TRANSCAT INC [TRNS] Filings

10-Q 1 trns20230911_10q.htm FORM 10-Q trns20230911_10q.htm

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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: September 23, 2023

☐ 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 October 27, 2023 was 8,826,324.

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		Page(s)
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements:

	Statements of Income for the Second Quarter and Six Months Ended September 23, 2023 and September 24, 2022	1

	Statements of Comprehensive Income for the Second Quarter and Six Months Ended September 23, 2023 and September 24, 2022	2

	Balance Sheets as of September 23, 2023 and March 25, 2023	3

	Statements of Cash Flows for the Six Months Ended September 23, 2023 and September 24, 2022	4

	Statements of Changes in Shareholders' Equity for the Second Quarter and Six Months Ended September 23, 2023 and September 24, 2022	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	34

Item 6.	Exhibits	35

SIGNATURES		37

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

	(Unaudited)				(Unaudited)
	*Second Quarter Ended*				*Six Months Ended*
	*September 23,*		*September 24,*		*September 23,*		*September 24,*
	*2023*		*2022*		*2023*		*2022*

Service Revenue	$	41,431	$	35,267	$	81,284	$	69,143
Distribution Sales		21,373		21,172		42,118		41,957
Total Revenue		62,804		56,439		123,402		111,100

Cost of Service Revenue		27,347		23,780		54,229		46,821
Cost of Distribution Sales		15,332		15,892		30,338		31,474
Total Cost of Revenue		42,679		39,672		84,567		78,295

Gross Profit		20,125		16,767		38,835		32,805

Selling, Marketing and Warehouse Expenses		6,856		5,900		13,325		11,720
General and Administrative Expenses		11,626		7,241		19,227		13,855
Total Operating Expenses		18,482		13,141		32,552		25,575

Operating Income		1,643		3,626		6,283		7,230

Interest and Other Expense, net		841		537		1,719		693

Income Before Income Taxes		802		3,089		4,564		6,537
Provision for Income Taxes		342		732		1,155		1,108

Net Income	$	460	$	2,357	$	3,409	$	5,429

Basic Earnings Per Share	$	0.06	$	0.31	$	0.44	$	0.72
Average Shares Outstanding		7,819		7,550		7,732		7,542

Diluted Earnings Per Share	$	0.06	$	0.31	$	0.43	$	0.71
Average Shares Outstanding		7,948		7,646		7,840		7,635

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

	(Unaudited)						(Unaudited)
	*Second Quarter Ended*						*Six Months Ended*
	*September 23,*			*September 24,*			*September 23,*		*September 24,*
	*2023*			*2022*			*2023*		*2022*
Net Income	$	460		$	2,357		$	3,409	$	5,429

Other Comprehensive Income (Loss):
Currency Translation Adjustment		(352	)		(831	)		124		(1,271	)
Other, net of tax effects of $2 and $(2) for the second quarter ended September 23, 2023 and September 24, 2022, respectively; and $4 and $(6) for the six months ended September 23, 2023 and September 24, 2022, respectively		6			(7	)		12		(20	)
Total Other Comprehensive Income (Loss)		(346	)		(838	)		136		(1,291	)

Comprehensive Income	$	114		$	1,519		$	3,545	$	4,138

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

	(Unaudited)			(Audited)
	*September 23,*			*March 25,*
	*2023*			*2023*
ASSETS
Current Assets:
Cash	$	1,246		$	1,531
Accounts Receivable, less allowance for credit losses of $614 and $457 as of September 23, 2023 and March 25, 2023, respectively		44,382			44,698
Other Receivables		335			506
Inventory, net		15,685			16,929
Prepaid Expenses and Other Current Assets		3,525			3,935
Total Current Assets		65,173			67,599
Property and Equipment, net		35,648			29,064
Goodwill		106,366			69,360
Intangible Assets, net		23,156			13,799
Right To Use Assets, net		16,784			14,876
Other Assets		1,083			1,051
Total Assets	$	248,210		$	195,749

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable	$	12,523		$	15,869
Accrued Compensation and Other Current Liabilities		13,295			10,201
Current Portion of Long-Term Debt		2,293			2,248
Total Current Liabilities		28,111			28,318
Long-Term Debt		51,000			46,869
Deferred Tax Liabilities, net		10,836			6,538
Lease Liabilities		14,534			12,960
Other Liabilities		5,477			1,434
Total Liabilities		109,958			96,119

Shareholders' Equity:
Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,978,401 and 7,562,604 shares issued and outstanding as of September 23, 2023 and March 25, 2023, respectively		3,989			3,781
Capital in Excess of Par Value		64,310			27,886
Accumulated Other Comprehensive Loss		(1,064	)		(1,200	)
Retained Earnings		71,017			69,163
Total Shareholders' Equity		138,252			99,630
Total Liabilities and Shareholders' Equity	$	248,210		$	195,749

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	(Unaudited)
	*Six Months Ended*
	*September 23,*			*September 24,*
	*2023*			*2022*
Cash Flows from Operating Activities:
Net Income	$	3,409		$	5,429
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Loss on Disposal of Property and Equipment		11			34
Deferred Income Taxes		23			(54	)
Depreciation and Amortization		6,078			5,419
Provision for Accounts Receivable and Inventory Reserves		347			94
Stock-Based Compensation Expense		2,171			1,942
Changes in Assets and Liabilities, net of acquisitions:
Accounts Receivable and Other Receivables		2,384			(1,238	)
Inventory		3,376			(3,724	)
Prepaid Expenses and Other Current Assets		465			881
Accounts Payable		(3,969	)		(586	)
Accrued Compensation and Other Current Liabilities		1,677			(2,962	)
Net Cash Provided by Operating Activities		15,972			5,235

Cash Flows from Investing Activities:
Purchases of Property and Equipment		(5,444	)		(4,772	)
Proceeds from Sale of Property and Equipment		-			10
Business Acquisitions, net of cash acquired		(12,882	)		(4,040	)
Net Cash Used in Investing Activities		(18,326	)		(8,802	)

Cash Flows from Financing Activities:
Proceeds from Revolving Credit Facility, net		5,288			3,387
Repayments of Term Loan		(1,112	)		(1,026	)
Issuance of Common Stock		384			364
Repurchase of Common Stock		(2,247	)		(437	)
Net Cash Provided by Financing Activities		2,313			2,288

Effect of Exchange Rate Changes on Cash		(244	)		792

Net Decrease in Cash		(285	)		(487	)
Cash at Beginning of Period		1,531			1,396
Cash at End of Period	$	1,246		$	909

Supplemental Disclosure of Cash Flow Activity:
Cash paid during the period for:
Interest	$	1,680		$	829
Income Taxes, net	$	1,099		$	484
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock issued for acquisitions	$	34,769		$	145
Assets acquired and liabilities assumed in business combinations:
Accrued holdback and contingent consideration related to acquisitions	$	4,859		$	518

See accompanying notes to consolidated financial statements.

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TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN 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 26, 2022		7,529		$	3,765		$	23,900		$	(233	)	$	58,744		$	86,176
Issuance of Common Stock		8			3			363			-			-			366
Repurchase of Common Stock		(7	)		(3	)		(164	)		-			(270	)		(437	)
Stock-Based Compensation		16			8			820			-			-			828
Other Comprehensive Loss		-			-			-			(453	)		-			(453	)
Net Income		-			-			-			-			3,072			3,072
Balance as of June 25, 2022		7,546		$	3,773		$	24,919		$	(686	)	$	61,546		$	89,552
Issuance of Common Stock		3			2			141			-			-			143
Repurchase of Common Stock		-			-			-			-			-			-
Stock-Based Compensation		9			4			1,110			-			-			1,114
Other Comprehensive Loss		-			-			-			(838	)		-			(838	)
Net Income		-			-			-			-			2,357			2,357
Balance as of September 24, 2022		7,558		$	3,779		$	26,170		$	(1,524	)	$	63,903		$	92,328

							*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 25, 2023		7,562		$	3,781		$	27,886		$	(1,200	)	$	69,163		$	99,630
Issuance of Common Stock		82			42			6,988			-			-			7,030
Repurchase of Common Stock		(3	)		(2	)		(86	)		-			(213	)		(301	)
Stock-Based Compensation		2			1			929			-			-			930
Other Comprehensive Income		-			-			-			482			-			482
Net Income		-			-			-			-			2,949			2,949
Balance as of June 24, 2023		7,643		$	3,822		$	35,717		$	(718	)	$	71,899		$	110,720
Issuance of Common Stock		313			156			27,967			-			-			28,123
Repurchase of Common Stock		(22	)		(11	)		(593	)		-			(1,342	)		(1,946	)
Stock-Based Compensation		44			22			1,219			-			-			1,241
Other Comprehensive Loss		-			-			-			(346	)		-			(346	)
Net Income		-			-			-			-			460			460
Balance as of September 23, 2023		7,978		$	3,989		$	64,310		$	(1,064	)	$	71,017		$	138,252

See accompanying notes to consolidated financial statements.

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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 services, enterprise asset management services, and value-added distributor of professional grade handheld 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 Rule 10-01 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 25, 2023 (“fiscal year 2023”) contained in the Company’s Annual Report on Form 10-K for fiscal year 2023 filed with the SEC.

Use of Estimates: The preparation of Transcat’s Consolidated Financial Statements in accordance with GAAP requires that the Company make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for, but not limited to, allowance for doubtful accounts and returns, inventory reserves, estimated levels of achievement for performance-based restricted stock units, fair value of stock options, depreciable lives of fixed assets, estimated lives of major catalogs and intangible assets, fair value of the goodwill reporting units, and the valuation of assets acquired, liabilities assumed and consideration transferred in business acquisitions. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Consolidated Financial Statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes. Actual results could differ from those estimates. Such changes and refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements.

Revenue Recognition: Distribution non-rental sales are recorded when an order’s title and risk of loss transfers to the customer, which is generally upon shipment. Distribution rental revenue is recognized over time using the output method-time elapsed as this portrays the transfer of control 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. Freight billed to customers is included in revenue. Shipping and handling is not included in revenue. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.

Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include general payment terms that are between net 30 and 90 days.

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Revenue recognized from prior period performance obligations for the second quarter of the fiscal year ending March 30, 2024 (“fiscal year 2024”) was immaterial. As of September 23, 2023, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to ASC Topic 606, 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 September 23, 2023 and March 25, 2023 were immaterial. 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 on a portion of the debt with the balance bearing an interest rate approximating current market rates, and the carrying amounts for cash, accounts receivable and accounts payable 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 September 23, 2023 and March 25, 2023, investment assets totaled $0.2 million, and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.

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 awards expected to vest. 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. 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 six months of fiscal year 2024 and fiscal year 2023, the Company recorded non-cash stock-based compensation cost of $2.2 million and $1.9 million, respectively, in the Consolidated Statements of Income.

Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a Transcat Ireland), an Irish company, and Transcat Canada Inc., both of which are wholly-owned subsidiaries of the Company, are maintained in the local currencies, 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 business transactions denominated in foreign currency. The net foreign currency was a gain of less than $0.1 million in the first six months of fiscal year 2024 and a loss of less than $0.1 million in the first six months of fiscal year 2023. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its future earnings denominated in Canadian dollars would 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 loss of $0.1 million and a gain of $0.3 million during the first six months of fiscal years 2024 and 2023, respectively, was recognized as a component of Interest and Other Expenses, net 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 September 23, 2023, the Company had a foreign exchange contract, which matured in October 2023, outstanding in the notional amount of $2.1 million. This contract was subsequently renewed and remains in place. The Company does not use hedging arrangements for speculative purposes.

Earnings Per Share: Basic earnings per share of the Company's common stock, par value $0.50 per share ("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, proceeds received from the exercise of options and unvested restricted stock units 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.

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For the second quarter of each of fiscal years 2024 and 2023, the net additional common stock equivalents had no effect on the calculation of diluted earnings per share. For the first six months of each of fiscal years 2024 and 2023, 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):

	*Second Quarter Ended*				*Six Months Ended*
	*September 23,*		*September 24,*		*September 23,*		*September 24,*
	*2023*		*2022*		*2023*		*2022*
Average Shares Outstanding – Basic		7,819		7,550		7,732		7,542
Effect of Dilutive Common Stock Equivalents		129		96		108		93
Average Shares Outstanding – Diluted		7,948		7,646		7,840		7,635
Anti-dilutive Common Stock Equivalents		31		166		37		166

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 for each reporting unit on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value to determine whether it is necessary to perform the two-step goodwill impairment test. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value.

Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. 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 (amounts in thousands):

	*Goodwill*						*Intangible Assets*
	*Distribution*		*Service*		*Total*		*Distribution*			*Service*			*Total*
Net Book Value as of March 25, 2023	$	11,458	$	57,902	$	69,360	$	448		$	13,351		$	13,799
Additions		27,095		9,795		36,890		7,900			3,983			11,883
Amortization		-		-		-		(341	)		(2,187	)		(2,528	)
Currency Translation Adjustment		-		116		116		-			2			2
Net Book Value as of September 23, 2023	$	38,553	$	67,813	$	106,366	$	8,007		$	15,149		$	23,156

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Other Liabilities: A summary of other current and non-current liabilities is as follows (amounts in thousands):

	(Unaudited)		(Audited)
	*September 23,*		*March 25,*
	*2023*		*2023*
Current Liabilities:
Accrued Payroll and Employee Benefits	$	3,440	$	3,243
Accrued Incentives		1,873		2,507
Current Portion of Lease Liabilities		2,749		2,333
Accrued Acquisition Holdbacks		2,525		252
Accrued Contingent Consideration		942		-
Other Current Liabilities		1,766		1,866
Accrued Compensation and Other Current Liabilities	$	13,295	$	10,201

Non-Current Liabilities:
Postretirement Benefit Obligation	$	1,254	$	1,266
Accrued Acquisition Holdbacks		1,647		-
Accrued Contingent Consideration		2,358		-
Other Non-Current Liabilities		218		168
Other Liabilities	$	5,477	$	1,434

Recently Adopted 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 credit losses for accounts receivable is the most significant item for the Company under this ASU. The Company adopted ASU 2016-13 effective on March 26, 2023. The adoption of this standard did not have a material impact on our consolidated financial statements.

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NOTE 2 – LONG-TERM DEBT

On July 7, 2021, the Company entered into the Second Amended and Restated Credit Facility Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s prior credit agreement with M&T.

The Credit Agreement provides for a revolving credit commitment (the “Revolving Credit Commitment”) of $80.0 million through June 2026, with a letter of credit subfacility of $10.0 million. The Company's 2018 term loan, with an original principal amount of $15.0 million (the "2018 Term Loan"), is also provided for under the Credit Agreement.

The Credit Agreement allows the Company to use up to $50.0 million under the Revolving Credit Commitment for acquisitions in any single fiscal year. The Credit Agreement restricts the Company's ability to complete acquisitions of businesses with a principal place of business located in the United Kingdom or the European Union to an aggregate purchase price of $40.0 million during the term of the Credit Agreement, if the acquisition is financed directly or indirectly with the Revolving Credit Commitment.

Under the Credit Agreement, the Company may make restricted payments up to $25.0 million in the aggregate over the term of the Credit Agreement and $10.0 million in any single fiscal year to repurchase shares and pay dividends.

As of September 23, 2023, $32.0 million was available for borrowing under the revolving credit facility, with $48.0 million outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first six months of fiscal year 2024, $12.9 million was used for business acquisitions.

As of September 23, 2023, $5.3 million was outstanding on the 2018 Term Loan, of which $2.3 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 amortizing repayments (principal plus interest) of $0.2 million per month through its maturity date in 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 London Interbank Offered Rate ("LIBOR") or a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 0.25% floor), in each case, plus a margin. 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 six months of fiscal year 2024 ranged from 6.4% to 7.1%. Interest on outstanding borrowings under the 2018 Term Loan accrue at a fixed rate of 3.90% over the term of the loan. The Credit Agreement includes a mechanism for the adoption of a different benchmark rate upon the discontinuance of LIBOR. Per the terms of the Credit Agreement, LIBOR was replaced with the Daily Simple SOFR plus applicable Benchmark Replacement Adjustment effective July 1, 2023.

Covenants: The Credit Agreement has certain covenants with which the Company must comply, including a fixed charge ratio covenant, which prohibits the Company's fixed charge ratio from being less than 1.15 to 1.00, and a leverage ratio covenant, which prohibits the Company's leverage ratio from exceeding 3.00 to 1.00. The Company was in compliance with all loan covenants and requirements during the first six months of fiscal year 2024. The Company's leverage ratio, as defined in the Credit Agreement, was 1.37 at September 23, 2023, compared with 1.60 at March 25, 2023.

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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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

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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.

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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.

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NOTE 4 – SEGMENT INFORMATION

The basis for determining our operating segments is the manner in which financial information is used in monitoring our operations. Transcat has two reportable segments: Service and Distribution. Through our Service segment, we offer calibration, repair, inspection, analytical qualifications, preventative maintenance, consulting and other related services. Through our Distribution segment, we sell and rent national and proprietary brand instruments to customers globally. The Company has no inter-segment sales. We believe that reporting performance at the operating income level is the best indicator of segment performance. The following table presents segment and geographic data for the second quarter and first six months of fiscal year 2024 and fiscal year 2023 (dollars in thousands):

	*Second Quarter Ended*				*Six Months Ended*
	*September 23,*		*September 24,*		*September 23,*		*September 24,*
	*2023*		*2022*		*2023*		*2022*
Revenue:
Service	$	41,431	$	35,267	$	81,284	$	69,143
Distribution		21,373		21,172		42,118		41,957
Total		62,804		56,439		123,402		111,100

Gross Profit:
Service		14,084		11,487		27,055		22,322
Distribution		6,041		5,280		11,780		10,483
Total		20,125		16,767		38,835		32,805

Operating Expenses:
Service⁽¹⁾		13,342		8,980		23,121		17,283
Distribution⁽¹⁾		5,140		4,161		9,431		8,292
Total		18,482		13,141		32,552		25,575

Operating Income:
Service		742		2,507		3,934		5,039
Distribution		901		1,119		2,349		2,191
Total		1,643		3,626		6,283		7,230

Unallocated Amounts:
Interest and Other Expense, net		841		537		1,719		693
Provision for Income Taxes		342		732		1,155		1,108
Total		1,183		1,269		2,874		1,801

Net Income	$	460	$	2,357	$	3,409	$	5,429

Geographic Data:
Revenues to Unaffiliated Customers⁽²⁾
United States ⁽³⁾	$	57,119	$	51,036	$	111,376	$	100,033
Canada		3,896		3,868		8,143		7,855
Other International		1,789		1,535		3,883		3,212
Total	$	62,804	$	56,439	$	123,402	$	111,100

⁽¹⁾	Operating expense allocations between segments are based on actual amounts, a percentage of revenues, headcount, and management’s estimates.

⁽²⁾	Revenues are attributed to the countries based on the destination of a product shipment or the location where service is rendered.

⁽³⁾	United States includes Puerto Rico.

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NOTE 5 – BUSINESS ACQUISITIONS

Axiom: Effective August 8, 2023, Transcat purchased all of the outstanding capital stock of Axiom Test Equipment, Inc. (“Axiom”), a privately-held California rental provider of electronic test equipment to customers across the United States. 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 Distribution capabilities.

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

The total purchase price for Axiom was approximately $38.6 million and was paid with $10.0 million in cash and the issuance of our common stock valued at $28.6 million. Pursuant to the asset purchase agreement, the Company held back approximately $3.9 million of the purchase price for certain potential post-closing adjustments.

The purchase price allocation is subject to revision based upon our final review of tangible and intangible asset valuation assumptions, working capital adjustments, 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 Axiom's assets and liabilities acquired on August 8, 2023 (in thousands):

Goodwill		$	27,095
Intangible Assets – Customer Base & Contracts			7,900
			34,995
Plus:	Cash		37
	Accounts Receivable		962
	Inventory		1,678
	Other Current Assets		83
	Property and Equipment		4,695
Less:	Current Liabilities		(631	)
	Deferred Tax Liability		(3,256	)
Total Purchase Price		$	38,563

From the date of acquisition through the end of the second quarter of fiscal year 2024, Axiom has contributed revenue of $1.4 million and operating income of $0.1 million, which includes the negative impact of amortization of the acquired intangible assets.

SteriQual: Effective July 12, 2023, Transcat purchased all of the outstanding capital stock of SteriQual, Inc. (“SteriQual”), a Florida based provider of expert consulting services to pharmaceutical, biopharmaceutical, medical device and diagnostic equipment manufacturers. 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 SteriQual goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the SteriQual acquisition has been allocated to the Service segment. Intangible assets related to the SteriQual acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are not deductible for tax purposes. Amortization of goodwill related to the SteriQual acquisition is not deductible for tax purposes.

The total purchase price for SteriQual was approximately $4.3 million and was paid by the issuance of our common stock. Pursuant to the asset purchase agreement, the Company held back approximately $0.9 million of the purchase price for certain potential post-closing adjustments. Pursuant to the asset purchase agreement, the purchase price is subject to reduction by up to $0.5 million if certain revenue targets are not met through July 12, 2024. This contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company’s Consolidated Statements of Income. As of September 23, 2023, there has not been a receivable recognized relating to the $0.5 million contingent consideration.

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The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, 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 SteriQual's assets and liabilities acquired on July 12, 2023 (in thousands):

Goodwill		$	2,602
Intangible Assets – Customer Base & Contracts			1,062
Intangible Assets – Covenant Not to Compete			392
Intangible Assets – Sales Backlog			95
			4,151
Plus:	Accounts Receivable		665
Less:	Current Liabilities		(149	)
	Deferred Tax Liability		(383	)
Total Purchase Price		$	4,284

From the date of acquisition through the end of the second quarter of fiscal year 2024, SteriQual has contributed revenue of $0.7 million and operating loss of less than $0.1 million, which includes the negative impact of amortization of the acquired intangible assets.

TIC-MS: Effective March 27, 2023, Transcat purchased all of the outstanding capital stock of TIC-MS, Inc. (“TIC-MS”), a Missouri based provider of 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.

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

The total purchase price for TIC-MS was approximately $9.8 million and was paid with $2.9 million in cash, including $0.5 million placed in escrow for contingent consideration, certain post-closing adjustments and indemnification claims, if any, and the issuance of 77,387 shares of our common stock valued at $6.9 million. Pursuant to the asset purchase agreement, the purchase price will be subject to reduction by up to $0.5 million if a key customer relationship is not retained through March 27, 2024. This contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company’s Consolidated Statements of Income. As of September 23, 2023, we continued to retain this key customer relationship. As a result, there has not been a receivable recognized relating to the $0.5 million contingent consideration.

The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, 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 TIC-MS's assets and liabilities acquired on March 27, 2023 (in thousands):

Goodwill		$	7,193
Intangible Assets – Customer Base & Contracts			2,303
Intangible Assets – Covenant Not to Compete			132
			9,628
Plus:	Cash		80
	Accounts Receivable		470
	Property and Equipment		356
Less:	Current Liabilities		(118	)
	Deferred Tax Liability		(636	)
Total Purchase Price		$	9,780

From the date of acquisition through the end of the second quarter of fiscal year 2024, TIC-MS has contributed revenue of $1.7 million and operating income of $0.7 million, which includes the negative impact of amortization of the acquired intangible assets.

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Elite: Effective February 2, 2023, Transcat acquired substantially all of the assets of Elite Calibration LLC (“Elite”), a California 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 the goodwill related to the Elite acquisition has been allocated to the Service segment. Amortization of goodwill related to the Elite acquisition is deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition.

The total purchase price for the assets of Elite was approximately $0.9 million, of which $0.8 million was paid in cash. Pursuant to the asset purchase agreement, the Company held back $0.1 million of the purchase price for certain potential post-closing adjustments. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Elite’s assets and liabilities acquired on February 2, 2023 (in thousands):

Goodwill		$	820
Plus:	Accounts Receivable		62
Total Purchase Price		$	882

Since this operation was integrated immediately into our existing operations, its separate contributed revenue and operating income is undeterminable.

Complete Calibrations: Effective September 28, 2022, Transcat purchased all of the outstanding capital stock of Galium Limited (d/b/a Complete Calibrations) ("Complete Calibrations"), an Irish company. 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.

All the goodwill related to the Complete Calibrations acquisition has been allocated to the Service segment. Amortization of goodwill related to the Complete Calibrations acquisition is not deductible for tax purposes. The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition.

The total purchase price paid for Complete Calibrations was approximately $1.2 million in cash. In connection with this transaction, the Company also entered into a Technology License Agreement with Calibration Robots Limited, an Irish company and related party to Complete Calibrations, for the use of their proprietary robotics in completing calibrations. The Technology License Agreement includes transactional royalties in the amount of 3 Euros ($3.19) per calibration performed by technology covered under this license agreement, with a royalty term of up to ten years commencing from the earlier of (i) the date on which cumulative revenue earned from technology covered under this license agreement equals 0.75 million Euros ($0.80 million), and (ii) March 28, 2024. In addition to the transactional royalties, as long as a key employee is employed by the Company, there is an annual royalty fee of 0.1 million Euros ($0.11 million). For purposes of this paragraph, we used a conversion rate of 1.0646 to convert Euro to U.S. dollar as of September 23, 2023.

The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Complete Calibrations’ assets and liabilities acquired on September 28, 2022 (in thousands):

Goodwill		$	1,123
Plus:	Cash		10
	Inventory		44
Total Purchase Price		$	1,177

During the first six months of fiscal year 2024, Complete Calibrations has contributed revenue of $0.2 million and operating loss of less than $0.1 million.

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e2b: Effective September 27, 2022, Transcat acquired substantially all of the assets of e2b Calibration (“e2b”), an Ohio based provider of 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.

The e2b goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the e2b acquisition has been allocated to the Service segment. Intangible assets related to the e2b acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the e2b acquisition is deductible for tax purposes.

The total purchase price paid for the assets of e2b was approximately $3.1 million in cash. Pursuant to the asset purchase agreement, the Company held back $0.9 million of the purchase price in escrow for certain potential post-closing adjustments. During the third quarter of fiscal year 2023, $0.6 million of the escrow was released to the sellers. As of September 23, 2023, $0.3 million remains in escrow.

The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of e2b’s assets and liabilities acquired on September 27, 2022 (in thousands):

Goodwill		$	1,367
Intangible Assets – Customer Base & Contracts			746
Intangible Assets – Covenant Not to Compete			396
			2,509
Plus:	Accounts Receivable		361
	Other Current Assets		24
	Property and Equipment		326
Less:	Current Liabilities		(121	)
Total Purchase Price		$	3,099

During the first six months of fiscal year 2024, e2b has contributed revenue of $1.8 million and operating income of $0.2 million, which includes the negative impact of amortization of the acquired intangible assets.

Alliance: Effective May 31, 2022, Transcat acquired substantially all of the assets of Charlton Jeffmont Inc., Raitz Inc. and Toolroom Calibration Inc. d/b/a Alliance Calibration (“Alliance”), an Ohio based provider of 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.

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

The purchase price for Alliance was approximately $4.7 million and was paid with $4.0 million in cash and the issuance of 2,284 shares of our common stock valued at $0.1 million. Pursuant to the asset purchase agreement, the Company held back $0.5 million of the purchase price for certain potential post-closing adjustments, and the purchase price would have been subject to reduction by $0.5 million if a key customer relationship was not retained. During the first quarter of fiscal year 2024, $0.5 million of the holdback was released to the sellers.

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The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Alliance’s assets and liabilities acquired on May 31, 2022 (in thousands):

Goodwill		$	1,783
Intangible Assets – Customer Base & Contracts			2,320
Intangible Assets – Covenant Not to Compete			114
			4,217
Plus:	Accounts Receivable		343
	Property and Equipment		170
Less:	Current Liabilities		(27	)
Total Purchase Price		$	4,703

During the first six months of fiscal year 2024, Alliance has contributed revenue of $1.3 million and operating income of $0.4 million, which includes the negative impact of amortization of the acquired intangible assets.

NEXA: Effective August 31, 2021, Transcat purchased all of the outstanding capital stock of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an 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”). On September 11, 2023, the Company entered into an amendment (the “Amendment”) to a Share Purchase Agreement dated August 31, 2021 (the “Purchase Agreement”) with John Cummins and Ross Lane (the “Sellers”) associated with the Company’s purchase of all of the outstanding capital stock of NEXA. As described below, the Amendment changes the conditions necessary for the Sellers to receive potential earn-out payments, changes the lines of business included in the calculation of earnings before income taxes, depreciation and amortization (“EBITDA”), and changes the outside due date of any potential earn-out payments.

Pursuant to the Purchase Agreement, the Sellers were entitled to potential earn-out payments in an aggregate amount of up to $7.5 million for the calendar years ending December 31, 2022, 2023, 2024, and 2025 (each, an “Earn-Out Year”) if NEXA’s consolidated gross revenue, as defined in the Purchase Agreement, equaled or exceeded 70% of the target revenue specified in the Purchase Agreement and NEXA’s consolidated EBITDA percentage, as defined in the Purchase Agreement, equaled or exceeded 25% for a given earn-out year. The potential earn-out payment of up to $0.4 million for the 2022 Earn-Out Year was not earned under the Purchase Agreement.

Pursuant to the Amendment, the Sellers are now entitled to potential earn-out payments in an aggregate amount of up to $7.1 million for the remaining Earn-Out Years (2023, 2024 and 2025) if NEXA’s consolidated EBITDA, as defined in the Amendment, equals or exceeds 70% of the target EBITDA specified in the Amendment for a given earn-out year. Pursuant to the Amendment, the definition of EBITDA was revised to include EBITDA from the CQV business and incremental EBITDA from the SteriQual, Inc. business. The maximum earn-out payment will be received if NEXA’s consolidated EBITDA equals or exceeds 150% of the target EBITDA specified in the Amendment. The earn-out payments, if any, will be paid in shares of common stock, calculated using the volume-weighted average closing price of the common stock for 30 consecutive trading days ending on the trading day that is two days prior to the date the earn-out payment is to be paid (“VWAP”). If the VWAP is less than $45.07 per share, then the Company may pay the earn-out payment in cash in lieu of shares of common stock.

As of March 25, 2023, the estimated fair value for the total earn-out obligations under the Purchase Agreement, classified as Level 3 in the fair value hierarchy, was zero. As of September 23, 2023, the estimated fair value for the total earn-out obligations under the Amendment, classified as Level 3 in the fair value hierarchy, was approximately $2.8 million. This amount was calculated using a Geometric Brownian motion distribution that was then used in a Monte Carlo simulation model. Assumptions used in the Monte Carlo simulation model included: 1) discount rate of 9.00%, 2) risk-free interest rate of 5.00%, 3) asset volatility of 25.00%, and 4) forecasted revenue and EBITDA. This contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company’s Consolidated Statements of Income. Due to the uncertainty with utilizing these significant unobservable inputs for this Level 3 fair value measurement, materially higher or lower fair value measurements may be recognized at subsequent remeasurement periods. The Company recognized a non-cash expense of $2.8 million, which was recorded in general and administrative expenses in its Consolidated Statement of Income for the quarter ended September 23, 2023.

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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 Axiom, SteriQual, TIC-MS, Elite, Complete Calibrations, e2b and Alliance had occurred at the beginning of fiscal year 2023. 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)
	*Second Quarter Ended*				*Six Months Ended*
(in thousands except per share information)	*September 23, 2023*		*September 24, 2022*		*September 23, 2023*		*September 24, 2022*

Total Revenue	$	66,077	$	62,280	$	131,550	$	123,410
Net Income	$	422	$	1,670	$	3,085	$	3,975
Basic Earnings Per Share	$	0.05	$	0.22	$	0.40	$	0.53
Diluted Earnings Per Share	$	0.05	$	0.22	$	0.39	$	0.52

Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition and at subsequent remeasurement periods, as applicable. As of September 23, 2023, $0.9 million contingent consideration and $2.5 million of other holdback amounts unpaid are reflected in current liabilities on the Consolidated Balance Sheets and $2.4 million contingent consideration and $1.6 million of other holdback amounts unpaid are reflected in other liabilities on the Consolidated Balance Sheets. During the first six months of fiscal year 2024, no contingent consideration and $0.3 million of other holdback amounts were paid. During the first six months of fiscal year 2023, no contingent consideration or other holdback amounts were paid.

During the first six months of fiscal year 2024 and fiscal year 2023, acquisition costs of $0.5 million and less than $0.1 million, respectively, were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

NOTE 6 – SUBSEQUENT EVENT

On September 21, 2023, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc., as representative of several underwriters, for the sale of common stock in an underwritten public offering at a public offering price of $95.00 per share (the “Offering”). The Offering closed on September 25, 2023 and the Company sold an aggregate of 847,371 shares in the Offering, which included 110,526 shares issued upon the exercise by the underwriters of their over-allotment option, for total gross proceeds of $80.5 million. Net proceeds received after direct costs in the Offering were $75.5 million. A portion of the net proceeds from this Offering were used to pay off the Revolving Credit Facility in full.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” "potential," "outlook," “seek,” “strategy,” “target,” “could,” “may,” “will,” “would,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, general economic conditions applicable to our business, inflationary impacts, the impact of widespread public health crises, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, the concentration of Service segment customers in the life science and other FDA-regulated and industrial manufacturing industries, the significant competition we face in our Distribution segment, any impairment of our goodwill or intangible assets, tariffs and trade relations, our ability to successfully complete and integrate business acquisitions, cybersecurity risks, the risk of significant disruptions in our information technology systems, our ability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, our ability to achieve or maintain adequate utilization and pricing rates for our technical service providers, the prices we are able to charge for our services in our Service segment, competition in the rental market, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, supply chain delays or disruptions, the risks related to current and future indebtedness, foreign currency rate fluctuations, risks related to our intellectual property, geopolitical events, adverse weather events or other catastrophes or natural disasters, the volatility of our stock price, the relatively low trading volume of our common stock, changes in tax rates, changes in accounting standards, legal requirements and listing standards, and legal and regulatory risks related to our international operations. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 25, 2023. You should not place undue reliance on our forward-looking statements, which speak only as of the date they are made. Except as required by law, we undertake no obligation to update, correct or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 25, 2023.

RESULTS OF OPERATIONS

Executive Summary

During our second quarter of fiscal year 2024, we had consolidated revenue of $62.8 million. This represented an increase of $6.4 million or 11.3% versus the second quarter of fiscal year 2023. This increase was primarily due to recently completed acquisitions, strong demand in our Service segment’s highly-regulated end markets and increased rental sales, which includes incremental revenue from an acquisition.

Our second quarter of fiscal year 2024 gross profit was $20.1 million. This was an increase of $3.4 million or 20.0% versus the second quarter of fiscal year 2023. In addition, consolidated gross margin was 32.0%, an increase of 230 basis points versus the second quarter of fiscal year 2023. This increase was largely the result of operating leverage on our fixed costs, increased technician productivity and accretive gross margins from our rental business.

Total operating expenses were $18.5 million in the second quarter of fiscal year 2024, an increase of $5.3 million or 40.6% when compared to the prior year second quarter. Included in operating expenses during the second quarter of fiscal year 2024 were the non-cash charge related to the amended NEXA earn-out agreement (the "NEXA earn-out"), incremental operating expenses from the acquisitions of Axiom, SteriQual, TIC-MS, e2b and Complete Calibrations, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 29.4% in the second quarter of fiscal year 2024, up 610 basis points from 23.3% in the second quarter of fiscal year 2023. Operating income was $1.6 million, a decrease of $2.0 million, or 54.7% and operating margin decreased from 6.4% to 2.6% in the second quarter of fiscal year 2024.

Net income was $0.5 million in the second quarter of fiscal year 2024 versus $2.4 million in the second quarter of fiscal year 2023. The decrease was primarily due to lower operating income, driven by the non-cash charge for the NEXA earn-out, and higher interest expense associated with higher interest rates, partially offset by lower provision for income taxes.

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The following table presents, for the second quarter and for the first six months of fiscal year 2024 and fiscal year 2023, the components of our Consolidated Statements of Income:

	(Unaudited)						(Unaudited)
	Second Quarter Ended						Six Months Ended
	September 23,			September 24,			September 23,			September 24,
	2023			2022			2023			2022
As a Percentage of Total Revenue:
Service Revenue		66.0	%		62.5	%		65.9	%		62.2	%
Distribution Sales		34.0	%		37.5	%		34.1	%		37.8	%
Total Revenue		100.0	%		100.0	%		100.0	%		100.0	%

Gross Profit Percentage:
Service Gross Profit		34.0	%		32.6	%		33.3	%		32.3	%
Distribution Gross Profit		28.3	%		24.9	%		28.0	%		25.0	%
Total Gross Profit		32.0	%		29.7	%		31.5	%		29.5	%

Selling, Marketing and Warehouse Expenses		10.9	%		10.5	%		10.8	%		10.5	%
General and Administrative Expenses		18.5	%		12.8	%		15.6	%		12.5	%
Total Operating Expenses		29.4	%		23.3	%		26.4	%		23.0	%

Operating Income		2.6	%		6.4	%		5.1	%		6.5	%

Interest and Other Expense, net		1.3	%		1.0	%		1.4	%		0.6	%

Income Before Income Taxes		1.3	%		5.5	%		3.7	%		5.9	%
Provision for Income Taxes		0.6	%		1.3	%		0.9	%		1.0	%

Net Income		0.7	%		4.2	%		2.8	%		4.9	%

Second Quarter Ended September 23, 2023 COMPARED TO Second Quarter Ended September 24, 2022 (dollars in thousands):

Revenue:

	Second Quarter Ended				Change
	September 23,		September 24,
	2023		2022		$		%
Revenue:
Service	$	41,431	$	35,267	$	6,164		17.5	%
Distribution		21,373		21,172		201		0.9	%
Total	$	62,804	$	56,439	$	6,365		11.3	%

Total revenue was $62.8 million, an increase of $6.4 million, or 11.3%, in our fiscal year 2024 second quarter compared to the prior fiscal year second quarter.

Service revenue, which accounted for 66.0% and 62.5% of our total revenue in the second quarter of fiscal years 2024 and 2023, respectively, increased 17.5% from the second quarter of fiscal year 2023 to the second quarter of fiscal year 2024. This year-over-year increase included $2.6 million in revenue from acquisitions, and also included organic revenue growth of 10.0% driven by strong end-market demand and continued market share gains.

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Our fiscal years 2024 and 2023 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

	FY 2024						FY 2023
	Q2			Q1			Q4			Q3			Q2			Q1
Service Revenue Growth		17.5	%		17.6	%		14.7	%		19.0	%		19.4	%		22.9	%

The growth in Service segment revenue during the second quarter of fiscal year 2024 versus the second quarter of fiscal year 2023 reflected both organic growth and acquisitions.

Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment.

The following table presents the trailing twelve-month Service segment revenue for the first and second quarter of fiscal year 2024 and each quarter in fiscal year 2023 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:

	FY 2024						FY 2023
	Q2			Q1			Q4			Q3			Q2			Q1
Trailing Twelve-Month:
Service Revenue	$	157,024		$	150,860		$	144,883		$	139,787		$	134,047		$	128,324
Service Revenue Growth		17.1	%		17.6	%		18.8	%		20.2	%		20.9	%		21.2	%

Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service revenue derived from each source for the first and second quarter of fiscal year 2024 and for each quarter during fiscal year 2023:

	FY 2024						FY 2023
	Q2			Q1			Q4			Q3			Q2			Q1
Percent of Service Revenue:
In-House		85.8	%		87.3	%		86.9	%		86.2	%		86.2	%