation

18

9

357

-

-

366

Other Comprehensive Income

-

-

-

165

-

165

Net Income

-

-

-

-

2,024

2,024

Balance as of September 26, 2020

7,432

$

3,716

$

18,453

$

(682

)

$

48,615

$

70,102

 

Issuance of Common Stock

9

5

170

-

-

175

Stock-Based Compensation

-

-

197

-

-

197

Other Comprehensive Income

-

-

-

272

-

272

Net Income

-

-

-

-

1,761

1,761

Balance as of December 26, 2020

7,441

$

3,721

$

18,820

$

(410

)

$

50,376

$

72,507

See accompanying notes to consolidated financial statements.

5


Table of Contents

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Thousands, Except Par Value Amounts)

(Unaudited)

Capital

Common Stock

In

Accumulated

Issued

Excess

Other

$0.50 Par Value

of Par

Comprehensive

Retained

Shares

Amount

Value

Income (Loss)

Earnings

Total

Balance as of March 27, 2021

7,458

$

3,729

$

19,287

$

(451

)

$

52,513

$

75,078

Issuance of Common Stock

52

26

673

-

-

699

Repurchase of Common Stock

(62

)

(31

)

(755

)

-

(2,591

)

(3,377

)

Stock-Based Compensation

21

10

427

-

-

437

Other Comprehensive Income

-

-

-

182

-

182

Net Income

-

-

-

-

3,688

3,688

Balance as of June 26, 2021

7,469

$

3,734

$

19,632

$

(269

)

$

53,610

$

76,707

 

Issuance of Common Stock

72

36

2,871

-

-

2,907

Repurchase of Common Stock

(35

)

(18

)

(403

)

-

(1,851

)

(2,272

)

Stock-Based Compensation

12

7

613

-

-

620

Other Comprehensive Loss

-

-

-

(233

)

-

(233

)

Net Income

-

-

-

-

3,015

3,015

Balance as of September 25, 2021

7,518

$

3,759

$

22,713

$

(502

)

$

54,774

$

80,744

 

Issuance of Common Stock

2

1

115

-

-

116

Stock-Based Compensation

1

-

624

-

-

624

Other Comprehensive Loss

-

-

-

(215

)

-

(215

)

Net Income

-

-

-

-

1,629

1,629

Balance as of December 25, 2021

7,521

$

3,760

$

23,452

$

(717

)

$

56,403

$

82,898

See accompanying notes to consolidated financial statements.

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Table of Contents

TRANSCAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – GENERAL

Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly.

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended March 27, 2021 (“fiscal year 2021”) contained in the Company’s 2021 Annual Report on Form 10-K filed with the SEC.

Revenue Recognition: Distribution sales are recorded when an order’s title and risk of loss transfers to the customer. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.

Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 26, 2022 (“fiscal year 2022”) was immaterial. As of December 25, 2021, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 25, 2021 and March 27, 2021 were immaterial. Payment terms are generally 30 to 45 days. See Note 4 for disaggregated revenue information.

Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing, and the carrying amounts for cash, accounts receivable, other receivables, accounts payable and accrued compensation and other liabilities approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At each of December 25, 2021 and March 27, 2021, investment assets totaled $0.4 million and are included as a component of other assets on the Consolidated Balance Sheets.

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Table of Contents

Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. During the first nine months of each of fiscal year 2022 and fiscal year 2021, the Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of fiscal year 2022 and fiscal year 2021, the Company recorded non-cash stock-based compensation expense of $1.7 million and $0.9 million, respectively, in the Consolidated Statements of Income.

Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, and Transcat Canada Inc., both of which are wholly-owned subsidiaries of the Company, are maintained in the local currency, the Euro and the Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.

Transcat records foreign currency gains and losses on Irish and Canadian business transactions. The net foreign currency loss was less than $0.1 million in each of the first nine months of fiscal year 2022 and fiscal year 2021. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its earnings denominated in Canadian dollars will be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a gain of less than $0.1 million during the first nine months of fiscal year 2022 and a gain of $0.1 million during the first nine months of fiscal year 2021, was recognized as a component of other expense in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 25, 2021, the Company had a foreign exchange contract, which matured in January 2022, outstanding in the notional amount of $2.6 million. The foreign exchange contract was renewed in January 2022 and continues to be in place. The Company does not use hedging arrangements for speculative purposes.

Earnings Per Share: Basic earnings per share of common stock are computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options and unvested restricted stock units and the related tax benefits are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.

For each of the third quarter of fiscal years 2022 and 2021, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. For the first nine months of each of fiscal year 2022 and 2021, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows (amounts in thousands):

Third Quarter Ended

Nine Months Ended

December 25,

December 26,

December 25,

December 26,

2021

2020

2021

2020

Average Shares Outstanding – Basic

7,519

7,437

7,487

7,415

Effect of Dilutive Common Stock Equivalents

134

143

112

117

Average Shares Outstanding – Diluted

7,653

7,580

7,599

7,532

Anti-dilutive Common Stock Equivalents

-

-

100

30

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Table of Contents

Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value and whether it is necessary to perform the goodwill impairment process.

Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. The Company estimates the fair value of its reporting units using the fair market value measurement requirement. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (in thousands):

Goodwill

Intangible Assets

Distribution

Service

Total

Distribution

Service

Total

 

Net Book Value as of March 27, 2021

$

11,458

$

31,814

$

43,272

$

920

$

6,593

$

7,513

Additions

-

15,980

15,980

-

6,690

6,690

Amortization

-

-

-

(204

)

(2,492

)

(2,696

)

Currency Translation Adjustment

-

(119

)

(119

)

-

(4

)

(4

)

Net Book Value as of December 25, 2021

$

11,458

$

47,675

$

59,133

$

716

$

10,787

$

11,503

Recently Issued Accounting Pronouncements: In June 2016, the Financial Accounting Standard Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces the "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Allowance for doubtful accounts is the most significant item for the Company under this ASU. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on its consolidated financial statements.

NOTE 2 – LONG-TERM DEBT

On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).

The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65.0 million during the current fiscal year and $50.0 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. The 2021 Credit Agreement also reduced the fixed interest rate on our term loan in the amount of $15.0 million (the “2018 Term Loan”) from 4.15% to 3.90%.

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Table of Contents

The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40 million.

Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for fiscal year 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

As of December 25, 2021, $80.0 million was available under the revolving credit facility, of which $31.7 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first nine months of fiscal year 2022, $20.9 million was used for business acquisitions.

As of December 25, 2021, $9.1 million was outstanding on the 2018 Term Loan, of which $2.1 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

Interest and Other Costs: Interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period, in each case (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrued at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% during the second quarter of fiscal year 2022 and over the term of the loan for subsequent periods. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio. The Company’s interest rate for the revolving credit facility for the first nine months of fiscal year 2022 ranged from 1.0% to 2.2%.

Covenants: The 2021 Credit Agreement has certain covenants with which the Company must comply, including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2022. Our leverage ratio was 1.47 at December 25, 2021, as defined in the 2021 Credit Agreement, compared with 0.94 at March 27, 2021, as defined in the Prior Credit Agreement.

Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant, which were modified by the 2021 Credit Agreement. The allowable leverage ratio under the Prior Credit Agreement for the second, third and fourth fiscal quarter of fiscal year 2021 and the first quarter of fiscal year 2022 was a maximum multiple of 5.0, 5.5, 7.0 and 4.0, respectively, of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation. After the first quarter of fiscal 2022, pursuant to the 2021 Credit Agreement, the allowable leverage ratio is a maximum multiple of 3.0.

Other Terms: The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S.-based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the revolving credit facility.

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Table of Contents

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 December 25, 2021, 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 nine months of fiscal year 2022 and 2021 were $1.7 million and $0.3 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 64% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 30, 2019 and as a result, issued 19 thousand shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2022. The following table summarizes the non-vested restricted stock units outstanding as of December 25, 2021 (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

December 25, 2021

October 2018

October 2018 – September 2027

7

$

20.81

Time Vested

March 2019

April 2019 – March 2022

20

$

23.50

80% of target level

March 2019

April 2019 – March 2022

21

$

23.50

Time Vested

March 2020

April 2020 – March 2023

2

$

26.25

Time Vested

July 2020

July 2020 – March 2023

31

$

27.08

Time Vested

September 2020

September 2020 –July 2023

9

$

28.54

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 – May 2024

12

$

53.17

100% of target level

June 2021

June 2021 – May 2024

12

$

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

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $1.2 million and $0.7 million in the first nine months of fiscal year 2022 and fiscal year 2021, respectively. As of December 25, 2021, unearned compensation, to be recognized over the grants’ respective service periods, totaled $2.4 million.

11


Table of Contents

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.

The following table summarizes the Company’s options as of and for the first nine months of fiscal year 2022:

Weighted

Weighted Average

Average Remaining

Number

Exercise

Contractual

Aggregate

of

Price Per

Term (in

Intrinsic

Shares

Share

years)

Value

Outstanding as of March 27, 2021

125

$

15.47

Granted

125

$

59.87

Exercised

(85

)

$

12.00

Forfeited

(5

)

$

24.30

Redeemed

-

Outstanding as of December 25, 2021

160

$

51.72

9

$

6,589

Exercisable as of December 25, 2021

2

$

26.27

8

$

133

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 third quarter of fiscal year 2022 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 December 25, 2021. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

Total expense related to stock options was $0.4 million during the first nine months of fiscal year 2022. Total expense related to stock options was $0.1 million during the first nine months of fiscal year 2021. Total unrecognized compensation cost related to non-vested stock options as of December 25, 2021 was $2.0 million, which is expected to be recognized over a period of five years. The aggregate intrinsic value of stock options exercised in the first nine months of fiscal years 2022 and 2021 was $6.9 million and $0.3 million, respectively. Cash received from the exercise of options in the first nine months of fiscal years 2022 and 2021 was $1.0 million and $0.4 million, respectively.

NOTE 4 – SEGMENT INFORMATION

Transcat has two reportable segments: Service and Distribution. The Company has no inter-segment sales. The following table presents segment information for the third quarter and first nine months of fiscal years 2022 and 2021 (dollars in thousands):

Third Quarter Ended

Nine Months Ended

December 25,

December 26,

December 25,

December 26,

2021

2020

2021

2020

Revenue:

Service

$

30,237

$

24,776

$

87,338

$

72,297

Distribution

20,665

19,286

61,741

52,276

Total

50,902

44,062

149,079

124,573

 

Gross Profit:

Service

8,983

6,915

27,447

20,884

Distribution

4,653

4,330

14,320

11,264

Total

13,636

11,245

41,767

32,148

 

Operating Expenses:

Service (1)

7,322

4,959

20,165

14,822

Distribution (1)

3,953

3,767

11,974

10,765

Total

11,275

8,726

32,139

25,587

 

Operating Income:

Service

1,661

1,956

7,282

6,062

Distribution

700

563

2,346

499

Total

2,361

2,519

9,628

6,561

 

Unallocated Amounts:

Interest and Other Expense, net

136

219

581

779

Provision for Income Taxes

596

539

715

1,199

Total

732

758

1,296

1,978

 

Net Income

$

1,629

$

1,761

$

8,332

$

4,583

 

 

(1)

Operating expense allocations between segments were based on actual amounts, a percentage of revenues, headcount, and management’s estimates.

 

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Table of Contents

NOTE 5 – BUSINESS ACQUISITIONS

Tangent: Effective December 31, 2021, Transcat purchased all of the outstanding membership units of Tangent Labs, LLC, a privately-held company (“Tangent”). Tangent provides in-house and on-site calibrations of precision measurement and control instrumentation to customers in the life science, aerospace and other regulated industries, and has lab locations in Indianapolis, Indiana and Huntsville, Alabama. This transaction aligned with a key component of the Company’s strategy of acquiring local capabilities in attractive geographies.

The purchase price for Tangent was approximately $9.0 million, all paid in cash, and is subject to certain customary holdback provisions and a portion of which was placed in escrow to secure the sellers’ obligations in the event that a key employee terminates employment with Tangent on or before the first anniversary of the closing of the transaction.

The purchase price allocation has not been finalized, due to the timing of the acquisition date and the filing date of this Quarterly Report on Form 10-Q. Therefore, the allocation of the purchase price to the assets acquired and liabilities assumed, including values to be recognized for goodwill and other intangible assets, will be disclosed in the Annual Report on Form 10-K for the fiscal year ending March 26, 2022. The pro forma results of operations from the Tangent acquisition, will be disclosed in the Annual Report on Form 10-K for the fiscal year ending March 26, 2022. The goodwill related to Tangent is not expected to be deductible for income tax purposes. All of the goodwill and intangible assets relating to the Tangent acquisition will be allocated to the Service segment.

NEXA: Effective August 31, 2021, Transcat purchased all of the outstanding capital stock of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), a private Irish company, which owns all of the issued and outstanding capital stock of its U.S.-based subsidiary, Cal OpEx Inc., a Delaware corporation (collectively, “NEXA”). NEXA provides calibration optimization and other technical solutions to improve asset and reliability management programs to pharmaceutical, biotechnology, and medical device companies worldwide. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities.

The NEXA goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All of the goodwill and intangible assets relating to the NEXA acquisition has been allocated to the Service segment. Intangible assets related to the NEXA acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to five years and are deductible for tax purposes. Amortization of goodwill related to the NEXA acquisition is not deductible for tax purposes.

The total purchase price for NEXA was approximately $26.2 million and was paid with $23.9 million in cash and the issuance of 34,943 shares of our common stock valued at $2.4 million. Additionally, there are potential earn-out payments of up to $7.5 million over the four-year period following the closing of the transaction based upon NEXA achieving certain annual revenue and EBITDA goals. If achieved, the earn-out payments will also be made in shares of common stock unless certain criteria is met for cash payment. As of December 25, 2021, the estimated fair value for the contingent earn-out payments was $0.2 million and included in the preliminary purchase price allocation below. $0.1 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any.

The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments and true-up of the fair value of the contingent consideration, assets acquired and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of NEXA’s assets and liabilities acquired on August 31, 2021 (in thousands):

Goodwill

$

15,497

 

Intangible Assets – Customer Base & Contracts

5,600

Intangible Assets – Backlog

490

Intangible Assets – Covenant Not to Compete

600

 

22,187

Plus:

Cash

3,732

 

Accounts Receivable

2,434

 

Non-Current Assets

38

Less:

Current Liabilities

(453

)

Deferred Tax Liability

(1,706

)

Total Purchase Price

$

26,232

 

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From the date of acquisition, NEXA has contributed revenue of $2.9 million and operating loss of $0.3 million, which includes the negative impact of amortization of the acquired intangible assets, for the first nine months of fiscal year 2022.

Upstate Metrology: Effective April 29, 2021, Transcat acquired substantially all of the assets of Upstate Metrology Inc. (“Upstate Metrology”), a New York based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that can leverage the Company’s already existing operating infrastructure.

All of the goodwill related to the Upstate Metrology acquisition has been allocated to the Service segment. Amortization of goodwill related to the Upstate Metrology acquisition is deductible for tax purposes.

The total purchase price for the assets of Upstate Metrology was approximately $0.9 million. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Upstate Metrology’s assets and liabilities acquired on April 29, 2021 (in thousands):

Goodwill

$

483

 

Plus:

Current Assets

189

 

Non-Current Assets

270

 

Less:

Current Liabilities

(11

)

Total Purchase Price

$

931

 

BioTek: Effective December 16, 2020, Transcat acquired substantially all of the assets of BioTek Services, Inc. (“BioTek”), a Virginia based provider of pipette calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. BioTek’s focus on pipettes complements the current offerings Transcat provides to the life science sector.

All of the goodwill and intangible assets relating to the BioTek acquisition has been allocated to the Service segment. Intangible assets related to the BioTek acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to 10 years and are deductible for tax purposes. Amortization of goodwill related to the BioTek acquisition is deductible for tax purposes.

The total purchase price for the assets of BioTek was approximately $3.5 million. $0.4 million of the purchase price has been put into escrow as a holdback for indemnification claims, if any. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of BioTek’s assets and liabilities acquired during the period presented (in thousands):

Goodwill

$

1,063

 

Intangible Assets – Customer Base & Contracts

1,930

Intangible Assets – Covenant Not to Compete

100

3,093

Plus:

Current Assets

406

 

Non-Current Assets

8

 

Total Purchase Price

$

3,507

 

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The results of acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisitions of NEXA, Upstate Metrology and BioTek had occurred at the beginning of fiscal year 2021. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.

(Unaudited)

(Unaudited)

Quarter Ended