10-Q 1 trns20240103_10q.htm FORM 10-Q trns20240103_10q.htm
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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 23, 2023

 

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 26, 2024 was 8,829,127.

 

 

 
   

Page(s)

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Consolidated Financial Statements:

 
     
 

Statements of Income for the Third Quarter and Nine Months Ended December 23, 2023 and December 24, 2022

1

     
 

Statements of Comprehensive Income for the Third Quarter and Nine Months Ended December 23, 2023 and December 24, 2022

2

     
 

Balance Sheets as of December 23, 2023 and March 25, 2023

3

     
 

Statements of Cash Flows for the Nine Months Ended December 23, 2023 and December 24, 2022

4

     
 

Statements of Changes in Shareholders' Equity for the Third Quarter and Nine Months Ended December 23, 2023 and December 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 6.

Exhibits

35

     

SIGNATURES

37

 

 

 

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 23,

  

December 24,

  

December 23,

  

December 24,

 
  

2023

  

2022

  

2023

  

2022

 
                 

Service Revenue

 $41,509  $35,977  $122,793  $105,120 

Distribution Sales

  23,657   21,425   65,775   63,382 

Total Revenue

  65,166   57,402   188,568   168,502 
                 

Cost of Service Revenue

  28,015   25,184   82,244   72,005 

Cost of Distribution Sales

  16,215   15,818   46,553   47,292 

Total Cost of Revenue

  44,230   41,002   128,797   119,297 
                 

Gross Profit

  20,936   16,400   59,771   49,205 
                 

Selling, Marketing and Warehouse Expenses

  7,519   6,595   20,844   18,315 

General and Administrative Expenses

  9,123   6,642   28,350   20,497 

Total Operating Expenses

  16,642   13,237   49,194   38,812 
                 

Operating Income

  4,294   3,163   10,577   10,393 
                 

Interest Expense

  81   731   1,785   1,651 

Interest Income

  (347)  (5)  (347)  (15)

Other Income/Expense

  289   313   304   96 

Total Interest and Other

  23   1,039   1,742   1,732 
                 

Income Before Income Taxes

  4,271   2,124   8,835   8,661 

Provision for Income Taxes

  923   523   2,078   1,631 
                 

Net Income

 $3,348  $1,601  $6,757  $7,030 
                 

Basic Earnings Per Share

 $0.39  $0.21  $0.84  $0.93 

Average Shares Outstanding

  8,615   7,559   8,060   7,547 
                 

Diluted Earnings Per Share

 $0.38  $0.21  $0.83  $0.92 

Average Shares Outstanding

  8,752   7,666   8,187   7,644 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

 

  

(Unaudited)

  

(Unaudited)

 
  

Third Quarter Ended

  

Nine Months Ended

 
  

December 23,

  

December 24,

  

December 23,

  

December 24,

 
  

2023

  

2022

  

2023

  

2022

 

Net Income

 $3,348  $1,601  $6,757  $7,030 
                 

Other Comprehensive Income (Loss):

                

Currency Translation Adjustment

  364   393   488   (878)

Other, net of tax effects of $3 and $2 for the third quarter ended December 23, 2023 and December 24, 2022, respectively; and $7 and $(4) for the nine months ended December 23, 2023 and December 24, 2022, respectively

  9   8   21   (12)

Total Other Comprehensive Income (Loss)

  373   401   509   (890)
                 

Comprehensive Income

 $3,721  $2,002  $7,266  $6,140 

 

See accompanying notes to consolidated financial statements.

 

 

 

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

 

  

(Unaudited)

  

(Audited)

 
  

December 23,

  

March 25,

 
  

2023

  

2023

 

ASSETS

        

Current Assets:

        

Cash and cash equivalents

 $35,205  $1,531 

Accounts Receivable, less allowance for credit losses of $579 and $457 as of December 23, 2023 and March 25, 2023, respectively

  43,307   44,698 

Other Receivables

  819   506 

Inventory, net

  16,178   16,929 

Prepaid Expenses and Other Current Assets

  3,295   3,935 

Total Current Assets

  98,804   67,599 

Property and Equipment, net

  37,222   29,064 

Goodwill

  105,700   69,360 

Intangible Assets, net

  21,459   13,799 

Right To Use Assets, net

  16,834   14,876 

Other Assets

  1,055   1,051 

Total Assets

 $281,074  $195,749 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current Liabilities:

        

Accounts Payable

 $11,355  $15,869 

Accrued Compensation and Other Current Liabilities

  15,683   10,201 

Current Portion of Long-Term Debt

  2,316   2,248 

Total Current Liabilities

  29,354   28,318 

Long-Term Debt

  2,411   46,869 

Deferred Tax Liabilities, net

  10,855   6,538 

Lease Liabilities

  14,457   12,960 

Other Liabilities

  5,527   1,434 

Total Liabilities

  62,604   96,119 
         

Shareholders' Equity:

        

Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 8,828,515 and 7,562,604 shares issued and outstanding as of December 23, 2023 and March 25, 2023, respectively

  4,414   3,781 

Capital in Excess of Par Value

  140,382   27,886 

Accumulated Other Comprehensive Loss

  (691)  (1,200)

Retained Earnings

  74,365   69,163 

Total Shareholders' Equity

  218,470   99,630 

Total Liabilities and Shareholders' Equity

 $281,074  $195,749 

 

See accompanying notes to consolidated financial statements.

 

 

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

  

(Unaudited)

 
  

Nine Months Ended

 
  

December 23,

  

December 24,

 
  

2023

  

2022

 

Cash Flows from Operating Activities:

        

Net Income

 $6,757  $7,030 

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

        

Net Loss on Disposal of Property and Equipment

  24   62 

Deferred Income Taxes

  42   (52)

Depreciation and Amortization

  9,841   8,243 

Provision for Accounts Receivable and Inventory Reserves

  379   174 

Stock-Based Compensation Expense

  3,338   2,757 

Changes in Assets and Liabilities, net of acquisitions:

        

Accounts Receivable and Other Receivables

  3,819   1,850 

Inventory

  3,208   (3,589)

Prepaid Expenses and Other Current Assets

  728   1,074 

Accounts Payable

  (5,194)  (424)

Accrued Compensation and Other Current Liabilities

  3,947   (3,150)

Net Cash Provided by Operating Activities

  26,889   13,975 
         

Cash Flows from Investing Activities:

        

Purchases of Property and Equipment

  (9,099)  (7,149)

Proceeds from Sale of Property and Equipment

  -   10 

Business Acquisitions, net of cash acquired

  (12,932)  (8,306)

Net Cash Used in Investing Activities

  (22,031)  (15,445)
         

Cash Flows from Financing Activities:

        

(Repayment of) Proceeds from Revolving Credit Facility, net

  (42,713)  2,286 

Repayments of Term Loan

  (1,678)  (1,570)

Issuance of Common Stock, net of direct costs

  75,714   503 

Repurchase of Common Stock

  (2,247)  (437)

Net Cash Provided by Financing Activities

  29,076   782 
         

Effect of Exchange Rate Changes on Cash and cash equivalents

  (260)  885 
         

Net Increase in Cash and cash equivalents

  33,674   197 

Cash and cash equivalents at Beginning of Period

  1,531   1,396 

Cash and cash equivalents at End of Period

 $35,205  $1,593 
         

Supplemental Disclosure of Cash Flow Activity:

        

Cash paid during the period for:

        

Interest

 $1,652  $1,510 

Income Taxes, net

 $1,884  $957 

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 

Balance Sheet Reclassification of Property and Equipment, net to Inventory

 $737  $576 
         

 

See accompanying notes to consolidated financial statements.

 

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 

Issuance of Common Stock

  1   -   139   -   -   139 

Stock-Based Compensation

  1   1   814   -   -   815 

Other Comprehensive Income

  -   -   -   401   -   401 

Net Income

  -   -   -   -   1,601   1,601 

Balance as of December 24, 2022

  7,560  $3,780  $27,123  $(1,123) $65,504  $95,284 

 

          

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 

Proceeds from Issuance of Common Stock

  849   424   80,229   -   -   80,653 

Direct Costs of Stock Offering

  -   -   (5,323)  -   -   (5,323)

Stock-Based Compensation

  2   1   1,166   -   -   1,167 

Other Comprehensive Income

  -   -   -   373   -   373 

Net Income

  -   -   -   -   3,348   3,348 

Balance as of December 23, 2023

  8,829  $4,414  $140,382  $(691) $74,365  $218,470 

 

See accompanying notes to consolidated financial statements.

 

 

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 and rental source for 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 credit losses 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.

 

Cash and Cash Equivalents:  Cash equivalents consist of highly liquid investments with an original maturity when purchased of three months or less and are stated at cost, which approximates fair value.

 

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 sales are 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.

 

6

 

Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 30, 2024 (“fiscal year 2024”) was immaterial. As of December 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 December 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 the 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 and cash equivalents, 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 December 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 nine months of fiscal year 2024 and fiscal year 2023, the Company recorded non-cash stock-based compensation cost of $3.3 million and $2.8 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 net loss of $0.1 million for each of the first nine months of fiscal year 2024 and 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 nine 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 December 23, 2023, the Company had a foreign exchange contract, which matured in January 2024, outstanding in the notional amount of $2.0 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.

 

7

 

For the third quarter of fiscal year 2024, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. For the third quarter of fiscal year 2023, the net additional common stock equivalents had no effect on the calculation of diluted earnings per share. For the first nine 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):

 

  

Third Quarter Ended

  

Nine Months Ended

 
  

December 23,

  

December 24,

  

December 23,

  

December 24,

 
  

2023

  

2022

  

2023

  

2022

 

Average Shares Outstanding – Basic

  8,615   7,559   8,060   7,547 

Effect of Dilutive Common Stock Equivalents

  137   107   127   97 

Average Shares Outstanding – Diluted

  8,752   7,666   8,187   7,644 

Anti-dilutive Common Stock Equivalents

  37   148   46   163 

 

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

  26,707   9,416   36,123   7,900   3,983   11,883 

Amortization

  -   -   -   (910)  (3,317)  (4,227)

Currency Translation Adjustment

  -   217   217   -   4   4 

Net Book Value as of December 23, 2023

 $38,165  $67,535  $105,700  $7,438  $14,021  $21,459 

 

8

 

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

 

  

(Unaudited)

  

(Audited)

 
  

December 23,

  

March 25,

 
  

2023

  

2023

 

Current Liabilities:

        

Accrued Payroll and Employee Benefits

 $4,056  $3,243 

Accrued Incentives

  3,095   2,507 

Current Portion of Lease Liabilities

  2,878   2,333 

Accrued Acquisition Holdbacks

  2,749   252 

Accrued Contingent Consideration

  1,029   - 

Other Current Liabilities

  1,876   1,866 

Accrued Compensation and Other Current Liabilities

 $15,683  $10,201 
         

Non-Current Liabilities:

        

Postretirement Benefit Obligation

 $1,238  $1,266 

Accrued Acquisition Holdbacks

  1,647   - 

Accrued Contingent Consideration

  2,402   - 

Other Non-Current Liabilities

  240   168 

Other Liabilities

 $5,527  $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.

 

 

 

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 December 23, 2023, $80.0 million was available for borrowing under the revolving credit facility.  As of December 23, 2023, there were no amounts outstanding under the revolving credit facility. During the first nine months of fiscal year 2024, $12.9 million was drawn from the revolving credit facility and used for business acquisitions.

 

As of December 23, 2023, $4.7 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: Effective July 1, 2023, interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable Daily Simple SOFR or a fixed rate for a designated period at the SOFR 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 nine 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. 

 

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 nine months of fiscal year 2024. The Company's leverage ratio, as defined in the Credit Agreement, was 0.12 at December 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.

 

 

 

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 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 nine months of fiscal year 2024 and fiscal year 2023 were $0.7 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 December 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

 

December 23, 2023

October 2018

 

October 2018 – September 2028

 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

 

11

 

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $2.4 million and $1.7 million in the first nine months of fiscal year 2024 and fiscal year 2023, respectively. As of December 23, 2023, unearned compensation, to be recognized over the grants’ respective service periods, totaled $4.4 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 three and nine months of fiscal year 2024 and fiscal year 2023:

 

  

Third Quarter Ended

  

Nine Months Ended

 
  

December 23,

  

December 24,

  

December 23,

  

December 24,

 
  

2023

  

2022

  

2023

  

2022

 
                 

Risk-Free Interest Rate

  4.84%  N/A   4.09%  2.65%

Volatility Factor

  37.31%  N/A   37.12%  37.62%

Expected Term (in Years)

  6.50   N/A   6.30   4.58 

Annual Dividend Rate

  0.00%  N/A   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 nine 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 options for 20,000 shares of common stock (10,000 each) to two Company directors that vest over five years.

 

During the first nine 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 $0.9 million in the first nine months of fiscal year 2024 and $1.1 million in the first nine months of fiscal year 2023.

 

12

 

The following table summarizes the Company’s options as of and for the first nine months ended December 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

  37  $93.18         

Exercised

  (4) $24.30         

Forfeited

  (5) $68.13         

Outstanding as of December 23, 2023

  245  $62.06   6  $11,180 

Exercisable as of December 23, 2023

  82  $41.17   6  $4,984 

 

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 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 December 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 December 23, 2023 was $2.4 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised during the first nine months of fiscal year 2024 was $0.3 million and during the first nine months of fiscal year 2023 was $0.2 million. Cash received from the exercise of options in the first nine months of fiscal year 2024 and fiscal year 2023 was $0.1 million and less than $0.1 million, respectively.

 

 

 

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 third quarter and first nine months of fiscal year 2024 and fiscal year 2023 (dollars in thousands):

 

  

Third Quarter Ended

  

Nine Months Ended

 
  

December 23,

  

December 24,

  

December 23,

  

December 24,

 
  

2023

  

2022

  

2023

  

2022

 

Revenue:

                

Service

 $41,509  $35,977  $122,793  $105,120 

Distribution

  23,657   21,425   65,775   63,382 

Total

  65,166   57,402   188,568   168,502 
                 

Gross Profit:

                

Service

  13,494   10,793   40,549   33,115 

Distribution

  7,442   5,607   19,222   16,090 

Total

  20,936   16,400   59,771   49,205 
                 

Operating Expenses:

                

Service (1)

  10,528   8,957   33,649   26,240 

Distribution (1)

  6,114   4,280   15,545   12,572 

Total

  16,642   13,237   49,194   38,812 
                 

Operating Income:

                

Service

  2,966   1,836   6,900   6,875 

Distribution

  1,328   1,327   3,677   3,518 

Total

  4,294   3,163   10,577   10,393 
                 

Unallocated Amounts:

                

Interest and Other Expense, net

  23   1,039   1,742   1,732 

Provision for Income Taxes

  923   523   2,078   1,631 

Total

  946   1,562   3,820   3,363 
                 

Net Income

 $3,348  $1,601  $6,757  $7,030 
                 

Geographic Data:

                

Revenues to Unaffiliated Customers (2)

                

United States (3)

 $59,090  $51,209  $170,466  $151,241 

Canada

  4,083   4,221   12,226   12,075 

Other International

  1,993   1,972   5,876   5,186 

Total

 $65,166  $57,402  $188,568  $168,502 

 

(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.

 

 

 

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 amount of goodwill changed since September 23, 2023 due to the finalization of inventory and property and equipment values.  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

 $26,707 

Intangible Assets – Customer Base & Contracts

  7,900 
    34,607 

Plus:

Cash

  37 
 

Accounts Receivable

  962 
 

Inventory

  1,796 
 

Other Current Assets

  84 
 

Property and Equipment

  4,965 

Less:

Current Liabilities

  (631)
 

Deferred Tax Liability

  (3,256)

Total Purchase Price

 $38,564 

 

From the date of acquisition through the end of the third quarter of fiscal year 2024, Axiom has contributed revenue of $4.3 million and operating income of $0.4 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 $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. The purchase price was reduced to $3.8 million as of December 23, 2023 as the Company recorded a receivable in the amount of $0.5 million related to the revenue target contingent consideration. This receivable was recognized based on the facts and circumstances at the date of acquisition and is recognized as a component of goodwill and not recorded in the Consolidated Statement of Income. 

15

 

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 amount of goodwill changed since September 23, 2023 due to the accounts receivable balance as part of the contingent consideration.  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

 $2,163 

Intangible Assets – Customer Base & Contracts

  1,062 

Intangible Assets – Covenant Not to Compete

  392 

Intangible Assets – Sales Backlog

  95 
    3,712 

Plus:

Accounts Receivable

  666 

Less:

Current Liabilities

  (211)
 

Deferred Tax Liability

  (383)

Total Purchase Price

 $3,784 

 

From the date of acquisition through the end of the third quarter of fiscal year 2024, SteriQual has contributed revenue of $1.9 million and operating income 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 December 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 following is a summary of the 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

 $7,253 

Intangible Assets – Customer Base & Contracts

  2,303 

Intangible Assets – Covenant Not to Compete

  132 
    9,688 

Plus:

Accounts Receivable

  499 
 

Property and Equipment

  356 

Less:

Current Liabilities

  (128)
 

Deferred Tax Liability

  (636)

Total Purchase Price

 $9,779 

 

From the date of acquisition through the end of the third quarter of fiscal year 2024, TIC-MS has contributed revenue of $2.7 million and operating income of $1.1 million, which includes the negative impact of amortization of the acquired intangible assets.

 

16

 

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.  As of December 23, 2023, no amounts have been paid.  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 1.1014 to convert Euro to U.S. dollar as of December 23, 2023.  As of December 23, 2023, the key employee is still employed by the Company.

 

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 nine months of fiscal year 2024, Complete Calibrations has contributed revenue of $0.3 million and operating loss of less than $0.1 million.

 

17

 

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.  During the third quarter of fiscal year 2024, $0.3 million was released to the sellers.  As of December 23, 2023, there is no money remaining 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 nine months of fiscal year 2024, e2b has contributed revenue of $2.6 million and operating income of $0.4 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.

 

18

 

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 nine months of fiscal year 2024, Alliance has contributed revenue of $2.0 million and operating income of $0.6 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 Commissioning, Qualification and Validation business ("CQV") 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.  As of December 23, 2023, the estimated fair value of the total earn-out obligations under the Amendment was approximately $2.9 million.  The change in accrual is due to the actual results of the 2023 calendar Earn-Out Year and the accretion of the 2024 and 2025 Earn-Out Years.  As a result, the Company recognized a non-cash expense of $0.1 million, which was recorded in general and administrative expenses in its Consolidated Statement of Income for the quarter ended December 23, 2023.  There were no material changes in assumptions that would impact the valuation as of December 23, 2023.

 

19

 

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)

 
  

Third Quarter Ended

  

Nine Months Ended

 

(in thousands except per share information)

 

December 23, 2023

  

December 24, 2022

  

December 23, 2023

  

December 24, 2022

 
                 

Total Revenue

 $65,166  $62,868  $192,613  $186,276 

Net Income

 $3,348  $1,383  $6,548  $5,801 

Basic Earnings Per Share

 $0.39  $0.18  $0.81  $0.77 

Diluted Earnings Per Share

 $0.38  $0.18  $0.80  $0.76 

 

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 December 23, 2023, $1.0 million contingent consideration and $2.7 million of other holdback amounts unpaid are reflected in current liabilities on the Consolidated Balance Sheets and $2.4 million of contingent consideration and $1.6 million of other holdback amounts unpaid are reflected in other liabilities on the Consolidated Balance Sheets. During the first nine months of fiscal year 2024, $0.8 million of holdback amounts were paid.  During the first nine months of fiscal year 2023, no contingent consideration or other holdback amounts were paid.

 

During the first nine months of fiscal year 2024 and fiscal year 2023, acquisition costs of $0.7 million and $0.1 million, respectively, were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.

 

 

NOTE 6  STOCK OFFERING

 

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 $75.2 million. A portion of the net proceeds from this Offering were used to pay off the Revolving Credit Facility in full.

 

 

ITEM 2. MANAGEMENTS 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

 

Recent Developments

 

On September 25, 2023, we closed an underwritten public offering of our common stock for aggregate gross proceeds of $80.5 million (the “Offering”). In the Offering, we sold an aggregate of 847,371 shares at $95.00 per share. We received net proceeds of $75.2 million in the Offering, a portion of which was used during the third quarter of fiscal year 2024 to repay in full our revolving credit facility. See “Liquidity and Capital Resources” below for more information. 

 

Executive Summary

 

During our third quarter of fiscal year 2024, we had consolidated revenue of $65.2 million. This represented an increase of $7.8 million or 13.5% versus the third 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 completed in fiscal year 2024.  See Note 5 – “Business Acquisitions” to our unaudited consolidated financial statements in this report for more information about the impact of our acquisitions.

 

Our third quarter of fiscal year 2024 gross profit was $20.9 million. This was an increase of $4.5 million or 27.7% versus the third quarter of fiscal year 2023. In addition, consolidated gross margin was 32.1%, an increase of 350 basis points versus the third 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 $16.6 million in the third quarter of fiscal year 2024, an increase of $3.4 million or 25.7% when compared to the prior year third quarter. Included in operating expenses during the third quarter of fiscal year 2024 were incremental operating expenses from the acquisitions of Axiom, SteriQual, TIC-MS, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 25.5% in the third quarter of fiscal year 2024, up 240 basis points from 23.1% in the third quarter of fiscal year 2023. Operating income was $4.3 million, an increase of $1.1 million, or 35.8% and operating margin increased from 5.5% to 6.6% in the third quarter of fiscal year 2024.

 

Net income was $3.3 million in the third quarter of fiscal year 2024 versus $1.6 million in the third quarter of fiscal year 2023. The increase was primarily due to higher operating income and lower interest expense associated with the repayment of our revolving credit facility, partially offset by higher provision for income taxes.

 

 

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

 

   

(Unaudited)

   

(Unaudited)

 
   

Third Quarter Ended

   

Nine Months Ended

 
   

December 23,

   

December 24,

   

December 23,

   

December 24,

 
   

2023

   

2022

   

2023

   

2022

 

As a Percentage of Total Revenue:

                               

Service Revenue

    63.7 %     62.7 %     65.1 %     62.4 %

Distribution Sales

    36.3 %     37.3 %     34.9 %     37.6 %

Total Revenue

    100.0 %     100.0 %     100.0 %     100.0 %
                                 

Gross Profit Percentage:

                               

Service Gross Profit

    32.5 %     30.0 %     33.0 %     31.5 %

Distribution Gross Profit

    31.5 %     26.2 %     29.2 %     25.4 %

Total Gross Profit

    32.1 %     28.6 %     31.7 %     29.2 %
                                 

Selling, Marketing and Warehouse Expenses

    11.5 %     11.5 %     11.1 %     10.9 %

General and Administrative Expenses

    14.0 %     11.6 %     15.0 %     12.2 %

Total Operating Expenses

    25.5 %     23.1 %     26.1 %     23.0 %
                                 

Operating Income

    6.6 %     5.5 %     5.6 %     6.2 %
                                 

Interest and Other Expense, net

    0.0 %     1.8 %     0.9 %     1.0 %
                                 

Income Before Income Taxes

    6.6 %     3.7 %     4.7 %     5.1 %

Provision for Income Taxes

    1.5 %     0.9 %     1.1 %     1.0 %
                                 

Net Income

    5.1 %     2.8 %     3.6 %     4.2 %

 

Third Quarter Ended December 23, 2023 COMPARED TO Third Quarter Ended December 24, 2022 (dollars in thousands):

 

Revenue:

 

   

Third Quarter Ended

   

Change

 
   

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Revenue:

                               

Service

  $ 41,509     $ 35,977     $ 5,532       15.4 %

Distribution

    23,657       21,425       2,232       10.4 %

Total

  $ 65,166     $ 57,402     $ 7,764       13.5 %

 

Total revenue was $65.2 million, an increase of $7.8 million, or 13.5%, in our fiscal year 2024 third quarter compared to the prior fiscal year third quarter.

 

Service revenue, which accounted for 63.7% and 62.7% of our total revenue in the third quarter of fiscal years 2024 and 2023, respectively, increased $5.5 million or 15.4% from the third quarter of fiscal year 2023 to the third quarter of fiscal year 2024. This year-over-year increase included $2.2 million in revenue from the acquisitions of TIC-MS, SteriQual and Axiom, and also included organic revenue growth of 9.1% driven by strong end-market demand and continued market share gains.

 

 

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

 

   

FY 2024

   

FY 2023

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Service Revenue Growth

    15.4 %     17.5 %     17.6 %     14.7 %     19.0 %     19.4 %     22.9 %

 

The growth in Service segment revenue during the third quarter of fiscal year 2024 versus the third quarter of fiscal year 2023 reflected both organic growth and increased revenue from the acquisitions of TIC-MS, SteriQual and Axiom.

 

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, second and third 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

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Trailing Twelve-Month:

                                                       

Service Revenue

  $ 162,556     $ 157,024     $ 150,860     $ 144,883     $ 139,787     $ 134,047     $ 128,324  

Service Revenue Growth

    16.3 %     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, second and third quarter of fiscal year 2024 and for each quarter during fiscal year 2023:

 

   

FY 2024

   

FY 2023

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Percent of Service Revenue:

                                                       

In-House

    86.2 %     85.8 %     87.3 %     86.9 %     86.2 %     86.2 %     85.4 %

Outsourced

    12.6 %     13.0 %     11.6 %     11.9 %     12.6 %     12.6 %     13.2 %

Freight Billed to Customers

    1.2 %     1.2 %     1.1 %     1.2 %     1.2 %     1.2 %     1.4 %
      100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %

 

 

Our Distribution sales accounted for 36.3% of our total revenue in the third quarter of fiscal year 2024 and 37.3% of our total revenue in the third quarter of fiscal year 2023. During the third quarter of fiscal year 2024, Distribution segment sales were $23.7 million which was an increase of 10.4% or $2.2 million . This increase was due to $2.9 million of incremental revenue from the acquisition of Axiom offset by slower demand for our non-rental products.

 

The following table presents the quarterly historical trend of Distribution sales in fiscal years 2024 and 2023 compared to the prior year fiscal quarter:

 

   

FY 2024

   

FY 2023

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Distribution Sales Growth (Decline)

    10.4 %     0.9 %     (0.2 )%     5.1 %     3.7 %     1.6 %     2.7 %

 

The Distribution segment sales increase for the third quarter of fiscal year 2024 versus the third quarter of fiscal year 2023 was due to sales from the acquisition of Axiom.

 

Distribution sales orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Product backorders are the total dollar value of orders received for which revenue has not yet been recognized. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the distribution segment.

 

The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of the first, second and  third quarter of fiscal year 2024 and each quarter of fiscal year 2023:

 

   

FY 2024

   

FY 2023

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Total Pending Product Shipments

  $ 4,652     $ 6,332     $ 7,109     $ 8,101     $ 9,543     $ 9,116     $ 9,034  

% of Pending Product

                                                       

Shipments that were Backorders

    82.0 %     87.4 %     85.0 %     84.8 %     78.4 %     80.8 %     78.1 %

 

Our total pending product shipments at the end of the third quarter of fiscal year 2024 were $4.7 million, a decrease of $4.9 million versus the end of the third quarter of fiscal year 2023 and a decrease of $3.5 million since March 25, 2023. The decrease in pending product shipments and backorders was a result of improved fulfillment of existing orders.

 

Gross Profit:

 

   

Third Quarter Ended

   

Change

 
   

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Gross Profit:

                               

Service

  $ 13,494     $ 10,793     $ 2,701       25.0 %

Distribution

    7,442       5,607       1,835       32.7 %

Total

  $ 20,936     $ 16,400     $ 4,536       27.7 %

 

Total gross profit for the third quarter of fiscal year 2024 was $20.9 million, an increase of $4.5 million or 27.7% versus the third quarter of fiscal year 2023. Total gross margin was 32.1% in the third quarter of fiscal year 2024, up from 28.6% in the third quarter of fiscal year 2023, a 350 basis point increase.

 

Service gross profit in the third quarter of fiscal year 2024 increased $2.7 million, or 25.0%, from the third quarter of fiscal year 2023. Service gross margin was 32.5% in the third quarter of fiscal year 2024, a 250 basis point increase versus the third quarter of fiscal year 2023. This increase in gross margin was the result of increased revenue, which allows us to leverage our fixed-costs, and continued increases in technician productivity.

 

 

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

 

   

FY 2024

   

FY 2023

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Service Gross Margin

    32.5 %     34.0 %     32.5 %     34.0 %     30.0 %     32.6 %     32.0 %

 

Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.

 

The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:

 

   

FY 2024

   

FY 2023

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Distribution Gross Margin

    31.5 %     28.3 %     27.7 %     25.2 %     26.2 %     24.9 %     25.0 %

 

Distribution segment gross margin was 31.5% in the third quarter of fiscal year 2024 versus 26.2% in the third quarter of fiscal year 2023, a 530 basis point increase. The increase in segment gross margin was primarily due to increased margins from rental revenue, which now includes Axiom and a favorable mix of higher margin products sold.

 

Operating Expenses:

 

   

Third Quarter Ended

   

Change

 
   

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Operating Expenses:

                               

Selling, Marketing and Warehouse

  $ 7,519     $ 6,595     $ 924       14.0 %

General and Administrative

    9,123       6,642       2,481       37.4 %

Total

  $ 16,642     $ 13,237     $ 3,405       25.7 %

 

Total operating expenses were $16.6 million in the third quarter of fiscal year 2024 versus $13.2 million during the third quarter of fiscal year 2023. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisitions and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes incremental expenses related to acquired companies, increased payroll costs for new employees and continued investments in technology.

 

As a percentage of total revenue, operating expenses were 25.5% in the third quarter of fiscal year 2024 and 23.1% in the third quarter of fiscal year 2023, an increase of 240 basis points.

 

Income Taxes:

 

   

Third Quarter Ended

   

Change

 
   

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Provision for Income Taxes

  $ 923     $ 523     $ 400       76.5 %

 

Our effective tax rate for the third quarter of fiscal years 2024 and 2023 was 21.6% and 24.6%, respectively. The increase in the tax provision is due to higher operating income and lower interest expense associated with the repayment of our revolving credit facility. The decrease in effective tax rate is due to the mix of net income by country.  Our quarterly provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the third quarter of fiscal years 2024 and 2023 was less than $0.1 million.

 

 

Net Income:

 

   

Third Quarter Ended

   

Change

 
   

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Net Income

  $ 3,348     $ 1,601     $ 1,747       109.1 %

 

Net income for the third quarter of fiscal year 2024 increased from the third quarter of fiscal year 2023 primarily due to higher operating income and lower interest expense associated with the repayment of our revolving credit facility, partially offset by a higher provision for income taxes.

 

Adjusted EBITDA:

 

Total Adjusted EBITDA, a non-GAAP measure, for the third quarter of fiscal year 2024 was $9.1 million, an increase of $2.5 million or 38.5% versus the third quarter of fiscal year 2023. See “Non-GAAP Financial Measures” below for a description of the non-GAAP measures we use and a reconciliation to the most directly comparable GAAP measures. As a percentage of revenue, Adjusted EBITDA increased to 14.0% for the third quarter of fiscal year 2024 from 11.5% for the third quarter of fiscal year 2023. The increase in Adjusted EBITDA during the third quarter of fiscal year 2024 was primarily driven by increases in operating income, depreciation and amortization expense and non-cash stock compensation.

 

nine months ended December 23, 2023 COMPARED TO nine months ended December 24, 2022 (dollars in thousands):

 

Revenue:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Revenue:

                               

Service

  $ 122,793     $ 105,120     $ 17,673       16.8 %

Distribution

    65,775       63,382       2,393       3.8 %

Total

  $ 188,568     $ 168,502     $ 20,066       11.9 %

 

Service revenue, which accounted for 65.1% and 62.4% of our total revenue in the first nine months of fiscal years 2024 and 2023, respectively, increased $17.7 million, or 16.8%, from the first nine months of fiscal year 2023 to the first nine months of fiscal year 2024. This year-over-year increase included $7.1 million of incremental revenue from the acquisitions of TIC-MS, SteriQual and Axiom, and also included organic revenue growth of 10.0% driven by strong end-market demand and continued market share gains.

 

Distribution revenue, which accounted for 34.9% and 37.6% of our total revenue in the first nine months of fiscal years 2024 and 2023, respectively, increased $2.4 million, or 3.8%, from the first nine months of fiscal year 2023 to the first nine months of fiscal year 2024. This year-over-year increase is primarily due to $4.2 million of incremental revenue from the acquisition of Axiom offset by slower demand for our non-rental products.

 

 

Gross Profit:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Gross Profit:

                               

Service

  $ 40,549     $ 33,115     $ 7,434       22.4 %

Distribution

    19,222       16,090       3,132       19.5 %

Total

  $ 59,771     $ 49,205     $ 10,566       21.5 %

 

Total gross profit for the first nine months of fiscal year 2024 was $59.8 million, an increase of $10.6 million or 21.5% versus the first nine months of fiscal year 2023. Total gross margin was 31.7% in the first nine months of fiscal year 2024, up from 29.2% in the first nine months of fiscal year 2023, a 250 basis point increase. This increase in gross margin was primarily due to increased revenue in our Service segment, which allows us to leverage our fixed costs, continued technician productivity improvements, and a favorable sales mix driven by increases in rental sales in the Distribution segment.

 

Operating Expenses:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Operating Expenses:

                               

Selling, Marketing and Warehouse

  $ 20,844     $ 18,315     $ 2,529       13.8 %

General and Administrative

    28,350       20,497       7,853       38.3 %

Total

  $ 49,194     $ 38,812     $ 10,382       26.7 %

 

Total operating expenses were $49.2 million in the first nine months of fiscal year 2024 versus $38.8 million during the first nine months of fiscal year 2023, an increase of $10.4 million or 26.7%. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisitions and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes the non-cash charge related to the NEXA earn-out, incremental expenses related to acquired companies, increased payroll costs for new employees and continued investments in technology.

 

As a percentage of total revenue, operating expenses were 26.1% in the first nine months of fiscal year 2024 and 23.0% in the first nine months of fiscal year 2023, an increase of 310 basis points.

 

Income Taxes:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Provision for Income Taxes

  $ 2,078     $ 1,631     $ 447       27.4 %

 

Our effective tax rate for the first nine months of fiscal years 2024 and 2023 was 23.5% and 18.8%, respectively. The increase in the effective rate and tax provision is due to the discrete tax treatment of the non-cash charge related to the NEXA earn-out. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first nine months of fiscal years 2024 and 2023 was $0.7 million and $0.5 million, respectively.

 

 

Net Income:

 

   

Nine Months Ended

   

Change

 
   

December 23,

   

December 24,

                 
   

2023

   

2022

   

$

   

%

 

Net Income

  $ 6,757     $ 7,030     $ (273 )     (3.9 )%

 

Net income for the first nine months of fiscal year 2024 was $6.8 million, a decrease of $0.3 million versus the first nine months of fiscal year 2023. The year over year decrease in net income was primarily due to flat operating income and a higher provision for income taxes.

 

Adjusted EBITDA:

 

Total Adjusted EBITDA, a non-GAAP measure, for the first nine months of fiscal year 2024 was $26.9 million, an increase of $5.5 million or 25.7% versus the first nine months of fiscal year 2023. See “Non-GAAP Financial Measures” below for a description of the non-GAAP measures we use and a reconciliation to the most directly comparable GAAP measures. As a percentage of revenue, Adjusted EBITDA increased to 14.3% for the first nine months of fiscal year 2024 from 12.7% for the first nine months of fiscal year 2023. The increase in Adjusted EBITDA during the first nine months of fiscal year 2024 was primarily driven by the NEXA earn-out adjustment and increases in depreciation and amortization expense and non-cash stock compensation.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

 

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

   

Third Quarter Ended

   

Nine Months Ended

 

(dollars in thousands)

 

December 23,

   

December 24,

   

December 23,

   

December 24,

 
   

2023

   

2022

   

2023

   

2022

 

Net Income

  $ 3,348     $ 1,601     $ 6,757     $ 7,030  

+ Interest (Income) Expense

    (266 )     726       1,438       1,636  

+ Other Expense

    289       313       304       96  

+ Tax Provision

    923       523       2,078       1,631  

Operating Income

    4,294       3,163       10,577       10,393  

+ Depreciation & Amortization

    3,783       2,824       9,842       8,243  

+ Transaction Expense

    78       96       591       126  

+ Acquisition Earn-Out Adjustment

    87       -       2,887       -  

+ Other (Expense)

    (289 )     (313 )     (304 )     (96 )

+ Noncash Stock Compensation

    1,167       815       3,338       2,757  

Adjusted EBITDA

  $ 9,120     $ 6,585     $ 26,931     $ 21,423  

 

 

 

 

Adjusted Diluted Earnings Per Share

 

In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, acquisition amortization of backlog and restructuring expense; divided by the average diluted shares outstanding during the period), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

 

Adjusted Diluted Earnings Per Share is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted Diluted Earnings Per Share, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

   

Third Quarter Ended

   

Nine Months Ended

 
   

December 23,

   

December 24,

   

December 23,

   

December 24,

 
   

2023

   

2022

   

2023

   

2022

 

Net Income

  $ 3,348     $ 1,601     $ 6,757     $ 7,030  

+ Amortization of Intangible Assets

    1,674       1,180       4,183       3,411  

+ Acquisition Amortization of Backlog

    24       -       43       -  

+ Acquisition Deal Costs

    343       254       1,312       792  

+ Income Tax Effect @ 25%

    (532 )     (359 )     (1,406 )     (1,051 )

+ Acquisition Earn-Out Adjustment

    87       -       2,887       -  

Adjusted Net Income

    4,944       2,676       13,776       10,182  
                                 

Average Diluted Shares Outstanding

    8,752       7,666       8,187       7,644  
                                 

Diluted Earnings Per Share – GAAP

  $ 0.38     $ 0.21     $ 0.83     $ 0.92  
                                 

Adjusted Diluted Earnings Per Share

  $ 0.56     $ 0.35     $ 1.68     $ 1.33  

 

LIQUIDITY AND CAPITAL RESOURCES

 

We expect that foreseeable liquidity and capital resource requirements will be met through cash and cash equivalents, anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements.

 

Under our Second Amended and Restated Credit Facility Agreement (the “Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), we have access to 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. Our 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 us to use up to $50.0 million under the Revolving Credit Commitment for acquisitions in any single fiscal year. The Credit Agreement restricts our 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, we 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.

 

 

Effective July 1, 2023, interest on outstanding borrowings under the revolving credit facility accrue, at our election, at either the variable Daily Simple SOFR or a fixed rate for a designated period at the SOFR 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 our calculated leverage ratio. Our interest rate for the revolving credit facility for the first nine 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 has certain covenants with which we must comply, including a fixed charge ratio covenant, which prohibits our fixed charge coverage ratio from being less than 1.15 to 1.00, and a leverage ratio covenant, which prohibits our leverage ratio from exceeding 3.00 to 1.00. We were in compliance with all loan covenants and requirements during the first nine months of fiscal year 2024. Our leverage ratio, as defined in the Credit Agreement, was 0.12 at December 23, 2023, compared with 1.60 at March 25, 2023.

 

As of December 23, 2023, $80.0 million was available for borrowing under the revolving credit facility.  As of December, 23, 2023, there were no amounts outstanding under the revolving credit facility. After the closing of the Offering, we used approximately $50.0 million of the net proceeds to repay in full the amounts outstanding under the revolving credit facility.  During the first nine months of fiscal year 2024 and 2023, we used $12.9 million and $4.0 million, respectively, drawn from the revolving credit facility for business acquisitions. 

 

As of December 23, 2023, $4.7 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 repayments (principal plus interest) of $0.2 million per month through December 2025.

 

Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (dollars in thousands):

 

   

Nine Months Ended

 
   

December 23,

   

December 24,

 
   

2023

   

2022

 

Cash Provided by (Used in):

               

Operating Activities

  $ 26,889     $ 13,975  

Investing Activities

  $ (22,031 )   $ (15,445 )

Financing Activities

  $ 29,076     $ 782  

 

Operating Activities: Net cash provided by operations was $26.9 million during the first nine months of fiscal year 2024 compared to $14.0 million of net cash provided by operating activities during the first nine months of fiscal year 2023. The year-over-year increase in cash provided by operations was primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:

 

 

Receivables: Accounts receivable decreased $1.4 million during the first nine months of fiscal year 2024 inclusive of $2.6 million of accounts receivable acquired during the period. During the first nine months of fiscal year 2023, accounts receivable increased $2.0 million inclusive of $0.7 million of accounts receivable acquired during the period. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of December 23, 2023 and December 24, 2022 (dollars in thousands):

 

   

December 23,

   

December 24,

 
   

2023

   

2022

 

Net Sales, for the last two fiscal months

  $ 45,501     $ 40,088  

Accounts Receivable, net

  $ 43,307     $ 37,702  

Days Sales Outstanding

    57       59  

 

 

 

Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKUs stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor purchase and sales volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance decreased $0.8 million during the first nine months of fiscal year 2024 inclusive of $1.8 million of inventory acquired during the period.  Our inventory balance increased by $4.2 million during the first nine months of fiscal year 2023 due to strategic inventory purchases during the first nine months of the fiscal year.

 

 

Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors and capital expenditures.  Accounts payable decreased $4.5 million during the first nine months of fiscal year 2024.  Accounts payable decreased $0.3 million during the first nine months of fiscal year 2023. The variances are largely due to the timing of inventory and capital expenditures and other payments in the respective periods.

 

 

Accrued Compensation and Other Current Liabilities: Accrued compensation and other current liabilities include, among other things, amounts paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including changes in expected performance levels, the performance measurement period, and timing of payments to employees.  During the first nine months of fiscal year 2024, accrued compensation and other current liabilities increased by $5.5 million, inclusive of $4.0 million from assumed liabilities, contingent consideration and purchase price holdbacks from acquisition transactions. During the first nine months of fiscal year 2023, accrued compensation and other current liabilities decreased by $2.4 million. The change from the first nine months of fiscal year 2023 was largely due to the inclusion of the acquisition related transactions, partially offset by the annual payment of incentive based compensation accruals.

 

 

Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first nine months of fiscal years 2024 and 2023, income taxes payable remained flat.

 

Investing Activities: During the first nine months of fiscal years 2024 and 2023, we invested $9.1 million and $7.1 million, respectively, in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

 

During the first nine months of fiscal years 2024 and 2023, we used $12.9 million and $8.3 million, respectively, for business acquisitions.

 

During the first nine months of fiscal year 2024, we paid $0.8 million of other holdback amounts relating to business acquisitions.  During the first nine months of fiscal year 2023, no contingent consideration or other holdback amounts were paid related to business acquisitions.

 

Financing Activities: During the first nine months of fiscal year 2024, $75.7 million in cash was generated from the issuance of common stock, net of direct costs of the Offering. In addition, we used $42.7 million to repay our revolving line of credit, $1.7 million for scheduled repayments of our term loan and $2.2 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2024, which are shown as a repurchase of shares of our common stock.

 

During the first nine months of fiscal year 2023, $2.3 million was borrowed from our revolving line of credit and $0.5 million in cash was generated from the issuance of common stock. In addition, we used $1.6 million for scheduled repayments of our term loan and $0.4 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in the quarter, which are shown as a repurchase of shares of our common stock.

 

 

OUTLOOK

 

We are proud of our dedicated team, which has consistently delivered exceptional results through various economic cycles as can be seen over the past decade and a half of profitable growth. During this fiscal year, we expect organic Service revenue growth in the high-single digit to low double-digit range and gross margin expansion. Automation of our calibration processes and overall process improvement will be key enablers to future margin expansion in the Service segment. We believe the Service segment has substantial runway ahead for growth, both organically and through acquisition. Our robust and diverse acquisition pipeline enables strategic, accretive acquisitions that drive synergistic growth opportunities and will be a key component of our future strategy. We believe our unique value proposition drives a sustainable competitive advantage in the highly regulated markets that we serve, particularly the Life Science, Aerospace, and Defense markets, along with a growing Rentals business. We have a long history of generating sustainable value for our shareholders and providing a dynamic, rewarding workplace for our team.

 

We expect our income tax rate to range between 24% and 26% for full fiscal year 2024. This estimate includes Federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards. 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

INTEREST RATES

 

Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.5 million assuming our average borrowing levels during the first nine months of fiscal year 2024 remained constant under the revolving credit facility. As of December 23, 2023, $80.0 million was available for borrowing under the revolving credit facility.  As of December 23, 2023, there were no amounts outstanding under the revolving credit facility. As described above under “Liquidity and Capital Resources,” we also have a $15.0 million (original principal) term loan. The 2018 Term Loan is considered a fixed interest rate loan. As of December 23, 2023, $4.7 million was outstanding under the 2018 Term Loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The 2018 Term Loan requires total (principal and interest) repayments of $0.2 million per month.

 

Effective July 1, 2023, at our option, we may borrow from our revolving credit facility at the variable one-month Daily Simple SOFR or at a fixed rate for a designated period at the SOFR corresponding to such period (subject to a 0.25% floor), in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate during the first nine months of fiscal year 2024 for our revolving credit facility ranged from 6.4% to 7.1%. Interest on outstanding borrowings of the 2018 Term Loan accrued at a fixed rate of 3.90% over the term of the loan. On December 23, 2023, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to movements in interest rates.  

 

FOREIGN CURRENCY

 

Approximately 90% of our total revenues for each of the first nine months of fiscal year 2024 and 2023 were denominated in U.S. dollars, with the remainder denominated in Canadian dollars and Euros. A 10% change in the value of the Canadian dollar to the U.S. dollar and the Euro to the U.S. dollar would impact our revenue by approximately 1%. We monitor the relationship between the U.S. dollar and the Canadian dollar and the U.S. dollar and the Euro on a monthly basis and adjust sales prices for products and services sold in Canadian dollars or Euros as we believe to be appropriate.

 

We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. We do 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 nine months of the fiscal years 2024 and 2023, respectively, was recognized as a component of Interest and Other Expense, 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 December 23, 2023, we had a foreign exchange contract, which matured in January 2024, outstanding in the notional amount of $2.0 million. The foreign exchange contract was renewed in January 2024 and continues to be in place. We do not use hedging arrangements for speculative purposes.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

 

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our third quarter of fiscal year 2024) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 6. EXHIBITS

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Description

       

(31)

 

Rule 13a-14(a)/15d-14(a) Certifications

       
   

31.1*

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       
   

31.2*

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       

(32)

 

Section 1350 Certifications

       
   

32.1**

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

       

 

 

       

(101)

 

Interactive Data File

       
101.INS*     Inline XBRL Instance Document
       
101.SCH*     Inline XBRL Taxonomy Extension Schema Document
       
101.CAL*     Inline XBRL Taxonomy Extension Calculation Linkbase Document
       
101.DEF*     Inline XBRL Taxonomy Extension Definition Linkbase Document
       
101.LAB*     Inline XBRL Taxonomy Extension Label Linkbase Document
       
101.PRE*     Inline XBRL Taxonomy Extension Presentation Linkbase Document
       
(104)     Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*

Exhibit filed with this report.

**

Exhibit furnished with this report.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  TRANSCAT, INC.  
     
     

Date: January 31, 2024

/s/ Lee D. Rudow

 
 

Lee D. Rudow

 
 

President and Chief Executive Officer

(Principal Executive Officer)

 
     
     

Date: January 31, 2024

/s/ Thomas L. Barbato

 
 

Thomas L. Barbato

 
 

Senior Vice President of Finance and Chief Financial Officer

(Principal Financial Officer)

 

 

 

37